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Challenging China’s Trade Practices — What Role for the WTO?

The U.S.-China Economic and Security Review Commission (USCC) is holding a hearing on April 14, 2022 looking at the following topic — Challenging China’s Trade Practices:  Promoting Interests of U.S. Workers, Farmers, Producers and Innovators. See U.S.-China Economic and Security Review Commission, Notice of Public Hearing, 87 Fed. Reg. 18,075 (March 29, 2022. I am participating on the fourth panel which looks at China and the WTO. I copy below my written testimony. Before that I provide a summary of my thoughts and some recommendations for U.S. action.

As is broadly recognized, the WTO is struggling to maintain relevance and develop updated rules for international trade that reflect the changing landscape on critical issues. The growth of the WTO in terms of membership and accession applications is notable but has resulted in an organization where progress on multilateral issues is nearly impossible and in any event too slow. China and other Members emulating China’s state-directed economic model have pushed the organization into a nonsustainable position as the current rules are premised on major Members having market economies. The clash between the economic systems has resulted in increasing tensions as market economies struggle to deal with distortions created by China and others, many of which distortions are not addressable by existing WTO rules. With a consensus based system for modifications to existing rules or for the creation of new rules, there are questions about the ability to move forward to address China’s massive distortions. Similarly, while there are important activities that the WTO can and sometimes does do in the Committee structure, the Committees are not generally effective and a lack of transparency in practices, particularly in areas such as subsidies by China and others, reduces the effectiveness of the Committee function. Dispute settlement, while important, has developed a range of problems that both harm Members’ maintenance of existing rights and which complicate the ability of Members to address state-directed economies distortions. This is not to say that there aren’t important efforts underway within the WTO, often on a plurilateral vs. multilateral basis, that can be useful in the U.S.-China relationship. Moreover, frequently the ability of the WTO to collect and disseminate of information on important issues such as import and export restrictions introduced during the pandemic and the recent work looking at the trade effects of the Russian invasion of Ukraine is important in helping Members understand current challenges and identify activities that may be useful in improving the global economy.

The Biden Administration has made it clear that it wants to work within multilateral organizations as possible while pursuing domestic tools where needed and making the investments in the country to improve U.S. competitiveness.

So within the WTO, the U.S. should continue to pursue reforms that would make the WTO better able to address the distortions that flow from state-directed economies like China. The work that has been underway with the EU and Japan on industrial subsidies, global excess capacity and state-owned/invested companies is an excellent example, although what can be achieved in the WTO is likely to be far less than what is needed.

Similarly, working to complete the fisheries subsidies negotiations (including the ban on forced labor) is an important multilateral undertaking.

There are a number of plurilateral negotiations that are ongoing (so-called Joint Initiative Statements) that deal with important issues like e-commerce and domestic regulation of services and a number of environmental and other issues. The U.S. is active in some but not all. It should be active in all of the JSIs.

On dispute settlement, there are fundamental reforms needed that I have outlined in earlier posts as well as changes to the trade defense agreements to restore rights. See, e.g., July 12, 2020:  WTO Appellate Body reform – revisiting thoughts on how to address U.S. concerns, https://currentthoughtsontrade.com/2020/07/12/wtos-appellate-body-reform-revisiting-thoughts-on-how-to-address-u-s-concerns/. But the U.S., EU, Japan and others could bring a broad based case against China focusing on the many ways in which China has not fulfilled its commitments under the protocol of accession. Such a case would permit an identification of the many failures of China to in fact implement the obligations it undertook in 2001 in joining the WTO. A panel report would help focus the WTO membership on the changes that need to be made by China to have an economic system that is compatible with the WTO or that will address Chinese distortions and can lead to more flexibilities in terms of WTO reform. Depending on the outcome of the challenges to U.S. Section 232 actions on steel and aluminum (national security claims), the U.S. may also need/want to obtain reforms in whether national security claims are reviewable and whether the standards contained within GATT 1994 Art. XXI need updating/revision.

Much of what needs to be done to address China’s trade practices will be handled through domestic legislation and regulation or through bilateral negotiations with China or through unilateral actions that may not be consistent with WTO requirements.

Getting better enforcement of the Phase I Agreement and pursuing a Phase II Agreement presumably are elements of bilateral talks. Making U.S. trade remedies more effective and less costly can be done through domestic legislation and agency regulations.

Beefing up transparency requirements for foreign owned companies listing on U.S. stock exchanges is important and needs to be fully implemented and enforced.

The U.S.-U.K. agreement on steel and aluminum contains an important requirement that Chinese owned companies in the U.K. in these sectors be audited to determine if there are subsidies provided from China.

Resources to permit aggressive implementation of the ban on forced labor imports from Xinjiang is also within the Congress’ purview.

Tighter oversight of Chinese investment (direct and indirect) in strategic sectors, as well as addressing investment needs in critical sectors domestically, improving the resiliency of supply chains and getting infrastructure modernized are all important actions – a number of which are already approved by the Congress or being pursued by the Administration.

Written Testimony Submitted to the U.S.-China Economic and Security Commission for April 14 Hearing

Since joining the WTO at the end of 2001, China has risen to become the world’s largest exporter and has generally outperformed the world economy becoming the world’s second largest economy.  China will likely overtake the United States in terms of national GDP in the coming years.  So WTO membership has been of enormous benefit to China including through encouraging foreign investment, transfer of technology, improved productivity and quality and higher living standards.  Indeed, hundreds of millions of Chinese have been lifted out of poverty over the last decades.

When China was admitted to the WTO, the Chinese economy was not yet market oriented nor consistent with a wide range of WTO obligations.  The result was a Protocol of Accession and Working Party Report that were the most complicated in terms of additional efforts needed by China and a timeframe for making additional wide ranging modifications to its economic system.

While China adopted many of its obligations at the beginning of WTO membership in 2002 and worked for a number of years to implement further important structural changes, China has moved away from its efforts to reform its economy to be more market driven and has reembraced its state-directed economic model over the last decade or so. 

Because of the size of the Chinese economy and the enormity of the government’s involvement and distortions imposed on the functioning of the economy, the distortions caused to trading partners operating on market principles have been massive.  These have included massive excess capacity in many industries flowing from state plans and subsidies, restricted market access to foreign products, theft of intellectual property and forced technology transfer, and the creation of false market signals in terms of costs of production.  There have been many critiques of China’s WTO membership.  My reflections are contained in a recent post.  See December 11, 2021:  20 Years of China’s Membership in the WTO — a brief critique, https://currentthoughtsontrade.com/2021/12/11/20-years-of-chinas-membership-in-the-wto-a-brief-critique/.

Even without China, the WTO has struggled since its creation to update global trade rules.  The inability to have successful negotiations on a range of topics flows from a variety of reasons including the consensus based decision making, large differences in views of purpose of and direction for the WTO among Members, and a dispute settlement system that has often deviated from its limited role encouraging members to file disputes instead of negotiating.  The organization has struggled to maintain its relevance in a rapidly changing world.  For many market economies, the WTO is not viewed as able to adequately address the distortions created by a state-directed economy the size of China’s.  

From the beginning of China’s WTO membership, other Members have worked to help China conform its system to the WTO requirements.  For example, major trading partners of China, including the U.S., European Union, Japan, Canada, Australia and others spent years working with Chinese agencies to help them bring laws into compliance with WTO obligations and worked bilaterally to resolve problems as they arose.  Such activity has not been unusual for WTO Members in the early years of membership to help new Members understand what additional changes are appropriate or to resolve practices of concern bilaterally.  

Where China was unable or unwilling to bring practices or laws/regulations into conformity, the U.S., EU and others have brought disputes at the WTO.  As of April 8, 2022, China is or has been a respondent in 49 WTO disputes.  It has also brought 22 cases against the U.S., EU and others and participated as a third party in 192 disputes.  Most of the cases that have brought against China consisted of situations where China’s actions were facially inconsistent with WTO obligations. Where cases weren’t resolved through consultations and China lost the dispute, China has typically implemented the loss although in a narrow fashion.  China has brought cases to address what it considered to be “discriminatory” provisions of its Protocol of Accession (country specific safeguard; continuation of treatment as a non-market economy after 15 years) or to attempt to weaken trade remedies of major trading parties like the United States and the EU.  Some of these efforts were unsuccessful.  However, China has been able to obtain weakening of trade remedy practices with reports by WTO panels and the Appellate Body viewed by the U.S. and others as changing the rights they had under the trade remedy agreements.

As the 2020 USTR report on the WTO Appellate Body made clear, dispute settlement at the WTO has had the unintended consequence of changing the bargain reached in the Uruguay Round for the United States.  See February 14, 2020: USTR’s Report on the WTO Appellate Body – An Impressive Critique of the Appellate Body’s Deviation from Its Proper Role, https://currentthoughtsontrade.com/2020/02/14/ustrs-report-on-the-wto-appellate-body-an-impressive-critique-of-the-appellate-bodys-deviation-from-its-proper-role/.

Moreover, as articulated by the prior Administration and the present Administration, the current WTO agreements and dispute settlement don’t adequately address the global distortions caused by the state-directed economy of China and those copying its practices.  See, e.g., December 14, 2020:  WTO December 14th Heads of Delegation meeting – parting comments of U.S. Ambassador Dennis Shea, https://currentthoughtsontrade.com/2020/12/14/wto-december-14th-heads-of-delegation-meeting-parting-comments-of-u-s-ambassador-dennis-shea/

There have been efforts by the U.S., EU and Japan to start an evaluation of possible modifications to the Subsidies and Countervailing Measures Agreement to address the massive industrial subsidies, global excess capacity and state-owned, state-invested enterprises that characterize some of the important ongoing distortions created by the Chinese state-directed economy.  While China has indicated it would be open to a reexamination of all subsidy practices, it is unclear what agreement could be reached within the WTO.  In any event, agreement on any changes will take years to accomplish and will almost certainly be less than what is needed because of the consensus approach to decision making at the WTO.  Presumably the first panel today reviewed the eforts at WTO reform on industrial subsidies, excess capacity and state-owned enterprises.  Several posts of mine have addressed some aspects of the issue. See, e.g., January 14, 2020: WTO Reform – Joint Statement of January 14, 2020 of Japan, the U.S. and the EU, https://currentthoughtsontrade.com/2020/01/14/wto-reform-joint-statement-of-january-14-2020-of-japan-the-u-s-and-the-eu/.

China has been viewed by many WTO Members as retaliating against WTO Members who bring disputes or who use trade remedies by bringing disputes themselves or bringing trade remedy cases.   They also resort to intimidation through wide ranging and often non-transparent actions to punish trading partners who take positions China strongly disagrees with.  China’s actions against Australia and more recently Lithuania are just two examples.   I have looked at both cases in posts in the last several years.  See January 27, 2022:  The European Union requests consultations with China at the WTO for restrictions on Lithuanian goods imposed by China,

https://currentthoughtsontrade.com/2022/01/27/the-european-union-requests-consultations-with-china-at-the-wto-for-restrictions-on-lithuania-goods-imposed-by-china/; January 7, 2022:  China’s “bullying” of Lithuania — a repeating story inconsistent with WTO rules, https://currentthoughtsontrade.com/2022/01/07/chinas-bullying-of-lithuania-a-repeating-story-inconsistent-with-wto-rules/; December 22, 2020:  China’s trade war with Australia – unwarranted and at odds with China’s portrayal of itself as a strong supporter of the WTO, https://currentthoughtsontrade.com/2020/12/22/chinas-trade-war-with-australia-unwarranted-and-at-odds-with-chinas-portrayal-of-itself-as-a-strong-supporter-of-the-wto/.

The lack of transparency in the Chinese system permits a wide range of trade distortions to arise (e.g., when state, provincial or local governments ban imports without formal notice or explanation, when technology transfer is required to operate but not included in documents, etc.).  China’s submissions to the WTO in areas such as subsidies have been viewed by the U.S., EU and others as woefully incomplete and have led to counternotifications being made by the U.S.  See, e.g., USTR Press Release, United States Details China and India Subsidy Programs in Submission to WTO, October 6, 2011, https://ustr.gov/about-us/policy-offices/press-office/press-releases/2011/october/united-states-details-china-and-india-subsidy-prog; SUBSIDIES, Request from the UNITED STATES to CHINA, Pursuant to Article 25.10 of the Agreement,  G/SCM/Q2/CHN/42 (11 October 2011).

While China has long been cited as having major human rights problems, in recent years, the trade implications of forced labor and other human rights issues have led to increased activity in an effort to cut off imports into the U.S. of products made from forced labor (in part or total).  See, e.g., February 13, 2022:  February 10, 2022 release of ILO report and subsequent U.S. State Department press release on forced labor and other human rights issues in Xinjiang Autonomous Region of China, https://currentthoughtsontrade.com/2022/02/13/february-10-2022-release-of-ilo-report-and-subsequent-u-s-state-department-press-release-on-forced-labor-and-other-human-rights-issues-in-xinjiang-autonomous-region-of-china/; February 11, 2022:  Stopping imports made in whole or in part from forced labor — U.S. law and the looming challenge on goods made from cotton and polysilicon, https://currentthoughtsontrade.com/2022/02/11/stopping-imports-made-in-whole-or-in-part-from-forced-labor-u-s-law-and-the-looming-challenge-on-goods-made-from-cotton-and-polysilicon/; December 19, 2021:  Forced labor and trade — U.S. Congress passes legislation to address China’s treatment of Uyghurs, https://currentthoughtsontrade.com/2021/12/19/forced-labor-and-trade-u-s-congress-passes-legislation-to-address-chinas-treatment-of-uyghurs/; January 25, 2021:  Child labor and forced labor in cotton production — is there a current WTO mandate to identify and quantify the distortive effects?, https://currentthoughtsontrade.com/2021/01/25/child-labor-and-forced-labor-in-cotton-production-is-there-a-current-wto-mandate-to-identify-and-quantify-the-distortive-effects/; January 24, 2021:  Forced labor and child labor – a continued major distortion in international trade for some products, https://currentthoughtsontrade.com/2021/01/24/forced-labor-and-child-labor-a-continued-major-distortion-in-international-trade-for-some-products/.

The array of inconsistencies with WTO norms are reviewed annually in the USTR Report to Congress on China’s Compliance with the WTO.  See, e.g., February 16, 2022:  USTR’s 2021 Report to Congress on China’s WTO Compliance — a recognition that all of China’s distortions to competition cannot be dealt with within the WTO, https://currentthoughtsontrade.com/2022/02/16/ustrs-2021-report-to-congress-on-chinas-wto-compliance-a-recognition-that-all-of-chinas-distortions-to-competition-cannot-be-dealt-with-within-the-wto/.

Prior Administrations have engaged both bilaterally with China and through disputes to get China to live up to its commitments under the WTO.  The Trump Administration sought to address global excess capacity in steel and aluminum through use of Section 232 of the Trade Expansion Act  of 1962, as amended on national security concerns and conducted a section 301 investigation on a range of Chinese practices in, inter alia, the intellectual property area which resulted in additional tariffs being imposed on most goods coming from China.  WTO challenges and court challenges in the U.S. have been testing the breadth of the U.S. national security law and the WTO consistency of such actions.

While some observers have called for excluding China from the WTO or forming a separate grouping that excludes China, the WTO has no identified process for removing countries from membership, although the current crisis caused by the Russian Federation’s invasion of Ukraine has shown the willingness of a number of major economies to remove most favored nation status on a Member for national security reasons.  See, e.g.,  January 16, 2022:  Is it time for a new approach to bilateral trade with China?, https://currentthoughtsontrade.com/2022/01/16/is-it-time-for-a-new-approach-to-bilateral-trade-with-china/; March 2, 2022:  A former Appellate Body Chair argues WTO Members have the ability to remove the Russian Federation from WTO Membership; other proposals to strip MFN benefits from Russia and services restrictions, https://currentthoughtsontrade.com/2022/03/02/a-former-appellate-body-chair-argues-wto-members-have-the-ability-to-remove-the-russian-federation-from-wto-membership-other-proposals-to-strip-mfn-benefits-from-russia-and-services-restrictions/; March 20, 2022:  Banned imports, higher tariffs, other actions by trading partners as Russia and Belarus lose most favored nation treatment by G-7 countries and EU during the conflict in Ukraine, https://currentthoughtsontrade.com/2022/03/20/banned-imports-higher-tariffs-other-actions-by-trading-partners-as-russia-and-belarus-lose-most-faovered-nation-treatment-by-g-7-countries-and-eu-during-the-conflict-in-ukraine/.

The Biden Administration has expressed the intention of working with allies to improve the WTO while looking at additional tools to address the distortions caused by the Chinese system.  See, e.g,. Testimony of Ambassador Katherine Tai Before the Senate Finance Committee Hearing on the President’s 2022 Trade Policy Agenda, https://ustr.gov/about-us/policy-offices/press-office/speeches-and-remarks/2022/march/testimony-ambassador-katherine-tai-senate-finance-committee-hearing-presidents-2022-trade-policy (March 31, 2022).  Thus, the Biden Administration will engage bilaterally with China, will focus on strengthening the U.S. economy (e.g., improved infrastructure, more resilient supply chains, more domestic production of key products, improved Buy America), explore new tools to address distortions (e.g., the U.S.-EU efforts on steel and aluminum to address excess capacity), and will work regionally and through the WTO to address issues of importance where possible.  

Questions of interest to the USCC for this panel

  1.  China has repeatedly refused to abide by the spirit of the World Trade Organization.  Is the WTO still relevant to addressing the challenges posed by China’s policies?

The fundamental problem posed by China in the WTO is its state-directed economic system which is fundamentally at odds with market economies.  Former Deputy Director-General of the WTO Alan Wolff has opined on a number of occasions that a core principle of the WTO is the need for convergence of economic systems of WTO Members.  Coexistence of different economic systems is not dealt with by the WTO Agreements and is not compatible with WTO rules.  See, e.g., November 10, 2020:  The values of the WTO – do Members and the final Director-General candidates endorse all of them?, https://currentthoughtsontrade.com/2020/11/10/the-values-of-the-wto-do-members-and-the-final-director-general-candidates-endorse-all-of-them/  August 19, 2020 [updated August 27]; August 19, 2020 [updated August 27]:   The race to become the next WTO Director-General – where the candidates stand on important issues:  convergence vs. coexistence of different economic systems; possible reform of rules to address distortions from such economic systems – Part 2, comments by the candidates, https://currentthoughtsontrade.com/2020/08/19/the-race-to-become-the-next-wto-director-general-where-the-candidates-stand-on-important-issues-convergence-vs-coexistence-of-different-economic-systems-possible-reform-of-rules-to-addre/; August 17, 2020:  The race to become the next WTO Director-General – where the candidates stand on important issues:  convergence vs. coexistence of different economic systems; possible reform of rules to address distortions from such economic systems – Part 1, background on issues, https://currentthoughtsontrade.com/2020/08/17/the-race-to-become-the-next-wto-director-general-where-the-candidates-stand-on-important-issues-convergence-vs-coexistence-of-different-economic-systems-possible-reform-of-rules-to-address-dist/.

While the U.S., EU and others have raised the need to address the myriad distortions caused by non-market economies (or state directed economies) as part of WTO reform, it is highly unlikely that WTO Members will agree to broad based changes, although some changes to the Subsidies Agreement may be accomplished over the medium term (5 years or more). 

  • Can the WTO meaningfully address the repeated problem of Chinese subsidies?  In particular, with subsidies emanating from state-owned companies, is it feasible to overcome the WTO’s definition of what constitutes a “public body”?  Was the WTO’s decision correctly decided based on negotiated commitments?

While the U.S. lost the dispute on “public bodies,” the U.S. has continued to pursue countervailing duty cases against imports from China, typically with large countervailable subsidies found.  Thus, U.S. countervailing duty law can likely still be effective in many cases despite the adverse public body decision.  That does not protect U.S. export interests both in China and in third countries.

The WTO adverse decision will almost certainly be part of the package of proposals for reform coming from the U.S., EU and Japan.  Because of China’s interest in maintaining the Appellate Body’s  reading of “public body”, it is unclear if revision at the WTO will be possible.

The United States identified the public body decision as one of the most egregious Appellate Body overreach decisions in its 2020 report on the Appellate Body.  See USTR,  REPORT ON THE APPELLATE BODY OF THE WORLD TRADE ORGANIZATION, February 2020, https://ustr.gov/sites/default/files/Report_on_the_Appellate_Body_of_the_World_Trade_Organization.pdf, pages 82-88 (“The Appellate Body’s Erroneous Interpretation of ‘Public Body’ Threatens the Ability of WTO Members to Counteract Trade-Distorting Subsidies Provided through SOEs, Undermining the Interests of All Market-Oriented Actors”).  I concur that the decision is inconsistent with the underlying WTO Subsidies and Countervailing Measures Agreement.

The decision has been widely criticized, including by people who were actively involved in the negotiations (Jan Woznowski, Director of the Rules Division; Michael Cartland, Permanent Representative of Hong Kong who served as the Chair of the Subsidies and Countervailing Measures negotiations, and Gerard DePayre, negotiator for the European Union on Subsidies and Countervailing Measures).  See Cartland, Michael, Depayre, Gérard &Woznowski, Jan. “Is Something Going Wrong in the WTO Dispute Settlement?” Journal of World Trade 46, no. 5 (2012): 979–1016, at 996.  USTR characterized the paper as follows in its 2020 Report (pages 86-87):

“Commentators have also criticized the Appellate Body’s interpretation. For example, in an article in the Journal of World Trade, Michael Cartland, Gérard Depayre, and Jan Woznowski – each of whom participated in the Negotiating Group on subsidies and countervailing measures in the Uruguay Round – present a detailed discussion of the Appellate Body report in US – Anti-Dumping and Countervailing Duties (China) and raise a host of concerns with the Appellate Body’s interpretation of the term ‘public body,’ calling the analysis ‘internally contradictory’ and ‘disingenuous.’”

  • As national security becomes a higher priority for both the United States and China, how can the WTO remain relevant or useful in breaking down barriers to trade?

Since the GATT started in the late 1940s there has always been a national security exception to obligations assumed under the GATT and now under the WTO. GATT 1994 Article XXI reads:

Article XXI

Security Exceptions

Nothing in this Agreement shall be construed

  • to require any contracting party to furnish any information the disclosure of which it considers contrary to its essential security interests; or
  • to prevent any contracting party from taking any action which it considers necessary for the protection of its essential security interests
  • relating to fissionable materials or the materials from which they are derived;
  • relating to the traffic in arms, ammunition and implements of war and to such traffic in other goods ad materials as is carried on directly or indirectly for the purpose of supplying a military establishment;
  • taken in time of war or other emergency in international relations; or
  • to prevent any contracting party from taking any action in pursuance of its obligations under the United Nations Charter for the maintenance of international peace and security. 

Similar provisions are in the Services and TRIPS Agreements.

The bulk of the actions taken by the United States against China have not been premised on national security.  Trade remedies (antidumping, countervailing duty, safeguard), Section 301 actions have not been premised on national security but other statutory bases. Section 232 actions, such as on steel and aluminum, have been based on national security concerns.

Similarly, U.S., EU, UK, Canada, Japan and others who have removed most favored nation treatment from the Russian Federation after its invasion of Ukraine have justified such action on national security (presumably GATT 1994 Art. XXI (b)(iii) for goods).

Many WTO Members, including China, the EU, Canada, Mexico and others, took unilateral action without WTO authorization when the U.S. imposed duties under Section 232, some claiming that such action was supported by the Safeguard Agreement where imports had not increased. Such actions by U.S. trading partners were not justified on national security grounds.

U.S. 232 action is currently subject to panel review at the WTO with panel reports currently due by the end of the first half of 2022. See, e.g., UNITED STATES – CERTAIN MEASURES ON STEEL AND ALUMINIUM PRODUCTS COMMUNICATION FROM THE PANEL, WT/DS544/12 (China as complainant)(10 December 2021).

The U.S. has long contended that when a Member claims national security as the basis for action, there is no role for the WTO dispute settlement system.  National security actions by other countries whether involving goods or TRIPS have been found by WTO panels and the Appellate Body as subject to review and permissible if in accordance with the provisions of GATT 1994 Article XXI (or comparable provisions in the TRIPS Agreement).  See, e.g.,  World Trade Institute Working Paper No. 03/2020,  Peter Van den Bossche and Sarah Akpofure, The Use and Abuse of the National Security Exception under Article XXI(b)(iii) of the GATT 1994, https://www.wti.org/media/filer_public/50/57/5057fb22-f949-4920-8bd1-e8ad352d22b2/wti_working_paper_03_2020.pdf.

If the panel report finds the U.S. not having complied with WTO obligations, the U.S. will have the option of seeking a resolution with the complainants or filing an appeal.

To the extent that the U.S. views an increased need to invoke national security justification for action contrary to other WTO obligations and such actions would not fall under the exceptions as construed by panels, the U.S. will be left with seeking modification of GATT Art. XXI (and the comparable GATS and TRIPS provisions) as part of WTO reform or can hold up reacceptance of binding dispute settlement, or can simply accept the retaliation likely to follow.

It is not my view that national security will be the major tool used going forward to address distortions from China.  

  • Katherine Tai recently posed the question of whether U.S. policy is aiming for a greater quantity of liberalized trade or “for smarter and more resilient trade.”  Is the WTO compatible with a latter vision?

The GATT and now WTO have always had provisions permitting members to deviate from obligations in certain circumstances and to adopt laws and regulations to address health, quality and other national concerns.  Thus, there is nothing in the WTO that prevents countries from engaging in smarter or more resilient trade.

The U.S. during the Trump Administration, had raised a series of issues concerning whether the existing system was sustainable as being tilted against the United States.  The issues included self-selection as a developing country (with entitlement to special and differential treatment), lack of transparency by some Members, the need to rebalance tariff commitments in light of current level of economic development, revised agreements to address distortions created by state-directed economies like China.  See, e.g., August 24, 2020:  USTR Lighthizer’s Op Ed in the Wall Street Journal – How to Set World Trade Straight, https://currentthoughtsontrade.com/2020/08/24/ustr-lighthizers-op-ed-in-the-wall-street-journal-how-to-set-world-trade-straight/.  These types of changes, if made to the WTO, would make the international trading system smarter and more resilient.  Most observers believe such changes are unlikely to be achievable.

The Biden Administration has been putting a push on trading partners to take action against forced labor within the ongoing negotiations on fisheries subsidies.  While it is unlikely that such provisions will be accepted by all WTO Members (particularly China) as part of the fisheries subsidies negotiations, such action is being pursued within USMCA countries and some others.  Eliminating trade based on forced labor would be smarter and more resilient trade.

The WTO and GATT before it have historically been reluctant to embrace labor and environmental issues, though there has been a trade and environment committee for many years and there are now a range of environmental plurilateral negotiations taking place.  Dealing with environmental issues and to the extent possible labor issues would make for smarter and more resilient trade.  The environmental negotiations are likely to be plurilateral but open to all to join.

In short, it should be possible for WTO Members to adopt at least many aspects of “smarter and more resilient trade” without running afoul of WTO obligations. 

  • What is the promise of other initiatives taking place in the WTO related to digital trade and what is the likelihood that they can change Chinese practices?

WTO Members launched a series of Joint Statement Initiatives (JSIs) among the willing at the 11th Ministerial Conference held in Buenos Aires in 2017.  While countries like India and South Africa have not joined any of the JSIs and have raised questions about the propriety of the WTO incorporating plurilateral agreements without consensus of all Members, there has been a lot of effort over the last four years on moving the negotiations forward, seeking some completions by the 12th Ministerial Conference this June. 

Ongoing JSI include those on electronic commerce, investment facilitation for development, plastics pollution and environmentally sustainable plastics trade, services domestic regulation, informal working group on MSMEs, and trade and environmental sustainability.  The WTO issues periodic press releases on developments in the talks.  See, e.g., JOINT INITIATIVE ON E-COMMERCE, E-commerce negotiators seek to find common ground, revisit text proposals, 21 February 2022, https://www.wto.org/english/news_e/news22_e/jsec_23feb22_e.htm (hoping to have convergence on majority of issues by end of 2022)(86 WTO Members participating accounting for 90% of e-commerce trade including China, U.S. and most other major countries);  INVESTMENT FACILITATION FOR DEVELOPMENT, Investment facilitation negotiators take steps to assess needs of developing countries, 15 February 2022, https://www.wto.org/english/news_e/news22_e/infac_23feb22_e.htm (looking to complete by end of 2022)(over 100 WTO Members participate including China and most developed countries, but not the U.S.); INFORMAL DIALOGUE ON PLASTICS POLLUTION AND ENVIRONMENTALLY SUSTAINABLE PLASTICS TRADE, Plastics dialogue emphasizes need for international collaboration, cooperation, 30 March 2022, https://www.wto.org/english/news_e/news22_e/ppesp_31mar22_e.htm  (70 Members participate including China and most major developed countries but not the U.S.); Joint Initiative on Services Domestic Regulation, Negotiations on services domestic regulation conclude successfully in Geneva, https://www.wto.org/english/news_e/news21_e/jssdr_02dec21_e.htm (67 Members participated including China, the U.S. and other major developed countries); . MICRO, SMALL AND MEDIUM-SIZED ENTERPRISES (MSMES), Working group on small business welcomes three more members, 8 February 2022, https://www.wto.org/english/news_e/news22_e/msmes_08feb22_e.htm (94 participants including China and most major developed countries but not the U.S.).

Since the Doha Development Agenda reached an impasse in 2008, U.S. Administrations have participated in WTO activities but have also pursued free trade agreements and other regional and plurilateral activities.  There is good progress being made in Geneva on the various JSIs, although the impact of the Russian Federation’s invasion of Ukraine may create challenges to forward movement in some talks.

The U.S. is obviously pursuing important topics like e-commerce in multiple fora.  While the WTO may result in a plurilateral agreement that is less robust than U.S provisions with Canada and Mexico or that get achieved with other trading partners, the plurilaterals at the WTO are an important effort to maintain relevance for the WTO in a rapidly changing world.

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Despite the China-Russian Federation Relationship, is supporting Russia in China’s economic interest?

The United States and China met in Italy on March 14th for a lengthy meeting on the Russia-Ukraine conflict. Press accounts make clear that the United States has articulated its concern about any nation serving to undermine the sanctions being imposed on Russia for its unprovoked invasion of Ukraine. See, e.g., CNBC, China says it wants to steer clear of U.S. sanctions over Russia’s invasion of Ukraine, March 15, 2022, https://www.cnbc.com/2022/03/15/ukraine-crisis-china-wants-to-avoid-us-sanctions-over-russias-war.html (“The U.S. has warned of consequences for any country that provides Russia with support amid the Kremlin’s conflict with Ukraine. ‘We are watching very closely to the extent to which the PRC [People’s Republic of China] or any country in the world provides support material, economic, financial, rhetorical otherwise, to this war of choice that President [Vladimir] Putin is waging against the government of Ukraine, against the state of Ukraine and against the people of Ukraine,’ State Department spokesman Ned Price said at a news briefing Monday. ‘We have been very clear both privately with Beijing and publicly with Beijing that there would be consequences for any such support,’ Price said.).

Indeed, the U.S. has indicated it has information suggesting that Russia has asked China for such assistance, although China has denied the U.S. claim. See, e.g., Financial Times, US officials say Russia has asked China for military help in Ukraine, March 13, 2022, https://www.ft.com/content/30850470-8c8c-4b53-aa39-01497064a7b7; New York Times, Russia Asked China for Military and Economic Aid for Ukraine War, U.S. Officials Say, March 13, 2022, https://www.nytimes.com/2022/03/13/us/politics/russia-china-ukraine.html.

The relationship between the Russian Federation and China is currently quite close as shown in the meeting between Xi Jining and Vladimir Putin at the start of the Winter Olympics last month. See, e.g., Ministry of Foreign Affairs of the People’s Republic of China, President Xi Jinping Held Talks with Russian President Vladimir Putin, February 4, 2022, https://www.fmprc.gov.cn/mfa_eng/zxxx_662805/202202/t20220204_10638923.html; NPR, Parsing the meaning of the Xi-Putin meeting on the sidelines of the Beijing Olympics, February 8, 2022, https://www.npr.org/2022/02/08/1079112810/parsing-the-meaning-of-the-xi-putin-meeting-on-the-sidelines-of-the-beijing-olym (“After Russian President Vladimir Putin attended the opening ceremony in Beijing last Friday, he met with China’s President Xi Jinping. The two men declared there were no limits to their strategic partnership. And they went further, too. In a statement, China backed Russia’s demand to stop the NATO expansion to the East. The countries took aim at the U.S. with a promise to, quote, ‘counter interference by outside forces in the internal affairs of sovereign countries under any pretext.'”).

In a blog post today, Alan Wolff and Nicolas Veron explore reasons why China’s providing assistance to Russia should be increasingly unattractive. Nicolas Veron and Alan Wm. Wolff, Six reasons why backstopping Russia is an increasingly unattractive option for China, Bruegel blog, March 15, 2022, https://www.bruegel.org/2022/03/six-reasons-why-backstopping-russia-is-an-increasingly-unattractive-option-for-china/. Alan Wolff is a former Deputy Director-General at the WTO and a former Deputy U.S. Trade Representative. Nicolas Veron is a senior fellow at Bruegel, a Brussels-based economic policy think tank he helped cofound in 2002–04.  Both are with the Peterson Institute for International Economics. The blog post is an excellent review of reasons why China should find it in its own interest to distance itself from the war of aggression by Russia.

The six reasons are laid out in the post as follows:

“First, China in recent decades has displayed a preference for stability. Its primary engagement with the world at large has been as a trading partner and major investor in infrastructure. As the war grinds on, the invasion of Ukraine looks increasingly like a reckless gamble that will disrupt and break many relationships, including trade and financial ones. By supporting Russia, China can only prolong the conflict, actively contributing to continued destabilisation of the international order. A return to stability can only come with an early peaceful resolution in Ukraine.

“Second, China has promoted a geo-economic vision for Eurasia, in which it stands at the eastern end of a trading network that extends all the way to Western Europe. China has invested heavily in its relationships with the countries to its west, including Russia and Ukraine. With the EU now firmly on the side of the Ukrainian government, the new reality is that Ukraine will emerge more closely integrated with the rest of Europe. If China stands on the Russian side in a prolonged conflict, it would undermine its Eurasian vision of the Belt and Road.

