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The U.S. Modifies the List of Developing and Least Developed Countries Under U.S. Countervailing Duty Law

During the Uruguay Round, various special and differential treatment provisions were included in the agreements being negotiated. The Agreement on Subsidies and Countervailing Measures (“ASCM”) included provisions that would give developing countries and least developed countries higher subsidy de minimis levels and higher negligibility levels. See ASCM Art. 11.9 (de minimis level of subsidies is 1%; negligible imports not subject to orders), Art. 27.10 (de minimis level of subsidies is 2% for developing countries; negligibility is 4% of total imports for developing countries or 9% for multiple developing countries).

The Uruguay Round Agreements Act implemented these requirements within U.S. law. Negligible imports from any country are 3% of total imports (7% for multiple countries each less than 3%) and 4% and 9% for developing/least developed countries. De minimis subsidy levels are 1% generally but 2% for developing and least developed countries. See 19 U.S.C. 1671b(b)(4) and 19 U.S.C. 1677(24)(A) and (B).

Under U.S. law, the U.S. Trade Representative is charged with developing a list of developing and least developed countries for purposes of U.S. countervailing duty law. Such a list should be published and should be updated as necessary. 19 U.S.C. 1677(36). While some criteria are listed in the statute, USTR is given discretion on what other criteria to consider.

The first list was published in 1998 on June 2, 63 FR 29945-29948. https://www.govinfo.gov/content/pkg/FR-1998-06-02/pdf/98-14737.pdf. A revised list was published on February 10, 2020, 85 FR 7613-7616. https://www.govinfo.gov/content/pkg/FR-2020-02-10/pdf/2020-02524.pdf.

The New List Brings Forward the U.S. Position at the WTO on Need for Differentiation Among Countries

The Federal Register notice of February 10, while not referencing the U.S. position at the WTO on the need for differentiation for purposes of which WTO Members take advantage of special and differential treatment, largely uses the same factors proposed at the WTO for determining which countries should not be afforded developing country/least developed country status for purposes of U.S. countervailing duty law.

Specifically, USTR for its new list looked to (1) per capita GNI excluding any country listed as a high income country by the World Bank, (2) share of world trade (reduced from 2% in 1998 to 0.5% in 2020), (3) membership or application for membership in the OECD, (4) G20 membership, (5)(not in the WTO differentiation proposal) membership in the EU and (6) any WTO members who did not declared itself a developing country during accession to the WTO where its per capita GNI is lower than high income. A country that satisfied any of the five criteria are excluded from the higher de minimis and higher negligibility standards

High income countries based on World Bank June 2019 data

The World Bank list shows 218 countries/territories and identifies whether they are high income or lower income countries on a per capita GNI. The last data for June 2019 shows 80 of 218 countries being high income. See https://blogs.worldbank.org/opendata/new-country-classifications-income-level-2019-2020.

Various countries or territories like Korea, Taiwan, Saudi Arabia, UAE, Qatar, Hong Kong, Macao, Singapore, Oman, Chile are listed as high income and would not be eligible for increased de minimis or higher negligibility standards under U.S. countervailing duty law based on this criteria.

Share of world trade (0.5% or greater)

Besides Korea, Hong Kong and Singapore which had been excluded from the 1998 list based on their share of global trade, the new list excludes Brazil, India, Indonesia, Malaysia, Thailand and Viet Nam based on share of world trade figures. 85 FR at 7615.

Membership in or application to the OECD

Colombia and Costa Rica are excluded from higher de minimis and negligibility levels under U.S. countervailing duty law based on their application for membership to the OECD. 85 FR at 7615.

Membership in the G20

The G20 came into existence in 1999, thus after the 1998 list was published by USTR. China has not been treated as eligibile for higher de minimis or higher negligibility levels and continues not to be considered for eligibility. Other G20 countries (besides China) who are not eligible despite per capita GNI levels below high income are Argentina, Brazil, India, Indonesia, and South Africa. 85 FR at 7615.

Membership in the EU

Several EU member countries are not high income countries on the World Bank list but are excluded from higher de minimis and negligibility levels on the new list — Bulgaria and Romania. 85 FR at 7615.

WTO Members who have not claimed developing country status at accession

While the U.S. would not have flagged countries who did not claim developing country status at accession but whose per capita GNI was below high income as needing to be addressed in its differentiation papers at the WTO, such countries are not included in the list of countries eligible for higher de minimis and negligibility levels under U.S. countervailing duty law. This list includes Albania, Armenia, Georgia, Kazakhstan, the Kyrgyz Republic, Moldova, Montenegro, North Macedonia and Ukraine.

Likely Importance of the Changes in the USTR List

Data compiled by the WTO from country notifications of investigations brought under national countervailing duty laws, shows that between January 1, 1995 and June 30, 2019 (latest data presently available), the U.S. initiated 254 countervailing duty investigations. One or more investigations were brought against imports of products from 37 countries. See the WTO chart below.

CV_InitiationsRepMemVsExpCty

While there have been no countervailing duty cases in the United States against the vast majority of WTO Members during the first twenty-five years of the WTO, the changes in the list could be relevant for some countries where there have been CVD cases in the past — Argentina, Brazil, India, Indonesia, Malaysia, South Africa, Vietnam being the most likely countries affected. Any changes in results would depend on the underlying facts and may be relevant in only some cases or for one or more producers in a given case.

Conclusion

Monday’s Federal Register notice from the U.S. Trade Representative will not result generally in significant changes in how U.S. countervailing duty law operates. It could be important in particular cases or against particular exporters.

The real importance would appear to be the Administration’s taking its views on differentiation and applying them to an important U.S. trade remedy as a sign of the seriousness of the need to obtain a modification to who is eligible for special and differential treatment. The larger issue is viewed by the United States as critical to restoring the negotiating function at the WTO.

USTR’s Report on the WTO Appellate Body — An Impressive Critique of the Appellate Body’s Deviation from Its Proper Role

On February 11, 2020 the U.S. Trade Representative released a Report on the Appellate Body of the World Trade Organization . https://ustr.gov/sites/default/files/Report_on_the_Appellate_Body_of_the_World_Trade_Organization.pdf. The Report is a total of 174 pages, the report itself being 122 pages along with four appendices. The Report does not lay down what it views as the required solutions to the widespread problems that the United States has with the Appellate Body’s actions over the first twenty-five years of the WTO. But the report lays out the U.S. concerns in great detail, why the concerns reflect violations of the limited role of the Appellate Body within the WTO’s dispute settlement system and how WTO Members are harmed by the actions of the Appellate Body over time. The report goes over the issues that the U.S. has reviewed extensively at the Dispute Settlement Body and the General Council over the last two years and adds several additional concerns.

On the critical issue of Appellate Body overreach, the Report lays out examples of specific major problems for the United States in terms of the Appellate Body creating obligations or limiting rights under the WTO Agreements but identifies a number of other examples as well. It is fair to opine that the overreach issues flagged in the report constitute an absolute minimum of issues that need to be corrected for there to be an adequate restoration of rights and obligations in the view of the United States.

The appendices review concerns expressed over the last twenty years by members of Congress, various U.S. Trade Representatives and their Deputies on the continuing problem of WTO Appellate Body overreach vis-a-vis U.S. laws, regulations and practices, and actions by Congress calling for the U.S. Administration to address problems of WTO Appellate Body overreach.

In short, the Report is an extraordinary document that lays out in a comprehensive and coherent manner the U.S. view on why the WTO dispute settlement system has deviated far from its intended path. The full report is included below.

USTR-report-on-the-AB-of-the-WTO

The Report’s release at the time that the WTO Members seek a road forward on the dispute settlement system and how to restore an appellate body level of review gives all WTO Members notice that the U.S. is serious in insisting on Members coming to grips with how and why the Appellate Body has strayed so far from the limited mandate of the Dispute Settlement Understanding. Without a coming together of the Membership on the causes, one can expect that the United States will continue to block the start of selecting Appellate Body members.

Because certain major WTO Members seem unconcerned with (or are even supportive of) the violations that characterize a large number of Appellate Body decisions (at least on particular issues), it is not clear that meaningful movement and discussion will occur in the coming months in the lead up to the 12th Ministerial Conference in Kazakhstan in early June of this year. If not, resolution of the current impasse on the WTO Appellate Body is likely to drag on indefinitely.

Excerpts from the Executive Summary

The Executive Summary provides a concise review of the U.S. concerns. Excerpts are provided below (Report at 1-3):

“The United States and other free-market nations established the World Trade Organization (“WTO”) in 1995 as a forum for negotiating and implementing trade agreements. The dispute settlement mechanism of the WTO was designed to help Members resolve trade disputes arising under those agreements, without adding to or diminishing the rights and obligations to which Members had agreed. When the WTO dispute settlement system functions according to the agreed rules, it provides a vital tool to enforce Members’ WTO rights and obligations. For more than 20 years, however, the United States and other WTO Members have expressed serious concerns with the Appellate Body’s disregard for those rules.