“Third, China has a longstanding diplomatic doctrine that emphasises five principles of mutual coexistence: mutual respect for sovereignty and territorial integrity; mutual non-aggression; mutual non-interference in each other’s internal affairs; equality and mutual benefit; and peaceful coexistence. A quick Russian operation that delivered a stable puppet government in Ukraine could have allowed China to formulate a narrative in which these principles were upheld, but the evidence of Ukrainian patriotism in a war of resistance renders this impossible. To be seen to be discarding the foundational principles of its diplomacy would be costly for China, not least in its relations with its Asian neighbours.

“Fourth, China wants to reunify Taiwan with the mainland. A quick Russian victory in Ukraine might have provided support for a Chinese strategy of seizing the ‘23rd province’ by force. By contrast, a protracted conflict in which the Ukrainian side achieves impressive feats of resistance is a reality from which China may want to distance itself as much as possible. By propping up Russia, China could solidify the pro-Ukraine camp into a durable coalition that could provide a similarly unified response to any Chinese move against Taiwan.

“Fifth, China is energy-dependent. The oil price inflation resulting from the war in Ukraine is bad news for the Chinese economy – even assuming it can buy more oil and gas from Russia at a discount. Furthermore, the war-induced price increases in commodities such as wheat, which are basic to the well-being of many developing countries, could subtract from the goodwill built up via the Belt and Road Initiative if China’s actions are viewed as prolonging the conflict.

“Sixth, China’s extraordinary growth has been critically supported by access to markets and a continuing flow of international investment. Were China to materially support Russia’s aggression, the pro-Ukraine camp’s sanctions could begin to apply to Chinese interests. Russia’s increasingly murderous attacks against civilians add to the challenge. If China supports Russia, the implied reputational damage may lead to boycotts and lost investment, not to mention moral revulsion among the Chinese population as well. A scenario of significant decoupling of pro-Ukraine countries from China would do direct harm to China’s economic interests.”

A recent Financial Times article looked at the rising costs for China of its close relationship with Russia. Financial Times, The rising costs of China’s friendship with Russia, March 10, 2022, https://www.ft.com/content/50aa901a-0b32-438b-aef2-c6a4fc803a11. The article reviews the serious reputational problems for China from Russia’s brutal war. On the topic of trade costs, the article also notes both its reliance on imported oil, gas, iron ore and wheat and reviews the fact that China is facing the worst harvest in recent memory of wheat requiring increased imports of about 50% more than the average over recent years.

“Among the large economies, China is one of the most exposed to the fallout from the war. As the world’s biggest importer of oil, it has watched crude prices — which were already high — surge 27 per cent since the war began, while Chinese iron ore contracts surged 25 per cent over the first 10 days of the conflict.

“The impact could be even more pronounced on food. Chinese wheat prices and corn futures are also at record highs, perhaps prompting a lecture on Sunday by Xi about the importance of food security to a group of delegates attending the annual session of China’s parliament.”

According to the WTO Trade Profiles 2021, China imported in 2019 $176.321 billion of crude oil, $118.944 billion of iron ores and concentrates and $42.078 of petroleum gases. Page 80. Wheat and corn are not among the top five agricultural imports and so their value in 2019 were each below $4 billion. So the big hit economically in terms of higher costs will be in oil, gas and steel inputs.

The higher costs for imported products may be the smallest of the costs China faces from the potential rupture in relations with the EU, U.S. and other countries, and the other issues identified above. That said, the challenge for China may flow from the leader-to-leader commitments which may make it hard for Xi to accept distancing from Russia and the misinformation being spread by Chinese officials which may prevent a rational evaluation of self-interest by top Chinese leadership. Let’s hope that China is able to understand the costs they are incurring and likely to incur from solidarity with Russia.

The EU – AU Summit and the promise of a resolution to the WTO pandemic response package

The sixth European Union – African Union summit took place last week in Brussels on February 17-18. The summit covered a broad array of topics including access to vaccines. It followed an event on vaccine equity in Africa hosted by BioNTech and the kENUP Foundation on the 16th which announced the schedule for shipping facilities to several African countries to produce mRNA vaccines in the second half of 2022. See February 16, 2022:  Building Vaccine Capacity in Africa – Exciting News from BioNTech, https://currentthoughtsontrade.com/2022/02/16/building-vaccine-capacity-in-africa-exciting-news-from-biontech/.

The Summit was an effort to have the two Unions form a new partnership, and for the EU to be the partner of choice for countries in Africa. The joint declaration from the summit is included below and reviews the broad areas of discussion and agreed actions to be taken by the two Unions following the Summit.

final_declaration-en

The discussion of the COVID-19 pandemic and the ongoing discussion on the WTO’s consideration of a response to the pandemic (both trade and intellectual property) was one of the important issues at the summit. The joint declaration discussion of the issue is copied below.

“The immediate challenge is to ensure a fair and equitable access to vaccines. Together we will support local and regional mechanisms for procurement, as well as allocation and deployment of medical products. The EU reaffirms its commitment to provide at least 450 million of vaccine doses to Africa, in coordination with the Africa Vaccine Acquisition Task Team (AVATT) platform, by mid-2022. Contributing to this and complementing the actions of the AVATT, Team Europe has provided more than USD 3 billion (i.e. the equivalent of 400 million vaccine doses) to the Covax Facility and to vaccination on the African continent.

“Team Europe will mobilise EUR 425 million to ramp up the pace of vaccination, and in coordination with the Africa CDC, to support the efficient distribution of doses and the training of medical teams and the capacity of analysis and sequencing. We will also contribute in this context to the fight against health-related disinformation.

“Learning from the current health crisis, we are committed to supporting the full-fledged African health sovereignty, in order for the continent to respond to future public health emergencies. To this end, we support a common agenda for manufacturing vaccines, medicines, diagnostics, therapeutics and health products in Africa, including investment in production capacities, voluntary technology transfers as well as strengthening of the regulatory framework to enable equitable access to vaccines, diagnostics and therapeutics.

“The African Union and the European Union underlined the urgency of the WTOs contribution to the fight against the pandemic and to the recovery of the global economy, and commit to engage constructively towards an agreement on a comprehensive WTO response to the pandemic, which includes trade related, as well as intellectual property related aspects.”

The European Commission’s President Ursula von der Leyen statement at the press conference on February 18 provided the timeline for reaching agreement with the African Union on the WTO response package to the COVID-19 pandemic, including finding an acceptable path forward on intellectual property. The EU and AU will be meeting in the Spring to find a mutually acceptable solution. President von der Leyen’s comments at the press conference on this topic are copied below.

“And finally, from the health of our planet, to the health of our people. Europe is Africa’s number one
partner in the fight against COVID-19. And we will do even more. We are on the right track to reach
our goal to share at least 450 million vaccine doses by this summer. And indeed, together, we are
building up mRNA manufacturing capacity across Africa. I will not go in detail because we have
discussed that in the press conference this morning.

“But important is that we had a very good, intense, constructive discussion on the question of TRIPS
waiver and compulsory licencing. We share the same goal. We have different ways to reach that goal.
There must be a bridge between those two ways. And therefore, we have decided that the two
Commissions – the African Union Commission and the European Union Commission – will work
together. We will organise a College-to-College meeting here in Brussels, in spring. And at that time,
at the latest, we have to deliver a solution. This will be accompanied by the WTO, Director-General
Ngozi. And therefore, I always like it when a task is clear and defined. The task is set for the two
Commissions. The frame is clear, the goal is clear, we have to deliver.”

Statement by President von der Leyen at the joint press conference following the 6th European Union-African Union Summit, Brussels, 18 February 2022, https://ec.europa.eu/commission/presscorner/detail/en/STATEMENT_22_1181.

The European Union has been working for most of the last year on moving towards significant vaccine production capacity being built in Africa. President von der Leyen’s statements at the start of the EU-AU Summit and her statement at the Vaccine Equity for Africa event on February 16 provide significant detail on actions the EU is taking to help Africa develop vaccine manufacturing capacity as well as address the build up of health care infrastructure on the continent. See Opening speech by President von der Leyen at the 6th European Union-African Union Summit, Brussels, 17 February 2022, https://ec.europa.eu/commission/presscorner/detail/en/SPEECH_22_1142; Statement by President von der Leyen at the‘Vaccine Equity for Africa’ launch event, co-organised by BioNTech SE and the kENUP Foundation, 16 February 2022, https://ec.europa.eu/commission/presscorner/detail/en/STATEMENT_22_1105.

Parts of the February 16 speech are copied below.

“This year already, at least two of these container factories will move to Africa. To Rwanda and to Senegal, where I visited last week the Institut Pasteur de Dakar. Close cooperation is ongoing with South Africa’s Biovac Institute. And with our partners in Ghana. We are advancing in record time. Commercial production is set to begin in 2023. 

“The ‘Vaccine Equity for Africa’ project is only possible thanks to teamwork. Starting with Africa’s declared ambition to build its own vaccine production capacity. Teaming up with a European innovation champion such as BioNTech. Supported by the European Union and the African Union. Governments in Europe and Africa. And the UN system. This is how we emerge from the pandemic and build a stronger future for Africa and Europe.

“The initiative is first and foremost about vaccine equity. Vaccines from the new factories will be sold at not-for-profit prices, exclusively to African countries. They will be made in Africa, for Africa, with world-class technology.

“At the same time, this initiative can advance public health and industry, well beyond the pandemic. We know the mRNA technology is revolutionary. It holds promises for the fight against other diseases, like malaria and tuberculosis. BioNTech factories can be adjusted within weeks to make different vaccines. It could thus be an African-made solution to diseases that currently kill millions.

“This project is part of a larger ambition. By 2040, the African Union wants that 60% of the vaccines used on the continent are manufactured on the continent. The European Union fully supports that goal. Together with our Member States and financial institutions, we have committed over one billion euros in financing. To strengthen regulatory frameworks, and transfer skills and know-how. Because regional capacities are the cornerstone of global public health.

“And the project goes even beyond public health. Building this technological capacity in Ghana, Rwanda, Senegal and South Africa – countries that are regional leaders in innovation – will strengthen the innovation ecosystem on the entire continent.”

Documents from the European Council and European Commission at the conclusion of the Summit provide the EU’s view of the healthcare portion of the summit and EU actions. See European Council, Council of the European Union, First technology transfer of mRNA vaccines: Working together to build new solutions, 18 February 2022, https://www.consilium.europa.eu/en/european-council/president/news/2022/02/18/20220218-mrna-vaccines-technology-transfer/ (“In the margins of the European Union-African Union Summit, the World Health Organisation (WHO) announced the first six countries that will receive the technology needed for the production of mRNA vaccines on the African continent. Egypt, Kenya, Nigeria, Senegal, South Africa and Tunisia all applied and have been selected as recipients. The announcement was made at a ceremony hosted by the European Council, France, South Africa and the WHO in the presence of the following leaders: Charles Michel, President of the European Council, Ursula von der Leyen, President of the European Commission. President Macron, President Ramaphosa, President Sall, President Kenyatta, President Buhari, President Saïed and  President al-Sisi.”); European Commission, EU-Africa: Global Gateway Investment Package – Health, factsheet, 9 February 2022,https://ec.europa.eu/commission/presscorner/detail/en/fs_22_870.

While vaccines and health issues were just one of a number of important topics reviewed during the Summit, it has been the focus of this post simply because the outcome and promised meeting in the Spring between the two Unions offers the hope of a resolution to the WTO’s ongoing negotiations on a pandemic response package — one that covers various trade actions as well as what, if any, actions are needed on intellectual property rights during a pandemic. While the member states of the EU and the AU are not the only parties with strong positions in the ongoing discussions at the WTO, it would seem likely that if the EU and AU are able to reach agreement on a package that will likely form the basis of a final resolution in Geneva.

With the WTO apparently discussing dates in June 2022 for rescheduling the 12th Ministerial Conference, the ability of the EU and AU countries to find a mutually agreeable solution to the intellectual property component of the pandemic response package could permit an agreed package to be accepted by WTO Members at the Ministerial Conference. See Inside U.S. Trade’s World Trade Online, World Trade Organization now eyeing June for 12th ministerial, February 18, 2022, https://insidetrade.com/daily-news/world-trade-organization-now-eyeing-june-12th-ministerial. The announcement last week of the Spring effort to reach agreement may also help facilitate movement on fisheries subsidies at the WTO — a negotiation that has been ongoing for more than 20 years.

In short, the EU-AU Summit while covering a lot of ground on issues of importance to both Unions may also have created a path to forward movement at the WTO on the response to the pandemic and more ahead of the 12th Ministerial Conference.

Actions by the US, EU, Quad (US, Japan, India, Australia), China and others should ensure that there are more than adequate vaccines available in 2022 to vaccinate all countries against COVID-19. Efforts by the WHO, GAVI, the U.S., EU and others are also likely to significantly increase the ability of countries in Africa to vaccinate their populations. Thus, the real benefit of resolving the WTO pandemic response at the 12th Ministerial will not be responding to COVID-19 but rather adopting rules and policies that will make the world more responsive to future pandemics.

We wish the EU and AU well in their upcoming negotiations.

The WTO Panel Report, UNITED STATES – SAFEGUARD MEASURE ON IMPORTS OF LARGE RESIDENTIAL WASHERS, WT/DS546/R (8 February 2022)

On February 8th, a WTO panel report was released to the public on a U.S. safeguard case on imports of large residential washers. A challenge to the U.S. action was filed at the WTO by Korea on May 18, 2018 after safeguard relief was provided by the U.S. beginning February 7, 2018. The panel process was complicated by COVID restrictions on in person meetings. The challenge was to the U.S. International Trade Commission’s affirmative serious injury determination and remedy recommendation from December 2017 and the President’s issuance of import relief in late January 2018. See USITC, Large Residential Washers, Inv. No. TA 201 076, USITC Pub. 4745 (December 2017); Presidential Documents, Proclamation 9694 of January 23, 2018 – To Facilitate Positive Adjustment to Competition from Imports of Large Residential Washers, 83 FR 3553 (25 January 2018). As noted in footnote 11 to the Panel Report, “We note that in its comments to the Descriptive Part of the Panel Report, Korea noted that the safeguard measure at issue was extended on 14 January 2021 for two additional years, through 7 February 2023. (Korea’s comments to the Descriptive Part of the Panel Report (referring to US notification to the WTO, G/SG/N/10/USA/8/Suppl.7)).” WT/DS546/R at 10 fn. 11.

The panel found a number of aspects of the USITC determination and Presidential action to be contrary to U.S. obligations. The violations by and large raise important questions about needed reforms to GATT 1994 Art. XIX and the Agreement on Safeguards to ensure a functioning safeguard remedy as well as the proper role of dispute settlement in such cases. At the same time, a large number of challenges by Korea were rejected by the panel through the correct application of burden of proof and standard of review of administrative findings. Thus, the U.S. will have to decide if it will appeal the panel report, agree to its adoption or seek some other form of resolution with Korea.

GATT Art. XIX:1(a)

The first “violation” of obligations found by the panel reflects prior Appellate Body findings that provisions of Article XIX permit safeguard actions only where there are unforeseen developments and the problems are from the effects of obligations incurred by Members. The panel, following earlier decisions, found that these factors had to be explained and justified in the USITC determination and not raised after the fact during the dispute. WT/DS546/R at part 7.2, page 13-19. The concluding paragraph states, “7.35. In light of the above, we find that the USITC acted inconsistently with Article XIX:1(a) of the GATT 1994 and Article 3.1 of the Agreement on Safeguards because its report does not contain a reasoned and adequate explanation on ‘unforeseen developments’ and the ‘obligations incurred’ by the United States, within the meaning of Article XIX:1(a) of the GATT 1994.”

In the USTR report on the Appellate Body of the World Trade Organization from February 2020, USTR flagged six particularly eggregious decision areas of the Appellate Body that reflected the range of problems of concern to the United States. The fifth area was “The Appellate Body’s Non-Text-Based Interpretation of Article XIX of the GATT 1994 and the Safeguards Agreement Undermines the Ability of WTO Members to Use Safeguards Measures”. Report at 110-114, https://ustr.gov/sites/default/files/Report_on_the_Appellate_Body_of_the_World_Trade_Organization.pdf. The segment from the USTR Report is copied below.

E. The Appellate Body’s Non-Text-Based Interpretation of Article XIX of the GATT 1994 and the Safeguards Agreement Undermines the Ability of WTO Members to Use Safeguards Measures

“• WTO Members specifically reserved for themselves the right to impose safeguard measures to protect their industries from import surges that cause or threaten to cause serious injury.

“• The Appellate Body has diminished this right by inventing additional requirements for the imposition of safeguards that Members never agreed to.

“• For example, the Appellate Body has found that prior to taking a safeguard action, a Member’s competent authority must include in its report a demonstration of the existence of ‘unforeseen developments,’ despite the absence of any such requirement in the GATT 1994 or the Safeguards Agreement.

“• The Appellate Body has also departed from the WTO agreements in creating a high threshold for serious injury determinations under the Safeguards Agreement.

“• Through the imposition of new obligations, the Appellate Body has rendered legitimate
safeguard measures significantly more difficult to defend.

“Safeguard measures provide a crucial means for WTO Members to protect their industries from import surges (including surges that would destroy domestic industry). WTO Members specifically reserved for themselves the right to impose such measures and established rules for the application of such measures in the WTO Agreement on Safeguards (‘Safeguards Agreement’).

1.The GATT and the Safeguards Agreement Reflect the Agreed Rules for Safeguard Measures

“Article XIX:1(a) of the GATT 1947 provides as follows:

“If, as a result of unforeseen developments and of the effect of the obligations incurred by a contracting party under this Agreement, including tariff concessions, any product is being imported into the territory of that contracting party in such increased quantities and under such conditions as to cause or threaten serious injury to domestic producers in that territory of like or directly competitive products, the contracting party shall be free, in respect of such product, and to the extent and for such time as may be necessary to prevent or remedy such injury, to suspend the obligation in whole or in part or to withdraw or modify the concession.

“As with most obligations in GATT 1947, panels evaluated compliance with Article XIX by examining, after the fact, whether the conditions justified a contracting party’s decision to suspend an obligation or withdraw or modify a concession. Parties to the proceeding could rely on information and findings from their domestic proceedings, or introduce new evidence and make new arguments to defend their actions.

“The WTO Agreement incorporated Article XIX of the GATT 1947 substantively unchanged into the GATT 1994, but added the Safeguards Agreement to ‘establish[] rules for the application of safeguard measures which shall be understood to mean those measures provided for in Article XIX of GATT 1994.”260 The Safeguards Agreement set out standards for determining when serious injury existed. The Safeguards Agreement also set forth a requirement that a Member apply a safeguard measure only after an investigation by the competent authorities of that Member ‘to determine whether increased imports have caused or are threatening to cause serious injury to a domestic industry under terms of the Agreement.’261 Article 3.1 provides that ‘[t]he competent authorities shall publish a report setting forth their findings and reasoned conclusions reached on all pertinent issues of fact and law.’ The Safeguards Agreement does not mention ‘unforeseen developments’ or require the competent authorities to evaluate whether serious injury is ‘as a result of unforeseen developments’ for purposes of Article XIX of the GATT 1994.

2. The Appellate Body Has Created Additional Obligations for Imposing Safeguard Measures

“In 2001, in US – Lamb Meat, the Appellate Body proclaimed (1) that the WTO Member taking safeguard action must publicly demonstrate unforeseen developments as a matter of fact before applying a safeguard measure and (2) that the demonstration must have appeared in the report of the competent authorities.262 Neither of these determinations is based on the text of Article XIX. Indeed, the Appellate Body admitted that ‘Article XIX provides no express guidance’ on the issue of ‘when, where or how this demonstration should occur.’263 Undaunted, the Appellate Body based its new determination on ‘instructive guidance’ that it drew from its own findings in earlier safeguard disputes. The Appellate Body’s approach was erroneous. The Appellate Body took a statement from one of its earlier reports, that unforeseen developments are circumstances that ‘must be demonstrated as a matter of fact,’ and used this phrase in a different context to create an entirely new and additional obligation that is not in Article XIX or the Safeguards Agreement.

“The lack of ‘guidance’ on this issue in Article XIX and the absence of any reference to “unforeseen developments” in the Safeguards Agreement demonstrates that WTO Members have not consented to be bound by any particular approach. The United States and other Members have given the Appellate Body no authority to to use its own prior reports to create obligations that do not appear in the text that Members agreed to.

“First, Article XIX does not require a ‘demonstration.’ As with other trade remedies covered by the GATT 1994, Article XIX merely specifies the conditions that justify an action. Thus, a need to ‘demonstrate’ that the conditions exist could arise only if and when another WTO Member challenges the action’s consistency with the relevant condition in Article XIX. By requiring a ‘demonstration’ before application of a safeguard measure, the Appellate Body’s approach appears to reverse the normal burden of proof in dispute settlement proceedings – that the complaining WTO Member bears the burden to show that serious injury was not ‘a result of unforeseen developments.’ The Appellate Body ignored this, and instead required that the WTO Member maintaining a safeguard measure bear the burden of demonstrating the existence of unforeseen developments before another WTO Member even challenged the safeguard measure.

“Second, the Appellate Body states that the ‘demonstration’ must be made by a WTO Member’s competent authorities, and in their published report, and not by any other official of the WTO Member or in any other manner. But Article XIX makes reference neither to competent authorities nor to published reports, two concepts that originate in the Safeguards Agreement, not in Article XIX. And, the Safeguards Agreement charges the competent authorities with the investigation of serious injury – not the other elements of Article XIX. For example, in Korea – Definitive Safeguard Measure on Imports of Certain Dairy Products, the Appellate Body correctly found that there is no obligation for the competent authorities to make findings justifying the type and extent of a safeguard measure. There is simply no textual basis for the Appellate Body’s conclusion in US – Lamb Meat that Article XIX requires the competent authorities to make any finding on unforeseen developments in their report.

“The Appellate Body supports its interpretation by claiming that any other approach would leave the means for complying with Article XIX ‘vague and uncertain’. This is simply not true. WTO Members take most measures without providing an advance demonstration of consistency with the WTO. A WTO Member challenging a safeguard measure must prove that a measure fails to meet one of the relevant requirements, and the Member applying that measure needs to demonstrate consistency only to the extent that the complaining WTO Member has proven its case. The same approach should apply to those elements of Article XIX, like unforeseen developments, that the Safeguards Agreement requires to be subject to the investigation and determination of the competent authorities. In any event, it is outside the mandate of the Appellate Body to elaborate on the text to satisfy the Appellate Body’s own sense of what is ‘clear’ or ‘certain.’ That is a task that WTO members reserved for themselves. Article 3.2 of the DSU is quite clear on this point.

“Other Members also have criticized the Appellate Body’s reasoning as well. As Korea explained in statements to the General Council, the Appellate Body’s reasoning left Members with ‘an ambiguous requirement to demonstrate the existence of ‘unforeseen developments’ [that was] not in line with the drafters’ intention.’ Korea also noted that the drafting history of the Safeguards Agreement demonstrated that ‘it would be unreasonable to conclude that the negotiators had left an essential requirement in Article XIX of GATT 1994 and had not included it in the new Agreement, which was meant to be the final embodiment of the rules on safeguards.’264

“The Appellate Body also strayed from the text of Article XIX and the Safeguards Agreement in US – Wheat Gluten in 2000, and US – Line Pipe in 2002. In these proceedings, the Appellate Body imposed a heightened threshold on the serious injury determinations by the competent authorities.

“Article 4.2(a) of the Safeguards Agreement provides for the competent authorities to conduct ‘an investigation to determine whether increased imports have caused or are threatening to cause serious injury to a domestic industry under the terms of this Agreement.’ It instructs them to ‘evaluate all relevant factors of an objective and quantifiable nature having a bearing on the situation of that industry,’ and lists several of these. Article 4.2(b) of the Safeguards Agreement then provides:

‘The determination referred to in subparagraph (a) shall not be made unless this investigation demonstrates, on the basis of objective evidence, the existence of the causal link between increased imports of the product concerned and serious injury or threat thereof. When factors other than increased imports are causing injury to the domestic industry at the same time, such injury shall not be attributed to
increased imports.

“Relying on a negative obligation not to attribute injury from other causes to imports, the Appellate Body fashioned an affirmative requirement to analyze not only the nature of other factors, but to identify their ‘extent’ and then ‘separate and distinguish’ the effects of other factors from the effects of increased imports. The Appellate Body could even be understood to have suggested that the extent of injury from other factors should be mathematically ascertained so as to precisely separate and distinguish the injury.265 None of these additional requirements appear in the treaty text. The Appellate Body’s erroneous approach could also be understood to prevent an investigating authority from evaluating the injury caused by other factors and then examining whether that injury attenuates the causal link between the increased imports and serious injury. This would diminish the rights of WTO Members to take safeguard action in the circumstances set out in GATT 1994 Article XIX and the Safeguards Agreement.

3. The Appellate Body Has Made It All But Impossible for WTO Members to Impose Safeguard Measures

“A number of safeguard measures have been challenged at the WTO and, with one exception, all have been found to be WTO-inconsistent. 266 This is not surprising given the Appellate Body’s erroneous interpretations. The additional requirements invented by the Appellate Body raise the threshold for an affirmative finding that increased imports cause serious injury to a height that makes it all but impossible to impose safeguards. Under the Appellate Body’s erroneous approach, even if the imports are the most important cause of serious injury, a WTO Member may not apply a safeguard measure if its authorities did not mathematically determine and isolate the effects of other factors. These invented requirements seriously detract from WTO Members’ ability to protect themselves from unforeseen surges in imports, a right clearly reserved to them in Article XIX and the Safeguards Agreement.

“260 Agreement on Safeguards, Article 1.

“261 Agreement on Safeguards, Articles 3.1 and 4.2(a).

“262 US – Lamb (AB), para. 72 (2001).

“263 Id.

“264 Dispute Settlement Body, Minutes of the Meeting Held on January 12, 2000), WT/DSB/M/73 (4 February 2000); accord T. Raychaudhuri, The Unforeseen Developments Clause in Safeguards under the WTO: Confusions in Compliance, 11 Estey Ctr. J. Int’l Law and Trade Pol’y 302, 314 (‘The addition of such a requirement does not appear to be at all consistent with the intent of the negotiators in the Uruguay Round. In fact, a perusal of the negotiating history reveals that the draft version of the AS did contain the unforeseen developments clause. By mid1990, however, the clause was omitted from the draft, while other conditions of Article XIX were repeated almost verbatim.’).

“265 See US – Lamb (AB) (2001), para. 130 (‘[t]he words ‘factors of an objective and quantifiable nature’ imply, therefore, an evaluation of objective data which enables the measurement and quantification of these factors.’).”

While it is perhaps not surprising that the panel would follow the prior Appellate Body decisions on the issue of GATT 1994 Article XIX:1(as), the problem flagged by the U.S. and others remains present in the current decision. Moreover, the lack of inclusion of the requirement in the Agreement on Safeguards may simply reflect the reality experienced by the United States between 1962 and 1974 that the Art. XIX language was not administrable, and hence represent the desire of Members to have the Agreement on Safeguards be operational in fact.

Look for the U.S. to need a resolution of this issue (among others) before the Dispute Settlement problems are resolved. Resolution could occur through a revision to GATT 1994 Art. XIX or the Safeguard Agreement and/or meaningful reform of the dispute settlement system including panel reports.

Likeness of domestically produced parts and imported parts of LRWs

The domestic industry was defined by the USITC as consisting of washing machines and certain parts. Korea made various challenges to the domestic like product including challenging whether domestic parts were like imported parts since such parts were designed for particular models and hence not interchangeable. The panel viewed the Commission’s determination as violative of U.S. obligations under Art. 4.1(c) of the Safeguards Agreement since the Commission indicated the products didn’t compete and the Commission didn’t provide an adequate explanation for why the products were nonetheless “like”. See Panel Report at 23-27. Paras. 7.66 and 7.67 provided the summary of the panel’s finding.

“7.66. In the underlying investigation, the USITC specifically found that imported and domestically produced parts did not compete. We note that the United States alludes to different ways in which conditions of competition could manifest in the market, including situations where imports of LRW parts that do not directly compete with either domestic parts or finished products may nevertheless have an indirect impact on domestic producers of parts and finished products if they are assembled into finished products in domestic screwdriver operations that do not change the fundamental character of the parts. However, the USITC did not undertake any such analysis alluded by the United States as part of its likeness analysis.112

“7.67. Based on the foregoing, we find that the USITC did not find imported covered parts to be like domestically produced covered parts in a manner consistent with Article 4.1(c) of the Agreement on Safeguards in defining the domestic industry. Having reached this finding, we do not consider it necessary to make additional findings under Article 2.1 of the Agreement on Safeguards.

“112 See e.g. United States’ response to Panel question No. 67(a), paras. 1-2. The United States clarified that the USITC did not undertake an analysis of any indirect competition between domestically produced and imported parts as part of its likeness analysis because LG and Samsung, the two Korean producers, had not yet commenced production of LRWs at their planned US LRW production facilities as of the date of the USITC’s vote on injury. The United States explains that the USITC reasonably considered the likelihood of indirect competition from imports of covered parts in recommending safeguard remedy be imposed on parts. We also note that the United States suggests that the USITC found that domestic and imported covered parts competed as they “offer[ed] alternative ways of satisfying the same consumer demand in the marketplace”. (United States’ comments on Korea’s response to question No. 67, fn 12 (referring to USITC report, (Exhibit KOR-1), p. 17)). However, we recall that the USITC stated that covered parts did not compete. Moreover, at the cited section of the USITC report, the USITC stated that “[d]omestically produced and imported covered parts share the same general functionality when installed in LRWs” (emphasis added). This statement does not imply that covered parts competed in the market. As the USITC noted, covered parts may only be installed in specific LRW models. (USITC report, (Exhibit KOR-1), p. 16).”

While the finding can be viewed as a narrow one and one perhaps readily addressable by the USITC in future investigations, the finding of violation is questionable at best. Imported parts were used for repairs and potentially for downstream assembly. Domestically produced parts were used both in original equipment and for sale as repairs. The fact that the parts weren’t interchangeable for a given model doesn’t mean there wasn’t competition. The panel report mentions elsewhere serious price depression found by the Commission for LRWs. The same was likely the case for parts in the aftermarket. It is not uncommon for merchants to promote the total cost of equipment including costs of repairs if needed. Lower replacement costs for an imported part would likely put pressure on domestic replacement part prices. The USITC questionnaires that went to producers and importers may have captured some information on shipments/sales of parts. In any event, for panelists to construe the ITC description of a lack of competition in terms of use within a given model as undermining the appropriateness of parts being found to be like products ignores commercial reality. See also Panel Report at 26 fn. 110 (“We note that in its third-party statement, the European Union argued that because LRW parts are used to repair the respective LRW units, the market for LRW parts may constitute an ‘aftermarket’, while the market for LRW units would be the ‘primary market’. The European Union considered that it is possible that the interaction between the primary market (LRW units) and the aftermarket (LRW parts) form one ‘system market’, so that competition would take place between LRW systems. In its view, if one single domestic market exists for LRW units and parts, within that market, imported and domestic LRW parts would be ‘directly competitive’ with each other because competition would follow from the competition at the system level. (European Union’s third-party submission, paras. 34-40). We note that the USITC did not take such “system market” approach in the underlying investigation. Therefore, whether such approach would be consistent with Article 4.1(c) is not an issue in the matter before us.”).

As part of its attack on the U.S. like product findings, Korea separately argued that the USITC had included parts pursuant to its product line approach to analysis. The panel agreed with Korea (Panel Report at 27-30), but that issue would be irrelevant if a proper analysis had been performed on the like product issue on parts.

Other issues

The panel faulted the USITC for not explaining why it had excluded one domestic producer from profit and loss data and why the remaining data were sufficient. It also faulted the U.S. for not giving Korea sufficient time to consult on the safeguard remedy once the Administration had decided to include product from Korea in the relief. Regardless of the merits of the panel’s findings on these issues, neither should pose significant challenges to the U.S. in future cases.

Conclusion

Because the panel report contains several significant errors, including at least one of longstanding concern to the United States as reflected in the USTR Report on the Appellate Body of the World Trade Organization, it is possible that the United States will choose to file an appeal at the WTO and hence join the 24 other disputes where appeals have been filed where resolution is helpdup by the lack of a functioning Appellate Body (including a case where Korea has appealed (22 January 2021:  Notification of Appeal by Korea in DS553: Korea — Sunset Review of Anti-Dumping Duties on Stainless Steel Bars (WT/DS553/6)).

However, relief under the U.S. safeguard action is due to expire on February 7, 2023. Moreover, on many issues raised by Korea, the panel found no violation of obligation by the United States. In such circumstances, it is possible that the U.S. will agree to resolve the dispute by terminating the 201 relief sometime in the Spring.

My bet would be on the resolution option.

The WTO’s efforts to address the COVID-19 pandemic — will Members reach agreement by the end of February?

Throughout the current pandemic, the WTO has generated large amounts of information to help Members examine the response to the pandemic that would minimize disruptions and maximize availability of medical goods. See, e.g., WTO webpage and series of reports generated by the Secretariat (WTO, COVID-19 and world trade, https://www.wto.org/index.htm; https://www.wto.org/english/tratop_e/covid19_e/covid19_e.htm. The WTO Secretariat provides periodic updates on reports as well as tracking import and export restrictions on medical goods and inputs. See, e.g., WTO news, WTO Secretariat updates members on COVID-19 reports and new tools, 28 January 2022, https://www.wto.org/english/news_e/news22_e/nama_28jan22_e.htm.

With support from WTO Members, the WTO has worked with other multilateral organizations to promote a coordinated response. See, e.g., WTO press release, WHO, WIPO, WTO heads chart future cooperation on pandemic response, 1 February 2022, https://www.wto.org/english/news_e/news22_e/igo_01feb22_e.htm; WTO press release, International organizations discuss how to improve access to COVID vaccines, countermeasures, 22 December 2021, https://www.wto.org/english/news_e/news21_e/covid_22dec21_e.htm (IMF, World Bank, WHO, WTO); WTO-IMF COVID-19 Vaccine Trade Tracker, Last updated: 17 January 2022, https://www.wto.org/english/tratop_e/covid19_e/vaccine_trade_tracker_e.htm.