“As detailed in this Report, the Appellate Body has repeatedly failed to apply the rules of the WTO agreements in a manner that adheres to the text of those agreements, as negotiated and agreed by WTO Members. The Appellate Body has strayed far from the limited role that WTO Members assigned to it, ignoring the text of the WTO agreements. Through this persistent overreaching, the Appellate Body has increased its own power and seized from sovereign nations and other WTO Members authority that it was not provided. For example:

“ The Appellate Body consistently ignores the mandatory deadline for deciding appeals;
“ The Appellate Body allows individuals who have ceased to serve on the Appellate Body to continue deciding appeals as if their term had been extended by WTO Members in the Dispute Settlement Body;
“ The Appellate Body has made findings on issues of fact, including issues of fact relating to WTO Members’ domestic law, although Members authorized it to address only legal issues;
“ The Appellate Body has issued advisory opinions and otherwise opined on issues not necessary to assist the WTO Dispute Settlement Body in resolving the dispute before it;
“ The Appellate Body has insisted that dispute settlement panels treat prior Appellate Body interpretations as binding precedent;
“ The Appellate Body has asserted that it may ignore WTO rules that explicitly mandate it recommend a WTO Member to bring a WTO-inconsistent measure into compliance with WTO rules; and
“ The Appellate Body has overstepped its authority and opined on matters within the authority of WTO Members acting through the Ministerial Conference, General Council, and Dispute Settlement Body.

“The Appellate Body’s persistent overreaching has also taken away rights and imposed new obligations through erroneous interpretations of WTO agreements. The Appellate Body has attempted to fill in “gaps” in those agreements, reading into them rights or obligations to which the United States and other WTO Members never agreed. These errors have favored non-market economies at the expense of market economies, rendered trade remedy laws ineffective, and infringed on Members’ legitimate policy space. For example:

“ The Appellate Body’s erroneous interpretation of the term “public body” threatens the ability of Members to counteract trade-distorting subsidies provided through SOEs, undermining the interests of all market-oriented actors;
“ The Appellate Body has intruded on Members’ legitimate policy space by essentially converting a non-discrimination obligation for regulations into a ‘detrimental impact’ test;
“ The Appellate Body has prevented WTO Members from fully addressing injurious dumping by prohibiting a common-sense method of calculating the extent of dumping that is injuring a domestic industry (“zeroing”);
“ The Appellate Body’s stringent and unrealistic test for using out-of-country benchmarks to measure subsidies has weakened the effectiveness of trade remedy laws in addressing distortions caused by state-owned enterprises in non-market economies;
“ The Appellate Body’s creation of an “unforeseen developments” test and severe causation analysis prevents the effective use of safeguards by WTO Members to protect their industries from import surges; and
“ The Appellate Body has limited WTO Members’ ability to impose countervailing duties and antidumping duties calculated using a non-market economy methodology to address simultaneous dumping and trade-distorting subsidization by non-market economies like China.

“For many years, successive Administrations and the U.S. Congress have voiced significant concerns about the Appellate Body’s disregard for the rules agreed to by WTO Members. As set forth in the Appendices to this Report, in multiple Congressional Sessions, up to and including the current Session, Senators and Representatives of both parties have voiced urgent concerns and the need for reform in numerous resolutions, reports, and statements.1

“1 See Statements by Members of the United States Congress Expressing Concerns with Appellate Body Overreaching (Appendix A1); Congressional Legislation and Reports Expressing Concern with Appellate Body
Overreaching (Appendix A2); Statements by U.S. Trade Representatives or Their Deputies on Appellate Body Overreach (Appendix B1); and Statements by the United States to the WTO Dispute Settlement Body Expressing Concerns with the Appellate Body’s Failure to Follow WTO Rules and Erroneous Interpretations of the WTO Agreements (Appendix B2).

“Unfortunately, U.S. efforts were ignored, and the problem has worsened as too many WTO Members remain unwilling to do anything to rein in this conduct. The proper functioning of the WTO Appellate Body has a disproportionate impact on the United States because more than one quarter of all disputes at the WTO have been challenges to U.S. laws or other measures. Specifically, 155 disputes have been filed against the United States, and no other Member has faced even a hundred disputes. According to some analyses, up to approximately 90 percent of the disputes pursued against the U.S. have led to a report finding that the U.S. law or other measure was inconsistent with WTO agreements. This means that, on average, over the past 25 years, the WTO has found a U.S. law or measure WTO-inconsistent between five and six times per year, every year.

“But these failings have dire consequences for U.S. interests in the WTO, and for all WTO Members, as well. The negotiating function of the WTO has atrophied as the Appellate Body has facilitated efforts by some Members to obtain through litigation what they have not achieved through negotiation; the effectiveness of WTO tools designed to address distortions by nonmarket economies has been greatly diminished; and the WTO dispute settlement system continues to lose the credibility necessary to maintain public support for the system.

“In short, the Appellate Body’s failure to follow the agreed rules has undermined not only WTO dispute settlement, but the effectiveness and functioning of the WTO more generally. Furthermore, by encouraging behavior that distorts markets, the Appellate Body has helped to make the global economy less efficient. Lasting and effective reform of the WTO dispute settlement system requires all WTO Members to come to terms with the failings of the Appellate Body.”

Additional Comments

The Executive Summary lists seven ways in which the Appellate Body has deviated from the limited role assigned to the Appellate Body within the Dispute Settlement Understanding. The last two listed have not been the focus of much of the U.S. commentary over the last several years but reflect additional concerns with the Appellate Body’s conduct. The first issue goes to decisions where the Appellate Body has ignored the clear Dispute Settlement Understanding requirement to recommend a party bring its actions into conformity with its WTO obligations where during the pendency of a dispute the Member alleged to be acting inconsistent with WTO obligations withdraws the measure in question. Report at 64-68. The second deals with situations where the Appellate Body has articulated how WTO bodies should carry out their functions even though the functioning of various WTO bodies is not an area properly before the Appellate Body. Report at 69-74. A third additional issue that is not listed in the Executive Summary but is in the full report (Report at 74-80) is “The Appellate Body Has Departed from WTO Rules by Deeming Decisions Not Made under Article IX:2 to Be Authoritative Interpretations of Covered Agreements”.

A major part of the Report is a review of selected Appellate Body decisions which have incorrectly interpreted various WTO Agreements and have thus either created obligations or reduced rights of the United States (and other Members). See pages 81 – 119. The opening paragraphs of this part of the Report summarize the concerns (page 81):

“In addition to failing to follow the rules that WTO Members have adopted, the Appellate Body has erroneously interpreted and applied numerous important WTO agreements. The Appellate Body has overreached on substantive issues, engaged in impermissible gap-filling, and read into
the WTO agreements rights or obligations that are not there.

“The texts of the covered agreements result from extensive negotiations among sovereign nations and autonomous customs territories, and reflect differing negotiating objectives and positions. It is often possible to reach agreement on only one particular obligation or discipline while being unable to reach agreement on any obligation or discipline even in a related area. As such, ‘gaps’ in the text of a covered agreement may simply reflect a situation where there was a limit upon what negotiators could agree. WTO Members have not agreed to delegate to WTO adjudicative bodies the task of filling in gaps in the covered agreements, and it is critical for WTO
adjudicators to respect these limits.

“Despite this, the Appellate Body has expanded its own power and attempted to substitute for negotiators to re-write, reduce or supplement the agreed text. Among other interpretive errors, the Appellate Body has engaged in impermissible gap-filling and read into the text of the covered agreements obligations or rights that are not present in the text. This conduct is inconsistent with the Appellate Body’s role and adds to or diminishes Members’ rights and obligations, contrary to Articles 3.2 and 19.2 of the DSU.”

Five examples are reviewed at length, including four that address issues from trade remedy agreements (Subsidies and Countervailing Measures; Anti-Dumping; Safeguards) and one that involves the Technical Barriers to Trade Agreement. Moreover, four additional decisions are referenced in footnote 195:

“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.”

The problem of the Appellate Body (or panels) creating obligations or diminishing rights not contained in the various agreements of the WTO is not limited to these nine cases where the U.S. has raised serious concerns but has included concerns raised by many trading partners. In a paper prepared for the Asia Society Policy Institute in early 2018, I reviewed excerpts from various Dispute Settlement Body meetings where various WTO Members raised concerns about creating obligations or diminishing rights. The paper is enclosed below.

Final-Asia-Society-Paper-re-dispute-settlement

Conclusion

The fundamental questions facing the WTO membership on the dispute settlement system are whether Members will agree to conform the dispute settlement system to the limited role envisioned at its creation in 1995 and restore balance to the Agreements that were negotiated. The United States has laid out its case that a limited role for the Appellate Body was all that was intended and all that the U.S. supports. Many Members have seen the deviation from the Dispute Settlement Understanding but have looked the other way or even encouraged the expansion of the deviation for a variety of reasons, not least of which is achieving through disputes what wasn’t achieved through negotiations. Without a resolution acceptable to the United States, the WTO dispute settlement system will struggle to regain its full measure of legitimacy and there will be no restoration of an Appellate Body.

U.S. modifies its regulations to provide path for countervailing undervalued currencies in certain circumstances

On February 4, 2020, the Commerce Department’s modification of its countervailing duty (“CVD”) regulations was published in the Federal Register specifically to outline when Commerce would investigate allegations of subsidies on certain imported goods flowing from undervalued foreign currency achieved at least in part through government action. 85 Fed. Reg. 6031-6044. The modification to the U.S. CVD regulations “will apply to all segments of proceedings initiated on or after April 5, 2020”. The modification to the U.S. regulation is enclosed below.

85-FR-6031-2-4-2020-ITA-FR-final-rule-re-benefit-and-specificity-re-currency

The U.S. Department of Commerce International Trade Administration published its proposed modification of its regulations on May 28, 2019 (84 FR 24406) and received some forty-seven written comments on the proposal, including from some foreign governments (Brazil and India) and various business groups and law firms in China as well as from domestic parties (industries, workers, companies, law firms representing parties, trade associations, individuals) supporting or opposing or seeking modifications to the proposal.

Many domestic industries and their workers competing with imports believed to benefit from undervalued currencies had been seeking for years a modification to U.S. law to address what have been viewed over the years as periods of very active government interference in the market to achieve undervalued currencies by major trading partners. In recent years, China has been the main concern, but there have been ongoing concerns about past actions of the governments of Japan, Korea and others. Thus, the Commerce Department’s decision to develop modifications to its regulations has generally been viewed as a positive development by industries and workers who have competed with undervalued imported goods.

Article VI of the GATT, dealing with antidumping and countervailing duties, has had an Ad note to Paragraphs 2 and 3 which recognized that certain currency practices could be addressed by GATT Contracting Parties as either countervailable subsidies or as a form of dumping. Specifically, “2. Multiple currency practices can in certain circumstances constitute a subsidy to exports which may be met by countervailing duties under paragraph 3 or can constitute a form of dumping means of a partial depreciation of a country’s currency which may be met by action under paragraph 2. By ‘multiple currency practices’ is meant practices by governments or sanctioned by governments.” Article VI and the Ad notes remain part of the WTO.

While the multiple currency practices of the 1930s and 1940s are not the currency problems of the last thirty years, there is nothing in the WTO agreements that prohibits Members from addressing currency practices under the Agreement on Subsidies and Countervailing Measures (“ASCM”) where the terms of the Agreement are met. The Commerce Department modified regulations place certain undervalued currency situations within U.S. law which in turn reflects the U.S. understanding of its obligations under the ASCM.

The revisions modify the Commerce regulations on specificity and on benefit. 19 C.F.R. 351.502, dealing with specificity of domestic subsidies, is modified by adding a new subsection (c) which states that “In determining whether a subsidy is being provided to a ‘group’ of enterprises or industries within the meaning of section 771(5A)(D) of the Act, the Secretary will consider enterprises that buy or sell goods internationally to comprise such a group.” 85 FR at 6043.

A new section, 19 C.F.R. 351.528, is added to identify when exchanges of undervalued currencies will be viewed as countervailable. Commerce will examine whether there is a potentially actionable subsidy only where a country’s currency is undervalued during the relevant period. If that condition is met, Commerce will make an affirmative determination only where “there has been government action on the exchange rate that contributes to an undervaluation of the currency.” Government action will not generally include “monetary and related credit policy of an independent central bank or monetary authority”. Commerce may consider the foreign “government’s degree of transparency regarding actions that could alter the exchange rate.” 85 FR at 6043. This latter provision is presumably a reflection of the need for transparent actions by trading partners or the potential need to use adverse facts available where the actual actions of the foreign government can not be ascertained.

Finally, if there is currency undervaluation caused in part by government action, Commerce reviews how a benefit will be measured. Commerce will look to see if there is a difference between the nominal, bilateral United States dollar rate consistent with the equilibrium real effective exchange rate (REER) and the actual rate during the period of investigation or review. If yes, the benefit is the difference between the amount received by the foreign company and the amount that would have been received by the company if the currency had not been undervalued.

Commerce will seek input from the U.S. Department of Treasury on the questions of currency undervaluation, government action, and any difference between the equilibrium REER and the actual exchange rate. Treasury has expertise in exchange rate matters, but the determination of whether undervaluation constitutes a domestic subsidy is for Commerce to make. Information submitted by Treasury will be on the record and subject to comment and rebuttal by parties to the proceeding.

Part of the regulatory process in the United States includes the agency promulgating the regulations addressing issues raised by those who submit comments on the proposal. There were eleven categories of issues raised on the modifications to the CVD regulations. As the full Federal Register notice is available above, this note simply lists the range of issues addressed by Commerce in its final notice and encourages the reader to review the full Federal Register for the details of the Commerce Department comments on specific issues:

  1. Whether the CVD Law is an Appropriate Tool To Remedy Subsidies From Currency Undervaluation
  2. Statutory Authority to Promulgate This Rule
  3. Financial Contribution
  4. Determination of Undervaluation
  5. Government Action on the Exchange Rate
  6. Calculation of the Benefit
  7. Other Calculation Issues
  8. The Role of Treasury
  9. Specificity
  10. General Comments (Commerce’s Proposal Infringes on the IMF’s Authority, Possible Retaliation by U.S. Trading Partners, Other Methods To Combat Currency Manipulation/Misalignment May Be More Effective, Relationship to the Antidumping Law)
  11. Economic Impact

When Commerce published its proposal in May 2019, it noted that of the nineteen countries where the U.S. had one or more countervailing duty orders outstanding, twelve of the countries in 2017 were shown by either the IMF or by the Peterson Institute as having an undervalued currency (84 FR at 24411 n.13):

“13 In FY 2018, countervailing duties were deposited on various products imported from 19 countries. For 12 of these 19 countries, at least one of the two sources (IMF or Peterson Institute for International Economics) deemed
the domestic currency undervalued during 2017. Based on information from Customs and Border Protection, the total value of imports from these 12 countries with potentially undervalued currencies equaled roughly 32 percent of the total value of imports from all 19 countries.”

As reviewed, undervaluation is but the first step in any evaluation. Government action is another critical element and generally won’t cover monetary policy actions of governments. Nonetheless, using 2017 data, twelve countries had potentially undervalued currencies and hence could be subject of investigations or reviews to determine if the currency undervaluation constitutes a countervailable subsidy.

Conclusion

It is likely that 2020 will see one or more petitions or administrative reviews of existing orders where a petitioning party seeks to explore whether undervalued currencies constitute actionable subsidies under U.S. law. With Japan, Korea and China having changed the extent of government interference in their exchange rates in recent years, the first case or cases may go after other countries where government actions to depress currency value is identified by domestic industries or their workers. As is true in any area of new exploration, there are many unknowns that will presumably be answered as cases are brought and investigations or reviews conducted: whether Commerce will deem any such petitions or requests in administrative review to be sufficient to proceed on currency undervaluation; how the development of a record will proceed including provision of information from foreign governments whose practices are under investigation; how Treasury will proceed in providing information and its views and the extent of independent review by Commerce versus simple adoption of Treasury views — are just a few of the unknowns.

Trading partners may opt to challenge the modification in U.S. regulations as such at the WTO or may pursue as applied challenges should Commerce investigate their currency for undervaluation in a particular case. China has warned the U.S. that going after its currency would be problematic for any Phase 2 negotiations. The Director-General in response to a question about the new US regulations has opined that the WTO is not the right forum for currency issues (this despite the AD note to Article VI of the GATT).

But for domestic producers and their workers who face various forms of trade distortions through subsidies and/or dumping, the modification to U.S. countervailing duty regulations is a potentially important advance in permitting at least individual industries and their workers to obtain a more level trading field going forward.

Counterfeit and Contraband Goods — Issuance of A Presidential Executive Order on January 31, 2020

Rounding out a busy January on trade issues, President Trump on January 31st issued an Executive Order (“EO”) addressing the ballooning volume of illicit trade (counterfeit and pirated goods). The EO is directed at traffickers and those seeking to avoid U.S. customs duties, taxes, and fees but will also affect “express consignment operators, carriers, hub facilities, international posts, customs brokers, and other entities, including e-commerce platform operators”.

Executive Order 13904 of January 31, 2020, on Counterfeit Goods

The Executive Order issued by President Trump follows the issuance of a Memorandum on Combating Trafficking in Counterfeit and Pirated Goods from the President issued on April 3, 2019, calling for a study by the Department of Homeland Security on the extent of the problem and presenting suggested potential solutions. See, e.g., https://www.whitehouse.gov/presidential-actions/memorandum-combating-trafficking-counterfeit-pirated-goods/.