Most WTO Members view agreeing on a multilateral response to the pandemic as of critical importance. This includes both addressing a host of non intellectual property issues [“These include issues relating to trade facilitation, export restrictions, regulatory coherence, transparency and monitoring, scaling-up of production and distribution on essential goods, services and crisis preparedness and resiliency, and coordination with relevant stakeholders, including international organizations and the private sector.”] and resolving whether there should be a waiver from some TRIPS obligations as requested by India, South Africa and supported by others. The WTO Secretariat put out a briefing note on the issue of trade and health looking at the state of play as of 6 January 2022. See Trade and health: WTO response to the COVID-19 pandemic, 6 January 2022 (above quote is from the briefing note), https://www.wto.org/english/thewto_e/minist_e/mc12_e/briefing_notes_e/bftrade_and_health_e.htm.

As I have reviewed in prior posts, the waiver of TRIPS obligations proposal from India and South Africa has been challenging for a number of Members to accept. See, e.g., WTO efforts to address the COVID-19 pandemic — the January 10, 2022 General Council meeting and some current developments of interest, https://currentthoughtsontrade.com/2022/01/11/wto-efforts-to-address-the-covid-19-pandemic-the-january-10-2022-general-council-meeting-and-some-current-developments-of-interest/. The briefing note provides a good summary of the TRIPS waiver proposal and is copied below.

“TRIPS Council

“In parallel to the process facilitated by Ambassador Walker, members have been seeking convergence on how best to use the global intellectual property (IP) system to tackle COVID-19 in the context of the Council for Trade-Related Aspects of Intellectual Property Rights (TRIPS).

“Waiver request

“Over the past year, members have engaged in discussions based on various texts. On 15-16 October 2020, India and South Africa introduced at the TRIPS Council document IP/C/W/669 requesting a waiver from certain provisions of the TRIPS Agreement for the prevention, containment and treatment of COVID-19. The proposal has since been co-sponsored by the delegations of Kenya, Eswatini, Mozambique, Pakistan, Bolivia, Venezuela, Mongolia, Zimbabwe, Egypt, the African Group, the LDC Group, the Maldives, Fiji, Namibia, Vanuatu, Indonesia and Jordan.

“Since the introduction of the document, discussions have taken place in various formal and informal TRIPS Council meetings. Delegations have exchanged views, asked questions, sought clarifications and provided replies, clarifications, and information on the waiver request. On 21 May 2021, the co-sponsors issued a revised proposal which was circulated in document IP/C/W/669/Rev.1 and on 29 September 2021 they circulated a summary of their interventions in document IP/C/W/684.

“In the course of discussions on the revised waiver proposal, delegations have held focused discussions on the topics of scope, both from the perspective of products and of IP rights, on duration, implementation and the protection of undisclosed information.

“All delegations remain committed to the common goal of providing timely and secure access to high-quality, safe, efficacious and affordable vaccines and medicines for all, but discussions have shown that disagreement persists on the fundamental question of whether a waiver is the appropriate and most effective way to address the shortage and inequitable distribution of and access to vaccines and other COVID-related products.

“EU proposal

“In addition, a proposal (IP/C/W/681) for a draft General Council declaration on the TRIPS Agreement and Public Health in the circumstances of a pandemic, issued by the European Union, has also been discussed in meetings since its circulation on 21 June 2021.

“The European Union proposal, which is backed by other developed country members, calls for limiting export restrictions, supporting the expansion of production, and facilitating the use of current compulsory licensing provisions in the TRIPS Agreement, particularly by clarifying that the requirement to negotiate with the right holder of the vaccine patent does not apply in urgent situations such as a pandemic, among other issues.

“While recognizing that intellectual property rights (IPRs) should not stand in the way of deploying and creating capacity, or of ensuring equitable access to vaccines and therapeutics, several developed and developing members have cautioned that this can be attained while maintaining IP as the basis for incentivizing investment in innovation, and for licensing technology transfer, so that members can effectively fight new strains of COVID-19 and any future diseases and pandemics. Some are particularly concerned that waiving IP rights might undermine the existing efforts and arrangements for large scale production of vaccines that rely, in part, on the IP system.  

“State of play

“Since the General Council held on 7 October 2021,  members have held intense contacts in various configurations. Some members have noted encouraging exchanges at small group discussions and bilateral meetings which have helped to identify points of convergence on how to provide a common IP response to COVID-19. Others have said that further conversations that move the TRIPS Council towards evidence-based and pragmatic solutions should guide their discussions at this critical juncture.

“At a meeting of the TRIPS Council on 18 November, members formally adopted an oral status report for the General Council on 22-23 November indicating that the TRIPS Council has not yet completed its consideration of the revised waiver request. The TRIPS Council will therefore continue its consideration, including through small-group consultations and informal open-ended meetings, and report back to the 12th Ministerial Conference (MC12) as stipulated in Article IX:3 of the Marrakesh Agreement. In addition, the TRIPS Council will also continue in the same manner its consideration of the other related proposals by members.

“This means the TRIPS Council remains in session so that it  can continue to provide a forum for delegations to provide transparency on their ongoing talks, and to adopt any elements or solutions they may have found.”

Despite the postponement of the 12th Ministerial Conference due to the increase in COVID cases from the omicron variant, WTO Members have indicated a desire to push ahead to resolve some matters, including the multilateral response to the pandemic. Last month, Director-General Ngozi Okonjo-Iweala urged WTO Members to push forward and seek a resolution on the WTO’s response to the pandemic by the end of February this year. See WTO press release, Members discuss way forward in dedicated meeting on WTO pandemic response, 27 January 2022,https://www.wto.org/english/news_e/news22_e/gc_27jan22_e.htm (“WTO members met on 27 January to discuss the WTO response to the COVID-19 pandemic. The informal meeting convened by the Chair of the General Council, Ambassador Dacio Castillo of Honduras, looked at issues related to cross-border trade flows and the proposal to waive certain intellectual property protections related to COVID-19 countermeasures. Director-General Ngozi Okonjo-Iweala called on members to move swiftly to try and reach a comprehensive outcome by the end of February.).

One week later according to press reports, Amb. Castillo called for a “strategic pause” in the formal negotiations on a WTO response to permit WTO Members to discuss their differences with each other outside of the full group format. See Inside U.S. Trade’s World Trade Online, General Council chair: WTO pandemic package talks need ‘strategic pause’, February 4, 2022, https://insidetrade.com/daily-news/general-council-chair-wto-pandemic-package-talks-need-%E2%80%98strategic-pause%E2%80%99.

Observations

The chances of a final resolution on a pandemic response package by the end of February seem remote if not nonexistent at the present time. The United States is reportedly not actively engaged and has raised some concerns with the export restraint portion of the package. There seems little likelihood that the EU and others supporting an approach other than TRIPS waiver will agree to a waiver, while those supporting a waiver don’t seem inclined to accept an alternative approach.

There are a number of reasons why a waiver is unlikely to be accepted. First, vaccine equity in 2021 had more to do with India’s failure to export the volumes of vaccines contracted with COVAX than any other single cause although slowness in shifting supplies from countries with surplus product was also an issue. In 2022, there will be sufficient supplies of vaccines for the entire world, and there have been major commitments by major countries to supply large volumes of doses to countries in need. UNICEF tracks capacity to produce COVID vaccines and shipments of vaccines. Around 11 billion doses were shipped globally (including in-country) in 2021 and projections for shipments in 2022 range from 16.8-20.9 billion doses. See COVID-19 Vaccine Market Dashboard, 5 February 2022, doses delivered collectively, 11.771 billion, https://www.unicef.org/supply/covid-19-vaccine-market-dashboard; forecasted COVID-19 vaccine supply availability, 2022 (low estimate 16.8 billion doses; base estimate, 18.7 billion doses; high estimate 20.9 billion doses) (under capacity tab), A waiver of TRIPS obligations would be unlikely to change the quantity of vaccines available for shipment in 2022, so seems unnecessary to address vaccinating the world’s population in 2022.

Second, multilateral efforts and efforts of some pharmaceutical companies has resulted in a rapid expansion of production capacity around the world as the above figures confirm. Even where pharmaceutical companies have not licensed their vaccine technologies, there have been independent breakthroughs including on mRNA vaccines. See, e.g., Reuters, In world first, South Africa’s Afrigen makes mRNA COVID vaccine using Moderna data, February 4, 2022, https://www.reuters.com/world/africa/world-first-safricas-afrigen-makes-mrna-covid-vaccine-using-moderna-data-2022-02-03/ (“CAPE TOWN, Feb 3 (Reuters) – South Africa’s Afrigen Biologics has used the publicly available sequence of Moderna Inc’s (MRNA.O) mRNA COVID-19 vaccine to make its own version of the shot, which could be tested in humans before the end of this year, Afrigen’s top executive said on Thursday. The vaccine candidate would be the first to be made based on a widely used vaccine without the assistance and approval of the developer. It is also the first mRNA vaccine designed, developed and produced at lab scale on the African continent.”).

Third, recent press articles indicate that some countries with very low vaccination rates have nonetheless developed significant antibodies in their populations due to prior waves of infections of COVID-19. With lower average age of populations, COVID-19 has had less severe consequences on their populations, such that there is a belief they are moving to an endemic situation with COVID-19. See my recent post, January 30, 2022:  Recent National Public Radio story, “Africa may have reached the pandemic’s holy grail,” raises interesting questions on a country’s age distribution and ability to get past the pandemic stage with lower vaccination rates, https://currentthoughtsontrade.com/2022/01/30/recent-national-public-radio-story-africa-may-have-reached-the-pandemics-holy-grail-raises-interesting-questions-on-a-countrys-age-distribution-and-ability-to-get-past-the-pandemic-stage-wit/.

All of the above suggests that the case for a waiver, at least at this time, is not strong, which will likely keep opposition of the EU and others strong.

The WTO has served as a depository for information on the types of restrictions and has permitted Members to encourage limiting restrictions on access to critical medicines and inputs. It has also developed reports helpful to Members to understand existing barriers or restrictions as well as to do outreach to the private sector for a better understanding of bottlenecks in production and distribution ramp-ups. The WTO in conjunction with other multilateral organizations has helped generate information to better inform the needs of countries for assistance and develop more coordinated efforts at support.

The WTO Members may yet be able to reach agreement on a response to the pandemic that will not only help with the current pandemic but establish a common frame of reference of dealing with future pandemics in a more effective manner that promotes greater equity. It is just unlikely to happen in the next 23 days.

Recent National Public Radio story, “Africa may have reached the pandemic’s holy grail,” raises interesting questions on a country’s age distribution and ability to get past the pandemic stage with lower vaccination rates

Every country that has had large numbers of COVID-19 cases and deaths reported have shared the experience that older populations and those with certain health conditions have been the groups at greatest risk, along with front line health care workers Vaccinations and booster shots can significantly reduce the risk of hospitalization and death for these groups and for younger age groups as well.

The COVID-19 pandemic has raised important questions on vaccine equity. Low income and lower-middle income countries have generally had much poorer access to vaccines and to getting vaccines received administered, although the rate of vaccination varies within income groups as well as between income groups. See, e.g., January 23, 2022:  COVID-19 Omicron variant – hopeful signs of peaking in the U.S. and Europe; supply disruptions continue from zero tolerance policy in China, https://currentthoughtsontrade.com/2022/01/23/covid-19-omicron-variant-hopeful-signs-of-peaking-in-the-u-s-and-europe-supply-disruptions-continue-from-zero-tolerance-policy-in-china/.

Much focus has been on low income countries and lower-middle income countries, particularly in Africa, where vaccination rates trail dramatically all other countries and income groups.

On Friday, January 28, 2022, National Public Radio in the U.S. posted an article, “Africa may have reached the pandemic’s holy grail,” https://www.npr.org/sections/goatsandsoda/2022/01/28/1072591923/africa-may-have-reached-the-pandemics-holy-grail. The following excerpt reviews that large portions of the population in countries like Malawi were infected by the first waves of the COVID-19 virus which built up immunity to the omicron variant. Despite any reinfections that have occurred, hospitalizations and deaths were very low despite very low vaccination rates. The population of many low income countries is much younger than higher income countries and thus infections were typically much less severe. A few excerpts from the NPR article follow.

“When the results of his study came in, Kondwani Jambo was stunned.

“He’s an immunologist in Malawi. And last year he had set out to determine just how many people in his country had been infected with the coronavirus since the pandemic began.

“Jambo, who works for the Malawi-Liverpool-Wellcome Trust Clinical Research Programme, knew the total number of cases was going to be higher than the official numbers. But his study revealed that the scale of spread was beyond anything he had anticipated — with a huge majority of Malawians infected long before the omicron variant emerged. ‘I was very shocked,’ he says.

“Most important, he says, the finding suggests that it has now been months since Malawi entered something akin to what many countries still struggling with massive omicron waves consider the holy grail: the endemic stage of the pandemic, in which the coronavirus becomes a more predictable seasonal bug like the flu or common cold.

“In fact, top scientists in Africa say Malawi is just one of many countries on the continent that appear to have already reached — if not quite endemicity — at least a substantially less threatening stage, as evidenced by both studies of the population’s prior exposure to the coronavirus and its experience with the omicron variant.”

With global vaccine production dramatically up from this time last year and with much larger quantities getting shipped to low income and lower-middle income countries, the above article suggests that omicron has not done serious damage to most countries at the low income range and that significantly increased vaccinations in 2022 should help ensure a safer future.

Looking at UN population data by age group and by median age shows an interesting correlation between median age and income level of country. The median age for low income countries in 2020 (est.) was 19.0 years; for low-middle income countries, 26.6 years; for upper-middle income countries, 35.4 years and for high income countries, 41.0 years. See United Nations Population Division Department of Economic and Social Affairs, World Population Prospects 2019.

Looking at breakdowns by age groups, the UN data show the following percent of population in the World Bank income groups.

Age GroupLow IncomeLower-Middle IncomeUpper-Middle IncomeHigh Income
0-14 41.3% 29.4% 20.4% 16.6%
15-49 48.2% 52.8% 50.5% 45.6%
50+ 10.5% 17.8% 29.1% 37.7%
60+ 5.2% 9.1% 15.8% 24.4%
65+ 3.3% 5.9% 10.8% 18.4%
75+ 1.0% 1.9% 3.6% 8.4%

Age distribution has been a silver lining in an otherwise challenging global situation these last two years.

The trade and investment restrictions flowing from censorship — a recent U.S. International Trade Commission Report and the implications for the ongoing Joint Statement Initiative on E-Commerce

Eighty-six WTO Members are engaged in the ongoing Joint Statement Initiative negotiations on e-commerce. See WTO, Joint Initiative on E-Commerce, https://www.wto.org/english/tratop_e/ecom_e/joint_statement_e.htm (“As of January 2021, there are 86 WTO members participating in these discussions, accounting for over 90 per cent of global trade. As is the case for all the joint initiatives, participation in the e-commerce JI is open to all WTO members. The initiative is jointly co-convened by Ambassador George Mina (Australia), Ambassador YAMAZAKI Kazuyuki (Japan) and Ambassador Tan Hung Seng (Singapore).”). Among the 86 Members who are participating in the negotiations are China, Russia, Indonesia and Turkey as well as major developed countries from Europe, the U.S., Japan, Korea, Canada, Australia, and New Zealand. Not included in the list as of January last year were India and Vietnam. The lack of meaningful rules on e-commerce is a reflection of the challenges the WTO negotiating function has faced in moving forward with multilateral rules.

Reports from the WTO have been that the plurilateral negotiations on e-commerce have made good progress through the end of 2021. See WTO news release, E-commerce co-convenors welcome substantial progress in negotiations, 14 December 2021, https://www.wto.org/english/news_e/news21_e/ecom_14dec21_e.htm; WTO Joint Statement Initiative on E-commerce, Statement by Ministers of Australia, Japan and Singapore, December 2021, https://www.wto.org/english/news_e/news21_e/ji_ecom_minister_statement_e.pdf. The Joint Statement is copied below.

“The COVID-19 pandemic has highlighted the digital economy’s importance, accelerated the digital
transformation and heightened the need for global rules governing digital trade. As Co-convenors of the
Joint Statement Initiative on Electronic Commerce, we are committed to responding to this challenge. This
initiative will update the WTO rulebook in an area of critical importance to the global economy.

“We recognise the importance of the digital economy in post-COVID-19 economic recovery. The digital
economy offers enormous opportunities for developing Members and least-developed country (LDC)
Members, including by lowering the costs for businesses, particularly MSMEs, to access and participate in
global markets. WTO rules and commitments on digital trade can help unlock these opportunities.

“In this context, we will continue to drive negotiations towards a high standard and commercially meaningful outcome building on existing WTO agreements and frameworks. We will continue to promote inclusiveness and encourage the participation of as many WTO Members as possible in the negotiations, which were launched in our January 2019 Ministerial statement.

“We welcome the substantial progress made to date in the negotiations. We have achieved good
convergence in negotiating groups on eight articles – online consumer protection; electronic signatures and authentication; unsolicited commercial electronic messages; open government data; electronic contracts; transparency1; paperless trading; and open internet access. The outcomes already achieved in these areas will deliver important benefits including boosting consumer confidence and supporting businesses trading online.

“In addition, we have seen the consolidation of text proposals in other areas, including on customs duties on electronic transmissions, cross-border data flows, data localisation, source code, electronic transactions frameworks, cybersecurity, and electronic invoicing, as well as advanced discussions on market access. We will intensify negotiations in these areas from early 2022. We note that provisions that enable and promote the flow of data are key to high standard and commercially meaningful outcome.

“Participants in the initiative support the continuation of the multilateral e-commerce moratorium in
fostering certainty and predictability for businesses. The co-convenors consider it crucial that the initiative
makes permanent among participants the practice of not imposing customs duties on electronic
transmissions.

“”In light of the strong progress that has been achieved to date, the co-convenors will arrange the JSI work programme to secure convergence on the majority of issues by the end of 2022. We will identify
opportunities throughout 2022 for Ministers to provide guidance on key issues in the negotiations.
We look forward to working with all participating Members as we intensify the negotiations and work
towards a successful conclusion.

“The Hon Dan Tehan MP, Minister for Trade, Tourism and Investment, Australia
“H.E. Mr HAYASHI Yoshimasa, Minister for Foreign Affairs, Japan
“H.E. Mr HAGIUDA Koichi, Minister of Economy, Trade and Industry, Japan
“H.E. Mr Gan Kim Yong, Minister for Trade and Industry, Singapore

“____

“1 Subject to the final scope of provisions and architecture”

Absent from the topics being discussed (based on the joint statement) are rules around censorship, although some topics can indirectly affect censorship actions (localisation and free flow of data).

Censorship is a major problem for digital trade and service providers, a fact made clear by a recent study from the U.S. International Trade Commission in response to a request from the U.S. Senate Finance Committee. See U.S. International Trade Commission, Foreign Censorship, Part 1: Policies and Practices Affecting U.S. Businesses, Inv. No. 332-585, Publ. 5244 (December 2021), https://www.usitc.gov/publications/332/pub5244.pdf. It is hard to understand how the U.S., EU countries and others can sign off on an e-commerce agreement that doesn’t address the enormous harmful trade effects from censorship.

Part of the Executive Summary of the USITC report (pages 7-13) is copied below and identifies the importance of addressing censorship practices. The countries focused on in the report are China, the Russian Federation, India, Indonesia, Turkey and Vietnam. However, as recognized in the report, censorship is practiced by many more WTO Members.

“Executive Summary

“This report identifies and describes various foreign government censorship policies and practices,
including examples that U.S. businesses consider impediments to trade and investment. It is the first of
two reports requested by the U.S. Senate Committee on Finance (Committee) in its letter to the U.S.
International Trade Commission (Commission) dated April 7, 2021. The Committee stated that censorship
and its impact on the flow of information and services are critical issues for the digital economy and
requested that this first report include detailed information on the following:

“1. Identification and descriptions of various foreign censorship practices, in particular any
examples that U.S. businesses consider to impede trade or investment in key foreign markets.
The description should include to the extent practicable:

“a. the evolution of censorship policies and practices over the past five years in key
foreign markets;

“b. any elements that entail extraterritorial censorship; and

:c. the roles of governmental and nongovernmental actors in implementation and
enforcement of the practices.

“In response to the Committee’s request, this report identifies and describes censorship and censorship enabling policies and practices and the evolution of these policies and practices over the past five years in
six key foreign markets: China (including Hong Kong), Russia, Turkey, Vietnam, India, and Indonesia. For
these key markets, the report also describes elements that entail extraterritorial censorship and the roles
of governmental and nongovernmental actors in implementation and enforcement of censorship policies
and practices.

“In preparing this report, the Commission relied on information provided by a review of relevant
literature, a public hearing, written submissions, interviews with representatives from industry,
academia, the U.S. government, and nongovernmental organizations (NGOs), and publicly available data.
The Commission held a public hearing on July 1, 2021, and participants included representatives of
academic institutions, NGOs, and trade associations. The Commission also received written submissions
for that hearing from a similar cross section of interested parties.

“Defining Censorship

“Censorship can be defined in various ways. For the purposes of this investigation, based on the request
letter from the Committee to the Commission dated January 4, 2021, censorship is defined as the
prohibition or suppression of speech or other forms of communication. This report addresses foreign
government censorship policies and practices, including laws, regulations, and other measures that either
directly target the suppression of speech or may be used to enable or facilitate its suppression. For
purposes of this report, we refer to these measures generally as “censorship-related policies and
practices” or simply “policies and practices.” This investigation focuses on foreign government
censorship-related policies and practices that impede trade and investment by U.S. businesses in key
markets.1 Industries commonly subject to censorship include digital and non-digital media (such as
newspapers, journals, and magazines); producers and distributors of audiovisual content (such as movies
and online video, television, books, and music); and social media and internet search providers, as well as
computer services more generally. The broad trend toward online publication and communication in the
global media and audiovisual services sectors and the heavy reliance on digital distribution for the crossborder provision of news, information, and audiovisual content imply that foreign censorship of the flow of information over digital platforms is having a significant impact on the digital economy. Given this and consistent with the Committee’s request, this report focuses on censorship in the online environment.

“This report in chapter 1 briefly describes how international human rights law has sought to distinguish
between measures that are and are not censorship and whether an instance of censorship may represent
a legitimate exception to freedom of expression. For example, international human rights law considers
such factors as whether a law provides clear direction and is not vague or ambiguous. However, it is
beyond the scope of this report to determine whether a given law may be appropriate or inappropriate
under international human rights law or other legal frameworks.

“Key Markets Where Foreign Censorship Affects U.S. Businesses

“In response to the Committee’s request for information about foreign censorship policies and practices in key markets, the Commission identified six markets: China, Russia, Turkey, Vietnam, India, and Indonesia.

“These six key markets were selected because they meet two broad criteria. First, governments in these
markets have introduced a wide range of censorship policies and practices, in particular with respect to
digital content, that involve restrictions on firms, including U.S. businesses. Second, for the digital and
media services most likely affected by censorship, demand in each of these markets is large enough to
represent a significant market opportunity for U.S. firms. In identifying key markets, the Commission
considered a range of potential foreign censorship policies and practices, noting that these may affect
U.S. businesses either by restricting their existing access or limiting new access to a foreign market.

“While the Commission relied on a variety of sources to inform its identification of key markets, an
important starting point was information from Freedom House, a well-known human rights advocacy
NGO, and its annual Freedom on the Net reports, which provide internet freedom scores related to
obstacles to access, limits on content, and violations of internet user rights, as well as data on
governments’ use of nine ‘key internet controls’ in regulating online platforms, content, and users. To
assist in identifying the key markets with relevant censorship policies and practices, the Commission also
reviewed data on the incidence of internet shutdowns, government requests for moderation of content,
legal guarantees of freedom of expression, and the degree of freedom afforded the press in various
countries around the world. To identify markets where demand is large enough to represent a significant
market opportunity for U.S. businesses, the Commission looked at indicators of demand for digital media
and audiovisual content. These included demographic indicators of consumer demand such as population
and gross domestic product (GDP) per capita, as well as indicators of the size of a market’s digital
economy, including the percentage of the population with access to the internet and the United Nations
Conference on Trade and Development Readiness for Frontier Technologies Index, which assesses
countries’ rate of adoption of important internet technologies.

“Overview of Censorship-Related Policies and Practices

“To get a full picture of foreign government censorship regimes in the key markets, it is useful to
understand the ‘who,’ ‘what,’ and ‘how’ of these policies and practices, as well as their evolution, and
the concepts of extraterritoriality and self-censorship. Many different governmental agencies and actors
have a role in censorship-related policies and practices in the key markets—the ‘who’ of censorship.
Also, governments in the key markets often require the cooperation of nongovernmental actors, such as
U.S. internet companies, to carry out censorship, given the growing importance of the internet for
communication and speech.

“Governments in the key markets censor a wide variety of content—the ‘what’ of censorship. This
content includes political, social, and national security-related topics as well as internet tools that can be
used to circumvent censorship (such as virtual private networks). For example, based on an empirical
analysis conducted by researchers at Harvard University’s Berkman Klein Center for Internet & Society, 26
of 45 countries engaged in state-sponsored filtering of internet content through technical means in
2015–17 and before.2 In particular, all of the key markets engaged in “pervasive” or “substantial” filtering
of political content as well as other topics (figure ES.1).

“Governments in the key markets operationalize censorship—the “how” of censorship—through policies
and practices that can be broadly grouped into two categories: those that directly target speech for
suppression and those that can in some circumstances operate to enable government censorship.

“Government policies and practices in the first category include laws that prohibit particular categories of
speech, as well as the premarket review of audiovisual and other creative works by censors. They also
include, in the online environment, government policies and practices that shut down the internet, block
entire websites, filter access to particular content on sites, or make it more difficult to access websites
(e.g., throttling).

“By contrast, censorship-enabling policies and practices facilitate governments’ ability to suppress speech.
Such measures may include, for example, internet intermediary rules, data localization or local presence
requirements, and foreign investment and market access restrictions. However, whether such measures
should be considered censorship enabling depends on context and the end to which such measures are
used. As detailed in chapters 3 and 4, in the key markets various measures work together, or may work
together, to facilitate government censorship. For example, broad definitions of prohibited content are
often combined with short deadlines for internet companies to identify and takedown prohibited content
and substantial penalties for noncompliance. Or, for example, internet intermediaries are required to
keep data and personnel in the jurisdiction, which can make it easier for governments to ensure
compliance with content prohibitions. In addition, whether a policy or practice should be considered
direct censorship or censorship enabling can be difficult to determine. This is particularly the case in the
key markets where, for example, the same law may combine direct elements (such as banning specific
categories of content) with censorship-enabling elements (such as data localization and local presence
requirements). Table ES.1 provides examples of different types of censorship-related policies and
practices (both direct censorship and censorship enabling) in the key markets. It also highlights some of
the industries particularly affected by these policies and practices. (See chapters 3 and 4 for details of the
examples listed in table ES.1.

“The evolution of censorship policies and practices in the past five years in the key markets has largely
been driven by the growing importance of the internet. U.S. internet companies report ever-growing
numbers of government requests for the takedown of online content. Moreover, governments are using
multiple levers—from data and personnel localization requirements to threats of retaliation—to pressure
compliance with censorship policies. Technological developments, such as the growing reliance on
artificial intelligence by governments and internet companies to identify and suppress large quantities of
online content, also present substantial challenges.

“Foreign governments’ censorship policies and practices may be augmented by extraterritoriality and self-censorship. Extraterritorial censorship occurs when governments seek to suppress speech outside of
their borders. In some cases, a law or policy will expressly state that its prohibition on certain content
applies to companies or persons outside the jurisdiction. A recent example of this would be the Hong
Kong National Security Law, which criminalizes broad categories of offenses (including speech in favor of
Hong Kong independence) and states that it applies regardless of where the crime is committed or who
commits it. In other cases, which arise most notably in China, economic coercion is used to advance
censorship goals even when the targeted speech is legal in the jurisdiction where it occurred. A well- known example involves the Houston Rockets of the National Basketball Association (NBA), whose
general manager posted images on Twitter supportive of Hong Kong independence. The Chinese
government responded by, among other actions, stopping the broadcast of NBA games on Chinese state-owned television stations for more than a year.

“Self-censorship involves censoring or suppressing one’s own speech to avoid offending government
censors or to facilitate market access. It is reportedly present in all of the key markets. Moreover, self-censorship can also occur extraterritorially; for example, movie studios reportedly have removed images
from the master version of films, rather than just the China-specific version, that they believe may offend
the Chinese government. Another example is Bloomberg reportedly not publishing a follow-up story on
the wealth of Chinese officials in order to protect its financial markets terminal business in China.
Additionally, in Turkey, almost two-thirds of Turkish citizens responding to a survey in 2018 reported that
the fear of being jailed for posting political views or opinions on the internet contributed to self-censorship in the country.”

Conclusion

Developing multilateral rules at the WTO or plurilaterally through the Joint Statement Initiative to address e-commerce is of great importance to global trade and prosperity. Failure to come to grips with rules on censorship would greatly reduce the utility of an agreement and permit those who engage in widespread censorship to deprive trading partners of the benefits of an e-commerce agreement. And this is just a reflection of challenges on the trade front, ignoring human rights and other international concerns.

WTO Arbitration Report on China’s challenge to U.S. countervailing duty investigations — while retaliation is much smaller than China sought, core problems with original Appellate Body decision flags challenge to restoring the Dispute Settlement binding process

On January 26, 2022, an arbitration decision was issued on the level of retaliation China is entitled to take for the findings of the Appellate Body that the United States hadn’t brought its countervailing duty determinations on China into conformity with WTO obligations as construed by the Appellate Body. See UNITED STATES – COUNTERVAILING DUTY MEASURES ON CERTAIN PRODUCTS FROM CHINA, RECOURSE TO ARTICLE 22.6 OF THE DSU BY THE UNITED STATES, DECISION BY THE ARBITRATOR, WT/DS437/ARB,
26 January 2022. China sought retaliation rights of $2.4 billion/year. The U.S. had argued for a cap of $120 million/year. The arbitrator concluded retaliation rights were $645.121 million/year. Id at 12.

The original request for consultations was made on May 25, 2012 with a series of panel and Appellate Body reports issued between 2014 and 2019 (original dispute and Art. 21.5 proceedings). The original findings covered a range of issues including a string of issues relating to whether state-owned enterprises were public bodies. See summary of key findings, DS437, United States – Countervailing Duty Measures on Certain Products from China, https://www.wto.org/english/tratop_e/dispu_e/cases_e/ds437_e.htm.

The press releases from China and the United States state their respective positions – with China claiming the U.S. violates its WTO obligations and needs to bring itself into compliance, and with the U.S. noting that the underlying decisions reflect the problems with the Appellate Body that the U.S. has long identified and point to the need for reform of both the rules and dispute settlement. See Ministry of Commerce of the People’s Republic of China, Press Release on the Issuance of the WTO Arbitration Award in the Dispute United States — Countervailing Duty Measures on Certain Products from China (Recourse to Article 22.6 of the DSU by the United States), http://wto.mofcom.gov.cn/article/newsupdates/202201/20220103240040.shtml; Statement from USTR Spokesperson Adam Hodge on the WTO Arbitration Award Announcement in United States – Countervailing Duty Measures on Certain Products from China, January 26, 2022, https://ustr.gov/about-us/policy-offices/press-office/press-releases/2022/january/statement-ustr-spokesperson-adam-hodge-wto-arbitration-award-announcement-united-states (“The deeply disappointing decision today by the WTO arbitrator reflects erroneous Appellate Body interpretations that damage the ability of WTO Members to defend our workers and businesses from China’s trade-distorting subsidies. Today’s decision reinforces the need to reform WTO rules and dispute settlement, which have been used to shield China’s non-market economic practices and undermine fair, market-oriented competition. The Biden Administration will continue to use all our tools to stand up for the interests of America’s workers,”). businesses, farmers and producers, and strengthen our middle class. 

There have been many who have written about the problems of the Appellate Body in its construction of the Subsidies Agreement. See, e.g., Cartland, Michael, Depayre, Gérard &Woznowski, Jan. “Is Something Going Wrong in the WTO Dispute Settlement?” Journal of World Trade 46, no. 5 (2012): 979–1016; Dukgeun Ahn, Why Reform is Needed: WTO ‘Public Body’ Jurisprudence, 12 Global Policy, Supplement 3 at 61-70 ( April 2021)(and articles referenced therein).

USTR Lighthizer during the Trump Administration released in 2020 USTR’s Report on the Appellate Body of the WTO reviewing in great detail the concerns with the operation of the dispute settlement system. The concern about the Appellate Body interpretations preventing the U.S. and other Members from addressing the distortions including subsidies flowing from the Chinese economic system was a major focus in discussing the problems on “public body”. The Biden Administration and Congress have similar ongoing concerns which requires revisions to both the scope of the subsidies agreement and a revamp of the dispute settlement system.

Because of the extent of analysis presented by USTR, below are copied pages 82 – 89 of the 2020 USTR report.

A. The Appellate Body’s Erroneous Interpretation of ‘Public Body’ Threatens the Ability of WTO Members to Counteract Trade-Distorting Subsidies Provided through SOEs, Undermining the Interests of All Market-Oriented Actors

“• The Appellate Body has adopted an erroneous interpretation of the term ‘public body’ that is not found in the agreed text and is not consistent with the ordinary meaning of that term.

“• The Appellate Body’s narrow interpretation favors non-market economies operating through SOEs over market economies and undermines the ability of WTO Members to counteract subsidies by non-market economies.