  1. April 3, 2019 Presidential Memorandum

President Trump’s April 3, 2019 Memorandum was a call for a coordinated game plan by the Administration on addressing the challenges posed by counterfeit and pirated goods including via the internet. Here is the relevant part of the Memorandum:

“Section 1.  Policy and Background.  (a)  It is the policy of my Administration to protect American businesses, intellectual property rights holders, consumers, national and economic security, and the American public from the dangers and negative effects of counterfeit and pirated goods, including those that are imported through online third-party marketplaces and other third-party intermediaries.  We must improve coordinated efforts within the Federal Government to address this challenge, which are led by the Attorney General, the Secretary of Commerce, the Secretary of Homeland Security, the Director of the Office of Management and Budget, through the Intellectual Property Enforcement Coordinator, and the United States Trade Representative.

“(b)  Counterfeit trafficking impairs economic competitiveness by harming United States intellectual property rights holders and diminishing the reputations and trustworthiness of online markets; cheats consumers and poses risks to their health and safety; and may threaten national security and public safety through the introduction of counterfeit goods destined for the Department of Defense and other critical infrastructure supply chains.  An estimate from the Organisation for Economic Co-operation and Development (OECD) indicates the value of trade in counterfeit and pirated goods to be approximately half a trillion dollars per annum, with roughly 20 percent of this trade infringing upon intellectual property belonging to United States persons.  A recent Government Accountability Office report examined four categories of frequently counterfeited goods, and, based on a small sample of these goods purchased through various online third-party marketplaces, found that more than 40 percent were counterfeit.

“(c)  Preventing the manufacture, importation, and sale of counterfeit and pirated goods is a priority for Federal law enforcement agencies.

“(d)  Existing efforts within the Federal Government to deter online trafficking in counterfeit and pirated goods through third-party intermediaries should be expanded and enhanced to better address the scale, scope, and consequences of counterfeit and pirated goods trafficking.

“(e)  Third-party intermediaries, including online third party marketplaces, carriers, customs brokers, payment providers, vendors, and others involved in international transactions, can all be beneficial partners in combating trafficking in counterfeit and pirated goods.  In order to build on cooperative efforts that are already underway with such partners, a coordinated approach by the Federal Government, including its law enforcement agencies, and private industry is needed.

“(f)  Comprehensive data regarding the extent of counterfeit trafficking through online third-party marketplaces are lacking.

“Sec. 2.  Report on the State of Counterfeit and Pirated Goods Trafficking and Recommendations.  (a)  Within 210 days of the date of this memorandum, the Secretary of Homeland Security, in coordination with the Secretary of Commerce, and in consultation with the Attorney General, the Director of the Office of Management and Budget, the United States Trade Representative, the Assistant to the President for Economic Policy, the Assistant to the President for Trade and Manufacturing Policy, the heads of other executive departments and agencies (agencies) and offices as determined by the Secretary of Homeland Security, shall prepare and submit a report to the President through the Assistant to the President for Economic Policy and the Assistant to the President for Trade and Manufacturing Policy.  In preparing the report, the Secretary of Homeland Security, in coordination with the Secretary of Commerce, shall, consistent with applicable law, consult with intellectual property rights holders, third-party intermediaries, and other stakeholders.

“(b)  The report shall:

“(i)     Analyze available data and other information to develop a deeper understanding of the extent to which online third-party marketplaces and other third party intermediaries are used to facilitate the importation and sale of counterfeit and pirated goods; identify the factors that contribute to trafficking in counterfeit and pirated goods; and describe any market incentives and distortions that may contribute to third-party intermediaries facilitating trafficking in counterfeit and pirated goods.  This review should include data regarding the origins of counterfeit and pirated goods and the types of counterfeit and pirated goods that are trafficked, along with any other relevant data, and shall provide a foundation for any recommended administrative, regulatory, legislative, or policy changes.

“(ii)    Evaluate the existing policies and procedures of third-party intermediaries relating to trafficking in counterfeit and pirated goods, and identify the practices of those entities that have been most effective in curbing the importation and sale of counterfeit and pirated goods, including those conveyed through online third-party marketplaces.  The report should also evaluate the effectiveness of Federal efforts, including the requirement for certain Federal contractors to establish and maintain a system to detect and avoid counterfeit electronic parts under the Defense Federal Acquisition Regulation Supplement (DFARS) 252.246-7007, as well as steps taken by foreign governments, such as France and Canada, to combat trafficking in counterfeit and pirated goods.

“(iii)   To the extent that certain types of data are not currently available to the Federal Government, or accessible in a readily usable form, recommend changes to the data collection practices of agencies, including specification of categories of data that should be collected and appropriate standardization practices for data.

“(iv)    Identify appropriate administrative, statutory, regulatory, or other changes, including enhanced enforcement actions, that could substantially reduce trafficking in counterfeit and pirated goods or promote more effective law enforcement regarding trafficking in such goods.  The report should address the practices of counterfeiters and pirates, including their shipping, fulfillment, and payment logistics, and assess means of mitigating the factors that facilitate trafficking in counterfeit and pirated goods.

“(v)     Identify appropriate guidance that agencies may provide to third-party intermediaries to help them prevent the importation and sale of counterfeit and pirated goods.

“(vi)    Identify appropriate administrative, regulatory, legislative, or policy changes that would enable agencies, as appropriate, to more effectively share information regarding counterfeit and pirated goods, including suspected counterfeit and pirated goods, with intellectual property rights holders, consumers, and third-party intermediaries.

“(vii)   Evaluate the current and future resource needs of agencies and make appropriate recommendations for more effective detection, interdiction, investigation, and prosecution regarding trafficking in counterfeit and pirated goods, including trafficking through online third-party marketplaces and other third-party intermediaries.  These recommendations should include suggestions for increasing the use of effective technologies and expanding collaboration with third party intermediaries, intellectual property rights holders, and other stakeholders.

“(viii)  Identify areas for collaboration between the Department of Justice and Department of Homeland Security on efforts to combat trafficking in counterfeit and pirated goods.

“(c)  Within 30 days of submitting the report required by section 2(a) of this memorandum, the Secretary of Homeland Security is authorized and directed to prepare, consistent with applicable law, a public version of the report and publish it in the Federal Register.”

2. The January 24, 2020 Report to the President from Homeland Security, Combating Trafficking in Counterfeit and Pirated Goods.

Last month, following outreach to stakeholders, the U.S. Department of Homeland Security (“DHS”) submitted its report to President Trump. Combating Trafficking in Counterfeit and Pirated Goods, Report to the President of the United States, January 24, 2020 (“January 24, 2020 DHS Report” or “Report”). https://www.dhs.gov/sites/default/files/publications/20_0124_plcy_counterfeit-pirated-goods-report_01.pdf.

It is this report that was relied upon for Executive Order 13904 issued on January 31.

The report reviews the severity of the problem counterfeiting and pirated goods pose to the U.S. economy, U.S. competitiveness, health and safety and to national security. It references information gained from other studies and from the private sector. For example, a 2018 report from the OECD, Governance Frameworks to Counter Illicit Trade, is cited by DHS for its finding that there was “a 154 percent increase in counterfeits traded internationally – from $200 billion in 2005 to $509 billion in 2016.” January 24 DHS Report at 4. “Relevant to the President’s inquiry into the linkages between e-commerce and counterfeiting, OECD reports that ‘E-commerce platforms represent ideal storefronts for counterfeits and provide powerful platform[s] for counterfeiters and pirates to engage large numbers of potential consumers.’1/” Page 4 of the Report citing OECD, Governance Frameworks to Counter Illicit Trade, Illicit Trade, OECD Publishing, https://doi.org/10.1787/9789264291652-en.

The health problems from counterfeit medicines and food products have been widely reported over the last decade or more with knock-of medicines not containing the proper elements. Similarly, counterfeit food products (for humans and animals) may be made with fillers that may cause health problems or even death. The quantity of counterfeit auto and defense sector parts, made of inferior materials and not to manufacturer or government specifications create quality issues and can pose problems for national security. The examples are endless and are found around the world.

The report reviews the complications in combating counterfeit and pirated goods with the growth of e-commerce, the shift from ship cargo shipments to express delivery and mail shipments, from expanded de minimis levels and reduced information from such shipments, and from failure of the private sector to broadly adopt best practices to reduce availability of such goods.

The report both identifies product categories with high levels of counterfeit and pirated goods, some of the major sources of such goods, and provides a list of actions for the U.S. Government and a list of best practices for the private sector involved in e-commerce platforms and third-party marketplaces.

For example, Customs and Border Protection publishes data on annual seizures of goods involving intellectual property rights. The top ten product categories from 2018 were wearing apparel/accessories, footwear, watches/jewelry, handbags/wallets, consumer electronics, consumer products, pharmaceuticals/personal care, optical medial, toys and computers/accessories. Seizures also occur of prohibited substances (e.g., drugs like cocaine, ecstasy, marijuana, LSD, DMT, etc.). January 24, 2020 DHS Report at 10 and 16.