“The WTO agreements discipline certain subsidies provided ‘by a government or any public body,’ but the Appellate Body has adopted a narrow interpretation of public body that requires an entity to possess, exercise or be vested with government authority, in order for it to constitute a public body. That requirement is not found in the agreed text, nor is it consistent with the ordinary meaning of the term ‘public body.’ The Appellate Body’s narrow interpretation of public body fails to capture a potentially vast number of government-controlled entities, such as state-owned enterprises (SOEs), that are owned or controlled by foreign governments, and therefore undermines the ability of Members to counteract subsidies that are injuring their workers and businesses. The WTO was created by and for market economies, but the Appellate Body’s public body interpretation favors non-market economies at the expense of market economies and has given rise to confusion among WTO panels and WTO Members.

1. Interpreted Correctly, the Term “Public Body” Means Any Entity Controlled by the Government

“Article 1.1(a)(1) of the SCM Agreement provides, in relevant part, that ‘a subsidy shall be deemed to exist if … there is a financial contribution by a government or any public body within the territory of a Member (referred to in this Agreement as ‘government’).’

“The Subsidies Agreement does not define the term ‘public body,’ but definitions of the words ‘public’ and ‘body’ shed light on the ordinary meaning of the term ‘public body’ in Article 1.1(a)(1). By definition, the noun ‘body’ refers to a group of persons or an entity (as opposed to, for example, the ‘material frame’ of persons). This definition in the sense of ‘an aggregate of individuals’ is: ‘an artificial person created by legal authority; a corporation; an officially constituted organization, an assembly, an institution, a society.’196 Turning to the adjective ‘public,’ the relevant definition that pertains to a ‘body’ as a group of individuals is the first: ‘of or pertaining to the people as a whole; belonging to, affecting, or concerning the community or nation.’197

“Thus, the ordinary meaning of the composite term ‘public body’ according to dictionary definitions would be ‘an artificial person created by legal authority; a corporation; an officially constituted organization’ that is ‘of or pertaining to the people as a whole; belonging to, affecting, or concerning the community or nation.’ These definitions point towards ownership by the community as one meaning of the term ‘public body.’ If an entity ‘belongs to’ or is ‘of’ the community, it also follows that the community can make decisions for, or control, that entity.

“Contrary to the Appellate Body’s interpretation, nothing in these dictionary definitions restricts the meaning of the term ‘public body’ to an entity vested with, or exercising, government authority. Had the drafters of the SCM Agreement intended to convey that meaning, they might have chosen any number of other terms. For example, the drafters might have used ‘governmental body,’ ‘public agency,’ ‘governmental agency,’ or ‘governmental authority.’

“These terms would have, through their ordinary meaning, more clearly conveyed the sense of exercising governmental authority. That they were not chosen sheds light on the different concept captured by the term that was chosen, ‘public body.’

“The ordinary meaning of the terms of a treaty must be understood ‘in their context.’198 Reading the term ‘public body’ in context supports the conclusion that a ‘public body’ is an entity controlled by the government such that the government can use that entity’s resources as its own.

“In Article 1.1(a)(1) of the SCM Agreement, the term ‘public body’ is part of the disjunctive phrase ‘by a government or any public body within the territory of a Member.’ The SCM Agreement thus uses two different terms – ‘a government’ on the one hand and ‘any public body’ on the other hand – to identify the two types of entities that can provide a financial contribution. As a contextual matter, the use of the distinct terms ‘a government’ and ‘any public body’ together this way indicates that the terms have distinct and different meanings.

“Treaty interpretation should give meaning and effect to all terms of a treaty. As the Appellate Body has recognized, provisions of the WTO Agreement should not be interpreted in such a manner that whole clauses or paragraphs of a treaty would be reduced to redundancy or inutility.199 Accordingly, the term ‘public body’ should not be interpreted in a manner that would render it redundant with the word ‘government.’

“The term ‘government,’ as the panel in US – Anti-Dumping and Countervailing Duties (China) found, means, among other things: ‘The governing power in a State; the body or successive bodies of people governing a State; the State as an agent; an administration, a ministry.’200 In Canada – Dairy, the Appellate Body explained that ‘[t]he essence of ‘government’ is . . . that it enjoys the effective power to ‘regulate’, ‘control’ or ‘supervise’ individuals, or otherwise ‘restrain’ their conduct, through the exercise of lawful authority.’201 The Appellate Body further explained that a ‘‘government agency’ is, in our view, an entity which exercises powers vested in it by a ‘government’ for the purpose of performing functions of a ‘governmental’ character, that is, to ‘regulate’, ‘restrain’, ‘supervise’ or ‘control’ the conduct of private citizens.’202

“The term ‘public body,’ therefore, should be interpreted as meaning something other than an entity that performs ‘functions of a ‘governmental’ character, that is, to ‘regulate’, ‘restrain’, ‘supervise’ or ‘control’ the conduct of private citizens.’203 Otherwise, a ‘public body’ is ‘a government,’ or a part of ‘a government,’ and there is no reason for the term ‘public body’ to have been included in Article 1.1(a)(1) of the SCM Agreement.

“In seeking to understand the term ‘public body’ in its context, it is also important to recall that the SCM Agreement is identifying those entities that may make ‘financial contributions.’ Those financial contributions are one part of a definition of ‘subsidy,’ and those subsidies are granted or maintained by WTO Members. A WTO Member can make the financial contribution underlying the subsidy directly through its ‘government’ (narrowly understood). However, it also can make that financial contribution through entities that it controls.

“Article 1.1(a)(1) of the SCM Agreement identifies a variety of actions that constitute financial contributions, including ‘a direct transfer of funds (e.g. grants, loans, and equity infusion), potential direct transfers of funds or liabilities (e.g. loan guarantees),’ foregoing or not collecting ‘government revenue,’ ‘provid[ing] goods or services other than general infrastructure, or purchas[ing] goods,’ and ‘mak[ing] payments to a funding mechanism.’ The ordinary meaning of a ‘financial contribution’ suggested by this list of actions is to convey value. In this ordinary sense, entities controlled by the government can convey value just as the government can, and the value conveyed can be precisely the same as that conveyed by the government.

“Consider, for example, a ‘direct transfer of funds’ by a government to a recipient in the form of a grant. Conveying value in this way is plainly a ‘financial contribution’ within the meaning of the SCM Agreement. If the government formed and controlled a legal entity (for example, a corporation whose shares are all owned by the government), and the entity provided the same grant to a recipient, the same financial contribution has occurred: the government has conveyed value. Whether the funds are provided directly by the government or by an entity controlled by the community through its government, it is a Member’s funds that are being used to make the financial contribution.

“There is no evident reason for the first transaction to fall within the scope of Article 1.1(a)(1) of the SCM Agreement and the second to fall outside the scope. Nor would the term ‘financial contribution’ suggest that a distinction should be drawn between those transactions based on whether the entity or corporation is ‘vested with or exercising governmental authority.’ Rather, the context supplied by ‘financial contribution’ suggests a different common concept between ‘government’ and ‘public body’ than that discerned by the Appellate Body. If a ‘financial contribution’ means to convey something of value, the concept sought to be captured by the SCM Agreement term is the use by a government of its resources, or resources it controls, to convey value to economic actors.

2. The Appellate Body Has Interpreted the Term ‘Public Body’ Incorrectly

“In US – Anti-Dumping and Countervailing Duties (China) in 2011 and US – Carbon Steel (India) in 2014, the Appellate Body interpreted the term ‘public body’ in Article 1.1(a)(1) of the SCM Agreement incorrectly. The key issue before the Appellate Body in these disputes was whether a wholly or majority government-owned SOE is a ‘public body,’ such that WTO Members can take action to counteract any unfair subsidies the SOEs provide. The Appellate Body recognized that, based on its ordinary meaning, the term ‘public body’ encompassed a ‘rather broad range of potential meanings.’ Nonetheless, the Appellate Body set out a very limited interpretation of the term, concluding that a ‘public body’ ‘must be an entity that possesses, exercises or is vested with governmental authority,’ including because the entity has ‘the effective power to regulate, control or supervise individuals, or otherwise restrain their conduct, through the exercise of lawful authority.’204 Under the Appellate Body’s interpretation, even where a government owns or controls an entity, that would not be sufficient to hold the government responsible for any injurious subsidies it provides.

“The Appellate Body’s ‘government authority’ test significantly limits the ability of governments to effectively combat unfairly subsidized imports and is nowhere reflected in the text of the SCM Agreement. If an entity has no regulatory or supervisory authority, but is nonetheless controlled by the government such that the government can use the entity’s resources as its own – making any transfer of economic resources by that entity a conveyance of the government’s own resources – it would be anomalous to conclude that the financial contribution cannot be deemed a subsidy under Article 1.1(a)(1). On the other hand, if an entity has the power to ‘regulate’ individuals or ‘otherwise restrain their conduct,’ but not the power to provide financial contributions of government resources, its regulatory powers are not relevant to the SCM Agreement. The Appellate Body’s interpretation therefore does not reflect the structure of either Article 1.1(a)(1) or of the SCM Agreement, and the failure of this interpretation to capture a
potentially vast number of government-controlled entities undermines the disciplines of the SCM Agreement.

“The Appellate Body’s interpretation stands in contrast to the approach taken by several WTO panels that interpreted the term ‘public body’ to be an entity controlled by the government. In Korea – Commercial Vessels, for example, the panel concluded that ‘an entity will constitute a ‘public body’ if it is controlled by the government (or other public bodies).’205 In reaching this conclusion, that panel rejected some of the very same arguments China advanced before the panel and the Appellate Body in US – Anti-Dumping and Countervailing Duties (China).

“In EC and certain member States – Large Civil Aircraft, the panel, addressing the status of a government-owned financial institution, explained that, ‘at the time of its 1992 investment in Aerospatiale, Credit Lyonnais was controlled by the French government and was a ‘public body’ for purposes of Article 1.1(a)(1) of the SCM Agreement.’206 Accordingly, the capital contribution made by Credit Lyonnais to Aerospatiale constituted a financial contribution by a public body.207

“In US – Anti-Dumping and Countervailing Duties (China), the panel concluded that ‘a ‘public body’, as that term is used in Article 1.1 of the SCM Agreement, is any entity controlled by a government.’ As noted above, however, in reversing the Panel, the Appellate Body adopted a narrow definition of a ‘public body.’

“During the meeting of the WTO Dispute Settlement Body at which the panel and Appellate Body reports in US – Anti-Dumping and Countervailing Duties (China) were adopted, seven WTO Members (Mexico, Turkey, the European Union, Canada, Australia, Japan and Argentina) joined the United States in raising concerns about the Appellate Body’s interpretation.208

“Commentators have also criticized the Appellate Body’s interpretation. For example, in an article in the Journal of World Trade, Michael Cartland, Gérard Depayre, and Jan Woznowski – each of whom participated in the Negotiating Group on subsidies and countervailing measures in the Uruguay Round – present a detailed discussion of the Appellate Body report in US – Anti-Dumping and Countervailing Duties (China) and raise a host of concerns with the Appellate Body’s interpretation of the term ‘public body,’ calling the analysis ‘internally contradictory’ and ‘disingenuous.’209

3. The Appellate Body’s Non-Textual Interpretation Has Created Significant Uncertainty and Led Panels to Reach Absurd Results

“In US – Anti-Dumping and Countervailing Duties (China), the Appellate Body left open the possibility that ‘meaningful control’ over an entity could be sufficient to show that the entity ‘possesses, exercises or is vested with governmental authority,’ and in US – Carbon Steel (India), the Appellate Body appeared to confirm that an SOE’s authority over government resources could support a public body finding.

“However, the Appellate Body’s non-textual interpretation has created significant uncertainty as to the precise scope of Article 1.1(a)(1), and recent attempts by panels to apply the so-called ‘government authority’ test have only exacerbated the problem, confirming the fundamental errors in the Appellate Body’s approach.

“The panel’s findings in US – Pipes & Tubes CVD (Turkey), for example, illustrate the hazard
introduced by the Appellate Body’s approach to public body in US – Carbon Steel (India), and in
particular a suggestion in that report that there must be a demonstration that the government ‘in
fact exercised control over the [entity] and its conduct.’210 Citing to this report, the panel in Pipes & Tubes found that the ability of the government to intervene in an entity’s critical operations and key decisions was not relevant to a public body determination, and required evidence that the government had actually exercised that control with respect to the subsidization in question. Similarly, the panel found that the existence of commercial conduct could preclude a finding that an entity is a ‘public body,’ because it could reflect the absence of a governmental function on the part of the entity and therefore a lack of governmental authority.

“As the United States has explained, properly interpreted, the issue under Article 1.1(a)(1) is not whether the nature of the behavior or the conduct of the entity is governmental. Rather, the question is whether the entity engaging in the conduct is governmental or pertaining or belonging to the people, i.e., whether the entity is ‘a government or any public body.’ If the entity is governmental, or public, all of its activities are attributable to the government in question. Were this not the case, a government could shield its activities from the disciplines of the SCM Agreement simply by setting up an SOE and allowing it to engage in some commercial conduct, even where there is evidence that the government has the ability to intervene and control the entity whenever it chooses. This cannot be the case.

“If a government undertakes the activities described in Article 1.1(a)(1), there is a conveyance of value from a WTO Member to a recipient. There is an equivalent conveyance when there is an entity whose resources the WTO Member can control and use, and the entity engages in the same activities. The interpretation set out by the Appellate Body, however, allows WTO Members to evade their obligations under the SCM Agreement simply by establishing an entity that is private in form, but not in substance.

“The interpretation therefore significantly restricts the ability of WTO Members to counteract trade-distorting subsidies provided through SOEs, posing a significant threat to the interests of all market-oriented actors.

“The interpretation also fails to maintain the textual distinction in Article 1.1(a)(1) between a ‘public body’ and a ‘private body.’ Contrary to the panel’s application of the Appellate Body’s standard in US – Pipes & Tubes CVD (Turkey), focus on the specific conduct of an entity would be relevant when examining whether there was government entrustment or direction of a private body under Article 1.1(a)(1)(iv) of the SCM Agreement. That is, a private body may provide a subsidy if the government entrusts or direct the private body ‘to carry out one or more of the functions illustrated in (i) to (iii).’ The panel’s approach demonstrates the uncertainty introduced by the Appellate Body’s interpretation, which risks conflating the public body analysis with that of government entrustment and direction of a private entity, and renders the term ‘public body’ effectively meaningless.

4. The Appellate Body Has Continued Its Incorrect Approach to ‘Public Body” in a Recent Appellate Report concerning the Imposition by the United States of Countervailing Duties on Subsidized Imports from China

“Although the Appellate Body recently had an opportunity to correct its flawed approach, it did not do so and, instead, stuck with an approach that has no basis in the text of the Subsidies Agreement. In US – Countervailing Measures (China) (21.5), all three members of the Division on appeal rejected China’s extremely narrow definition of ‘public body.’ However, two members of the Division reiterated the Appellate Body’s flawed approach. The third member dissented on this point, stating that ‘the majority has repeated an unclear and inaccurate statement of the criteria for determining whether an entity is a public body, and [the dissenting member] disagree[d] with the majority’s implication that a clearer articulation of the criteria is neither warranted nor necessary.’211

“The dissent continued that ‘the continuing lack of clarity as to what is a ‘public body’ represents an undue emphasis on ‘precedent’, which has locked in a flawed interpretation that has grown more confusing with each iteration, as litigants and Appellate Body Divisions repeated the original flaw while trying to navigate around it.’212

“The ‘original mistake’, as the dissent put it,213 was the Appellate Body’s attempt, in US – Anti-Dumping and Countervailing Duties (China) (DS379), to define the term ‘public body’ as ‘an entity that possesses, exercises or is vested with governmental authority,’ including because the entity has ‘the effective power to regulate, control or supervise individuals, or otherwise restrain their conduct, through the exercise of lawful authority.”214 Under the Appellate Body’s interpretation, even where a government owns or controls an entity, that would not be sufficient to hold the government responsible for any injurious subsidies the entity provides.

5. The Appellate Body’s Interpretation Limits the Ability of Investigating Authorities to Address Unfairly Subsidized Imports

“The Appellate Body’s ‘governmental authority’ test significantly limits the ability of governments to combat unfairly subsidized imports. The Appellate Body’s approach is nowhere reflected in the text of the Subsidies Agreement. If an entity has no regulatory or supervisory authority, but is nonetheless controlled by the government – making any transfer of economic resources by that entity a conveyance of the government’s own resources – it would make no sense to conclude that this transfer of public resources is not a financial contribution under Article 1.1(a)(1).

“On the other hand, if an entity has the power to ‘regulate’ individuals or ‘otherwise restrain their conduct,’ but not the power to provide financial contributions of government resources, its regulatory powers are not relevant to the Subsidies Agreement. The Appellate Body’s interpretation therefore does not reflect the structure of either Article 1.1(a)(1) or of the Subsidies Agreement.

“The failure of the Appellate Body’s interpretation to capture a potentially vast number of SOEs and other entities that are owned or controlled by foreign governments undermines the ability of Members to effectively counteract subsidies that are injuring their workers and businesses. The WTO was created by and for market economies, but the Appellate Body’s public body interpretation favors non-market economies at the expense of market economies.

“195 For example, this Report does not discuss the dispute US – Continued Dumping and Subsidy Offset Act Of 2000, in which the Appellate Body’s interpretation of the Subsidies Agreement in effect created a new category of prohibited subsidies that was neither negotiated nor agreed to by WTO Members; or other examples, such as US – Gambling, US – Cotton, US – FSC.

“196 The New Shorter Oxford English Dictionary at 253 (1993).

“197 Id. at 253.

“198 Vienna Convention on the Law of Treaties, Article 31.

“199 US – Offset Act (Byrd Amendment) (AB), para. 271 (2003). See also US – Gasoline (AB) at p. 23 (1996).

“200 US – Anti-Dumping and Countervailing Duties (China) (Panel), para. 8.57 (citing Shorter Oxford English Dictionary, L. Brown (ed.) (Claredon Press, 1993), Vol. I, p. 1123) (2011).

“201 Canada – Dairy (AB), para. 97 (1999).

“202 Id.

“203 Id.

“204 US – Anti-Dumping and Countervailing Duties (China) (AB), para. 290 (2011) (citing Canada – Dairy (AB), para. 97).

204 US – Anti-Dumping and Countervailing Duties (China) (AB), para. 290 (2011) (citing Canada – Dairy (AB), para. 97).

“205 Korea – Commercial Vessels (Panel), para. 7.50 (2005). See also id., paras. 7.172, 7.353, and 7.356 (2005)(finding that the Korean Development Bank and the Industrial Bank of Korea were public bodies because they were totally, or near totally, owned by the Government of Korea).

“206 EC – Large Civil Aircraft (Panel), para. 7.1359 (2011).

“207 Id.

“208 See Dispute Settlement Body, Minutes of the Meeting Held on March 25 2011, WT/DSB/M/294, paras. 103-127. See also Joint Statement of the Trilateral Meeting of the Trade Ministers of Japan, the United States and the European Union, para. 6 (January 14, 2020) (‘The Ministers observed that many subsidies are granted through State Enterprises and discussed the importance of ensuring that these subsidizing entities are captured by the term ‘public body.’ The Ministers agreed that the interpretation of ‘public body’ by the WTO Appellate Body in several reports undermines the effectiveness of WTO subsidy rules. To determine that an entity is a public body, it is not necessary to find that the entity “possesses, exercises or is vested with governmental authority.’).

“209 Cartland, Michael, Depayre, Gérard &Woznowski, Jan. “Is Something Going Wrong in the WTO Dispute Settlement?” Journal of World Trade 46, no. 5 (2012): 979–1016, at 996.

“210 US – Carbon Steel (India) (AB), para. 4.37 (2014) (first emphasis in original, second emphasis added).

“211 US – Countervailing Measures (China) (Article 21.5) (AB), para. 5.243 (2015) (separate opinion of one Division member).

“212 Id. at para. 5.244.

“213 Id. at para. 5.245.

“214 US – Anti-Dumping and Countervailing Duties (China) (AB), para. 2.90 (2015) (citing Canada – Dairy (AB), para. 97).’195 For example, this Report does not discuss the dispute US – Continued Dumping and Subsidy Offset Act Of 2000, in which the Appellate Body’s interpretation of the Subsidies Agreement in effect created a new category of prohibited subsidies that was neither negotiated nor agreed to by WTO Members; or other examples, such as US – Gambling, US – Cotton, US – FSC.”196 The New Shorter Oxford English Dictionary at 253 (1993).’197 Id. at 253.”

Observations

In prior posts I have reviewed the challenges for the relevance of the WTO if Members don’t work on convergence of economic systems versus coexistence. That China’s system is at odds with market economy principles has raised concerns in the U.S., EU, Japan, Canada, Australia and other WTO Members. The Appellate Body has compounded the problems for market economies in dealing with state-driven economies (non-market economies) by permitting a wide array of subsidy practices to be not addressable through the narrow interpretation of public body.

Such erroneous interpretations and the inability to achieve correction through negotiations have led to shutting down of the Appellate Body and have exacerbated the inability of Members to get balanced rules negotiated. A multilateral trading system which doesn’t achieve a level trading environment in fact cannot survive as the basis for global engagement.

While in Geneva there is much talk about reform of both the rules and the dispute settlement system, the path forward to achieving balance in fact is hard to discern.

The European Union requests consultations with China at the WTO for restrictions on Lithuanian goods imposed by China

In a post on January 7, 2022, I reviewed the bullying and coercion being pursued by China against goods from Lithuania and the pressure on companies to stop using Lithuanian components. See January 7, 2022:  China’s “bullying” of Lithuania — a repeating story inconsistent with WTO rules, https://currentthoughtsontrade.com/2022/01/07/chinas-bullying-of-lithuania-a-repeating-story-inconsistent-with-wto-rules/. China’s actions followed actions by Lithuania to improve relations with Taiwan.

Today, January 27, 2022, the European Union filed a request for consultations at the WTO with China on the restrictions on trade with Lithuania and the efforts to restrict other countries from using Lithuanian components in their products. The request for consultations is embedded below.

request-for-consultations-with-China-re-restrictions-on-Lithuania

The background section of the request for consultations reviews the myriad actions being taken to deprive Lithuanian and other goods including parts from Lithuania from accessing China’s market and restrictions on goods going to Lithuania.

“1. Background to the dispute

“Beginning in or around the final quarter of 2021, importers of products originating in Lithuania
and/or transiting through Lithuanian ports and/or with some other link to Lithuania began
encountering restrictions on securing customs clearance for their goods to enter Chinese territory.
Those restrictions include in particular: (i) error messages on the IT systems used to input data
necessary to secure customs clearance from the Chinese customs authorities; (ii) containers being
blocked in Chinese ports pending customs clearance; (iii) failures on the part of the Chinese
customs authorities to process requests for customs clearance in due time or at all. Those
restrictions are novel, numerous, recurrent, persisting and strongly correlated in temporal and
substantive terms, as well as in terms of the provenance of the goods.

“Commencing in or around the final quarter of 2021, entities established in Lithuania began
encountering difficulties relating to goods due to be exported from China to Lithuania. Those difficulties include failures on the part of the Chinese customs authorities to process requests for customs clearance for export in due time, or at all. Those restrictions have similar characteristics.

“Since August 2021, there have similarly been reports of entities established in Lithuania encountering difficulties in obtaining financial services from Chinese entities. Beginning in or around the final quarter of 2021, there have similarly been reports of shipments of products covered by SPS certificates issued by Lithuanian authorities being refused customs clearance by Chinese customs authorities.

“2. The measures at issue

“The measures at issue include the adoption, maintenance and application through its actions or omissions, in law and in fact, by China, of:

“import bans or import restrictions on the products at issue, from the EU;

“export bans or export restrictions on the products at issue from China to the EU;

“restrictions or prohibitions on the supply of services from the EU or by a service supplier from the EU in the territory of China or in respect of EU consumers of services provided by Chinese service suppliers.

“The means through which China imposes and administers these measures operate collectively but also separately, and affect the importation or exportation of goods or the supply of services from or to Lithuania, or showing a link to Lithuania for example through the presence of Lithuanian components.

“These measures predominantly concern goods or services from or destined for Lithuania or linked in various ways to Lithuania, but also have an effect on supply chains throughout the EU.

“The above-described complex of measures are inter-linked and show a targeted prohibition or restriction relating to trade in goods or services from or to Lithuania or linked to Lithuania which is intended to be generally applicable.

“These measures are attributable to China which, through actions of the Government, and/or through measures designed, promulgated, or applied by entities (including local government bodies, non-governmental bodies and state-owned enterprises) in Chinese territory acting as, under the authority of, or in concert with the Government, has encouraged, incentivised or otherwise instigated a coordinated policy designed to restrict trade from and with the EU, and more specifically, Lithuania, in a manner that is inconsistent with the terms of the covered agreements.

“In particular, the acts or omissions of the General Administration of Customs China resulting in the failure to take administrative actions or decisions necessary for customs clearance, has the effect of prohibiting or restricting importation.

“China also grants less favourable treatment for transit for products with a link to Lithuania as described above.

“Furthermore, it appears that Chinese State Trading Enterprises are not acting in conformity with the principle of non-discriminatory treatment in their purchases or sales involving either imports or exports from the EU with a link to Lithuania as described above.

“China arbitrarily or unjustifiably discriminates between the EU and other Members where identical or similar conditions prevail, including between China’s own territory and that of the EU, in applying sanitary and phytosanitary measures, and applies sanitary and phytosanitary measures in a manner which constitutes a disguised restriction on international trade, when goods with a link to Lithuania are involved.

“Moreover, China has put in place restrictions or treatment less favourable than that accorded to service suppliers from other Members or domestic service suppliers, in relation to the supply of services from the EU, by a service supplier from the EU in the territory of China, and as regards EU service consumers seeking services from Chinese service suppliers, when those services, suppliers or consumers had a link to Lithuania.”

The EU press release of today’s date (https://trade.ec.europa.eu/doclib/press/index.cfm?id=2355) on the matter is copied below.

“European Commission
“Directorate-General for Trade
“Press release
“ENFORCEMENT AND PROTECTION
“Brussels, 27 January 2022
“EU refers China to WTO following its trade restrictions on Lithuania

“The EU has today launched a case at the World Trade Organization (WTO) against the People’s Republic of China over its discriminatory trade practices against Lithuania, which are also hitting other exports from the EU’s Single Market. These actions, which appear to be discriminatory and illegal under WTO rules, are harming exporters both in Lithuania and elsewhere in the EU, as they also target products with Lithuanian content exported from other EU countries. As attempts to resolve this bilaterally have failed, the EU has resorted to initiating dispute settlement proceedings against China. The WTO consultations initiated today are the first step in this process.

“Executive Vice-President and Commissioner for Trade Valdis Dombrovskis said: ‘Launching a WTO case is not a step we take lightly. However, after repeated failed attempts to resolve the issue bilaterally, we see no other way forward than to request WTO dispute settlement consultations with China. The EU is determined to act as one and act fast against measures in breach of WTO rules, which threaten the integrity of our Single Market. We are in parallel pursuing our diplomatic efforts to deescalate the situation.’

“Over the past weeks, the European Commission has built up evidence of the various types of Chinese restrictions. These include a refusal to clear Lithuanian goods through customs, rejection of import applications from Lithuania, and pressuring EU companies operating out of other EU Member States to remove Lithuanian inputs from their supply chains when exporting to China.

“To deal with such cases in future, the Commission is strengthening its toolbox of autonomous measures. Last month, the Commission adopted a proposal for an Anti-Coercion Instrument, which would give the EU more possibilities to react in the event of economic coercion. The proposal is currently being considered by the European Parliament and the Council of the EU.

“Background

“From December 2021, and without informing the EU or Lithuanian authorities, China began to heavily restrict or de facto block imports from and exports to Lithuania, or linked to Lithuania. The Commission has repeatedly raised the matter with the Chinese authorities.

“Next steps

“The first stage under WTO dispute settlement procedures is the ‘request for consultations’, under which the EU formally asks China for more information on its measures with a view to reaching a satisfactory solution. Should these consultations not lead to a positive outcome within 60 days, the EU may request the establishment of a panel to rule on the matter.”

As noted in my prior post, the United States has come out in support of Lithuania in comments from the Biden Administration. One can expect many WTO Members to seek to join the consultations supporting EU concerns. China’s use of trade restrictions and coercion in response to actions by trading partners it disagrees with has been a major problem for various countries. Actions against Australia reviewed in a prior post are just one other example. See December 22, 2020:  China’s trade war with Australia – unwarranted and at odds with China’s portrayal of itself as a strong supporter of the WTO, https://currentthoughtsontrade.com/2020/12/22/chinas-trade-war-with-australia-unwarranted-and-at-odds-with-chinas-portrayal-of-itself-as-a-strong-supporter-of-the-wto/.

As the EC press release makes clear, the EU is considering additional tools to broaden its capabilities to respond to coercive economic actions by trading partners. See Brussels, 8.12.2021, COM(2021) 775 final
2021/0406 (COD), Proposal for a REGULATION OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL
on the protection of the Union and its Member States from economic coercion by third countries, https://trade.ec.europa.eu/doclib/docs/2021/december/tradoc_159958.pdf. As noted the proposed regulation is awaiting action by the European Council and European Parliament. The proposal is embedded below.

tradoc_159958

While major WTO Members like the EU and the U.S. can resort to or are working to have the internal authority to resort to unilateral actions to address coercion, the same is not true for most trading partners when facing such actions from countries like China. And unilateral actions by any WTO Member prior to authorization by the WTO is likely inconsistent with WTO obligations. Thus, such action shouldn’t be encouraged but is inevitable in circumstances like the Lithuania one covered in the present dispute where the actions taken follow a pattern of abuse of WTO obligations.

While Australia and the EU have pursued or are pursuing discrete WTO disputes against such coercion from China, a broader and more timely solution is obviously needed for such willful disregard of WTO obligations by a Member.

While China likes to state that it is a major defender of the multilateral trading system, its record belies that claim.

WTO negotiations on agriculture — slow if any progress to date

When the Uruguay Round was concluded, the Agreement on Agriculture included provision for periodic renewed negotiations to improve market access and address market distortions. See Agreement on Agriculture Art. 20. Negotiations started in 2000 and then were folded into the Doha Development Agenda in 2001. While there have been some important accomplishments — including an agreement for eliminating export subsidies at the Nairobi Ministerial in 2015 (EXPORT COMPETITION, MINISTERIAL DECISION OF 19 DECEMBER 2015, WT/MIN(15)/45, WT/L/980) — the divisions between Members has meant limited progress first during the Doha negotiations and in the years since 2008 in preparation for periodic Ministerial Conferences.

While eight topics are being pursued in ongoing negotiations, the current Chair of the negotiations, Ambassador Gloria ABRAHAM PERALTA (Costa Rica), has put out two texts in 2021, the latest of which from late November essentially calls for most topics to be the subject of ongoing negotiations aiming for resolution by the 13th Ministerial Conference (presumably December 2023 or later). The eight topics are public stockholding for food security purposes, domestic support, cotton, special safeguard mechanism, export prohibitions or restrictions, export competition, cotton and transparency (a cross-cutting issue). See COMMITTEE ON AGRICULTURE IN SPECIAL SESSION, REPORT BY THE CHAIRPERSON, H.E. MS GLORIA ABRAHAM PERALTA, TO THE TRADE NEGOTIATIONS COMMITTEE, 19 November 2021, TN/AG/50 (23 November 2021). Only Annex I presents a hoped for agreement on not blocking exports to the World Food Programme as doable by the now postponed 12th Ministerial Conference.

The latest draft, is much more limited than the July 2021 draft (COMMITTEE ON AGRICULTURE IN SPECIAL SESSION, DRAFT CHAIR TEXT ON AGRICULTURE, 29 July 2021, JOB/AG/215 (29 July 2021) reflecting widely divergent positions by Members on many of the proposed steps put forward by the Chair. The July document is 27 pages in length (20 of proposed text) and compares to a 16 page document in November (7 pages of text). Both pale in comparison to the text being considered during the Doha Development Agenda. See REVISED DRAFT MODALITIES FOR AGRICULTURE, TN/AG/W/4/Rev.4, 6 December 2008 (120 page document). On topic after topic, the Chair indicated that her discussions with delegations indicated an inability to come to closure quickly, hence proposals for work programs to go forward. See, e.g., TN/AG/50 at 4 (domestic support), para. 2.6 (“2.6. Taking into account the limited time left until MC12, and the persistent differences over how to discipline TDDS, it is clear that Members will be unable to achieve a substantive outcome at the Conference involving agreement on concrete modalities for the reduction of TDDS entitlements. I continue to believe, however, that MC12 can benefit all Members by delivering a useful step forward in the domestic support reform process that would set the direction for work after the Conference. I also believe that it is our collective duty to make every effort to find a way forward in this important area where an outcome is long overdue. I therefore suggest Members establish modalities by MC13 to substantially reduce trade-distorting domestic support by the date to be agreed upon by Members, coupled with some guiding principles and improved transparency requirements.”); at 5 (market access), para. 3.4 (“3.4. On the issue of applied tariff transparency, some Members remain concerned about logistical constraints or the implications of the proposed decision for possible legislative changes that it might necessitate. I sensed the reluctance of those Members to consider a definitive agreement at MC12, even on a ‘best endeavour’ or voluntary basis. Accordingly, I have proposed that Members’ work in this area continues in the Committee on Market Access, anchored by their sharing of current national practices when changing applied tariffs, and with a view to developing a non-exhaustive list of good practices for national customs authorities.”); at 5 (export competition), para. 4.2 (“4.2. Most of the discussions addressed the question of transparency, including a post-MC12 work programme and the possibility of encouraging Members to provide export data with the support of the Secretariat if deemed necessary.”); at 5-6 (export prohibitions or restrictions), paras. 4.5-5.8 (concerns of some re World Food Programme Annex, proposed work program on transparency); at 7 (cotton), para. 6.6 (“6.6. On the other hand, other Members considered that agreement on modalities for reductions by MC12 was out of reach in light of the short time left, the remaining strong divergence in positions, and the overall level of ambition for an agricultural package at MC12. The draft text therefore aims at finding a possible way forward reflecting Members’ commitment to continue the negotiations with a view to agreeing on modalities for the reduction of trade-distorting domestic support for cotton, in accordance with the mandate to address cotton ambitiously, expeditiously, and specifically, while also taking into account the overall context of the agriculture negotiations.”); at 7 (special safeguard mechanism), para. 7.1 (“7.1. Several developing Members attach importance to an outcome on SSM at MC12, especially in the wake of the COVID-19 pandemic. However, given the deep divergence among Members on some fundamental aspects of the SSM negotiations, including on the issue of linkage with market access, it has become apparent that a substantive outcome on SSM at MC12 – even in a limited or temporary setting – is increasingly unlikely. In these circumstances, and taking into consideration the current technical deficit in the SSM negotiations, my revised text proposes that Members engage in targeted thematic discussions post-MC12 to address this aspect – as my July draft text did as well. Technical elements of the SSG may inform these discussions to facilitate timely agreement on the numerous highly technical parameters of an SSM, including on scope, triggers and remedies. My draft revised text also proposes that the General Council makes recommendations on this matter to MC13 for the consideration of Ministers.”); at 8 (public stockholding for food security purposes), para. 8.6 (“8.6. My assessment that it would be extremely difficult to achieve a permanent solution at MC12 was not shared by some developing country Members, who insisted that I forward this issue to Ministers for their consideration and decision.6 Several Members strongly objected to this proposed course of action, notably due to the lack of detailed technical work on elements for a permanent solution and the absence of parallel progress on domestic support. Consequently, given the stalemate, my recommendation to Ministers is for the adoption of a work programme with a view to agreeing on a permanent solution by MC13. I also propose that the General Council regularly reviews progress in these negotiations. Given the importance attached to the PSH issue by several developing country Members, Ministers may, if they so wish, consider revisiting it, bearing in mind the significant divergent positions as outlined above, among the Membership.”).

Given the postponement of the 12th Ministerial Conference because of the COVID pandemic, some of the time pressures reflected in the documents from the Chair of the Agriculture Negotiations are reduced. Yesterday, January 24, 2022, there was an informal meeting of the Committee on Agriculture in Special Session. While there is no WTO press release on the meeting as of this post, press articles indicate that there was a split between agricultural exporting countries and others who were willing to work with the revised text and those calling for rejecting the revised text (India, the African Group, the African, Caribbean and Pacific Group and China). See, e.g., Inside U.S. Trade’s World Trade Online, WTO members debate fate of agricultural negotiating text, January 24, 2022, https://insidetrade.com/daily-news/wto-members-debate-fate-agricultural-negotiating-text. The United States has viewed agriculture negotiations as having potential to achieve short term agreement on transparency issues. The press reports indicate WTO Members are nowhere near a significant agriculture package for Ministers to consider whenever the 12th Ministerial occurs and obviously won’t achieve an early harvest ahead of the Ministerial.

Observations

Few topics are as important to as many WTO Members as the topic of agriculture. Despite the importance of the issue to populations around the world, governments have starkly different views of where WTO negotiations should go. India, South Africa and others have pushed for reducing obligations assumed during the Uruguay through proposals on public stockholding and special safeguard mechanisms. Major agricultural exporters have focused on market access liberalization and reduction of export and domestic subsidies. The U.S., EU and others have had concerns about the lack of transparency of many Members agricultural systems and the failure of timely and complete notifications. China, India and others have not wanted limits on special and differential treatment to developing countries and have not supported the level of differentiation between developing and least developed countries that is being proposed by the Chair.

The inability to move broad-based agricultural reform and liberalization forward at the WTO despite ongoing negotiations since 2000 is a good example of the breakdown of the WTO system to achieve results through negotiations. The 2008-2009 financial crisis and the ongoing COVID pandemic with resulting significant export prohibitions or restrictions of some agricultural products have not resulted in long term solutions or rules even on this limited issue. It is hard to see multilateral progress in the coming months or even years in the agriculture space on many of the present issues. This will place ongoing pressure on countries with agriculture export or import interests to explore regional or bilateral arrangements. It also undermines the ability of the world to meet UN sustainability goals.

Without a common vision of the goals for the WTO, WTO Members are likely to continue talk past each other rather than move forward together. These challenges are complicated by the different economic systems of major players, some of which are incompatible with the WTO system.

The concept that negotiations can go on for decades is plainly unacceptable if the WTO is to maintain relevance. Unfortunately, the path forward to relevance is unclear at best.

COVID-19 Omicron variant – hopeful signs of peaking in the U.S. and Europe; supply disruptions continue from zero tolerance policy in China

In a recent post, I reviewed vaccine equity issues around the COVID-19 pandemic and recent developments including a new low-cost vaccine being produced in India and available to be produced in many countries with no licensing costs. See January 11, 2022:  WTO efforts to address the COVID-19 pandemic — the January 10, 2022 General Council meeting and some current developments of interest, https://currentthoughtsontrade.com/2022/01/11/wto-efforts-to-address-the-covid-19-pandemic-the-january-10-2022-general-council-meeting-and-some-current-developments-of-interest/.

The omicron variant has wreaked havoc in Europe and in the U.S., though there are signs of the huge surge in cases starting to ebb. See, e.g., European Centre for Disease Prevention and Control, COVID-19 situation update worldwide, as of week 2, updated 20 January 2022 (data for last two weeks of 2021 not available; huge surge from omicron reflected in curve; dark blue is Europe, light blue is the Americas). The following chart shows new cases worldwide.

COVID-19 situation update worldwide, as of week 2, updated 20 January 2022

Distribution of COVID-19 cases worldwide, as of week 2 2022
The ECDC data show the U.S. being the first country to record more than 10 million infections in a fourteen day period (10.586 million; weekly data from the ECDC actually show 12.52 million cases reported in the U.S. in the first two weeks of 2022). The huge surge in Europe in the last several months is spread across many countries. France has been particularly hard hit with new cases numbering in the hundreds of thousands per day for nearly every day in January (highest, 464,679 on January 19 with declines since then). See ECDC, Data on the daily number of new reported COVID-19 cases and deaths by EU/EEA country 20 January 2022, https://www.ecdc.europa.eu/en/publications-data/data-daily-new-cases-covid-19-eueea-country.

In the United States, there is a note of optimism as the national number appears to be coming down. The decline is significant in some states where omicron was first identified but cases are still increasing in other parts of the country. See, e.g., NBC News, ‘An optimistic trend’: Covid cases are falling, but U.S. isn’t out of the woods yet, January 22, 2022, https://www.nbcnews.com/health/health-news/omicron-wave-covid-cases-finally-peaked-us-rcna13103 (“Cases are already falling in parts of the Northeast, Walensky said. ‘We are starting to see steep declines in areas that were first peaking, so areas of the Northeast — New York, Rhode Island, Connecticut — are really starting to come down.’ Shea said that cases in the rest of the country and deaths, which lag behind cases, are expected to trail shortly after. The big dropoff in cases in large states like New York can make the nationwide average look lower, even though cases are still rising in many states, but she expects all states to hit their peaks soon after Northeastern states.” 

Supply chain problems that have plagued the world for many months now and led to both shortages and large inflationary pressures may continue in part because of China’s zero-tolerance COVID policy has resulted in more shutdowns ahead of the approaching winter olympic games. See, e.g., New York Times, Supply Chain Woes Could Worsen as China Imposes New Covid Lockdowns, January 16, 2022, https://www.nytimes.com/2022/01/16/business/economy/china-supply-chain-covid-lockdowns.html (“Companies are bracing for another round of potentially debilitating supply chain disruptions as China, home to about a third of global manufacturing, imposes sweeping lockdowns in an attempt to keep the Omicron variant at bay.”).

Many countries, including the U.S. and EU, are reviewing supply chain issues to improve resiliency and reduce risks. Both the U.S. and EU for example have been looking at legislation to bolster semiconductor chip manufacturing. See, e.g., World Economic Forum, ‘There’s no digital without chips’: New European Chips Act announced, 20 January 2022 (“European Commission President Ursula von der Leyen has announced a new European Chips Act”), https://www.weforum.org/agenda/2022/01/theres-no-digital-without-chips-new-european-chips-act-announced/; Reuters, U.S. House bill on China competitiveness, chip investment, coming soon – Pelosi, January 21, 2022, https://www.reuters.com/world/us/pelosi-says-us-house-will-soon-introduce-competitiveness-bill-2022-01-21/.

While discussions continue around trade and health issues at the WTO including what, if any, temporary waiver from TRIPS obligations or other actions to improve vaccine production may be needed, data available on vaccine production and shipments continue to suggest that the issue is not necessary for a resolution to the COVID-19 pandemic. See, e.g., WTO-IMF COVID-19 Vaccine Trade Tracker, Last updated: 17 January 2021, https://www.wto.org/english/tratop_e/covid19_e/vaccine_trade_tracker_e.htm (showing total supply to the end of December at 11.5 billion doses; exports of 4.4 billion doses, with rapidly increasing shipments to low income and lower-middle income countries in the last few months of 2021). Several tables from the latest WTO-IMF COVID-19 Vaccine Trade Tracker are copied below.

“3. Imports

“Imports are defined as the number of doses received from producing economies, mirroring the information provided in the exports section. This definition does not take into account imports of vaccine substances in bulk form to be used in ‘fill and finish’ sites.”

Income Group ImportsNumber of doses (million)Doses per 100 peoplePopulation (million)
Low income234.034.5678.4
Lower middle income1,482.149.52,994.7
Upper middle income1,748.559.72,930.4
High income935.675.41,241.6
Note: as of 31 December 2021

ContinentNumber of doses (million)Doses per 100 peoplePopulation (million)
Asia2,372.551.04,652.6
South America682.7157.3434.0
Africa638.546.51,371.7
North America460.577.7592.8
Europe217.829.0750.8
Oceania28.365.543.2
Note: as of 31 December 2021

With more vaccines being reviewed by the WHO and individual countries, production of vaccines in 2022 will exceed volumes produced in 2021. Exports will also increase as trends in the second half of 2021 show have been happening.

While different sources look at vaccinations for individual countries and territories, attached is an excel spreadsheet of data from the World Health Organization for data available as of January 20, 2022. There are countries not covered by the WHO data (e.g., Taiwan) and others for which there is no World Bank 2022 income designation. I have added the categories of the World Bank GNI per capita income (low income, lower-middle income, upper-middle income, high income) to the WHO table. At the end of the WHO listing I have broken the data out by income group. For those countries/territories with no World Bank designation, they are listed “na”. For countries or territories in the World Bank list but not shown on the WHO list, I have included the name of the country/territory at the end of the income grouping.

As reviewed in prior posts, for groups and organizations focuses on vaccine equity, it is important to understand the causes of the very large differences in vaccines/100 people shown within at least the low income, lower-middle income and upper-middle income categories. For example, Rwanda (97.195 vaccinations/100 people), Mozambique (54.492 vaccinations/100 people) are low income countries. But their experience in vaccine access is much different than many other low income countries (most under 30 vaccine doses/100 people, many under 20 or 10/100 people, one less than 1/100 people). Medical infrastructure and many other factors are certainly important components in improving vaccine access to many low income countries. See GAVI, World leaders launch call for renewed support for vaccination in 2022 as part of the global fight against COVID-19, https://www.gavi.org/news/media-room/world-leaders-launch-call-renewed-support-vaccination-2022-part-global-fight (” Specifically, COVAX leaders called for at least US$ 5.2bn in new funding: US$ 3.7 billion to fund a 600 million dose Pandemic Vaccine Pool to address uncertainties and related uncovered risks, such as boosters, additional coverage, new variant vaccines if required, and to make sure there is reliable supply for the poorest countries. In addition, catalytic delivery funding of US$ 1 billion is requested to support getting doses into arms rapidly and safely without undermining routine immunization activities. A further US$ 545 million is needed to cover ancillary costs such as syringes, transport and insurance for donations.”).

The same is true for lower-middle income countries with Cambodia and Mongolia recording 189.643 and 164.686 vaccine doses/100 people respectively while Nigeria, Cameroon and and Zambia report just 9.007, 3.859, and 5.665 vaccine doses/100 people respectively. Seventeen countries have reported more than 100 vaccine doses/100 people while 9 have reported 20 vaccine doses/100 people or fewer.

The same is true for upper-middle income countries where the range of vaccine doses/100 people range from 32.258 for Equitorial Guinea to 283.945 for Cuba.

1-21-2022-WHO-COVID-vaccine-data-low-income-countries.xlsx

Cybertheft of intellectual property – do there need to be greater trade deterrents?

Cybertheft is a tremendous problem for governments, companies and individuals. While actors in the space are pursuing a range of objectives, this post looks at cybertheft of intellectual property and its effects on industry. Thus, the huge losses incurred by governments and by individuals outside of the business arena are not addressed nor are the misinformation campaigns of recent years.

In 2011, The Council on Foreign Relations published an interview with Dmitri Alperovitch, then McAfee’s vice president of threat research. The interview was titled “Cybertheft and the U.S. Economy”. See Council on Foreign Relations, Cybertheft and the U.S. Economy, August 11, 2011, https://www.cfr.org/interview/cybertheft-and-us-economy. The summary introduction paragraph summed up the situation as follows:

“In August 2011, the cybersecurity firm McAfee released an eye-opening report (PDF) detailing its investigation into a multi-year, most likely state-sponsored cyberattack that includes intrusions into the U.S. federal government and defense contractors, resulting in the theft of massive stores of intellectual property. The report’s author and McAfee’s vice president of threat research, Dmitri Alperovitch, describes these attacks, known as Operation Shady RAT, as a profound threat, indicative of a larger trend that may result in ‘the complete destruction’ of the U.S. economy. Rather than focus on the potential for a theoretical ‘cyber Pearl Harbor,’ he says that U.S. policymakers should use all of the nation’s power to stem the steady theft of national secrets.”

A 2019 report prepared by Price Waterhouse Cooper for the European Commission examined the scope of the cybertheft problem for businesses in the EU. See PWC, Study on the Scale and Impact of Industrial Espionage and Theft of Trade Secrets through Cyber, 2019, https://www.pwc.com/it/it/publications/docs/study-on-the-scale-and-Impact.pdf. The estimated cost to EU industry was summarized in the conclusion on the last page:

“Estimates of February 2018 provide details of the negative impacts at the European level of cyber theft of trade secrets: about €60 billion lost in economic growth, resulting in a loss of competitiveness, jobs and reduced R&D investments. More specifically, 289,000 jobs could be at risk in 2018 in Europe and 1 million jobs could be at risk by Stakeholders emphasized that direct impacts account for about 10% of costs the company will have to face. Therefore, the remaining 90% of costs are due to indirect impacts that are effectively measured and assessed 5-6 years after the cyber-intrusion.”

There have been many other reports looking at the costs and problems from cyber theft. See, e.g., U.S. Department of Justice, REPORT OF THE ATTORNEY GENERAL’S CYBER DIGITAL TASK FORCE, 2018, https://www.justice.gov/archives/ag/page/file/1076696/download.

But efforts at cybertheft have continued and intensified. See, e.g., New York Times, U.S. Accuses Hackers of Trying to Steal Coronavirus Vaccine Data for China, July 20, 2020, https://www.nytimes.com/2020/07/21/us/politics/china-hacking-coronavirus-vaccine.html, (“The Justice Department accused a pair of Chinese hackers on Tuesday of targeting vaccine development on behalf of the country’s intelligence service as part of a broader yearslong campaign of global cybertheft aimed at industries such as defense contractors, high-end manufacturing and solar energy companies.”).

Existing deterrents

Theft of intellectual property and other cybertheft actions face civil and criminal penalties in many countries, including the U.S. and other WTO Members. U.S. law also permits blockage of imports that violate IP holders rights (e.g., patents). The WTO since its launch in 1995 has had a Trade Related Aspects of Intellectual Property Rights Agreement, which incorporates provisions from a range of IP conventions, and requires WTO Members to provide adequate enforcement of such rights. The WTO has dispute settlement provisions which permit challenging trading partners who are not enforcing intellectual property rights. In addition, the U.S. has worked through its Special 301 authority to work with governments where the U.S. doesn’t perceive adequate enforcement occurring. It has also entered into bilateral agreements (e.g., U.S.-China Phase I Agreement) to address enforcement concerns including on cybertheft of intellectual property.

Despite these tools and the vast sums spent by industry trying to protect its intellectual property, the problems continue and in many ways are intensifying.

Experts like Dmitri Alperovitch have put forward a series of proposals for U.S. Congressional and Executive Branch action in 2022 to improve the situation for U.S. companies. See January 14, 2022 email from Silverado Policy Accelerator, Inc. (Mr. Alperovitch is Co-founder and Executive Chairman), Silverado’s 2022 Cybersecurity Policy Priorities for the Legislative and Executive Branches. The contents of the email are copied below (NOTE: I serve as one of a number of strategic advisors to Silverado but was not involved on the cybersecurity issues).

“To the friends of Silverado Policy Accelerator,

“The past year witnessed several notable bipartisan policy advances in the cyber arena. In March, Congress authorized $1 billion for the Technology Modernization Fund as part of the bipartisan American Rescue Plan to support new investments in federal agencies’ cybersecurity infrastructure. In May, the Biden administration released its Executive Order on Improving the Nation’s Cybersecurity, which included provisions to increase security standards for vendors who supply high-risk software through the government acquisition process and a number of critical technology implementation requirements that raise the bar for security across federal government networks. Finally, the Infrastructure Investment and Jobs Act, passed by Congress in November, included $1.9 billion for a range of cyber-related investments. 

“Although these bipartisan initiatives collectively represent a historic investment in the nation’s cybersecurity, there is much still to do to ensure that government agencies—as well as American companies and organizations—are protected from cyber attacks. As the legislative and executive branches look ahead to the coming calendar year, Silverado Policy Accelerator has compiled its own list of six policy priorities that deserve particular attention in 2022 (included below).

“Additionally, please join us tomorrow, January 13 from 9:00-10:00 am ET as Silverado’s Co-Founder and Executive Chairman Dmitri Alperovitch sits down with Congresswoman Yvette Clarke (D-NY), Congressman John Katko (R-NY), DHS Under Secretary for Policy Robert Silvers, and the FBI Cyber Division’s Assistant Director Bryan Vorndran to hear their perspectives on cybersecurity policy priorities for the coming year. You can register for tomorrow’s event here.

“A recording of tomorrow’s event will be available on Silverado’s website following the live broadcast. 

“* * *

Silverado’s 2022 Cybersecurity Policy Priorities for the Legislative and Executive Branches 

1. Passage of a comprehensive federal cyber incident reporting law

“In light of the 2022 National Defense Authorization Act not including provisions requiring companies to report hacks and ransom payments to the government, Congress should consider alternative paths to enacting a mandatory cyber incident reporting requirement in 2022. Such a law should require major private companies, including critical infrastructure entities, to report technical indicators associated with breach attempts to the Cybersecurity and Infrastructure Security Agency (CISA).  CISA should also build the architecture to immediately pass the information on to other agencies with a need to know, such as the FBI and sector-specific relevant agencies. Rapid access to these incident reports by CISA and FBI, among others, is necessary to allow the government to have a clear view into adversary campaigns targeting the U.S. and to support timely federal action. Such legislation is critical to provide insights to the government about the true nature of the threat to the private sector in order to take appropriate deterrent action (criminal investigation, cyber offense, sanctions, etc), as well as to help warn and notify other victims or vulnerable organizations who may not be aware that they had been targeted.

2. Provide CISA with the appropriate authorities and resources to eventually become the operational federal CISO, or Chief Information Security Office, for the civilian federal government (excluding DoD and IC)

“Congress took an important step toward centralizing federal cybersecurity strategy by creating CISA in DHS in 2018, but the next step is to give CISA both the authority and the resources that it needs to effectively execute its mission. The long-term goal for CISA should be to evolve into an operational cybersecurity shared services provider for most civilian federal government agencies, taking over fully or partially their cybersecurity operations. Achieving this objective would result in streamlined and more effective cybersecurity efforts, centralized accountability and a higher standard for security across the government.

“Congress should support CISA’s ongoing efforts in the following ways: 

  • Provide CISA with the resources and authority to create a 24/7 threat hunting operation center to search for intrusions on federal networks. 
  • Authorize CISA to conduct a trial in which it assumes responsibility for running cybersecurity operations of a small executive agency. The trial would allow the government to gauge what sort of additional resources CISA would need to be able to evolve into an operational Chief Information Security Office (CISO) for the civilian federal government.
  • Create budgetary and FISMA compliance incentives for federal agencies to outsource their cybersecurity operations to CISA, turning it into a Shared Service Provider for cybersecurity.
  • Provide CISA with the appropriations that are commensurate with its growing importance by reallocating resources from agencies that opt into the Shared Service Provider model. 

3. Adopt speed and outcome-based metrics to measure agencies’ response time to cyber threats

“In cyberspace, the only way to reliably defeat an adversary is to be faster than they are. For this reason, Congress should require federal agencies to adopt speed-metrics that measure agencies’ response to cyber threats based on the time it takes to begin and complete fundamental defensive tasks. ​

“Through legislation, Congress could require agencies to adopt speed-based metrics by mandating that they collect data on the average time it takes to perform three fundamental defensive actions: (1) detecting an incident; (2) responding to an incident; and (3) fully mitigating the risk of high-impact vulnerabilities. Taking these measurements should be as simple as recording the times of the initial discovery of the event (intrusion or vulnerability) and the time when the investigation or mitigation action is finished. Thus, it should require minimal additional resources to implement. Congress could also include a “recoverability metric” to measure agencies’ ability to recover data in the event of a ransomware attack or major cyber incident.

“Over time, these metrics would provide objective and diachronic measurement of an agencies’ incident response capabilities that they could report to CISA, OMB, and the relevant oversight committees in Congress. If the metrics prove effective at driving the right behavior to decrease agencies’ response time to cyber threats, Congress should also consider models to extend their adoption by the private sector.

“In addition to these fundamental intrusion and mitigation metrics, CISA should also be given the authority to develop new metrics beyond these fundamental intrusion and mitigation ones to respond to changes in the threat and defense landscape. To incentivize agencies to drive down the times it takes to discover and respond to intrusions or vulnerabilities, CISA should also implement a civilian-government-wide annual awards program to publicly acknowledge agencies and their leaders who achieve the best metrics.

4. Strengthen the executive branch’s authority to sanction foreign cryptocurrency exchanges that fail to comply with basic “Know Your Customers” and anti-money laundering requirements

“Ransomware criminals rely on widely-available and largely anonymous cryptocurrency such as Bitcoin to collect hundreds of millions of dollars in ransom payments each year and to launder ransom payments into fiat currencies without risk of disclosing their identities to victims or law enforcement. Although U.S.-based exchanges are required by law to comply with robust “Know Your Customer” (KYC) and other anti-money laundering regulations, foreign exchanges have been slow to adopt similar requirements. The lack of widespread compliance undermines the efficacy of the U.S.’s and other like-minded governments’ efforts to clean up the global cyber ecosystem, since malicious actors can easily circumvent security requirements simply by using less secure foreign exchanges.

“The United States should pursue a two-pronged strategy to level the international playing field. First, it should work with existing and new trading partners to ensure they have adequate KYC and AML safeguards in place for cryptocurrency exchanges based in their jurisdictions. Second, the executive branch should explore its ability to sanction foreign cryptocurrency exchanges that fail to comply with minimum KYC and other anti-money laundering requirements or that refuse to cooperate with U.S. law-enforcement on investigations. 

“The Treasury Department currently has broad authority to sanction specific foreign exchanges based on evidence that they cooperate with prohibited nations or entities, but it does not have the authority to sanction exchanges for non-compliance with KYC and AML regulations. Granting them such authority explicitly would likely encourage foreign institutions to implement these regulations in order to avoid the prospect of sanctions.

5. Incorporate cyber-specific details into OFAC’s SDN list

“The most difficult task facing many foreign cyber threat actors is procuring anonymous, reliable, fast, and long-lasting infrastructure (such as domains and cloud servers) to support malicious cyber attacks. These actors frequently go to great lengths—including registering shell companies and developing complex anonymous payment mechanisms—to disguise their activity, since using stolen bank accounts and credit cards for payment often results in the rapid shutdown of their infrastructure once the chargebacks start being reported. In addition, threat actors are increasingly taking advantage of legal constraints on the U.S. intelligence community’s ability to monitor domestic networks to gain access to the U.S.-based cyber infrastructure needed to carry out attacks against both private sector companies and U.S. government agencies. 

“The United States needs stronger mechanisms to deter cyber threat actors from leveraging U.S.-based cyber infrastructure to carry out cyber attacks. The Treasury Department’s Office of Foreign Assets Control (OFAC) already maintains a Specially Designated Nationals and Blocked Persons List (SDN), but the list only contains names of cyber criminals and other threat actors and does not include bank account information, credit card numbers or cryptocurrency wallets. As a consequence, the list is not always effective at identifying and blocking cyber threat actors, who almost always use fake names to procure infrastructure. 

“The Treasury Department should consider how to add these other identifying financial elements to the SDN to allow payment processors and cryptocurrency exchanges to block adversary-initiated transactions at the point of sale.

6. Require threat hunting on Defense Industrial Base (DIB) networks

“In March of 2020, the Cyberspace Solarium Commission recommended that Congress direct regulatory action that the executive branch could pursue in order to require companies that make up the Defense Industrial Base, as part of the terms of their contract with DoD, to create a mechanism for mandatory threat hunting on DIB networks. This recommendation was partially authorized in Section 1739 of the FY21 NDAA, but that article only required DoD to conduct an assessment on the feasibility and suitability of a DIB threat-hunting program without requiring DoD to establish the program after the report is issued. Congress should pass the necessary legislation to fulfill the intent of the initial proposal and enable DoD to execute threat hunting operations on the networks of cleared defense contractors that hold sensitive national security information.”

Are other trade remedies needed?

When the only remedies available to companies are individual or company specific and require the cooperation of the country from which cybertheft is occurring (if offshore), there is often a reluctance of companies who have been harmed to identify the problem or pursue legal actions. Fear of retaliation by foreign governments can also reduce the willingness of companies to defend their commercial interests in such situations.

This raises the question whether broader-based remedies should be available to deter such activity and provide a major incentive better behavior by trading partners where such conduct is not being addressed adequately.

For example, where a country provides notice to a trading partner of problems and there is no resolution in a relatively short period (e.g., 90 days), should the complaining party block imports of products in the same general category, prohibit investments in the sector, and/or other actions?

If the cybertheft from companies appears to be for the benefit of a foreign government or at the direction of a foreign government, should there be a loss of MFN treatment for the sector or more broadly?

The concerns around cybertheft could be addressed within the WTO or within bilateral or regional agreements. Considering the length of time that cybertheft has been harming many economies, unilateral action may be warranted pending broader agreement.

Is it time for a new approach to bilateral trade with China?

Press accounts last week reviewed new record merchandise trade surpluses for China with the world and a growing trade surplus with the United States despite the Section 301 tariffs and other actions which reduced the bilateral trade deficit in 2019 and 2020 from the figures in 2018. See Reuters, China posts record trade surplus in Dec and 2021 on robust exports, January 14, 2022, https://www.reuters.com/markets/currencies/chinas-exports-imports-grow-more-slowly-december-2022-01-14/ (“The trade surplus hit $676.43 billion in 2021, the highest since records started in 1950, up from $523.99 billion in 2020, according to data from the statistics bureau.” “China’s hefty trade surplus with the United States, a key source of contention between the world’s two biggest economies, hit $39.23 billion in December, widening from $36.95 billion the month before, but below this year’s high of $42 billion in September.”). While U.S. trade data are not yet available for December, the U.S. bilateral trade deficit with China for eleven months of 2021 was $319.151 billion, suggesting full year deficit with China of more than $358 billion — reversing the declining deficits of the last several years with China.

For the U.S., 2021 will be the first year where the trade deficit in goods exceeds $1 trillion dollars. So while the U.S. has significant deficits with a number of countries, for the Biden Administration and Congress, the most concerning aspect of the deficit is the effect of distortions flowing from China’s economic system, one that is at odds with the U.S. market-based system and not consistent with WTO basic principles.

I have in prior posts reviewed the incompatability of the Chinese economic system with WTO norms. I have also provided the views of a former WTO Deputy Director-General on the importance of convergence of economic systems as opposed to coexistence, and the views of trade officials in the U.S. and EU on challenges posed by Chna’s economic system. See, e.g., December 11, 2021:  20 Years of China’s Membership in the WTO — a brief critique, https://currentthoughtsontrade.com/2021/12/11/20-years-of-chinas-membership-in-the-wto-a-brief-critique/; October 16, 2021:  What role China could play in WTO reform — possibilities are real but chances of a positive role are not, https://currentthoughtsontrade.com/2021/10/16/what-role-china-could-play-in-wto-reform-possibilities-are-real-but-chances-of-a-positive-role-are-not/; April 8, 2021:  USTR 2021 National Trade Estimate Report on Foreign Trade Barriers — areas of concern with a focus on China, https://currentthoughtsontrade.com/2021/04/08/ustr-2021-national-trade-estimate-report-on-foreign-trade-barriers-areas-of-concern-with-a-focus-on-china/; March 31, 2021:  “Blowing up the trading system” — Clyde Prestowitz’s suggested way for the world to move forward in light of China’s economic system, https://currentthoughtsontrade.com/2021/03/31/blowing-up-the-trading-system-clyde-prestowitzs-suggested-way-for-the-world-to-move-forward-in-light-of-chinas-economic-system/; March 29, 2021:  China and the WTO – remarks by Dennis C. Shea to the Coalition for a Prosperous America, https://currentthoughtsontrade.com/2021/03/29/china-and-the-wto-remarks-by-dennis-c-shea-to-the-coalition-for-a-prosperous-america/; January 17, 2021, USTR on January 14, 2021 released its 2020 report to Congress on China’s WTO compliance, https://currentthoughtsontrade.com/2021/01/17/ustr-on-january-14-2021-releases-its-2020-report-to-congress-on-chinas-wto-compliance/; November 10, 2020:  The values of the WTO – do Members and the final Director-General candidates endorse all of them?, https://currentthoughtsontrade.com/2020/11/10/the-values-of-the-wto-do-members-and-the-final-director-general-candidates-endorse-all-of-them/; August 24, 2020:  USTR Lighthizer’s Op Ed in the Wall Street Journal – How to Set World Trade Straight, https://currentthoughtsontrade.com/2020/08/24/ustr-lighthizers-op-ed-in-the-wall-street-journal-how-to-set-world-trade-straight/; July 25, 2020:  A new WTO without China?  The July 20, 2020 Les Echos opinion piece by Mogens Peter Carl, a former EC Director General for Trade and then Environment, https://currentthoughtsontrade.com/2020/07/25/a-new-wto-without-china-the-july-20-2020-les-echos-opinion-piece-by-mogens-peter-carl-a-former-ec-director-general-for-trade-and-then-environment/.

As has been reviewed in annual USTR reviews of China’s compliance with WTO commitments, the challenges faced by China’s trading partners are many and largely unaddressed despite efforts through dispute settlement, through bilateral negotiations and otherwise. The U.S.-China Phase 1 Agreement resulted in minimal affirmative movement in U.S. exports to China and there are open issues in terms of China’s implementation and enforcement of other commitments. See, e.g., Peterson Institute for International Economics, December 23, 2021, US-China phase one tracker: China’s purchases of US goods, As of November 2021, https://www.piie.com/research/piie-charts/us-china-phase-one-tracker-chinas-purchases-us-goods. While there were increases in U.S. exports to China over 2017 levels in 2020 and 2021 for agriculture, manufactured goods and energy, there were large declines for non-covered goods, so that there was relatively little actual overall progress on merchandise trade and large declines in services trade. See, e.g., USITC data web, U.S. total exports to China (2017, $130.0 BN; 2018, $120.2 BN; 2019, $106.4 BN; 2020, $124.5 BN; 2021 (11 mos.) $137.7 BN); U.S. Census Bureau and the U.S. Bureau of Economic Analysis, MONTHLY U.S. INTERNATIONAL TRADE IN GOODS AND SERVICES, NOVEMBER 2021, January 6, 2022, https://www.census.gov/foreign-trade/Press-Release/current_press_release/ft900.pdf (Exhibit 20b).

Options

Obviously for nations facing the challenges of dealing with the distortions flowing from China’s economic system, one can attempt to work through the WTO and seek reforms that will address at least some of the major distortions. The U.S., EU, Japan and others are attempting that in the areas of industrial subsidies, state owned and controlled entities and other areas. The prognosis for movement is limited in the near term and even in the middle or long-term as long as China is committed to maintaining its system. Plurilateral negotiations on Joint Statement Initiatives also offer some hope for certain areas, assuming China is a participant and actually implements obligations undertaken.

Plurilateral trade agreements, such as CPTPP, could be another option. China has applied and would have to undertake some significant reforms to enter. The real question would be whether those changes would change the underlying disconnect between the state system pursued by China and market disciplines followed by many others.

Others have argued for major countries withdrawing from the WTO and setting up a system where China is either not a member or must become a market economy in fact to participate. Arguably if the EU and US were to join the CPTPP and seek further modifications, and if China’s application were not accepted until China’s system were significantly modified, this would be an option. A suggestion from the former EC Trade Commissioner is for the EU and U.S. to join the CPTPP. See PIIE’s Cecilia Malmstrom, The EU should use its trade power strategically, January 4, 2022, https://www.piie.com/blogs/realtime-economic-issues-watch/eu-should-use-its-trade-power-strategically (“The European Union should also seek to enter the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) and convince the United States to do the same. The European Union already has agreements with most members of the CPTPP, but an FTA would signal the European Union’s readiness to strengthen global trading rules with its partners.”).

The United States has pursued a strategy of strengthening various tools to address discrete issues with China and working with China to have them honor their existing WTO and bilateral agreements. Presumably that approach will continue to be pursued, but the downside of such an approach without more is the long time delay to meaningful change which means ongoing harm to the U.S. industrial base, workers and communities.

Warren Buffett in 2003 and again in 2016 advocated for a system of issuing import certificates to exporters equal to the value of the exports which certificates could be sold, etc. and which would result in a trade balance in goods. See, e.g., Fortune, Warren Buffett: Here’s How I Would Solve the Trade Problem,
April 29, 2016, ttps://fortune.com/2016/04/29/warren-buffett-foreign-trade/. His idea was to address the trade deficit overall and not focus on trading partners whose economic systems don’t mesh with the U.S. model. But an approach vis-a-vis selected countries pending the necessary economic reforms would be a narrower option and more focused on the underlying concern.