While China is identified as the largest source of counterfeit and pirated goods (id.at 8), other countries are obviously also the source of such goods. China, Hong Kong, Singapore and India were identified as having shipped 97 percent of the counterfeit medicines seized in the U.S. Id at 17.

The report makes clear that there are many actions that the U.S. government must take to deal with the evolving threat from counterfeit and pirated goods. However, the report and private sector input also make clear that there must be a stronger government-private sector partnership for future efforts to be successful. Below are the summary tables from the Report on government actions and best practices for the private sector that are meant to address both government and private sector practices.

From page 5 of the Report:

Immediate Actions by DHS and Recommendations for the U.S. Government

  1. Ensure Entities with Financial Interests in Imports Bear Responsibility
  2. Increase Scrutiny of Section 321 Environment
  3. Suspend and Debar Repeat Offenders; Act Against Non-Compliant International Posts
  4. Apply Civil Fines, Penalties and Injunctive Actions for Violative Imported Products
  5. Leverage Advance Electronic Data for Mail Mode
  6. Anti-Counterfeiting Consortium to Identify Online Nefarious Actors (ACTION) Plan
  7. Analyze Enforcement Resources
  8. Create Modernized E-Commerce Enforcement Framework
  9. Assess Contributory Trademark Infringement Liability for Platforms
  10. Re-Examine the Legal Framework Surrounding Non-Resident Importers
  11. Establish a National Consumer Awareness Campaign

From page 6 of the Report:

Best Practices for E-Commerce Platforms and Third-Party Marketplaces

  1. Comprehensive “Terms of Service” Agreements
  2. Significantly Enhanced Vetting of Third-Party Sellers
  3. Limitations on High Risk Products
  4. Rapid Notice and Takedown Procedures
  5. Enhanced Post-Discovery Actions
  6. Indemnity Requirements for Foreign Sellers
  7. Clear Transactions Through Banks that Comply with U.S. Enforcement Requests for Information
    (RFI)
  8. Pre-Sale Identification of Third-Party Sellers
  9. Establish Marketplace Seller ID
  10. Clearly Identifiable Country of Origin Disclosures

3. Executive Order 13904, 85 Fed. Reg. 6725-6729

The Executive Order (“EO”) was issued on January 31, 2020 and published in the Federal Register on February 5. The EO lays out the Administration’s policy on addressing the problems of counterfeit and pirated goods in e-commerce, including its intent to not permit those engaged in such conduct to be able to do business with the U.S. government or to engage in importing or to avoid liability under U.S. law. Section 1 of the EO, 85 FR 6725.

Section 2 of the EO instructs DHS to engage in rulemaking to establish criteria importers must meet in order to obtain an importer of record number. One such criteria shall be that any person seeking a number has not been debarred or suspended by CBP “for lack of present responsibility”. 85 FR at 6725-6726.

Section 3 of the EO outlines responsibilities of express consignment operators, carriers, hub facilities and licensed customs brokers (‘group”) including to identify efforts of individuals or entities not entitled to importer of record status to resume trade. DHS through CBP is also instructed to consider measures against any member or members of the group who facilitate business by those not entitled to importer of record rights. 85 FR at 6726.

Sections 4 and 5 deal with efforts to be undertaken by the U.S. Postal Service in conjunction with other parts of the Administration to work with the international postal network to adopt similar restrictions as are contained in Section 2 and to provide a series actions the U.S. will take against foreign posts that are deemed not to be compliant. 85 FR at 6726-6727.

Section 6 reviews Administration intention to publish more information on seizures pertaining to illicit trade. It also calls on the Attorney General to make available resources to ensure Federal prosecutors will accord a high priority to going after import violations of the EO. 85 FR at 6727.

Section 7, reflecting the concern of DHS that import fees are not sufficient to cover the costs evaluating imports and importers for counterfeit and pirated goods, orders DHS to prepare a report on the adequacy of current fees and suggesting modifications if appropriate and consistent with U.S. law. 85 FR at 6727-6728.

Conclusion

There is strong support in the Congress and amongst the business community for strong enforcement against illicit trade, including shutting down counterfeit and pirated goods.

The growth of e-commerce has had many positive effects on the U.S. and world economies. It has also unleashed a massively expanding capability of those engaged in counterfeiting and the pirating of goods to market such goods to consumers in the U.S. and around the world without consequence. The risks identified in the DHS Report to manufacturers, to consumers, to health and safety and to national security are real and expanding.

The tension between growing e-commerce and ensuring that all players in the e-commerce system bear responsibility to address shutting down counterfeit and pirated goods is apparent in the Executive Order and the disciplines it does and doesn’t impose on players.

Similarly, the business community (particularly those involved in e-commerce, express delivery and the retail sector) have pushed hard for larger de minimis level imports to facilitate the movement of trade. As the DHS report makes clear, however, those engaged in shipping counterfeit and pirated goods are working the de minimis process to make identification of their products harder. The Report envisions making the de minimis exception harder to hide behind where users may be suspected on engaging in illicit trade.

The EO and related actions described above have the potential to strengthen enforcement in this important area of global commerce. Time will tell whether the actions envisioned will be enough to make a difference in fact in the rate and direction of growth of counterfeit and pirated goods.

Brexit takes place at 11 p.m. London time on January 31, 2020

The European Union goes from 28 member countries to 27 at the end of January 31st as the British referendum to withdraw from the EU is brought to fruition by votes in the EU Parliament (621 votes in favor, 49 against, 13 abstentions) on January 29 and the European Council (unanimous) on January 30. The provisional text voted on by the Parliament is embedded below.

European-Parliament-agreement-on-withdrawal-of-UK-from-EU-P9_TA-2020-0018_EN.pd_

While the votes were not in doubt, withdrawal from the EU does not establish what the relationship with the EU will be after the interim period of 2020. What is clear is that by Saturday, February 1, the U.K. is no longer part of the EU and will be treated as a third country under EU laws and regulations.

There was a debate in the European Parliament on January 29th ahead of the vote which provides some clues as to the challenges facing the U.K. in the coming months. For example, while the EU is willing to consider an FTA with the U.K. with zero tariffs and quotas, it is dependent on the U.K. adhering to EU regulations (level playing field concept in Europe). While some U.K. industries (auto and aerospace) have urged their government to adhere to EU standards, it is not clear that the U.K. has the intention to do so across the board. Protecting the rights of Europeans in the U.K. (and of U.K. citizens in the EU) was reviewed at length by various Parliamentarians and representatives from the European Commission. It is obviously an important issue for the EU. As is dealing with climate change through aggressive actions by EU governments and any government wishing a special or close relationship. A number of speakers reviewed the challenges likely based on the short interim period and the complexity of negotiations anticipated.

The debate had many Parliamentarians from the remaining 27 member countries and the European Commissioners who spoke thanking their colleagues in the U.K. for the U.K.’s contribution over the 47 years of the U.K.’s membership in the EU, expressing regrets on the decision to leave but looking forward to working with the U.K. going forward, with some hoping that future generations of citizens in the U.K. will decide to rejoin.

There were some comments made on lessons to be learned from Brexit with some focusing on the need for EU reform, for member countries accepting all obligations versus a system of exceptions, and a general belief that the EU needs to be able to take action more quickly.

A number of Parliamentarians from the U.K. and Scotland spoke. A number representing constituents who voted against Brexit in the referendum expressed their concern with the withdrawal and indicated they would vote against the document.

A large group of U.K. Parliamentarians seemed to agree with the harsh words of Nigel Farage, a strong Brexit proponent and, by his own words, anti-EU. His views were that the U.K. had joined a common market not a political union. He opposes the expansion of the EU into traditional national issues and its push to become a super-nation with all the trappings of a nation (Parliament, Council, Court, etc.). He also views the EU as undemocratic and antidemocratic using as an example the failure of the EU to honor referendums in various countries that opposed the constitution (2005). His description of the U.K. feelings towards the rest of Europe was summed by his statement “We love Europe, we simply hate the European Union.” Mr. Farage reviewed that the new British Prime Minster Boris Johnson had indicated that there would be no “level playing field” agreed to in negotiations with the EU.

For access to the videos of the debate see https://www.europarl.europa.eu/news/en/press-room/20200128IPR71204/brexit-deal-approved-by-the-european-parliament

As noted above, the level of ambition in any new U.K.-EU relationship will depend in part on whether there is a “level playing field” in the regulatory arena. Prime Minister Johnson’s comments simply suggest that the next eleven months will be difficult for the parties as they see if they can find a new relationship acceptable to both sides or whether the U.K. assumes the status of any other third party without a Free Trade Agreement (“FTA”) with the EU.

The U.K. will also be under pressure from the U.S. to abandon various EU regulations to facilitate an FTA with the U.S.

So the U.K. will not be part of the EU in just over 24 hours. But the road ahead with the EU will likely keep markets uncertain for months to come.

WTO Appellate Body Impasse – How and Why

When the number of Appellate Body members dropped to one after December 10, 2019 (full membership is seven; minimum number to hear appeals is three), no new appeals could be heard by the Appellate Body. And only those appeals which had proceeded through a hearing were allowed to be completed by the Appellate Body (current and past members).

Many WTO Members are desirous of getting the Appellate Body restored and various Members have been discussing interim procedures to permit a second tier review pending resolution of the Appellate Body impasse.

While there has been a great deal of discussion during Dispute Settlement Body meetings and meetings of the General Council on the issue of the functioning of the Appellate Body and while Amb. David Walker, acting as facilitator for the General Council, developed a draft proposal to address concerns of the United States, such efforts have to date not been successful in resolving the impasse.

For the United States, the core issue is the following:

“the fundamental problem is that the Appellate Body has not respected the current, clear language of the DSU.

“Members cannot find meaningful solutions to this problem without understanding how we arrived at this point. Without an accurate diagnosis, we cannot assess the likely effectiveness of any potential solution.”

https://geneva.usmission.gov/wp-content/uploads/sites/290/Jan27.DSB_.Stmt_.as-deliv.fin_.public.pdf.

Stated differently, “if the words of the DSU are already clear, then why has the Appellate Body strayed so far on each of these issues?”

https://geneva.usmission.gov/2020/01/27/statement-by-ambassador-shea-at-davos-informal-wto-ministerial-gathering/.

Nearly seven weeks after the reduction of Appellate Body members to just one, there has been no apparent effort to resolve the “how” and “why” questions that the United States has teed up for many months.

U.S. suggested possible explanations for the why and how

Proposals put forward by WTO Members to address U.S. concerns (and the facilitator’s draft decision) often merely restated that which is in the Dispute Settlement Understanding (“DSU”) but not observed by Appellate Body actions.

The United States provided a detailed statement at the December 9, 2019 General Council meeting including a large number of possible reasons why the Appellate Body has felt free to deviate from the requirements of the DSU. A lengthy excerpt follows:

“For more than 16 years and across multiple U.S. Administrations, the United States has been raising serious concerns with the Appellate Body’s disregard for the rules set by WTO Members. Over the past two years, the United States has outlined its concerns in exhaustive detail.  We have not avoided discussion; rather, we have laid out in the clearest possible terms the U.S. position on the issues raised.

“While the DSU text is straightforward and clear, the Appellate Body has ignored that text, and many WTO Members had not focused on just how far the Appellate Body’s practice had strayed from that text.

“And beyond our detailed DSB statements, we have made clear our willingness to discuss these concerns further with any Member in order to deepen each other’s understanding of these substantive issues.  Several Members have participated in these dialogues and in many instances we have found the discussions to be frank and productive.

“Of course, engagement is a two-way street.  For nearly a year, in the General Council and the Dispute Settlement Body, we have sought to deepen Members’ collective understanding of the concerns raised and asked Members to engage on a fundamental question: why did the Appellate Body feel free to disregard the clear text of the agreements?

“The United States did not pose this question as part of an academic exercise.  Rather, this question is critical in the context of any “solution-focused discussion:” Without an accurate diagnosis, we cannot assess the likely effectiveness of any potential solution.

“A fuller understanding of the cause is particularly important here.  As the United States has explained, the rules of the DSU are clear.  Where ambiguity or uncertainty over the meaning of the treaty text has not caused the problem, then simply re-affirming the rules that have been persistently broken cannot resolve the concern.  Remarkably, nearly one year later, we have yet to hear Members engage with the United States on this question.

“Notwithstanding Members’ public silence, at the October meeting of the General Council, the United States offered several potential explanations based on conversations and on our own reflections.  For example, one cause could be the ongoing challenges facing the WTO negotiating function and its oversight function, leading to unchecked “institutional creep” by the Appellate Body.

“At the same meeting, we suggested that another cause could be that some WTO Members believe that the Appellate Body is an independent “international court” and its members are like “judges” who inherently have more authority to make rules than the focused review provided in the DSU.  A related cause could be that some Appellate Body members view themselves as “appellate judges”  serving on a “World Trade Court” that is the “centerpiece” of the WTO dispute settlement system, rather than one component of it.  Such an expansive vision of the Appellate Body is not reflected in the DSU and was not agreed to by the United States.

“We also commented at that meeting that it was possible that some explanations for why the Appellate Body felt free to depart from the clear text of the DSU may be specific to the concerns that have been raised.  For example, with regard to the Appellate Body’s repeated breach of Article 17.5 of the DSU, we noted that while some WTO Members raised concerns about the Appellate Body’s exceeding 90 days, particularly without consulting the parties, a few Members excused the breach of our agreed rules.  We asked whether the attitude of those Members contributed to a mindset among the Appellate Body that the WTO’s rules and deadlines did not need to be respected.

“Similarly, in that statement, with respect to so-called “cogent” reasons, we noted the Facilitator’s Report suggests that Members agree that “precedent” is not created through WTO dispute settlement.  And so we asked at that meeting why some WTO Members advocate for the Appellate Body to assert that its interpretations must be followed by panels absent unidentified cogent reasons.  We also asked why then does the Appellate Body assert a precedential value for its reports like an authoritative interpretation that only WTO Members in the Ministerial Conference or General Council can give.

“More recently, at the November meeting of the DSB, we sought to discuss with Members systemic concerns regarding the compensation of Appellate Body members.  We sought to further Members’ understanding of the compensation structure as a general matter, and to consider the possible consequences of that structure.  In that statement, we commented that a system that provides a financial reward for violating DSU rules and prolonging the duration of an appeal would appear inconsistent with the objective behind the DSU rule of providing for the prompt resolution of disputes.  And we asked Members whether the current structure creates the correct incentive, or a negative one?  Does this structure encourage prolonged appeals at the expense of clear WTO rules?  Without debate or effective oversight, have WTO Members acquiesced in a compensation structure that may undermine, rather than promote, the prompt resolution of a dispute?

“These repeated attempts over many months by the United States to provoke a meaningful conversation among Members in the DSB, in the General Council, and in the Informal Process have proven unsuccessful.  Accordingly, we are no closer to an understanding of how we have arrived at this point.”

https://geneva.usmission.gov/2019/12/09/ambassador-shea-statement-at-the-wto-general-council-meeting/ (emphasis added).

Some additional thoughts on causes

To the list teed up by the United States, I would add two and provide a subissue on the topic of precedent and a comment on failure to abide by time limits.

(1) achieving through disputes what was not achieved in negotiation

Many WTO Members have indicated privately that the dispute settlement system as it has evolved permits them to achieve objectives that are not part of existing agreements without having to negotiate. But for the current system, these Members would raise issues within ongoing or new negotiations. This cause is different than the institutional creep concern expressed by the United States and clearly undermines the negotiation function of the WTO.

(2) Subcontracting by many WTO Members of litigation to private law firms

While WTO Members have typically consulted with and worked with their domestic constituencies where disputes are being considered or pursued, over the last twenty-five years, there has been a dramatic increase in the role of private lawyers in developing and presenting cases for many governments at the WTO. Similar to the U.S. concern about the Appellate Body compensation scheme, a change in the dispute system to one often dominated by private lawyers has ensured cases with a huge number of alleged violations, a likelihood of more cases being appealed, an incentive for the case to take as long as possible, and a reduced likelihood of WTO Members finding an acceptable resolution without pursuit of the dispute.

(3) What, if any, role does the AB Secretariat play in the push for precedent

On the question of precedent, some observers have viewed the structure of the Appellate Body Secretariat as contributing to the rigidity of the Appellate Body in viewing later cases raising similar issues as generally controlled by earlier AB decisions. While the United States has not to date called for the review of the Appellate Body Secretariat as potentially relevant to understanding the how and why, to the extent other Members refuse to consider all aspects of the Appellate Body, including the Secretariat, one can predict that the impasse will drag on for a long time.

(4) Loss of compliance with DSU requirements over time

There is no doubt that some problems have worsened in the last decade. For example, the Appellate Body rendered most decisions in 90 days through 2010 while the vast majority since have been well beyond 90 days. Moreover, whereas the Appellate Body previously sought consent of the parties for missing the 90 day deadline, it no longer does. Thus, for the first fifteen years, the Appellate Body was able to conform to the requirement of DSU Article 17.5 for timely decisions but has flipped its position over the last ten years.

Conclusion

The January 27, 2020 Dispute Settlement Body meeting showed a basic replay of the existing positions of the WTO Members. A large number of WTO Members want the Appellate Body nomination process to be started. The U.S. does not agree since there has been no resolution of its longstanding concerns.

China noted that there are 10 appeals that are suspended until the Appellate Body resumes and that there are 33 panel proceedings ongoing that could be affected if the impasse is not resolved. https://www.wto.org/english/news_e/news20_e/dsb_27jan20_e.htm.