Last month in the Harvard Business Review, an article by Thomas Hout argued for a cap and trade system with China. See Harvard Business Review, Thomas Hout, A New Approach to Rebalancing the U.S-China
Trade Deficit, December 20, 2021, https://hbr.org/2021/12/a-new-approach-to-rebalancing-the-u-s-china-trade-deficit. The cap and trade approach is similar to Warren Buffett’s idea but limited to trade with China, as the author notes.

“Such a cap-and-trade system for imports from China would be much like the one for greenhouse gas emissions in various parts of the world. The beauty of this system is its insulation from political favoritism and bureaucracy: Market forces would determine who buys licenses and what gets imported. The cap’s level can be managed relative to a target such as GDP or the size of the trade deficit.” The author suggests flexibility in its implementation to limit any disruptions to U.S. businesses.

Conclusion

The Biden Administration has put its initial efforts into addressing domestic competitive needs such as the infrastructure legislation and the Build Back Better bill. At the same time, the Administration has been reviewing how the U.S. should be dealing with China across a broad array of issues including trade.

A multifaceted approach will certainly be needed. While the U.S. has pursued various multifaceted approaches in the past, China’s decision not to abandon state direction and control requires a recognition that global trade principles alone will not ensure fair trade conditions for U.S. companies either in the U.S., in China or in third countries.

In such a situation, considering a cap and trade system for trade with China and encouraging our major market-based trading partners to do the same would seem an important tool for achieving greater sustainability in our trade relationship with China.

WTO efforts to address the COVID-19 pandemic — the January 10, 2022 General Council meeting and some current developments of interest

As the world enters the third full year of fighting the COVID-19 pandemic, the WTO continues to seek both a response to the current challenges and a path forward for future pandemics. India, which along with South Africa (and later support from other countries), has sought since October 2020 a waiver from certain intellectual property protections provided under the WTO’s Trade-Related Aspects of Intellectual Property Rights (“TRIPS”) to address the COVID-19 pandemic, in late December 2021 sent a letter to the General Council Chair of the WTO seeking a virtual ministerial meeting to address the WTO response to the pandemic. This followed the postponement of the 12th WTO Ministerial Conference because of restrictions on travel flowing from the increase in COVID cases from the omicron variant.

The WTO press release on the General Council informal meeting held on January 10, 2022 to explore India’s request put a largely positive spin on the meeting, although press accounts suggest that there was push back from many other WTO Members to holding such a virtual Ministerial for various reasons, including lack of progress in developing an agreed text on any TRIPS waiver, need to address other pressing issues and the challenges of doing a Ministerial meeting virtually based on last year’s experience. See WTO news release, General Council discusses India’s call for virtual ministerial meeting on pandemic response, 10 January 2022, https://www.wto.org/english/news_e/news22_e/gc_10jan22_e.htm (” General Council Chair Ambassador Dacio Castillo (Honduras) convened the 10 January meeting in response to India’s recent proposal to hold a virtual Ministerial Conference on the WTO’s response to the COVID-19 pandemic, including a proposed waiver of relevant intellectual property protections. At the meeting, Director-General Ngozi Okonjo-Iweala urged WTO members to urgently step up their efforts, suggesting that with the requisite political will, members can in the space of the coming weeks reach multilateral compromises on intellectual property and other issues so that the WTO fully contributes to the global response to COVID-19 and future pandemics.”); Inside U.S. Trade’s World Trade Online, WTO members reluctant to hold virtual ministerial on TRIPS waiver, January 10, 2022, https://insidetrade.com/daily-news/wto-members-reluctant-hold-virtual-ministerial-trips-waiver (“India’s bid to schedule a virtual ministerial meeting focused on the proposed waiver of some intellectual property obligations to fight the pandemic did not win the support of other World Trade Organization members on Monday, as they raised concerns about the virtual format as well as with a lack of progress in the negotiations.”). While the U.S. was reportedly favorably disposed to such a meeting with greater clarifications, the European Union statement noted all of the issues raised in the Inside U.S. Trade article. See also The Hindu, WTO General Council discusses India’s call for holding virtual Ministerial meet on COVID-19 pandemic response, 11 January 2022, https://www.thehindu.com/business/wto-general-council-discusses-indias-call-for-holding-virtual-ministerial-meet-on-covid-19-pandemic-response/article38231454.ece.

While the U.S., under the Biden Administration, has stopped posting on the U.S. Mission website their statements at meetings other than the Dispute Settlement Body (unclear if this is due to a policy change or simply the lack of a Deputy USTR confirmed by the Senate), the EU is posting their statements on their Geneva website. See EU Statement at the General Council Informal Meeting, 10 January 2022, https://eeas.europa.eu/delegations/world-trade-organization-wto/109489/eu-statement-general-council-informal-meeting-10-january-2022_en. The entirety of the EU statement is copied below.

“Statement delivered by Ambassador João Aguiar Machado

“For the European Union, the WTO needs to put in place a process that is conducive to progress on all topics of the MC12 agenda.

“Of course, the European Union shares the view that the response to the pandemic is important. However, we need to be careful that a focus on this part of the MC12 agenda must not lead to a loss of momentum on the other key components, which are equally essential to the revitalisation of the organisation – such as the conclusion of the fisheries subsidies negotiations, agreeing on a way forward on agriculture, and finalising the Ministerial Declaration with a strong commitment on WTO reform – and this, building upon the work done by you, Chairman [Chairman of the General Council], in the run-up to the Ministerial meeting in November. These elements are all essential for the credibility and viability of this organisation. WTO reform is also essential from a health perspective. We need an efficient and effective organisation if we are going to be in a position to act decisively in the case of future pandemics.

“Before any decision to call a virtual Ministerial meeting and topics to be decided, we believe the WTO Director General and the Chair of the General Council should hold consultations with Members, to assess the way forward on all four issues that I referred to.

“As regards trade and health, the aim should be to seek consensus on the way forward both on intellectual property and on the Declaration and Action Plan. As regards the latter, Ambassador Walker’s draft text should be the basis for such consultations. And as regards intellectual property rights, consultations should continue with a view to identifying a text on which the WTO Membership can agree.

“Any virtual Ministerial should take place only once there is a consensus both on intellectual property rights and on the Declaration and Action Plan on the wider pandemic response. Only a comprehensive trade response to the pandemic can make a difference and address the identified bottlenecks as regards the production and distribution of COVID-19 vaccines such as restricted access to raw materials and other inputs as well as complex supply chains. Agreeing on the comprehensive elements contained in the Walker text will be important not only to tackle Covid-19, but also to address future pandemics.

“If we want to take forward work on all elements of the MC12 agenda, we must have a credible process in place.

“In summary, the European Union is open to consider the proposal by India and to reach an agreement on all aspects of the response to Covid-19 as quickly as possible. However, in the European Union’s view, it is premature to decide at this point in time on either the principle or on the date for such a virtual meeting.”

Thus, while the Director-General is pushing Members for an early resolution of the pandemic response (including any TRIPS waiver), the path forward looks certain to take significantly more time than a few weeks to reach agreement.

The WTO has added a page to its website entitled “Trade and health: WTO response to the COVID-19 pandemic”. The page accessed today states “State of Play – 6 January 2022” — i.e., before the informal General Council meeting on January 10th. However, it provides a good overview of what has been proposed and differences that exist on the waiver issue. See Briefing Note, State of Play 6 January 2022, Trade and health: WTO response to the COVID-19 pandemic, https://www.wto.org/english/thewto_e/minist_e/mc12_e/briefing_notes_e/bftrade_and_health_e.htm. The briefing note is embedded below.

WTO-_-Ministerial-conferences-MC12-briefing-note

Some current developments of interest

By the end of 2021, COVID vaccines were being produced at a rate of about 1.5 billion doses per month. Additional vaccines are being added which will drive production up even higher during the early months of 2022. See, e.g., BBC, Covovax and Corbevax: What we know about India’s new Covid vaccines, 28 December 2021, https://www.bbc.com/news/world-asia-india-55748124.

Corbevax has received a lot of attention in the media in the last few weeks. The Indian producer has 150 million doses ready for distribution, will be producing 100 million doses per month and plans to export one billion doses to other countries. The developers and the Indian producer are working with the WHO to pursue emergency use authorization through the WHO as well. See, e.g., NPR, A Texas team comes up with a COVID vaccine that could be a global game changer, January 5, 2022, https://www.npr.org/sections/goatsandsoda/2022/01/05/1070046189/a-texas-team-comes-up-with-a-covid-vaccine-that-could-be-a-global-game-changer (“A vaccine authorized in December for use in India may help solve one of the most vexing problems in global public health: How to supply lower-income countries with a COVID-19 vaccine that is safe, effective and affordable. The vaccine is called CORBEVAX. It uses old but proven vaccine technology and can be manufactured far more easily than most, if not all, of the COVID-19 vaccines in use today. ‘CORBEVAX is a game changer,’ says Dr. Keith Martin, executive director of the Consortium of Universities for Global Health in Washington, D.C. ‘It’s going to enable countries around the world, particularly low-income countries, to be able to produce these vaccines and distribute them in a way that’s going to be affordable, effective and safe.'” “Hotez says that unlike the mRNA vaccines from Pfizer and Moderna, and the viral vector vaccine from Johnson & Johnson, protein subunit vaccines like CORBEVAX have a track record. So he and Bottazzi were relatively certain CORBEVAX would be safe and effective. ‘And it’s cheap, a dollar, dollar fifty a dose,’ Hotez says. ‘You’re not going to get less expensive than that.'”); The Times of India, Discussions underway for WHO approval for
Corbevax Covid-19 vaccine, says developer, 31 December 2021, https://timesofindia.indiatimes.com/world/us/discussions-underway-for-who-approval-for-corbevax-covid-19-vaccine-says-developer/articleshow/88604880.cms.

These developments are occurring at a time of record breaking numbers of new infections due to the more highly contagious omicron variant. While many parts of the world are seeing huge surges, Europe and the United States are seeing particularly huge increases. See, e.g., Reuters, U.S. reports 1.35 million COVID-19 cases in a day, shattering global record, January 11, 2022, https://www.reuters.com/business/healthcare-pharmaceuticals/us-reports-least-11-mln-covid-cases-day-shattering-global-record-2022-01-11/; WHO, WHO: 7 million new omicron COVID cases in Europe last week, January 11, 2022, https://www.washingtonpost.com/politics/who-7-million-new-omicron-covid-cases-in-europe-last-week/2022/01/11/7e901e28-72cc-11ec-a26d-1c21c16b1c93_story.html.

A few thoughts

When one looks at vaccination distribution in 2021, the concerns about inequity center largely on the vary small volume of vaccines that have gone to low income countries (as classified by the World Bank) and to some lower middle-income countries. See, e.g., December 30, 2021:  COVID-19 and vaccine equity — outlook for 2022, https://currentthoughtsontrade.com/2021/12/30/covid-19-and-vaccine-equity-outlook-for-2022/.

The largest volume of vaccines that COVAX had envisioned going to these countries were lower cost ones that would be easier to store, handle and administer than some of the high cost new technology vaccines. Production problems and export bans of the more cost effective and easier to store vaccines in 2021 were the largest reasons of poor distribution of vaccines to lower income countries.

With large volumes of donations committed for 2022 from countries like the U.S. and EU and others and with Indian production both ramping up significantly and exports having resumed and with the availability of low cost options, including new vaccines like Corbevax already approved in India and likely to be produced in various countries around the world at very low costs, and with the overall very high levels of global vaccine production by the end of 2021 continuing to expand, the question of getting the world vaccinated in 2022 against COVID will almost certainly be more about issues other than availability of vaccines.

So the WTO’s most important role in the coming weeks and months is to focus on reducing barriers to trade such as those covered by the Walker draft text (discussed in the briefing paper). The TRIPS waiver issue is one that has attracted a lot of attention because of the perception of global needs and whether intellectual property rights were restricting access. In my view, while the proposal was popular with many groups, the evidence of production during 2021 did not support the concern that the TRIPS agreement was restricting production. More than 10 billion doses of COVID-19 vaccines were produced and shipped in 2021 — twice as many doses as all vaccines produced and shipped in 2020 for all other needs. Many licenses were granted for production in other countries. A waiver would not have resulted in significantly more production in 2021.

Production in 2022 and the arrival of new low cost vaccines should mean there is adequate volumes for the world to achieve 70% vaccination rates this year. The issue of equity in 2021 had to do with distribution of the production, infrastructure in many countries, trade restrictions on vaccines and inputs. These do not require a TRIPS waiver to address in 2022.

Looking forward to the next pandemic, there is much that the WTO Members could agree to that would reduce many of the challenges COVID-19 has posed. It is not clear that actions on intellectual property beyond what is being proposed by the EU are needed or justified by the experience gained these last several years.

How to Make Trade Work for Working Men and Women in 2022 — changing the status quo is needed but unrealistic in the near future

In prior posts, I have reviewed how the existing global trading system is not working as intended because of the massive distortions created by different economic systems (in particular, the presence and growth on state directed economies). See, e.g., October 16, 2021:  What role China could play in WTO reform — possibilities are real but chances of a positive role are not, https://currentthoughtsontrade.com/2021/10/16/what-role-china-could-play-in-wto-reform-possibilities-are-real-but-chances-of-a-positive-role-are-not/ (“Trade and the WTO have obviously been highly beneficial to China and to many other Members. Nonetheless, China has been working hard not to have its economic system evolve to a market-based one. It has generally not pursued liberalization that benefits all versus favoring China. It insists on coexistence vs. convergence. It uses the consensus system to prevent evaluation of its practices which distort trade It has limited transparency of its actions and has engaged in actions against individual Members that are retaliatory and coercive. As the world’s largest exporter, China has a critical role in global trade. But the dangers Amb. Wolff has outlined in his speech where market principles and convergence are not the core values are manifesting themselves in the world marketplace as countries look for alternative approaches to deal with China’s trade distortions. Amb. Wolff’s speech outlines a number of ways that China can improve the functioning of the WTO and exhibit leadership in WTO reform. His speech is an important one which hopefully has had a receptive audience in China. Unfortunately, while there are some identified actions that China may take, it is unlikely that China will do anything to address the critical differences that its economic system poses to the survival of the global trading system.”); October 8, 2021: The gap between WTO activity and the needs of businesses and workers for the international trading system, https://currentthoughtsontrade.com/2021/10/08/the-gap-between-wto-activity-and-the-needs-of-businesses-and-workers-for-the-international-trading-system/ (“The challenges at the WTO flow from some historical challenges (the preference of India to see no agreements imposing obligations on them, now supported by South Africa and others), from the growing divergence in views as to the purpose of the WTO, from the increased importance of non-market economies in the global trading system and the current failure of existing rules to address their distortions to global trade flows and competition, and the inability of a consensus system with 164 Members to move forward in a timely manner, if at all.”); May 1, 2021:  Alan Wolff’s vision for saving the WTO — aspirational but is it achievable?, https://currentthoughtsontrade.com/2021/05/01/alan-wolffs-vision-for-saving-the-wto-aspirational-but-is-it-achievable/; March 31, 2021:  “Blowing up the trading system” — Clyde Prestowitz’s suggested way for the world to move forward in light of China’s economic system, https://currentthoughtsontrade.com/2021/03/31/blowing-up-the-trading-system-clyde-prestowitzs-suggested-way-for-the-world-to-move-forward-in-light-of-chinas-economic-system/, March 29, 2021:  China and the WTO – remarks by Dennis C. Shea to the Coalition for a Prosperous America, https://currentthoughtsontrade.com/2021/03/29/china-and-the-wto-remarks-by-dennis-c-shea-to-the-coalition-for-a-prosperous-america/; March 24, 2021:  When human rights violations create trade distortions — the case of China’s treatment of the Uyghurs in Xinjiang, https://currentthoughtsontrade.com/2021/03/24/when-human-rights-violations-create-trade-distortions-the-case-of-chinas-treatment-of-the-uyghurs-in-xinjiang/.

The Biden Administration has been advocating a worker centric trade policy and has advanced domestic policies intended to improve U.S. competitiveness. But the challenges for working men and women in a trading system that doesn’t operate in fact on market principles and doesn’t have effective tools for addressing quickly distortions can be seen in the conflicts that arise when trade actions are taken by a single country. Remedies imposed (such as duties, quotas, etc.) will help the harmed industries and workers, although based on the level of difficulty of achieving a remedy, may occur only after the industry and its workers have suffered isignificant harm (layoffs, plant closings, reduced investment, etc.). At the same time, downstream users who have to compete with products from producers in other countries who have access to the distortively priced products view themselves as harmed by conditions of fair trade being imposed on inputs.

When a country like China engages in massive distortions through state direction, subsidization and other means, global excess capacity of extraordinary amounts can put global competitors in a long term struggle to survive despite not having caused the excess capacity. The Trump Administration imposed Section 232 tariffs on steel and aluminum to address U.S. national security concerns about the sectors with the primary cause of the problem being China’s actions and the global reactions to massive excess capacity. Similarly, long standing concerns about a range of practices by China led to the Trump Administration’s Section 301 investigation in 2018 and action when China did not address the U.S. concerns (with retaliation and counter actions following).

While many countries filed WTO disputes in 2018 on the 232 actions of the U.S. and a number of countries retaliated without WTO authorization (many claiming U.S. was a safeguard action permitting at least some retaliation immediately) and China challenged the 301 action, and the U.S. filed challenges to the retaliation taken by trading partners, those disputes remain before panels at the beginning of 2022, with indications that panel reports will issue during the first half of 2022 (232 challenges) or second half of 2022 (cases on retaliation).

The Biden Administration has continued both sets of remedies though has come up wth alternatives to tariffs for steel and aluminum with certain trading partners (EU, Japan in negotiations).

Because users of products subject to Section 232 or 301 tariffs look at the short term issue of cost competitiveness (and the consequences to their businesses and workers), importers have pursued broader product exclusions from tariffs or an end to the tariffs altogether. As has been true over the last three years, such efforts have support from some members of Congress.

Thus, conflict exists among different groups within the United States but flows directly from the massive market distortions flowing from activities by some countries for which there are no existing remedies. While seeking changes in global trading rules is an important avenue for change, such change will take years (a decade or more in all likelihood) to achieve, if any resolution is actually possible. The steel and aluminum sectors have been seeking a global solution to the massive excess capacity problem caused by China and others for years now with no demonstrable progress.

For workers in the industries directly affected by the massive distortions, they have been promised a trading system where trade will be guided by market principles and where distortions can be addressed through trade defense instruments or other tools or where temporary relief from imports can take place to address significant problems. Very clearly, the trading system has not ensured a level playing field in fact and has not addressed the massive distortions that exist for countries with state-controlled or directed economies like China. This has put an unreasonable burden on workers and their employers to pursue trade remedies in a system where there is no compensation for past harm and relief is not available until jobs are lost, companies have shuttered factories, reduced investment including in R&D.

A recent letter to the U.S. Congress from the United Steelworkers International President Thomas M. Conway on various duties (301, 232 and other) lays out the frustrations of working men and women who are in the direct line of attack from trade distortions abroad and their need for relief from such practices. The letter is embedded below.

USW-letter-to-Hill-re-301-and-232-relief

The USW is a former client of my firm before my retirement. As a result, I am aware of the extraordinary effort they take to preserve jobs from the effects of market distortions in a wide array of manufacturing sectors in the U.S. The USW understandably views efforts to undermine trade actions to address distortions or to protect national security as contrary to the interests of working men and women.

While 232 and 301 relief have been subject to exclusion processes in the U.S., for users, such processes will work only when applicants are actually attempting to work with domestic producers or third country producers for alternative sources of supply (for either immediate supply or for supply in the coming months/years) and only where frivolous requests carry some costs for the applicant. Exclusions should only continue until an alternate source or sources of supply are found and shouldn’t frustrate efforts of domestic producers and their workers to expand offerings. The existence of a lower price from China or others should not be the basis for an exclusion where a domestic producer is producing or will product the specific product of interest.

The challenge for the United States and other WTO Members is to adopt rules that deliver a level playing field in fact, that prevent massive global excess capacity, that permit defensive action to be taken before plants are closed, workers laid off, investments postponed or cancelled and R&D reduced, and that compensate companies and workers injured by dumping, subsidization and other distortive practices to reduce the incentive to engage in such practices.

The WTO and Member governments can’t be surprised at the lack of support for the trading system from many working men and women when a fundamental promise of the system is not kept — competition based on market principles with remedies to address distortions in a timely manner. The WTO has never been able to move quickly. Many issues simply never get addressed because of the consensus system and the lack of agreement on fundamental purpose and principles by the existing 164 Members. Thus, one should expect continued concern among working men and women with the ability of the WTO to deliver market based competition with effective remedies for distortions.

China’s “bullying” of Lithuania — a repeating story inconsistent with WTO rules

While China portrays itself as a champion of the global trading system and the WTO rules, it has a long history of misusing WTO provisions and cutting off market access to punish countries that take actions that China objects to. In a prior post, I reviewed the actions of China against Australia — actions that China has pretended were not occurring or simply reflected product quality issues or unfair trade actions by Australia. See December 22, 2020:  China’s trade war with Australia – unwarranted and at odds with China’s portrayal of itself as a strong supporter of the WTO, https://currentthoughtsontrade.com/2020/12/22/chinas-trade-war-with-australia-unwarranted-and-at-odds-with-chinas-portrayal-of-itself-as-a-strong-supporter-of-the-wto/.

Members have raised concerns about lack of transparency and discriminatory practices in various fora at the WTO including during the recent Trade Policy Review of China (hearing held on October 20 and 22, 2021), as captured in the Chair’s concluding statement. See WTO news release, TRADE POLICY REVIEW: CHINA, Concluding remarks by the Chairperson, 20-22 October 2021, https://www.wto.org/english/tratop_e/tpr_e/tp515_crc_e.htm (“Some Members also voiced concerns over a general increase in non-transparent and discriminatory measures and practices in China, sometimes in response to political disagreements with other trading partners. They urged China to take measures to end non-transparent and discriminatory measures.”).

Similarly, in the January 2021, USTR 2020 Report to Congress on China’s WTO Compliance (pages 7-8), USTR provided a review of a number of concerns including retaliation, intimidation and lack of transparency. https://ustr.gov/sites/default/files/files/reports/2020/2020USTRReportCongressChinaWTOCompliance.pdf

“China has been a particularly bad actor when it comes to trade remedies. While the use of trade remedies in a manner consistent with WTO rules is an important tool for protecting domestic industries
from unfair and injurious trade practices, China has made a practice of launching antidumping (AD) and
countervailing duty (CVD) investigations that appear designed to discourage its trading partners from the
legitimate exercise of their rights under WTO rules. This type of retaliatory conduct is not typical of WTO
members, nor is it a legitimate basis for seeking AD and CVD relief. Moreover, when China has pursued
AD and CVD investigations under these circumstances, it appears that its regulatory authorities have tended to move forward with the imposition of duties regardless of the strength of the underlying legal claims and evidence. The United States’ three successful WTO cases challenging the duties imposed by China on imports of U.S. grainoriented electrical steel (GOES), U.S. chicken broiler products, and U.S. automobiles offer telling examples of this problem. Indeed, China’s poor behavior does not always stop after an adverse WTO ruling. In two of the three WTO cases brought by the United States on trade remedies, China did not implement the WTO’s recommendations, and the United States was forced to bring Article 21.5 compliance proceedings to secure China’s compliance.

“China’s retaliatory use of trade remedies highlights another unique issue that WTO members face when
dealing with China – the threat of reprisal. It is no secret that foreign companies are hesitant to speak
publicly, or to be perceived as working with their governments to challenge China’s trade policies or
practices, because they fear retaliation from the Chinese state. A study by one U.S. industry association noted that foreign companies confidentially have reported receiving explicit or implicit threats from Chinese government officials – typically made orally rather than in writing – about possible retaliatory actions that could have severe repercussions for a company’s business prospects in China. At the same time, it is also no secret that China threatens more vulnerable WTO members to dissuade them from speaking publicly against China.

“A further persistent problem is China’s inadequate transparency. China disregards many of its WTO
transparency obligations, which places its trading partners at a disadvantage and often serves as a
cloak for China to conceal unfair trade policies and practices from scrutiny. For example, for the first 15
years of its WTO membership, China failed to notify any sub-central government subsidies to the WTO,
despite the fact that most subsidies in China emanate from provincial and local governments. The magnitude and significance of this problem is illustrated by the five WTO cases that the United States has brought challenging prohibited subsidies maintained by China. While those cases involved hundreds of subsidies, most of the subsidies were provided by sub-central governments. The United States was able to bring those cases only because of its own extensive investigatory efforts to uncover China’s opaque subsidization practices. Most other WTO members lack the resources to conduct the same types of investigations. Today, China continues to shield massive sub-central government subsidies from the scrutiny of WTO members. Together with other non-market practices, these subsidies contribute to the serious excess capacity problems that plague industries like steel, aluminum, solar panels, and fishing and devastate global markets and foreign competitors. Industrial plans such as Made in China 2025, which reportedly targets 10 sectors in China with hundreds of billions of dollars in subsidies, inevitably will create a new wave of industries with severe excess capacity to the detriment of China’s trading partners.

“For years, the United States has urged China to change the behaviors described above and become a
responsible member of the WTO. In the future, the United States will continue this effort. The United States also will continue to use the WTO dispute settlement mechanism as an enforcement tool as
appropriate and will continue working through WTO committees and councils and other WTO bodies to
seek effective actions to curb problematic Chinese policies and practices.”

The Chinese actions against Lithuania and indirectly against the European Union and United States

Last year, China embargoed imports from Lithuania after a warming of relations between Lithuania and Taiwan (Chinese Taipei). There are many articles on the row between China and Lithuania, but China’s political concerns about Lithuania’s actions towards Taiwan have led it to put pressure on European and U.S. companies in China to cut off using Lithuanian parts as well as embargoing imports from Lithuania and from other countries where products include Lithuanian components. See, e.g., Politico, China’s trade attack on Lithuania exposes EU’s powerlessness; Companies from several EU countries that depend on Lithuanian supply chains are now finding they face blockades at Chinese ports, December 16, 2021, https://www.politico.eu/article/china-trade-attack-on-lithuania-exposes-eu-powerlessness/ (“As Lithuania sought to deepen diplomatic ties with Taiwan over recent months, Beijing has moved to make an example of Vilnius by flexing its massive trade muscle and stopping imports of Lithuanian goods. Business organizations told POLITICO that China’s embargo is now hitting manufactured goods from other EU countries — such as France, Germany and Sweden — that are dependent on Lithuanian supply chains.” “A China-based business executive told POLITICO that Beijing is putting pressure on EU businesses to stop importing Lithuanian products. The executive explained that two German companies in the auto industry had parts stopped at Chinese ports in recent days because they were manufactured in Lithuania. Some of these components could take years to be replaced with trusted alternative suppliers, he added.”); Bloomberg, Europe Raises China-Lithuania Trade Dispute With WTO Chief, December 9, 2021, https://www.bloomberg.com/news/articles/2021-12-09/europe-raises-china-lithuania-trade-dispute-with-wto- chief#:~:text=The%20EU%20raised%20Lithuania’s%20claim,denied%20it’s%20blocking%20Lithuania’s%20exports (“The European Union raised its concerns over a growing dispute between member state Lithuania and China to the World Trade Organization as efforts by the bloc to get information from Beijing have been rebuffed.” “‘The EU is informed that Lithuanian shipments are not being cleared through Chinese customs and that import applications from Lithuania are being rejected,’ the EU’s trade chief, Valdis Dombrovskis, told reporters in Brussels on Thursday.”).

Typically, the Chinese government has hidden behind claims of faulty products, have denied intimidation or failing to grant import licenses. See, e.g., Foreign Ministry Spokesperson Zhao Lijian’s Regular Press Conference on December 22, 2021, question from The Paper and answer by Zhao Lijian https://www.fmprc.gov.cn/mfa_eng/xwfw_665399/s2510_665401/2511_665403/202112/t20211222_10474336.html:

The Paper: During the phone call with Lithuanian Prime Minister Ingrida Simonyte on December 21, US Secretary of State Antony Blinken said he noted public reports that China’s customs authorities are not clearing Lithuanian shipments or shipments with Lithuanian components, and that they are rejecting import applications from Lithuania. He said that such measures appear to constitute economic coercion. The US underscored its support for Lithuania and the commitment to work with like-minded countries to push back against China’s coercive diplomatic and economic behavior. What is China’s comment?

“Zhao Lijian: The Lithuanian side bears the sole responsibility for the severe difficulties in China-Lithuania relations. The claim that China’s authorities ‘are not clearing Lithuanian shipments’ and that ‘they are rejecting import applications from Lithuania’ is not true. If companies face technical problems in exporting certain products to China, they can report to competent Chinese authorities through normal channels.”

Nonetheless, Chinese media understand the embargo applied by China against Lithuanian goods and other goods incorporating Lithuanian components. See, e.g., South China Morning Post, China snubs EU efforts to mediate in Lithuania row, as trade embargo worsens, 9 December 2021, https://www.scmp.com/news/china/diplomacy/article/3159086/china-snubs-eu-efforts-mediate-lithuania-row-trade-embargo.

The U.S. has announced its support for Lithuania and the European Union in seeking to end the bullying and coercion. See, e.g., USTR press release, Readout of Ambassador Katherine Tai’s Call With Lithuanian Foreign Minister Gabrielius Landsbergis, January 5, 2022, https://ustr.gov/about-us/policy-offices/press-office/press-releases/2022/january/readout-ambassador-katherine-tais-call-lithuanian-foreign-minister-gabrielius-landsbergis; U.S. Department of State Press Release, Secretary Antony J. Blinken and German Foreign Minister Annalena Baerbock at a Joint Press Availability, January 5, 2002, https://www.state.gov/secretary-antony-j-blinken-and-german-foreign-minister-annalena-baerbock-at-a-joint-press-availability/. The USTR readout and an excerpt from Secretary Blinken during the joint press conference are copied below.

“January 05, 2022

“WASHINGTON – United States Trade Representative Katherine Tai today spoke with Lithuanian Foreign Minister Gabrielius Landsbergis and expressed the United States’ continuing strong support for Lithuania in the face of economic coercion from the People’s Republic of China (PRC).

“Ambassador Tai emphasized the U.S. commitment to working with the European Union and its Member States to address coercive diplomatic and economic behavior. They discussed the importance to addressing our shared challenges through a close, transatlantic partnership that embraces and reflects U.S. and EU jointly-held values, which can be supported in part through the U.S.-EU Trade and Technology Council. Ambassador Tai and Minister Landsbergis both noted that the United States and the EU, as democratic market economies, share a number of core values and principles that we need to defend internationally.

“Ambassador Tai and Minister Landsbergis agreed to stay in regular communication to strengthen the U.S. – EU and U.S. – Lithuanian economic relationship and to continue to address the PRC’s economic coercion.”

SECRETARY BLINKEN:

“The foreign minister and I also discussed China. Germany and the United States agree on the importance of transatlantic coordination on China because it poses a significant challenge to our shared values; to the laws, rules, and agreements that foster stability, prosperity, and freedom worldwide. We also agreed that together, we will continue to build, across the board, an affirmative vision for the future because fundamentally, this is about what we’re for together, not what we’re against.

“Having said that, we have immediate concern about the Government of China’s attempts to bully Lithuania, a country of fewer than three million people. China is pushing European and American companies to stop building products with components made in Lithuania or risk losing access to the Chinese market, all because Lithuania chose to expand their cooperation with Taiwan.

“Here again, this isn’t just about Lithuania, but about how every country in the world should be able to determine its own foreign policy free from this kind of coercion. And the United States will work with our allies and partners, including Germany, to stand up against intimidation like this from China by strengthening our economic resilience, diversifying our supply chains, and countering all forms of economic blackmail. And we’ll continue to stand together against flagrant human rights abuses by the Government of China and advocating for universal human rights around the world.”

China responded to the U.S. statements of support for Lithuania viewing such support as an effort to create a wedge between China and Taiwan. See, e.g., NPR, China lashes out at U.S. for supporting Lithuania in feud with Beijing over Taiwan, January 6, 2022, https://www.npr.org/2022/01/06/1070856065/china-lashes-out-at-us-for-supporting-lithuania-in-feud-with-beijing-over-taiwan.

China’s actions undermine integrity of WTO system and promote retaliation

While many WTO Members may take actions that are inconsistent with WTO obligations over time, the WTO is premised on Members’ commitment to compliance, transparency to permit trading partners to understand and, where appropriate, challenge Member policies, laws, regulations, practices and actions. While non-trade issues are relevant in most/all bilateral relationships, the WTO is premised on Members not taking trade actions that are inconsistent with WTO obligations for political reasons.

China’s practice of taking punitive actions against trading partners where it disagrees with actions taken by such trading partners, hiding the fact and denying the existence of such actions, intimidating companies invested in China or exporting to China and misusing WTO trade defense tools and standards as a means of retaliation is clearly contrary to a rules based approach to trade embodied by the WTO.

Uncorrected, such actions encourage large trading partners to consider unilateral retaliation options as is happening now in the European Union. See Politico, France eyes quick anti-China action to bail out Lithuania in trade war, January 6, 2022, https://www.politico.eu/article/france-china-measures-lithuania-new-trade-weapons/ (“France wants the EU to punch back quickly to stop China holding the bloc hostage in a snowballing trade conflict over Lithuania.” “The EU has plans to roll out a new trade weapon called an ‘anti-coercion instrument’ to retaliate in precisely these kinds of cases but that fresh legislation could take years to fully enter into force and Paris is signaling that action over Lithuania would be needed well before that. When asked whether Paris would push for EU action to resist Beijing before the anti-coercion instrument is ready, a senior French government official on Thursday told POLITICO: ‘Yes. We will take measures very quickly.'”).