Those numbers will only grow without a resolution of the underlying concerns with the operation of the dispute settlement system. Such a resolution will not occur without a meeting of the minds by WTO members on the how and why of the current situation. While pursuit of an interim approach announced in Davos by 17 WTO members may provide a second tier review for those members, the approach will not include all members and has the potential to make more rigid positions of some Members not interested in Appellate Body reform.

The involvement of the Director-General may encourage Members to engage more than the last year has shown many are willing to do. Absent such engagement, don’t expect movement by the United States.

U.S. Additional Tariffs on Imports of Steel and Aluminum “Derivative” Products — Presidential Proclamation 9980

The United States conducted two investigations under Section 232 of the Trade Expansion Act of 1962, as modified, in 2017 with findings that imports of steel and aluminum products were a threat to U.S. national security. Import relief (25% on covered steel products and 10% on covered aluminum products) was imposed by mid-2018. Retaliation by many trading partners followed without resort to WTO dispute settlement. Dispute settlement cases were also filed by a number of countries. The U.S. also filed disputes against those countries who had retaliated without obtaining final reports or decisions from the WTO panels or Appellate Body and authorization if the U.S. did not comply with any loss that might have happened. All the disputes that are ongoing are at the panel stage at the WTO.

A number of countries agreed to other arrangements with the U.S. or were excluded from coverage. These included Argentina, Australia, Canada and Mexico for aluminum products and those countries plus Brazil and South Korea for steel products.

On January 24, 2020, President Trump issued a Presidential Proclamation “on Adjusting Imports of Derivative Aluminum Articles and Derivative Steel Articles into the United States”. https://www.whitehouse.gov/presidential-actions/proclamation-adjusting-imports-derivative-aluminum-articles-derivative-steel-articles-united-states/. The Proclamation (No. 9980) will be published in the Federal Register on January 29, 2020 and will apply to imports from subject countries beginning on February 8 (25% on steel derivative products and 10% on aluminum derivative products listed in Annexes II and I respectively). The inspection version of the Federal Register for January 29 is available today and the document is attached below. In the Proclamation, the President lays out the history of the 232 investigations and actions previously taken as well as the President’s intention to have Commerce monitor developments in case other actions were warranted. The action laid out in Proclamation 9980 is responsive to information reportedly provided by Commerce of possible evasion/circumvention of the duties. Countries who are excluded or who have arrangements with the U.S. on the original 232 actions are also excluded subject to certain conditions being present suggesting a need to address imports from those countries as well.

1-29-2020-FR-of-presidential-proclamation-on-steel-and-aluminum-derivatives

The purpose of this note is not to review the legal basis for the U.S. action (there have been a number of judicial actions in the United States challenging various aspects of the steel and aluminum national security case), but rather to examine the U.S. trade data to understand the breadth of the term “derivatives” and which countries appear to be the main targets of the additional duties.

Prior Proclamations Sought Review by Commerce and Others of Developments in Case Additional Action Was Deemed Necessary

The President in Proclamation 9980 references the fact that the Secretary of Commerce was directed to monitor imports of aluminum and steel and identify any circumstances which might warrant additional action. For example, paragraph 5(b) of the Steel Proclamation (No. 9705) of March 8, 2018 contained the following language:

“(b)  The Secretary shall continue to monitor imports of steel articles and shall, from time to time, in consultation with the Secretary of State, the Secretary of the Treasury, the Secretary of Defense, the USTR, the Assistant to the President for National Security Affairs, the Assistant to the President for Economic Policy, the Director of the Office of Management and Budget, and such other senior Executive Branch officials as the Secretary deems appropriate, review the status of such imports with respect to the national security.  The Secretary shall inform the President of any circumstances that in the Secretary’s opinion might indicate the need for further action by the President under section 232 of the Trade Expansion Act of 1962, as amended.  The Secretary shall also inform the President of any circumstance that in the Secretary’s opinion might indicate that the increase in duty rate provided for in this proclamation is no longer necessary.”

https://www.whitehouse.gov/presidential-actions/presidential-proclamation-adjusting-imports-steel-united-states/.

Similar language was in the aluminum proclamation.

How Broad is the Term Derivative Aluminum or Derivative Steel Product?

The aim of the Proclamation is to deal with products that undermine the purpose of the earlier proclamations. Proclamation 9980 reviews (paragraph 6) how the term “derivative” is used for purposes of the proclamation:

“For purposes of this proclamation, the Secretary determined that an article is ‘derivative’ of an aluminum article or steel article if all of the following conditions are present: (a) the aluminum article or steel article represents,
on average, two-thirds or more of the total cost of materials of the derivative article; (b) import volumes of such derivative article increased year-to-year since June 1, 2018, following the imposition of the tariffs in Proclamation 9704 and Proclamation 9705, as amended by Proclamation 9739 and Proclamation 9740, respectively, in comparison to import volumes of such derivative article during the 2 preceding years; and (c) import volumes of such derivative article following the imposition of the tariffs
exceeded the 4 percent average increase in the total volume of goods imported into the United States during the same period since June 1, 2018.”

What is the Volume of Imports Covered and Which are the Major Exporting Countries?

When one looks at the products that are covered by the two Annexes, one will see relatively few tariff categories covered by the new Proclamation. There are two HS categories that contain products that may be either steel or aluminum – bumper stampings and body stampings. There are significant imports of bumper stampings (though the data are not broken between steel, aluminum and other material). Imports from all counttries of bumper stampings in the first eleven months of 2019 were $394.3 million (of which $199.6 million are from countries not excluded for aluminum; $198.4 million if steel). Body stamps were significantly smaller, $5.2 million from all countries in Jan.-Nov. 2019 ($2.4 million covered if all are aluminum; $2.3 million covered if all are steel). The 8708 categories may have met the Commerce criteria but show a decline in 2019 vs. 2018 of 8.63% for the covered products/countries.

The other aluminum products identified — stranded wire, cables, plaited bands and the like (HS 7614.10.50, 7614.90.20, 7614.90.40, 7614.90.50) are relatively small in value – $43 million for all countries in 2019 (11 months)($26.9 million for countries subject to the additional 10% duties). The products/countries covered increased over the first 11 months of 2018 by 41.45%.

The other steel products identified – nails, tacks (other than thumb tacks), drawing pins, corrugated nails, staples and similar articles (HTS 7317.00.30.00, 7317.00.5503, 7317.005505, 7317.00.5507, 7317.00.5560, 7317.00.5580, 7317.00.6560) were $331.8 million in the first eleven months of 2019 for all countries ($276.9 million for countries covered by the new 25% duty). However, the rate of increase for covered products/countries was only 7.03% in 2019 versus 2018 (but had large increases vs. 2016 and 2017).

Countries with large exports in 2019 of the aluminum products (other than bumpers and body stampings) include Turkey at $7.4 million, India at $7 million, China at $5.0 million, Indonesia at $1.6 million, Italy at $1.35 million.

Countries with large exports in 2019 of the steel derivative products (other than bumpers and body stampings) include Oman at $59.5 million, Taiwan at $31 million, Turkey at $28.4 million, Thailand at $26.0 million, India at $25.3 million, Sri Lanka at $22.2 million, China at $20.4 million, Liechtenstein at $13.0 million, Malaysia at $12.5 million, Austria at $9.9 million and Saudi Arabia at $9.4 million.

On bumpers and body stampings, a number of the excluded countries are major suppliers — imports from Canada were $151.9 million in the first eleven months of 2019. Imports from Mexico were $44.6 million. For countries facing higher tariffs of 10% or 25% depending on whether the exported bumper stamping or body stamping is steel or aluminum, some of the large suppliers in 2019 were Taiwan at $87.4 million, Japan at $41.4 million, China at $39.4 million, Germany at $12.1 million, South Africa at $4.5 million, Italy at $3.8 million and Thailand at $3.6 million.

Conclusion

While any import measure by the President should be periodically reviewed for effectiveness and the need to maintain, the current action by the President in essence is a minor tweak with only $504 million of imports covered by the modified coverage of the Section 232 Proclamations — likely less than 1% of imports of steel and aluminum covered by the original proclamations.

It is true that the domestic steel and aluminum industries are not operating at the levels viewed as optimal and the problem of massive excess capacity in China and other countries is little changed in fact. But if a revision were needed, the level of ambition reflected in the Proclamation seems inadequate to the task.

So perhaps the way to read the proclamation is a recognition by the Administration that the existing relief hasn’t achieved the full measure of relief intended and to give trading partners warning that more is possible if the underlying problems aren’t addressed.

The Proclamation will certainly engender more disputes and increased tension with many of our trading partners. It is hard to understand the calculus (divorced from 2020 election posturing) of taking such a modest step, but time will tell if this is simply a prelude to a larger action in the coming months.