Presumably, like minded Members (e.g., U.S., EU, Japan, Korea, Canada, Australia, New Zealand and others) will be looking at what types of WTO reforms would have a better chance of minimizing the type of bullying and economic coercion being practiced by China. The real question is whether such reforms can be adopted and whether they could be effective. Any such reforms are years away in a best case situation. Until then, one should expect continued flouting of WTO rules by China when it finds such actions politically attractive.

The Russian Federation’s compliance with WTO obligations — the recent USTR Report

The Russian Federation became the 156th Member of the WTO on August 22, 2012. Since the accession of the Russian Federation, eight other countries have acceded, the last on July 29, 2016 with 23 additional countries in the queue at the WTO. Like other WTO Members, the Russian Federation goes through periodic Trade Policy Reviews (“TPR”) as part of the WTO’s effort to ensure transparency in Member policies and to permit Members to raise questions on policies and practices of each other. The first TPR for the Russian Federation was conducted in 2016. See TRADE POLICY REVIEW, REPORT BY THE SECRETARIAT, RUSSIAN FEDERATION, 24 August 2016, WT/TPR/S/345; TRADE POLICY REVIEW, REPORT BY
RUSSIAN FEDERATION, 24 August 2016, WT/TPR/G/345; TRADE POLICY REVIEW, REPORT BY THE SECRETARIAT, RUSSIAN FEDERATION Revision, 6 December 2016, WT/TPR/S/345/Rev.1; TRADE POLICY REVIEW, RUSSIAN FEDERATION, MINUTES OF THE MEETING, 25 November 2016, WT/TPR/M/345; TRADE POLICY REVIEW, RUSSIAN FEDERATION, MINUTES OF THE MEETING, Addendum (written questions and replies), 19 December 2016, WT/TPR/M/345/Add.1; TRADE POLICY REVIEW: RUSSIAN FEDERATION, 28 AND 30 SEPTEMBER 2016, Concluding remarks by the Chairperson, https://www.wto.org/english/tratop_e/tpr_e/tp445_crc_e.htm.

The second TPR was conducted in 2021 with the two day meeting with Members happening on October 27 and 29, 2021. See TRADE POLICY REVIEW, REPORT BY THE SECRETARIAT, RUSSIAN FEDERATION, 22 September 2021, WT/TPR/S/416; TRADE POLICY REVIEW, REPORT BY RUSSIAN FEDERATION, 22 September 2021, WT/TPR/G/416; TRADE POLICY REVIEW MECHANISM, COMMUNICATION FROM THE CHAIRPERSON OF THE TRADE POLICY REVIEW BODY, RUSSIAN FEDERATION, Arrangements for Review Meeting, 6 October 2021, WT/TPR/466; TRADE POLICY REVIEW: RUSSIAN FEDERATION, Concluding remarks by the Chairperson, 27 and 29 October 2021, https://www.wto.org/english/tratop_e/tpr_e/tp516_crc_e.htm; EU Statement at the Trade Policy Review of the Russian Federation, 27 October 2021, https://eeas.europa.eu/delegations/world-trade-organization-wto/106279/eu-statement-trade-policy-review-russian-federation-27-october-2021_en; Statement by H.E. Ambassador LI Chenggang at the 2nd Trade Policy Review of Russia, http://wto.mofcom.gov.cn/article/meetingsandstatements/202111/20211103214021.shtml.

While the Russian Federation is not an important trading partner of the United States, because of the geopolitical relationship for the last many decades, the U.S. Congress has required an annual report on the Russian Federation’s compliance with WTO obligations since Russia’s accession in 2012. The ninth such report was released by the Office of the U.S. Trade Representative on December 21, 2021. See USTR Press Release, USTR Announces 2021 Report on the Implementation and Enforcement of Russia’s WTO Commitments, December 21, 2021, https://ustr.gov/about-us/policy-offices/press-office/press-releases/2021/december/ustr-announces-2021-report-implementation-and-enforcement-russias-wto-commitments; United States Trade Representative, 2021 Report on the Implementation and Enforcement of Russia’s WTO Commitments, December 2021, https://ustr.gov/sites/default/files/enforcement/WTO/2021%20Report%20on%20Russia’s%20WTO%20Compliance.pdf.

Today’s post reviews some of the USTR findings but starts with some background information on the Russian Federation and a look at the recent Trade Policy Review for the country.

Background information on the Russian Federation

The CIA World Factbook provides a lot of information on countries. The entry for the Russian Federation was last updated on December 17, 2021. See CIA, World Factbook, Russia, https://www.cia.gov/the-world-factbook/countries/russia/. According to the CIA World Factbook, the Russian Federation:

o is the largest country by land area (and roughly 1.8 times as large as the USA);

o has borders with fourteen countries (Azerbaijan, Belarus, China, Estonia, Finland, Georgia, Kazakhstan, North Korea, Latvia, Lithuania, Mongolia, Norway, Poland and Ukraine);

o has a coastline of 3,653 km;

o has the ninth largest population in the world (142,320,790 as of July 2021 est.);

o had a negative population growth rate in 2021 (-0.2%, placing it 207th on population growth);

o has a low birth rate (9.71 births per 1000 population, or 193rd in the world)

o has a high literacy rate (99.7% of those 15 years of age or older);

o had relatively low GDP growth in 2017-2019 (1.34% – 2.54%) or 160th in the world

o has low public debt (15.5% of GDP in 2017);

o has large foreign exchange reserves and gold (6th largest);

o is the world’s second largest producer and exporter of crude oil;

o is the world’s 3rd largest producer of refined petroleum products and 2nd largest exporter;

o is the world’s 2nd largest natural gas producer and largest exporter.

The CIA World Factbook has a great deal more information but the above are some examples of data on the Russian Federation.

Despite the Russian Federation’s high levels of education and abundant natural resources, the country in 2022 is rated by the World Bank as only an upper middle-income country (2020 GNI per capita of between $4,096 and $12,695). See World Bank Country and Lending Groups, Country Classification, July 1, 2021, https://datahelpdesk.worldbank.org/knowledgebase/articles/906519-world-bank-country-and-lending-groups. Russia in 2020 had a per capita GNI in current U.S. dollars of $10,690 which ranked the Russian Federation 74th. See World Bank, GNI per capita, Atlas method (current US$) – Russian Federation, https://data.worldbank.org/indicator/NY.GNP.PCAP.CD?locations=RU

Because so much of the economy is driven by the gas and oil sectors, increasing prices for both in 2021 led to strong growth in GDP in the Russian Federation, although growth is expected to moderate in 2022 and 2023. See World Bank, Amidst Strong Economic Rebound in Russia, Risks Stemming from COVID-19 and Inflation Build, Says World Bank Report, December 1, 2021,https://www.worldbank.org/en/news/press-release/2021/12/01/amidst-strong-economic-rebound-in-russia-risks-stemming-from-covid-19-and-inflation-build-says-world-bank-report.

The World Trade Organization provides useful information on each Member in various publications including its annual Trade Profiles. The 2021 publication shows that in 2020, the Russian Federation accounted for 1.89% of world merchandise exports and 1.35% of world merchandise imports. Total Russian Federation exports were $332.227 billion and its total imports were $240.380 billion. Its five largest export markets were the European Union (41.3%), China (13.4%), Belarus (5.1%), Turkey (5%) and the Republic of Korea (3.8%). The Russian Federation’s five largest trading partners for imports into the Russian Federation were the European Union (34.2%), China (21.9%), Belarus (5.5%), the United States (5.4%) and Japan (3.6%).

As noted, fuels and mining products are the largest exports — 59.1% of total Russian exports in 2020 with petoleum oils (crude and refined) accounting for$189.176 billion (49.49%). Coal ($15.987 billion) and natural gas ($9.501 billion) are the next largest export products.

The Russian Federation accounts for a smaller shares of the export trade in commercial services — 0.95% of global exports and a slightly larger share of imports of commercial services, 1.38%. The European Union accounts for the largest share of commercial service exports from the Russian Federation (35.9%) and 47.5% of the Russian Federation’s imports of commercial services. The U.S. accounts for 6.5% of Russia’s exports of commercial services and 4% of imports of such services into the Russian Federation. China is the third largest importer of Russian commercial services (6.2% of Russia’s exports) and 3.7% of Russia’s imports.

See World Trade Organization Trade Profiles 2021 at 298-299, October 2021,https://www.wto.org/english/res_e/booksp_e/trade_profiles21_e.pdf.

WTO Trade Policy Review of the Russian Federation in 2021

While the minutes to the 2021 TPR of the Russian Federation and the written questions and replies are not yet available, the Secretariat review along with the Russian Federation write-up are available as is the concluding statement of the chairman of the review on the Russian Federation. Both the EU and China’s statements on October 27 at the review are also available.

For brevity, the Chair’s concluding comments and the statement of the European Union (as the largest trading partner for the Russian Federation) are copied below. Both follow norms for the WTO by identifying areas where the Member being reviewed has made contributions to the system and then follows with particular concerns of some other Members. First the concluding remarks by the Chairperson on 29 October 2021. TRADE POLICY REVIEW: RUSSIAN FEDERATION, Concluding remarks by the Chairperson, 27 and 29 October 2021, https://www.wto.org/english/tratop_e/tpr_e/tp516_crc_e.htm

“Concluding remarks by the Chairperson

“The second Trade Policy Review of the Russian Federation has allowed us to better understand and discuss recent developments regarding trade, economic, and investment policies in the Russian Federation. 57 delegations took the floor, which demonstrates the importance Members attach to the review of the policies and practices of the Russian Federation. 1,017 advance written questions were submitted by Members, with additional questions submitted during and following the first day of our meeting.

“I would like to thank the delegation of the Russian Federation, headed by Ms Ekaterina MAYOROVA, Director of the Department of Trade Negotiations, Ministry of Economic Development, for their constructive participation in this exercise.

“I would like to express my gratitude to our discussant, His Excellency Ambassador Didier CHAMBOVEY of Switzerland, for his insightful remarks touching on macroeconomic and other developments, remaining trade and trade-related challenges, and the role the TPRM can play in overcoming these.

“I would like to thank the delegations that took the floor for their valuable contributions to this Review. Members commended the Russian Federation for its stable and resilient economic performance since the previous Review in 2016, including measures taken to stabilize the banking sector. They particularly stressed the effective macroeconomic and monetary policies undertaken, and the demonstrated resilience to the economic consequences of the COVID-19 pandemic, as well as to volatile energy markets. Some Members commented on policies aimed at diversifying the economy and addressing structural impediments to economic growth.

“Members also positively noted a number of policy reforms undertaken by the Russian Federation affecting, among others, trade facilitation, import tariffs and export duties, competition policy, protection of IPRs, and supporting MSMEs. Regarding trade facilitation, Members highlighted reforms to improve customs procedures and requirements in areas such as risk management, automation, electronic documents, and reducing clearance times.

“While Members appreciated the overall reduction in MFN tariffs, they nevertheless encouraged the Russian Federation to further simplify the tariff structure. Members expressed the hope that the Russian Federation would continue to deepen the reforms and to ensure that any new policies, regulations, and reforms would be in line with its WTO commitments.

“Many Members stressed the Russian Federation’s strong involvement in, and support of, the multilateral trading system. They highlighted the constructive engagement of the Russian Federation in the discussions around WTO reform, preparations for MC12, fisheries subsidies negotiations, the four Joint Statement Initiatives, and trade and gender.

“Regarding the JSI on Services Domestic Regulations, some Members encouraged the Russian Federation to swiftly submit its draft schedule of commitments. Members also encouraged the Russian Federation to complete its process of accession to the Agreement on Government Procurement in the near future.

“Members expressed their desire for the Russian Federation to continue its leadership role at the WTO. In this regard, they welcomed the stated commitment by the Russian Federation to the rules-based multilateral trading system with the WTO at its core.

“Some Members also commended the Russian Federation for its support to developing countries, for example, through the delivery of COVID-19 vaccines. In this regard, Members also emphasized the importance of trade preferences under the Generalized System of Preferences.

“Import substitution, localization policies, and local content requirements, especially in the context of public procurement, were issues raised by many Members. They were particularly interested in the impact such policies can have on trade, FDI, productivity, and the integration of the Russian Federation into global value chains. Members encouraged the Russian Federation to review such policies in light of WTO principles and the process of its accession to the Agreement on Government Procurement. For some Members, these policies were representative of a broader set of policies that they perceived as discriminatory and reducing predictability, transparency, and competition.

“Members commended the Russian Federation for the reforms undertaken to improve the business and investment environment, for example, the introduction of a “regulatory guillotine” mechanism, and the establishment of key conditions for electronic commerce. Members also expressed concerns regarding the remaining challenges in this area.

“Thus, in addition to the recent increase in restrictions on FDI, Members identified several factors as potentially having a negative effect on the conditions of doing business in the Russian Federation. These include governance and other rule-of-law issues, the dominant position of the State in key sectors of the economy and the lack of transparency regarding state-owned enterprises, the existence of a high degree of concentration in certain sectors, and the use of various subsidies in favour of domestic firms. Concerns were voiced in relation to developments in specific services sectors, including financial services and maritime transport.

“While many Members expressed appreciation for the numerous notifications submitted, they nevertheless encouraged the Russian Federation to further improve the timeliness and completeness of its notification record, mentioning in particular notifications related to state trading enterprises, licensing procedures, agriculture, and technical regulations applied at the national level.

“Sanitary and phytosanitary measures and technical regulations have also received much attention in this Review. Thus, for example, several Members raised issues regarding inspection procedures for meat imports and the ‘Track and Trace’ regime. Some Members expressed concerns regarding the application of measures that they consider were not based on international standards, unsupported by scientific evidence, and without adequate transparency. Some Members stressed the need for more clarity regarding the relationship between EAEU rules and rules applied at the national level.

“Other issues of interest for some Members included the introduction of export bans on agricultural and wood products, the imposition of temporary export restrictions and the increased use of export tariff rate quotas since the beginning of the pandemic, and measures relating to transit.

“This Trade Policy Review was characterized by open and constructive discussions around the Russian Federation’s trade and trade-related policies. As highlighted by the Russian Head of Delegation, the discussant, and many Members, the TPRM represents an opportunity to improve policies going forward.

“I therefore hope that the authorities will find the questions, comments, and experiences shared during this Review useful in their efforts to review and design their policies. Members look forward to receiving the answers to outstanding questions from the Russian Federation within one month, at which point the Review will be successfully concluded.”

A number of the concerns raised were also raised in the 2016 review, indicating limited if any improvement on important issues (e.g., import substitution, localization policies, and local content requirements). Others reflect actions by the Russian Federation following the start of the pandemic (“the introduction of export bans on agricultural and wood products, the imposition of temporary export restrictions and the increased use of export tariff rate quotas since the beginning of the pandemic, and measures relating to transit.”).

The European Union raised many of these same issues in its statement at the TPR meeting on October 27, 2021. As the largest trading partner of the Russian Federation, the concerns raised likely reflect the broadest understanding of problems with the Russian Federation’s compliance with WTO obligations. EU Statement at the Trade Policy Review of the Russian Federation, 27 October 2021, https://eeas.europa.eu/delegations/world-trade-organization-wto/106279/eu-statement-trade-policy-review-russian-federation-27-october-2021_en

“Statement delivered by Ambassador João Aguiar Machado

“The EU welcomes this second Trade Policy Review of the Russian Federation, almost a decade since itsaccession to the WTO. We welcome the delegation of Russia, led by Ms. Ekaterina Mayorova (Director of theDepartment of trade negotiations, Ministry of Economic Development) and thank the Discussant, Ambassadorof Switzerland H.E. Didier Chambovey, for his remarks.

“The EU is the main trade partner of the Russian Federation, both for goods and for services, and its main source of foreign direct investment, with some 75% of total inward FDI. Bilateral trade in 2020 represented some 4.8%of EU foreign trade in goods, down from 6% at the time of the previous TPR.

“Back in 2016, at its first Trade Policy Review, the EU had emphasized that Russia’s WTO accession represented an opportunity for its modernisation. A chance to diversify its economy and reduce its reliance on raw materials and commodities, but equally to adjust its judicial and legal framework to bring in a more dynamic and responsive market. The European Union continues to hold that belief.

“Over the last few years, Russia’s efforts to play a constructive role in various areas in the WTO have not gone unnoticed – be it in its involvement in the Joint Statement Initiatives, or in its general support to achieve a meaningful MC12 including through its openness towards WTO reform in order for the organization to remain strong and credible. The EU looks forward in making progress in the different Joint Statement Initiatives, and in particular concluding the Domestic Regulation JSI in the margins of MC12. We hope that Russia will be in the position to submit their schedule of specific commitments as soon as possible, noting that the schedules of all participants are an essential component for a successful conclusion of this negotiation.

“However, the Russian Federation needs to redouble its commitment to the WTO. Today, we regret to
note that since its accession the Russian authorities have expanded, rather than reduced, the scope of its import substitution policy without any realistic furthering their pretended aim of localisation. This not only has a negative effect on trade with the EU but is done in most cases to the direct detriment of Russian consumers.

“In addition, the arguments used by the Russian authorities to justify protectionist policies namely that they are a direct consequence of the sanctions of individual economies on the Russian Federation – are questionable in our view. These Russian policies started immediately after Russia’s WTO accession and predate the political tensions that Russia highlights.

“Some of the specific questions tabled by the EU better explain the underlying concerns that we have. Allow me to highlight some:

“Several questions target the contradiction between the aspiration of the Russian Federation to become a member of the Government Procurement Agreement, and the reality of its practice. The ability of foreign bidders to participate in government procurement has been obstructed or effectively denied through
a growing body of regulations granting advantages to domestic products via price preferences, quotas, or exclusion of foreign goods and services.

“A large part of the Russian state’s presence in the economy – up to 20% of Russian GDP — corresponds to state-owned enterprises providing products and services in a commercial context. Despite the applicable WTO rules in this area, the Russian Federation has introduced such a growing body of restrictions as to make the participation of foreign bidders in tenders uneconomic, or a practical impossibility.

“As to export restrictions – under the rationale of preventing illegal logging and supporting domestic forest-based industries – the Russian Federation has announced a ban on the export of unprocessed wood from 2022. It remains unclear how the Russian Federation intends to reconcile these measures
with the schedule of its concessions, which include export tariff-rate quotas in some of the categories of wood covered by the announced ban.

“One primary mission of the WTO is to facilitate transparency. For this, a reliable notification practice is
imperative. The Russian Federation’s performance in this area leaves much to be desired. For example,
Russian Federation notifications in the area of technical barriers to trade have concerned only
Eurasian Economic Union-level measures. A number of Russian Federation national measures falling within the scope of the TBT Agreement entered into force without any notification whatsoever to the WTO, including those regarding the wines and spirits sector. Not a single measure adopted at the national level has been notified to the WTO.

“The same can be said about the exclusive rights in the area of foreign trade granted to certain entities
in the Russian Federation including, for example, for the export of natural gas. The Russian Federation
has failed, since its accession, to notify a single state-trading enterprise to the WTO. At the same time, around 50% of the EU’s imports from the Russian Federation are sold by a single export monopoly of natural gas. Let me also remark that, beyond its non-notification, this fact sits uneasily with the overall principles of the WTO, and in our view also with the long-term interests of Russia.

“To conclude, the EU welcomes the Russian Federation’s commitment in its report to an open, non-discriminatory and transparent multilateral trading system, and for a reform aimed at preserving the WTO’s role in maintaining and developing new trade rules. We commend this as a good foundation for the necessary efforts that Russia should undertake to abide by the spirit and the letter of its WTO commitments, and to build a more open, transparent and non-discriminatory business environment.

“Thank you.”

USTR’s 9th Report to Congress on the Russian Federation’s Compliance with WTO obligations

USTR Katherine Tai’s press release on the latest USTR report on the Russian Federation’s compliance with WTO obligations summarizes concerns that the U.S. has more than nine years after the Russian Federation became a WTO Member.

“USTR Announces 2021 Report on the Implementation and Enforcement of Russia’s WTO Commitments

“December 21, 2021

“WASHINGTON – The Office of the United States Trade Representative today released its ‘2021 Report on the Implementation and Enforcement of Russia’s World Trade Organization (WTO) Commitments.’

“‘This Report provides an overview of Russia’s continued departure from the guiding principles of the World Trade Organization, such as non-discriminatory practices, more open trade, predictability, transparency, and fair competition,’ said Ambassador Katherine Tai. ‘Failure to follow WTO norms, rules, and commitments puts American workers and businesses at an economic disadvantage and prevents them from competing on a level playing field. USTR will continue to work with like-minded partners and use the tools of the WTO to hold Russia accountable for its behavior in the multilateral trading system.’

“The Report highlights areas in which USTR has raised concerns about Russia’s compliance with its WTO
commitments, including:

“‘Russia continues to adopt and implement localization measures to provide preferential treatment to both domestically produced goods and services.’

“‘In the agriculture sector, Russia maintains non-science-based import restrictions and refuses to recognize other countries’ guarantees on exporting facilities.’

“‘Russia’s import substitution strategies for the IT sector, such as the ‘Digital Economy of the Russian Federation,’ also raise additional national treatment and import substitution concerns.’

“‘As economies around the world were forced to retract and retrench in response to the COVID-19 pandemic, the government of Russia exacerbated those trends by extending its control over the Russian economy and tightening restrictions on trade.’

“Background

“This report was prepared pursuant to section 201 of the Russia and Moldova Jackson-Vanik Repeal and Sergei Magnitsky Rule of Law Accountability Act of 2012 (P.L. 112-208), which requires the U.S. Trade Representative to submit a report to the Committee on Finance of the U.S. Senate and the Committee on Ways and Means of the U.S. House of Representatives describing the commitments that Russia made upon entering the World Trade Organization on August 12, 2012, and assessing the extent to which Russia has implemented those commitments after 9 years of WTO membership.”

The USTR report is 62 pages in length and reviews an array of areas where the Russian Federation undertook commitments on acceding to the WTO and provides the USTR evaluation of whether there has been implementation to date. See 2021 Report on the Implementation and Enforcement of Russia’s WTO Commitments, December 2021, https://ustr.gov/sites/default/files/enforcement/WTO/2021%20Report%20on%20Russia’s%20WTO%20Compliance.pdf. The table of contents (pages i-ii) reviews the topics reviewed and is copied below.

Implementation and Enforcement of Russia’s WTO Commitments
Contents
I. Introduction ………………………………………………………………………………………………………….. 1
II. Executive Summary ………………………………………………………………………………………………. 2
III. Russia and the Customs Union/Eurasian Economic Union ………………………………… . 5
IV. Russia in the World Trade Organization ………………………………………………………………. 6
V. Import Regulation ………………………………………………………………………………………………… 7
A. Tariffs and Border Fees ………………………………………………………………………………………. 7
B. Customs Fees…………………………………………………………………………………………………….. 9
C. Customs Valuation …………………………………………………………………………………………….. 9
D. Trade Facilitation …………………………………………………………………………………………….. 10
E. Trading Rights …………………………………………………………………………………………………. 11
F. Quantitative Restrictions …………………………………………………………………………………… 12
G. Import Licensing ……………………………………………………………………………………………… 13
H. Trade Remedies ……………………………………………………………………………………………….. 15
VI. Export Regulation ……………………………………………………………………………………………….. 16
VII. Agriculture …………………………………………………………………………………………………………. 18
A. Sanitary and Phytosanitary Measures …………………………………………………………………. 18
B. Domestic Supports and Export Subsidies ……………………………………………………………. 24
VIII. Internal Policies Affecting Trade ……………………………………………………………………….. 26
A. Non-Discrimination ………………………………………………………………………………………….. 26
B. Industrial Policy, Including Subsidies …………………………………………………………………. 29
C. State-Owned, -Controlled, and -Trading Enterprises …………………………………………….. 31
D. Pricing Policies ………………………………………………………………………………………………… 33
E. Standards, Technical Regulations and Conformity Assessments ……………………………. 34
F. Government Procurement ………………………………………………………………………………….. 37
IX. Services ……………………………………………………………………………………………………………… 39
A. Financial Services ……………………………………………………………………………………………. 40
B. Telecommunications ………………………………………………………………………………………… 41
C. Computer and Related Services …………………………………………………………………………. 41
D. Distribution Services ………………………………………………………………………………………… 43
E. Audio-Visual and Media Services ………………………………………………………………………. 43
X. Intellectual Property Rights ………………………………………………………………………………….. 44
A. Legal Framework …………………………………………………………………………………………….. 44
B. Enforcement ……………………………………………………………………………………………………. 47
XI. Investment ………………………………………………………………………………………………………….. 50
A. Trade-Related Investment Measures …………………………………………………………………… 50
B. Special Economic Zones …………………………………………………………………………………… 53
XII. Rule of Law………………………………………………………………………………………………………… 53
A. Eurasian Economic Union …………………………………………………………………………………. 53
B. Transparency …………………………………………………………………………………………………… 54
C. Judicial Review ……………………………………………………………………………………………….. 56
XIII. Conclusion ………………………………………………………………………………………………………… 57

A portion of the Executive Summary section reveals U.S. concerns with Russia’s implementation of obligations. The excerpt (from pages 3-5) is copied below.

” Over the past year, Russia has continued its trajectory of an economy moving away from the guiding principles of the WTO: non-discrimination, freer trade, predictability, transparency, and fair competition. Rather, Russia maintains restrictive at-the-border measures, institutes behind-the-border measures to inhibit trade, and implements an industrial policy seemingly driven by the guiding principles of import substitution and forced localization.

“Russia maintains tariffs ranging from 25 percent to 40 percent on various industrial products imported from the United States in retaliation against tariffs imposed on U.S. imports of steel and aluminum articles under Section 232 of the Trade Expansion Act of 1962, as amended. Russia also maintains a near complete ban on imports of agricultural goods from the United States and other WTO Members. Russia also continues to apply quantitative restrictions or outright bans on certain agricultural exports.

“In addition to these border measures, Russia maintains various behind-the-border measures that interrupt the smooth flow of global trade, such as outmoded import licensing requirements and a mandatory labeling regime. In 2021, Russia introduced yet another regime to monitor products, a traceability regime, that requires tracking consignments of goods (as opposed to individual goods subject to the mandatory labeling regime) through the chain of commerce in Russia. In the agriculture sector, Russia maintains non-science-based import restrictions and refuses to recognize other countries’ guarantees on exporting facilities.

“Compounding these at-the-border and behind-the-border restrictions, Russia continues to adopt and implement localization measures to provide preferential treatment to both domestically produced goods and services. In response, the United States, often working with other WTO Members, has raised concerns about Russia’s import substitution plans, subsidies (including those contingent on use of domestic over imported content), preferential taxes, preferential pricing mandates, prohibitions on purchasing imported goods and services, and domestic purchasing requirements, among others.

“The United States has also continued to raise concerns about Russia’s lack of transparency, manifested, for example, in its refusal to notify a single state trading enterprise and its delay (or complete refusal) to provide written answers to questions about its import substitution policies. The United States, joined by other WTO Members, will continue to remind Russia of its transparency obligations.

“The United States has urged Russia to meet its commitments with regard to the protection and enforcement of intellectual property rights. In particular, the United States has reviewed Russia’s implementation of WTO commitments on data exclusivity, pharmaceutical patent protection, and collective management organizations. Moreover, Russia’s record on enforcement remains weak.

“Since early 2014, the U.S. Government has curtailed its bilateral engagement with Russia in response to Russia’s actions in Ukraine, limiting USTR’s ability to raise directly with Russia our concerns about the trajectory of its trade policies. The sequestration resulting from the COVID-19 pandemic further limited engagement with Russian officials. Nevertheless, the interagency team of Russia specialists in the U.S. Government continued to monitor and evaluate Russia’s trade and investment policies and practices, and where and when possible, USTR continues to raise concerns in WTO meetings and on the margins of committee and council meetings to hold Russia accountable for its actions. As it has to date, if the United States finds that Russia’s actions appear to be inconsistent with its WTO commitments. The United States will investigate and use all appropriate means to resolve the matter and keep Russia’s markets open to U.S. exports.”

The Russian Federation’s reaction to U.S. report

The Russian Federation has rejected U.S. claims of non-implementation and calls attention to sanctions imposed on the Russian Federation by the U.S. and EU. See Tass Russian News Agency, ‘Beyond absurdity’: Diplomat slams US claims about Russia’s import substitution, December 24, 2021, https://tass.com/economy/1380631.

The Road Forward

Most of the concerns raised by the United States in its latest report on the Russian Federation’s implementation of WTO commitments mirror concerns that have been raised by the European Union and presumably others in the latest TPR of the Russian Federation. Moreover, some of the concerns have persisted since the Russian Federation first joined the WTO in 2012 as reflected in the first TPR from 2016 and earlier USTR reports to Congress on the Russian Federation’s implementation of WTO commitments. It is unclear whether the Russian Federation has any intention of addressing these longstanding and more current concerns.

The Chairman of the TPR for the Russian Federation in his concluding remarks and the EU Ambassador in his statement during the TPR highlighted areas where the Russian Federation has made positive contributions to the WTO such as in the fisheries negotiations and a number of the Joint Statement Initiatives and in supporting WTO reform. Thus, the Russian Federation has the potential to make some meaningful contributions in the areas where it is contributing. Such contributions will hopefully continue in 2022.

While Russia is treated as a market economy by the U.S. and the EU in trade remedy cases, the reality is that a large portion of Russia’s economy remains state owned or state directed. Such state ownership and direction are fundamentally at odds with the multilateral trading system and the concept of a level playing field. WTO reform is likely critical to address distortions caused by state ownership and control. While the Russian Federation is supportive of reform, it is unlikely to support meaningful reform on the state-owned/directed sector.

In addition, the many behind the border restrictions reviewed above simply contribute to the lack of meaningful access to the market of the Russian Federation for many WTO Members and have led to the size of the Russian Federation’s trade surplus. There does not appear any likelihood that the Russian Federation will meaningfully address these issues.

Perhaps the biggest unknown in 2022 is whether potential actions by the Russian Federation vis-a-vis one of its neighbors (Ukraine) will be implemented. The U.S., EU and others will certainly impose expanded sanctions against the Russian Federation if there is further encroachment by the Russian Federation into Ukraine. A souring of political relations would also likely cause a broader fallout for the trading system.

Whether the Russian Federation will be a meaningful contributor to supporting the global trading system is solely in the hands of the Russian Federation. 2022 is likely to be a year where the Russian Federation has some positive contributions but fails to address the longstanding concerns.

COVID-19 and vaccine equity — outlook for 2022

In prior posts, I have written extensively on the issue of vaccine equity. In my view with the large ramp up of global production and increased production in multiple country locations, the key to equitable distribution going forward lies in improved fulfillment of contractual commitments, increased donations, and greatly increased efforts at improving the ability of low income and lower middle-income countries (as categorized by the World Bank) to handle increased vaccine supplies and other goods.

The U.S., EU and others have stepped up donations and made large commitments for donations in 2022. India, which was supposed to be a major source of vaccines for COVAX in 2021, has in recent months started to export vaccines again.

While the flow of vaccines and other medical goods has been significantly behind goal to low income and lower middle income countries in 2021, in recent months, the challenge has been helping those countries get people vaccinated with the increased supplies that are becoming available.

The WHO has issued emergency use authorization for more vaccines. The multilateral organizations — World Bank, IMF, WTO and WHO — have been working hard to coordinate developments among the organizations. There is agreement on working to achieve 70% vaccination of populations around the world by July 2022.

Data on global vaccinations compiled by Bloomberg as of December 30, 2021 (a.m.) reflect more than 9.11 billion vaccine doses having been administered globally to date — 118 shots for every 100 people worldwide. See Bloomberg, More than 9.11 Billion Shots Given: Covid-19 Tracker, updated December 30, 2021 at 6:37 AM EST, https://www.bloomberg.com/graphics/covid-vaccine-tracker-global-distribution/. However, vaccination rates vary enormously with very low rates in many low income and some lower middle income countries. So 70% global vaccination targets should be achievable if challenges in 2022 remain similar to those faced in 2021 recognizing the many advances.

However, the omicron variant is sweeping the world with large increases in infections, though the early analysis suggests infections are resulting in less severe cases. In the United States, new infections were close to 500,000 on December 29 alone – an incredible increase in cases in the last several weeks. The same is happening in many European countries (for example, France recorded its first 200,000 infection day this week).

The new variant and the renewed restrictions being imposed by many countries complicate the picture for 2022. With larger numbers of infections, governments are evaluating how to keep economies functioning and what restrictions the public will accept after the long period of disruption during the last two years.

Early studies indicate that boosters can significantly improve the effectiveness of existing MRNA vaccines against the new variant. Of course, boosters for people will reduce the volume of vaccines that can be shipped to countries with low levels of vaccination.

Some countries are imposing vaccine mandates and limiting activities of those who refuse to get vaccinated. The hit to the global economy from renewed restrictions particularly for hard hit sectors like travel and entertainment is unknown at present.

As increasing numbers of people are quarantined after being infected or being in contact with such individuals, governments, hospitals and companies struggle to cover operating needs. Will this cause supply chain problems for vaccines and other medical goods and supplies?

So how well vaccine equity will develop in 2022 will depend on a number of unknowns: will the omicron variant result in production setbacks in the coming months, reducing the volume of vaccines that get produced? Will a number of the existing vaccines prove to be ineffective against the omicron variant? If so, how quickly can other vaccines be ramped up including all needed inputs? What implications are there for medical infrastructure in the countries with low current vaccination rates if different vaccines are needed than those presently available and readily usable in the countries?

The heads of the World Bank, IMF, World Trade Organization and World Health Organization released a joint statement on December 17, 2021. See WTO Press Release, International organizations discuss how to improve access to COVID vaccines, countermeasures, 22 December 2021, https://www.wto.org/english/news_e/news21_e/covid_22dec21_e.htm. The joint statement identifies what the four organizations perceive as doable actions to improve vaccine equity.

Seventh Meeting of the Multilateral Leaders Task Force, December 17, 2021:
“’From Vaccines to Vaccinations’
“Joint Statement

“The heads of the International Monetary Fund, World Bank Group, World Health Organization, and World Trade Organization held high-level consultations with Gavi and UNICEF on December 17, 2021 aimed at increasing the use of COVID-19 vaccines and other critical medical countermeasures in low-income (LIC) and lower middle-income (LMIC) countries and supporting countries to be better prepared, resourced, and ready to roll out vaccines.

“We agreed on the urgency to accelerate vaccinations in LICs, where under 5% of the population is fully vaccinated, as well as in LMICs, where around 30% of the population is fully vaccinated. We agreed to work with countries to support and strengthen their national vaccination goals consistent with the global target to vaccinate 70% of the populations in all countries by mid-2022. The emergence of the Omicron variant underscores the vital need for fair and broad access to vaccines as well as testing, sequencing, and treatments to end the pandemic.

“Addressing vaccine inequity, particularly in LICs, requires increasing the supplies of vaccines to COVAX and AVAT, encouraging LICs and LMICs to purchase additional vaccine doses, and enhancing country readiness to deploy vaccines. Furthermore, to facilitate trade flows to support the manufacturing and distribution of vaccines and other COVID tools, export restrictions must be rolled back and trade-facilitating measures must be put in place. Fully funding the ACT-A Accelerator’s Financing Framework would play an important role in narrowing these gaps and reaching the global target.

“Some LICs and LMICs are facing serious challenges in vaccine deployment. Constraints related to storage, cold chain capacity, and trained vaccinators are exacerbated in some cases by doses arriving with short shelf lives and without adequate lead time and shortages in ancillary supplies (such as syringes, safety boxes, and dilutants), with challenges to plan and finance vaccination campaigns in a timely manner. As in wealthier countries, vaccine hesitancy is also an issue in some LICs and LMICs.

“To address such challenges, we call on governments that have already achieved high coverage to:

“o fulfill their donation pledges as quickly as possible to accelerate near-term deliveries to COVAX;

“o release manufacturers from contracts and options and implement delivery swaps, so they can prioritize supply to COVAX, AVAT, and low-coverage countries.”

We urge governments that have yet to achieve high vaccination coverage to:

“o contract additional doses immediately through AVAT, COVAX, or bilaterally;

“o establish in-country surge capacity to increase the rate of vaccine utilization as supplies increase; and

“o coordinate between health and finance authorities for making increased use of multilateral development banks’ resources that are readily available for both vaccine purchase and deployment.

“We call for better coordination among vaccine manufacturers, dose donating countries, COVAX, AVAT, and other partners to improve visibility on vaccine supply schedules and quality of supply for LICs and LMICs, to support country-level planning and preparedness for turning vaccines into vaccinations. Visibility on schedules along with adequate lead times and shelf lives of vaccines are critical for both equitable distribution as well as for recipient countries and their partners to prepare for in-country deployment. 

“Growing volumes of COVID-19 vaccines are forecast to arrive in LICs and LMICs in the coming months. Close coordination amongst all stakeholders will be crucial to help provide countries with the assistance and necessary resources to increase their capacity to administer those doses. In this regard, we welcome the recent appointment by UNICEF and WHO, in partnership with Gavi, of the Global Lead Coordinator for COVID Vaccine Country Readiness and Delivery, who will play an important key role in strengthening in-country vaccine deployment.”

The actions called for by the four organizations are reasonable and likely doable assuming existing vaccines are what is needed to address the current variants. However, I have raised in the past the desirability of understanding what has permitted some low income and lower middle-income countries to achieve significant vaccinations while some upper middle-income and high income countries are not achieving adequate levels of vaccination.

For example, Rwanda is one of 27 low income countries in the 2022 World Bank grouping. Yet Rwanda has achieved 99.3 vaccinations per 100 people as of data in the December 30 Bloomberg analysis. What actions permitted Rwanda to dramatically exceed the performance of other low income countries?

Similarly, amongst lower middle-income countries, many have achieved good vaccination rates in 2021. For example, Cambodia has achieved 183.9 vaccinations per 100 people, Mongolia 161.9/100 people, Bhutan 155/100 people, Sri Lanka 153.7/100 people, Vietnam 153.6/100 people, El Salvador 148/100 people, Morocco 141.2/100 people, Iran 139.6/100 people, nine other countries more than 100/100 people (Samoa, Nicaragua, Uzbekistan, Tunisia, India, Belize, Cape Verde, Indonesia and the Philippines) and four more who provided more than 80 vaccinations/100 people (Honduras, Timor-Leste, Bolivia and Laos). Why did so many lower middle-income countries achieve such levels of vaccinations versus other countries in the group?

In upper middle-income countries, Gabon has only gotten 27.2 vaccinations/100 people. A number of other countries in this group are similarly well below 80/100 people (a proxy for 40% vaccination of the population) — Namibia at 29.9; Equitorial Guinea at 33.3; Iraq at 36.2; Libya at 40.5; Jamaica at 44; Bosnia and Herzegovina at 47.1; South Africa at 47.5; Bulgaria at 53; and eight others (Armenia, St. Vincent and the Grenadines, St. Lucia, Guatemala, Lebanon, Moldova, Georgia and Grenada). Shouldn’t the international organizations be focused on all countries that are far below vaccination targets? What caused these countries to have such poor vaccination rates?

The Bahamas is the only high income country with a vaccination rate of less than 80/100 people (78.8) but there are other high income countries or islands with low rates of vaccination compared to other high income countries.

If the world is to achieve vaccine equity during 2022, all countries need to participate in achieving acceptable levels of vaccination. If problems differ among countries as to impediments to greater vaccinations, those problems need to be identified and addressed as well.

My compilation of data from the Bloomberg vaccine tracker of December 30 and an identification of which countries are classified in which income group by the World Bank is attached.

Dec.-30-2021-vaccines-per-100-people.xlsx

WTO Dispute Settlement — What the Recently Adopted Panel Report on United States – Antidumping and Countervailing Duties on Ripe Olives from Spain says about the existing dispute settlement system and about needed WTO reforms

On November 19, 2021, the WTO panel hearing the dispute brought by the European Union against the United States on trade remedies imposed on ripe olives from Spain released publicly its report. See UNITED STATES – ANTI-DUMPING AND COUNTERVAILING DUTIES ON RIPE OLIVES FROM SPAIN, WT/DS577/R (19 November 2021). The panel made some findings in the countervailing duty investigation by the U.S. Department of Commerce adverse to the U.S. determinations including finding a statutory provision contrary to the WTO obligations in the Subsidies and Countervailing Measures Agreement “as such”. The panel also disagreed with the EU on various aspects of its challenges to the U.S. countervailing duty investigation and disagreed on all claims of WTO violations from the U.S. International Trade Commission final injury determination in both the antidumping and countervailing duty investigations.

At the Dispute Settlement Body (“DSB”) meeting on December 20, 2021, the United States did not oppose adoption of the panel report despite reservations on parts of the decision. While the EU and U.S. statements at the DSB meeting paint different pictures of the relevance and/or importance of the panel report, U.S. acceptance of the report moves the dispute to the phase where the U.S. considers how it will bring itself into compliance with its WTO obligations. It is another case where the “losing” party has not opted to file an appeal into the void (i.e., where the Appellate Body is not functioning because of lack of AB members). It is another example of the U.S. and EU looking for ways to resolve bilateral disputes to permit greater focus on reform needs at the WTO. Indeed, the U.S. and EU agreed to delay the release of the panel report for several months — time while other bilateral matters were being handled. Adoption of the report by the U.S. also avoids the EU acting contrary to its WTO obligations by retaliating against a WTO Member who takes an appeal vs. pursuing other resolution.

The panel report raises some challenging issues for WTO Members if trade remedies are to be available to all industries in fact. That said, the analysis in the report is largely well reasoned and well articulated.

Statement of Parties at the DSB meeting of December 20, 2021

At the DSB meeting on December 20th, consideration of the panel report on olives was the seventh agenda item. See Airgram, WTO/AIR/DSB/113 10 DECEMBER 2021, SUBJECT: DISPUTE SETTLEMENT BODY.

The WTO press release on the WTO DSB meeting had the following discussion of the olive dispute panel report.

“United States — Anti-dumping and countervailing duties on ripeolives from Spain

“The European Union thanked the panel for its work in this dispute. The panel report circulated on 19 November (https://www.wto.org/english/news_e/news21_e/577r_e.htm) substantially upheld the EU’s claims and largely confirmed that in the anti-subsidy duties imposed by the US on ripe olives from Spain, the US acted inconsistently with the WTO Agreement on Subsidies and Countervailing Measures (ASCM), the EU said. The panel found that the US did not comply with its obligation in the determination of “de jure” specificity of the subsidy and in the calculation of the subsidy benefit for one specific EU company. It also found that Section 771B of the US Tariff Act of 1930, which presumes that the entire benefit of a subsidy provided in respect of a raw agricultural product passes through to the downstream processed agricultural product, is ‘as such’ inconsistent with the ASCM. The EU said it expects the US will promptly and fully implement the panel’s findings.

“The United States said that while it was disappointed in certain respects, it welcomed the panel’s findings on key issues in the dispute. The panel rightly rejected many of the numerous claims brought by the EU regarding the anti-dumping and countervailing duties at issue, including key EU claims relating to injury and so-called “decoupled” payments.

“The United States said it appreciated the panel’s rejection of all eight claims concerning the US International Trade Commission’s injury determination and that, contrary to certain comments, the panel rejected the EU position that so-called “decoupled” agricultural payments cannot be subject to countervailable duties. In particular, the panel did not find that the EU Common Agricultural Policy programs at issue were outside the scope of the ASCM. Although disappointed with some of the panel’s findings, the US has decided to allow the report to be adopted in light of all the circumstances, including the overall quality of the panel report and the US desire to work with the EU to resolve this dispute, the US said.

“Canada highlighted the panel’s important finding that an investigating authority must establish the existence and extent of indirect subsidization, taking into account all relevant factors, in order to impose countervailing duties.

“The DSB took note of the statements made and adopted the panel report.”

WTO Press Release, WTO panels to review Russian procurement measures, Dominican duties, 20 December 2021, https://www.wto.org/english/news_e/news21_e/dsb_20dec21_e.htm.

The WTO Press Release contained the entirety of the prepared EU statement on the dispute. See EU Statements at Regular Dispute Settlement Body (DSB) meeting, 20 December 2021, https://eeas.europa.eu/delegations/world-trade-organization-wto/109169/eu-statements-regular-dispute-settlement-body-dsb-meeting-20-december-2021_en. The U.S. statement was longer and is presented below in its entirety.

“7. UNITED STATES – ANTI-DUMPING AND COUNTERVAILING DUTIES ON RIPE OLIVES FROM SPAIN

“”A. REPORT OF THE PANEL (WT/DS577/R AND WT/DS577/R/ADD.1)

“• The United States thanks the Panel, and the Secretariat staff assisting it, for their work in this dispute. We acknowledge the Panel’s thorough review of the legal arguments put forward by the parties, and while we are disappointed in certain respects, we welcome the Panel’s findings on key issues in this dispute.

“• The EU brought numerous claims regarding antidumping and countervailing duties on ripe olives from Spain, as well as one statutory provision. The Panel rightly rejected many of those claims, including key EU claims relating to injury and so-called “decoupled” payments.

“• First, the United States appreciates the Panel’s rejection of all eight claims concerning the U.S. International Trade Commission’s injury determination.

“• For example, the Panel agreed with the United States that nothing in Articles 15.1 and 15.2 of the SCM Agreement or Articles 3.1 and 3.2 of the Antidumping Agreement prohibits an investigating authority from paying particular attention to one segment of the domestic industry in its injury analysis. And as a factual matter, the USITC did not exclude certain segments of the domestic industry in its analysis.

“• Furthermore, the USITC properly considered whether there was a significant increase in the volume of subsidized and dumped imports, and was not required to make a finding of absolute or relative volume increase, pursuant to Article 15.2 of the SCM Agreement or Article 3.2 of the Antidumping Agreement.

“• The Panel also agreed that the USITC considered all of the relevant economic factors having a bearing on the state of the entire domestic industry, established a causal link between subject imports and injury to the domestic industry, and accounted for any injury caused by factors other than subject imports as part of its non-attribution analysis.

“• Accordingly, the EU failed to make out its claims under Articles 15.1, 15.2, 15.4, and 15.5 of the SCM Agreement and Articles 3.1, 3.2, 3.4, and 3.5 of the Antidumping Agreement. We are gratified that the Panel agreed, and rejected all of the EU’s injury claims. (See, e.g., para. 7.319.)

“• Second, we welcome the Panel’s narrow findings with respect to specificity. While we disagree that the U.S. Department of Commerce erred in certain aspects of its factual evaluation, the Panel correctly rejected the EU’s broader challenge regarding the proper interpretation of Article 2 of the SCM Agreement.

“• Contrary to certain comments, including in press reports, the Panel has rejected the EU position that so-called ‘decoupled’ agricultural payments cannot be subject to countervailable duties:

“o In particular, and contrary to certain characterizations of these findings, the Panel did not find that the Common Agricultural Policy (CAP) programs at issue were outside the scope of the SCM Agreement.

“o To the contrary, the Panel rejected the EU’s arguments that the legal design of the CAP – in particular, ‘decoupling’ subsidies from current production or basing them on an earlier reference program – means the subsidies conferred cannot be countervailed. (See, e.g., paras. 7.30-7.33, 7.37-7.39, 7.51-7.52, 7.85, and 7.124.)

“o In doing so, the Panel similarly rejected the EU argument that decoupled ‘Green Box’ subsidies under the Agreement on Agriculture are not actionable under the SCM Agreement. The Panel found that Article 2.1(a) does not prescribe particular facts or factors that may or may not be taken into account by an investigating authority, or any particular methodology or analytical approach in evaluating that information.

“• Thus, on these two core issues in this panel proceeding, injury and countervailing so-called ‘decoupled’ payments, the Panel disagreed with the very premise of the EU’s claims.

“• We are disappointed with other of the Panel’s findings, however, and in particular its findings on a U.S. statute related to the calculation of subsidies for certain processed agricultural products.

“• By enacting Section 771B, the U.S. Congress sought to eliminate the possibility that ‘a foreign nation could avoid U.S. countervailing duty on an agricultural product merely by doing some minor processing of the agricultural product before it is exported to the United States’.1 The United States is evaluating the Panel’s findings with a view to ensure that countervailing duties account for the economic realities of trade in raw agricultural products and processed downstream products.

“• Mr. Chairman, although the United States is disappointed with certain of the Panel’s findings, on balance, we have decided to permit the report to be adopted today. We take this step in light of all the circumstances, including the overall quality of the Panel report and our desire to work with the European Union to resolve this dispute.

“• We thank Members for their attention to this statement.

“1 See 133 Congressional Record S8814 (Exhibit USA-9) at S8815. See also Issues and Decision Memo for Final Determination C-469-818 (Exhibit EU-2), p. 23.”

Statements by the United States at the Meeting of the WTO Dispute Settlement Body Geneva, December 20, 2021, pages 9-10, https://uploads.mwp.mprod.getusinfo.com/uploads/sites/25/2021/12/Dec20.DSB_.Stmt_.as_.deliv_.fin_.pdf

Panel conclusion

Because of the number and complexity of issues explored in the panel report, the panel’s conclusion is a good basis for understanding the extent of the EU “win” and US “loss”.

“8 CONCLUSIONS AND RECOMMENDATION

“8.1. For the reasons set forth in this Report, the Panel concludes as follows:

“a. With respect to the European Union’s claims regarding the USDOC’s de jure specificity determination:

“i. the European Union has demonstrated that the USDOC’s 29 May 2020 Remand Redetermination as it relates to the USDOC’s original findings of de jure specificity is a measure or is part of the measure that is before the Panel in this dispute;

“ii. the European Union has not demonstrated that the USDOC acted inconsistently with Articles 2.1 and 2.1(a) of the SCM Agreement merely because the USDOC based its findings of de jure specificity in the ripe olives countervailing duty investigation on the rules in the relevant subsidy programmes governing the calculation of the amounts of subsidies available to eligible enterprises;

“iii. the European Union has not demonstrated that the USDOC acted inconsistently with Article 2.1(a) of the SCM Agreement because the USDOC’s determination of de jure specificity was dependent upon how certain alleged features of past subsidy programmes no longer in force were relied upon and integrated into the BPS programme;

“iv. the European Union has not demonstrated that, as a matter of fact, the USDOC found that the BPS/GP and SPS subsidies were de jure specific to olive growers as a result of being coupled or tied to olive production;

“v. the USDOC acted inconsistently with Articles 2.1, 2.1(a), and 2.4 of the SCM Agreement because:

“(1) the USDOC did not properly examine and account for the rules governing the allocation and valuation of BPS entitlements with respect to new farmers, farmers holding entitlements transferred under the SPS programme, and farmers no longer growing olives;

“(2) the USDOC relied upon erroneous factual findings with respect to function and role of the so called “regional rate” to support its determination of de jure specificity; and

“(3) the USDOC did not properly examine and account for the rules governing the allocation and valuation of SPS entitlements with respect to farmers with SPS entitlements obtained via transfer, and farmers holding COMOF programme-based entitlements no longer producing olives.

“For the reasons set out in (v)(1)-(3), the USDOC’s determination of de jure specificity was not based on a reasoned and adequate explanation of why access to the BPS and SPS subsidies was explicitly limited to olive growers, within the meaning of Articles 2.1 and 2.1(a) of the SCM Agreement, and was not clearly substantiated on the basis of positive evidence, as required by Article 2.4 of the SCM Agreement;

“vi. the USDOC acted inconsistently with Article 2.4 of the SCM Agreement to the extent that the USDOC’s determinations of de jure specificity with respect to the SPS and BPS/GP subsidies relied upon an erroneous factual finding concerning the calculation of assistance under the COMOF programme832;

“vii. the European Union has not demonstrated that the USDOC acted inconsistently with Articles 2.1, 2.1(a), and 2.4 of the SCM Agreement because, contrary to the European Union’s assertions:

“(1) the USDOC’s rejection of the arguments concerning the application of the convergence factor under the BPS programme was supported by record evidence, and to this extent, reasonably and adequately explained and based on clearly substantiated positive evidence;

“(2) the totality of the USDOC’s discussion of the rules governing the calculation of SPS payments reveals that the USDOC correctly understood that SPS payments were made to farmers and that Spain did not implement the SPS programme on a regional basis; and

“(3) the lack of a formal specificity finding under US law does not undermine the USDOC’s determinations of de jure specificity with respect to the SPS, BPS, and GP programmes, given the absence of any suggestion on the part of the European Union that the COMOF programme subsidies were not de jure specific, and in the light of the fact that the USDOC considered it had made sufficient factual findings to satisfy itself that those subsidies would be de jure specific under its domestic legislation, had it been required to make such a determination.

“viii. given our findings at paragraphs 8.1.a.v and vi, the Panel declines to make further findings under Articles 1.2, 2.1, 2.1(a), 2.1(b), and 2.4 of the SCM Agreement.

“b. With respect to the European Union’s claims in relation to Section 771B of the Tariff Act of 1930 and its application in the ripe olives countervailing duty investigation:

“i. Section 771B of the Tariff Act of 1930 is as such inconsistent with Article VI:3 of the GATT 1994 and Article 10 of the SCM Agreement because it requires the USDOC to presume that the entire benefit of a subsidy provided in respect of a raw agricultural input product passes through to the downstream processed agricultural product, based on a consideration of only two factual circumstances, without leaving open the possibility of taking into account any other factors that may be relevant to the determination of whether there is any pass-through and, if so, its degree;

“ii. the USDOC acted inconsistently with Article VI:3 of the GATT 1994 and Article 10 of the SCM Agreement regarding its application of Section 771B of the Tariff Act of 1930 in the Spanish ripe olives countervailing duty investigation because it failed to establish the existence and extent of indirect subsidization taking into account all relevant facts and circumstances; and

“iii. given our findings at paragraphs 8.1.b.i and ii, the Panel declines to make further findings under Articles 19.1, 19.3, 19.4, and 32.1 of the SCM Agreement, either with respect to Section 771B of the Tariff Act of 1930 as such or the USDOC’s application of Section 771B of the Tariff Act of 1930 in the Spanish ripe olives countervailing duty investigation.

“c. With respect to the European Union’s claims regarding the USITC’s Injury Determination:

“i. with respect to the United States’ request for a preliminary ruling, the United States has not demonstrated that the European Union’s claims under Article 15.4 of the SCM Agreement and Article 3.4 of the Anti-Dumping Agreement are not properly before the Panel;

“ii. the European Union has not demonstrated that the USITC acted inconsistently with Articles 15.1 and 15.2 of the SCM Agreement, and Articles 3.1 and 3.2 of the Anti-Dumping Agreement, by failing to undertake an analysis of the volume of ripe olives from Spain based on an objective examination of positive evidence;

“iii. the European Union has not demonstrated that the USITC acted inconsistently with Articles 15.1 and 15.2 of the SCM Agreement, and Articles 3.1 and 3.2 of the Anti-Dumping Agreement, by failing to consider a “volume effect” within the meaning of Article 15.2 of the SCM Agreement and Article 3.2 of the Anti-Dumping Agreement;

“iv. the European Union has not demonstrated that the USITC acted inconsistently with Articles 15.1 and 15.2 of the SCM Agreement, and Articles 3.1 and 3.2 of the Anti-Dumping Agreement, by failing to undertake an analysis of the price effects of ripe olives from Spain that was based on an objective examination of positive evidence;

“v. given our findings at paragraphs c.ii-iv, the European Union has not demonstrated that the USITC acted inconsistently with Articles 15.4 and 15.5 of the SCM Agreement, and Articles 3.4 and 3.5 of the Anti-Dumping Agreement, as a consequence of alleged violations concerning the USITC’s volume analysis and price effects analysis;

“vi. the European Union has not demonstrated that the USITC acted inconsistently with Articles 15.1 and 15.4 of the SCM Agreement, and Articles 3.1 and 3.4 of the Anti-Dumping Agreement, by failing to undertake an analysis of the consequent impact of ripe olives from Spain on the domestic industry that was based on an objective examination of positive evidence;

“vii. given our findings at paragraph c.vi, the European Union has not demonstrated that the USITC acted inconsistently with Article 15.5 of the SCM Agreement, and Article 3.5 of the Anti-Dumping Agreement, as a consequence of alleged violations concerning the USITC’s impact analysis; and

“viii. the European Union has not demonstrated that the USITC acted inconsistently with Articles 15.1 and 15.5 of the SCM Agreement, and Articles 3.1 and 3.5 of the Anti-Dumping Agreement, by failing to undertake a causation analysis that was based on an objective examination of positive evidence.

“d. With respect to the European Union’s claims concerning Aceitunas Guadalquivir’s final subsidy margin and countervailing duty rate calculation:

“i. the USDOC acted inconsistently with Article VI:3 of the GATT 1994 because, by relying on the volume of Aceitunas Guadalquivir’s raw olive purchases reported in its response to the initial 4 August 2017 questionnaire to determine Aceitunas Guadalquivir’s final subsidy margin and countervailing duty rate, the USDOC did not ensure, and take the necessary steps to ascertain as accurately as possible the amount of subsidization bestowed on the investigated products;

“ii. the USDOC acted inconsistently with Article VI:3 of the GATT 1994 because the USDOC relied upon the margin of subsidization incorrectly determined for Aceitunas Guadalquivir in its determination of the ‘all others’ rate of countervailing duties imposed on exporters of ripe olives that were not individually investigated;

“iii. given our findings at paragraphs 8.1.d.i and ii, the Panel declines to make further findings that the same USDOC actions are also inconsistent with Articles 10, 19.1, 19.3, 19.4 and 32.1 of the SCM Agreement;

“iv. the USDOC acted inconsistently with Article 12.1 of the SCM Agreement because the USDOC failed to notify the respondents that the USDOC required information regarding the volume of purchases of raw olives processed into ripe olives; and

“v. the USDOC acted inconsistently with Article 12.8 of the SCM Agreement because the USDOC failed to inform interested parties before the final determination that the volume of purchases of raw olives processed into ripe olives was an ‘essential fact under consideration’.

“8.2. Under Article 3.8 of the DSU, in cases where there is an infringement of the obligations assumed under a covered agreement, the action is considered prima facie to constitute a case of nullification or impairment. We conclude that, to the extent that the measures at issue are inconsistent with the GATT 1994, the SCM Agreement and Anti-Dumping Agreement, they have nullified or impaired benefits accruing to the European Union under that agreement.

“8.3. Pursuant to Article 19.1 of the DSU, we recommend that the United States bring its measures into conformity with its obligations under the GATT 1994, the SCM Agreement, and the Anti-Dumping Agreement.

“832 See para. 7.127(d) above.”

Comments on the Panel Report

With the dispute settlement system likely to be without an agreed solution to the reforms needed and role of a second tier review (“appeal”) for the next several years, the panel report and the response thereto shows that Members can find solutions to disputes even if there is only the panel process, depending on the quality of the panel report and the goodwill of the parties. This is not surprising as most disputes in the GATT system resulted in eventual adoption by the parties. While many Members, including the U.S. and the EU and China, have filed appeals into the void, resolution of disputes is achievable even in these unusual circumstances.

While many of the panel findings of U.S. violations of existing obligations are arguably addressable by the U.S. without statutory or regulatory change, absent from the panel’s analysis is the practical ability of investigating governments to seek and of investigated companies and their governments to provide ever increasing quantities of information in the 12-18 month time frame of investigations. This is particularly true in most agricultural cases and processed agricultural cases where the number of producers can be in the thousands, tens of thousands or more.

In the United States, all industries are supposed to be able to avail themselves of statutory tools to address injurious dumping or subsidization. For many agricultural producers, there can be issues of seasonality that should be addressable in cases so that relief if warranted only addresses products entering during the relevant season.

But the same concern applies if options under U.S. law or the WTO agreements require gathering information from huge numbers of producers and/or processors. For example, in the olive case, there is the open question of whether benefits to farmers raising olives are larger than to other producers, whether there is a concentrated group receiving large funds, etc. Gathering information on benefits received under different programs from hundreds or thousands or tens of thousands of agricultural producers would provide factual information to confirm whether there is de facto specificity even if further refined analysis would be unclear on whether there is de jure specificity. No country sends questionnaires to such large numbers of producers and analyzing such data would presumably be impractical in the statutory time frame available to investigators.

Thus, the panel report puts into focus whether trade defense agreements like the countervailing duty law are available in fact to all industries or just to more concentrated industries. This is an issue that should concern trade officials and obviously is important to industries. A cornerstone right under the GATT and now WTO has been the right to seek redress from injurious dumped or subsidized imports. That right cannot be limited to a subset of industries without causing loss of support in a number of Members where such rights are important.

The same concern exists with regard to the panel finding “as such” inconsistency in Section 771B of the Tariff Act of 1930, as amended. 19 U.S.C. 1677-2. The panel report is probably at its weakest in its conclusion that the two factors listed under the statute are not a reasonable basis to find a pass through in processed agricultural cases or at least that it can be in many situations. That should have eliminated the as such claim. That would have left the EU’s as applied claim. The U.S. concern as articulated by the Commerce Department and the U.S. Congress is a real one. The WTO SCMA and U.S. law should not permit evasion of the countervailing duty law because of minor processing of agricultural products. Common sense approaches such as that adopted in 771B are important to ensure all industries can pursue relief when needed. Subsidization of upstream agricultural products will almost always result in excess production which will depress prices resulting in artificial advantages to downstream processors that are unaffiliated. That common sense understanding of reality in agricultural market was not accepted by the panel. It will be interesting to see how, if at all, the U.S. chooses to address this finding.

All of the above strongly suggests that WTO Members need to examine the needs of the trade defense agreements to be sure all industries facing injurious dumping or subsidization can seek relief, and that the agreements are administrable in fact without impossible factual data gathering requirements.

WTO Information Notes on COVID-19 Vaccine Production and Potential Bottlenecks

On October 8, 2021, the WTO released the latest in a series of Information Notes pertaining to the COVID-19 pandemic. The first one is entitled “COVID-19 Vaccine Production and Tariffs on Vaccine Inputs”. The purpose of the information note was to examine public information to see if import tariffs in any of the 27 major vaccine manufacturing countries could pose challenges or create “choke” points in vaccine production. The second Information Note is entitled “Indicative List of Trade-Related Bottlenecks and Trade-Facilitating Measures on Critical Products to Combat COVID-19” and is an update on an earlier version released 20 July 2020. Both Information Notes are linked to a WTO press release from 8 October. See WTO news, WTO issues papers on vaccine inputs tariffs and bottlenecks on critical COVID-19 products, 8 October 2021, https://www.wto.org/english/news_e/news21_e/covid_08oct21_e.htm

The second Information Note is the more important of the two papers as it identifies a range of challenges to the expedited movement of vaccines and inputs. However, the first paper is interesting in terms of identifying tariffs on critical materials in major producing countries. However, as the paper acknowledges, the analysis has its limitations.

” 2. TECHNICAL DETAILS
“The MFN applied tariffs were based on the dataset used for World Tariff Profiles 2021, and 2020
imports were based on the TDM dataset3. Even if the national tariff line data (i.e. eight-digit tariff
line codes) were available, beyond the standard HS six-digit level there is no uniformity of codes
across national tariff nomenclatures. Thus, even if only a portion of the HS six-digit code pertains to
the COVID-19 vaccine input, the data used in the analysis both for tariffs and imports were the
six-digit MFN tariff average and the total six-digit imports from the world. Preferential tariffs were
not taken into consideration and thus intra-EU imports, imports from partners of free trade
agreements (FTAs) or any other preferential imports were treated as if MFN tariffs were levied.
Furthermore, there was definitely an over-estimation of the import value of the inputs, since
identification of the national breakdown pertaining to the actual product used in vaccine
manufacturing cannot be easily done. Sometimes even within the most detailed national tariff line
(or specific product) code available (eight digits or longer), the product coverage does not
necessarily refer only to the specific vaccine input and includes non-vaccine-related inputs. While
tariff estimates can be arguably good enough,4 the same cannot be said of the estimated imports
value.” (footnotes omitted)

Certainly for the EU, U.S. and some others, many of the potentially dutiable imports will have been duty free from FTAs or other preferential partners. But the Information is nonetheless useful in flagging general categories of products important to vaccine production that have bound tariffs at 5% or greater. While neither the U.S. nor Japan have any such categories, many other vaccine producing countries have one, several or many product categories where bound tariffs are 5% or higher. Table 4 of the Information Note provides a useful summary of the findings made.

Table 2 of the Information Note presents a summary of the weighted average MFN tariff rate by country.
Thus, from a bound tariff perspective, some countries, particularly developing countries are assessing ordinary customs duties on materials needed for the production of COVIDE-19 vaccines at relatively high rates that at a minimum increase costs, making it more expensive to provide vaccines to the domestic population or export populations.

A detailed review of each of the 27 countries is provided in the WTO’s Vaccine Production and Tariffs on Vaccine Inputs which is attached to the first Information Note.

The second note is the more interesting as it reflects issues and suggestions from various stakeholders on how to expand production and access to vaccines, therapeutics and medical devices needed to combat COVID-19. The introduction to the Information note provides useful background.

“1. INTRODUCTION
“This information note seeks to facilitate access to information on possible trade-related bottlenecks and trade-facilitating measures on critical products to combat COVID-19, including inputs used in vaccine manufacturing, vaccine distribution and approval, therapeutics and pharmaceuticals, diagnostics and medical devices. It is not meant to be an exhaustive list of all specific trade measures, nor does it make any judgement on the effect or significance of the reported bottlenecks, nor on the desirability of implementing any of the suggestions on trade-facilitating measures.3

“The indicative list is based on issues identified and suggestions made by stakeholders at various events and consultations convened by the WTO, as well as with vaccine manufacturers in the context of meetings organized by the Multilateral Leaders Task Force on COVID-19,4 which includes the heads of the International Monetary Fund (IMF), the World Bank Group, the World Health Organization (WHO) and the WTO.5 This revision includes information as of 4 October 2021. Entries under each subheading are presented in no particular order. One common theme that emerges is that essential goods and inputs need to flow efficiently and expeditiously to support the rapid scaling up of COVID-19 production capacity worldwide. As manufacturers scale up production and establish new sites in different countries, the production network is not only becoming larger but also increasingly complex and international. The delay of a single component may significantly slow down or even bring vaccine manufacturing to a halt, so it follows that inputs need to flow expeditiously, and each node within the supply chain network needs to operate seamlessly with the others.” (footnotes omitted)

There are a large number of potential trade-related bottlenecks including export restrictions (13 WTO Members are reported to have one or more), such restrictions as applied by manufacturers to “fill and finish” sites, effect of such restrictions on clinical trials, high applied tariffs, customs administration challenges (no green channels for expedited clearance, limited hours of customs operation, treatment of non-commercial samples sent for testing ad quality control, import barriers/delays on manufacturing equipment), challenges in completing consular transactions.

There are also many bottlenecks identified from vaccine regulatory approval including when looking at WHO Emergency Use Listing, requirements for application/registration and authorization, inspection, release, post-approval changes, donations, EUA and regular approval, scaling up production and other issues.

The paper also identifies bottlenecks in the distribution of finished vaccines and immunization supplies, bottlenecks in trade in pharmaceuticals, bottlenecks in trade in diagnostics and other medical devices.

All in all, a daunting list of challenges the vast majority of which involve the importing country and the complexity of systems for approval of medical goods and vaccines.

The last four pages of the Information Note then identify “possible trade-facilitating measures” that could be taken to improve movement of goods. Because the information note is providing a summary of proposals put forward by stakeholders and is not an agreed set of steps by WTO Members, the note states that “no judgement is made on the desirability of implementing any of these suggestions.” Page 7. That said, many of the suggestions relate to streamlining import operations, e.g., through implementation of the Trade Facilitation Agreement, seeing that customs operates 24 hours/7 days a week, exemptions from export restrictions, harmonization of regulatory approaches and many more.

Conclusion

The Information Notes developed by the WTO provide useful information either from public sources, such as the bound tariff rates of COVID-19 vaccine input materials or summaries of information gathered from stakeholders at events looking at how to ramp up production and distribution of vaccines. It is clear that the challenges for all WTO Members in addressing the global pandemic are many and not easily addressed. The Information Notes provide a data base that can be used by WTO Members to see that the current pandemic is fully addressed in fact in the coming months, and that Members consider ways to prepare for a better outcome to future pandemics.