WTO Dispute Settlement – January 24, 2020 Statement by Ministers at Davos, Switzerland on Interim Appeal Arrangement Amongst Certain Major Countries

The WTO’s Appellate Body has not been in a position to handle any appeals from panel reports where the appeal was filed after December 10, 2019 and is processing some but not all of the appeals that were pending on that date. This situation flows from the existence of just one of seven Appellate Body slots currently being filled and the Dispute Settlement Understanding (“DSU”)requirement that appeals be heard by three members of the Appellate Body. The slots are unfilled as the United States has blocked the start of the process over the last two years while pressing WTO Members to acknowledge longstanding problems in how disputes are handled and to come up with effective reforms. For the United States, this requires WTO Members to come to grips with why clear requirements of the DSU were being ignored or violated by the Appellate Body.

For most members of the WTO, achieving a resolution of the dispute settlement impasse is a high priority with many countries looking to see if some form of interim approach could be adopted by those with an interest in having an interim process for a second tier review of panel reports by participating members. The European Union had announced bilateral arrangements with Canada and with Norway in 2019 and discussions have occurred with and among other countries about whether arbitration-type arrangements based on Article 25 of the DSU should be agreed to during the period when a solution to the impasse is pursued.

Earlier this week on the sidelines of the annual World Economic Forum, ministers from a number of WTO Members issued a statement indicating that a large number of WTO Members would work towards contingency measures. The statement was on behalf of seventeen WTO Members (46 Members if the EU’s 28 member countries are counted instead of the EU). The list includes a number of large trading nations including the EU, China, Canada, Mexico, Brazil, Australia and Korea along with ten others (Chile, Colombia, Costa Rica, Guatemala, New Zealand, Norway, Panama, Singapore, Sitzerland and Uruguay. The joint statement follows:

Statement by Ministers, Davos, Switzerland, 24 January 2020
“’We, the Ministers of Australia, Brazil, Canada, China, Chile, Colombia, Costa Rica, European Union, Guatemala, Republic of Korea, Mexico, New Zealand, Norway, Panama, Singapore, Switzerland, Uruguay, remain committed to work with the whole WTO membership to find a lasting improvement to the situation relating to the WTO Appellate Body. We believe that a functioning dispute settlement system of the WTO is of the utmost importance for a rules-based trading system, and that an independent and impartial appeal stage must continue to be one of its essential features.

“Meanwhile, we will work towards putting in place contingency measures that would allow for appeals of WTO panel reports in disputes among ourselves, in the form of a multi-party interim appeal arrangement based on Article 25 of the WTO Dispute Settlement Understanding, and which would be in place only and until a reformed WTO Appellate Body becomes fully operational. This arrangement will be open to any WTO Member willing to join it.

“We have instructed our officials to expeditiously finalise work on such an arrangement.

We have also taken proper note of the recent engagement of President Trump on WTO reform.’”

https://trade.ec.europa.eu/doclib/docs/2020/january/tradoc_158596.pdf

Since Australia and Brazil had been looking at a different approach than that announced by the EU and Canada or the EU and Norway, it will be interesting to see what type of contingency measures the larger group agrees upon. The U.S. had significant problems with the EU approach when it was announced last year as it simply continued many of the problems that the U.S. has identified as needing correction. A similar approach by the larger group would likely add complications to finding a permanent solution and also likely discourage at least some other WTO Members from joining the group’s approach.

Likely Coverage of Disputes by the 17 WTO Members

There are 164 WTO Members at the present time and there have been a total of 593 requests for consultations filed by WTO Members since the WTO came into existence in January 1995. The WTO webpage lists all disputes where a Member has been the complainant, the respondent or acted as a third party. Not all requests for consultations result in panels being requested, and not all panel proceedings result in appeals being filed. But a review of number of requests for consultations filed by a Member and the number of such requests where a Member was the respondent helps understand the coverage likely from the seventeen Members (46 at individual country level) who released the joint statement.

However, the data from the WTO webpage needs to be modified to eliminate requests for consultations where one party was not one of the seventeen Members. The following table reviews the data and then corrects to eliminate cases where the complainant or respondent was not another of the seventeen Members.

WTO Member# of cases complainant # of cases respondentcomplainant among 17respondent among 17
Australia91644
Brazil3316117
Canada40231811
China2144519
Chile101346
Colombia5735
European Union10486*/1123323*/49
Guatemala10272
Korea211847
Mexico2515118
New Zealand9030
Norway5030
Panama7161
Singapore1010
Switzerland5020
Uruguay1111
Subtotal306242/26811694/120
All countries593593593593

NOTE: EU numbers as a respondent differ based on whether include cases where EU is listed or just one or more of the EU member states (26 individual member disputes).

While the seventeen Members are obviously important WTO trading nations and participants in the dispute settlement system, the percent of disputes where the seventeen members are engaged in disputes with each other is obviously much smaller than their total number of disputes. Thus, the seventeen members accounted for 51.6% of the requests for consultations filed in the first twenty-five years and were respondents in 45.2% of the requests for consultations. However, when disputes with any of the 118 WTO Members who are not part of the joint statement are removed, the seventeen Members accounted for 19.56% of the cases where one was a complainant and 20.2% of the cases where one was a respondent. This is not surprising as there are many important trading nations who are not part of the seventeen signatories who are active both as complainants and as respondents – United States, Japan, India, South Africa, Argentina to name just five.

Of course, WTO Members do not have to be part of a group interim arrangement to handle ongoing or new disputes. Members can agree not to take an appeal, can agree (as the U.S. and India have done in one case) to hold up appeal until the Appellate Body is back functioning, to name two approaches some are pursuing.

While an interim approach is obviously of interest to many, the core issue remains finding a road forward to address needed reforms to the dispute settlement system. There seems to be little progress on that front. Procedural issues appear easier to resolve if consequences are added for deviation from procedural requirements. However, there is little active consideration of how to address the problem of overreach both prospectively and retroactively to permit a restoration of rights and obligations where panel reports or Appellate Body decisions created obligations or rights not contained in the Agreements.

In a Member driven organization, the hard work of the Secretariat doesn’t overcome fundamentally different views of how the dispute settlement system is supposed to operate. Thus, while it is a positive development that Director-General Azevedo and his team will visit Washington in the near future to discuss U.S. reform ideas, the real challenge is getting agreement on what the system is supposed to be and how to restore the balance that existed when the WTO commenced in 1995.

WTO Reform – Developments from Davos and What Might Be on U.S. Agenda

This year’s World Economic Forum had the usual side meetings of trade ministers and an unexpected meeting between President Trump and WTO Director-General Azevêdo. Trade ministers are discussing what needs to be accomplished ahead of the 12th Ministerial Conference (“MC12”) to be held in Kazakhstan in June 2020 with a focus on how to achieve agreement on fisheries subsidies to address illegal, unrecorded and unregulated fishing and overfishing and hence deliver on the UN sustainable development goal 14.6 during 2020. There are, of course, many other issues potentially on the agenda for MC12.

The potentially more interesting development out of Davos was the meeting between President Trump and DG Azevêdo. The President and the Director-General spoke about the meeting and need for WTO reform at a press conference the President held before leaving Davos. Here is the relevant exchange:

“[President Trump]: One of the people that was very important for me to meet from the World Trade Organization is Roberto Azevêdo. And he is a highly respected man. He happens to be this gentleman right here. I
thought I’d have him say a few words.

“But the World Trade Organization — as you know, I’ve had a dispute running with them for quite a while, because our country hasn’t been treated fairly. China is viewed as a developing nation.

“India is viewed as a developing nation. We’re not viewed a developing nation. As far as I’m concerned, we’re a developing nation, too. But they got tremendous advantages by the fact that they were considered “developing” and we weren’t. And they shouldn’t be. But if they are, we are.

“And we’re talking about a whole new structure for the deal, or we’ll have to do something. But the World Trade Organization has been very unfair to the United States for many, many years. And without it, China wouldn’t be China, and China wouldn’t be where they are right now. I mean, China — that was the vehicle that they used. And I give them great credit. And I also don’t give the people that were in my position great credit, because, frankly, they let that all happen. But the vehicle was the World Trade Organization.
And Roberto and I have a tremendous relationship, and we’re going to do something that I think will be very dramatic. He’ll be coming with a lot of his representatives to Washington sometime — maybe next week or the week after — and we’ll start working on it.

“So I’d like to introduce, just for — briefly — Roberto, and say a few words on behalf of the WTO. And then I’m going to introduce Larry Kudlow to say exactly where we are, in terms of our economy. Some of you know, but we’ve had some tremendous numbers just over the very recent past.

“So, please, Roberto.

“DIRECTOR-GENERAL AZEVÊDO: Well, thank you, Mr. President. And I think it’s fair to say that we have been saying, for quite some time, that if the multilateral system, if the WTO is to deliver and perform its role in today’s global economy, it has to be updated. It has to be changed. It has to be
reformed.

“This is an agenda that is squarely before members. I don’t think anybody in Geneva misses the point. I think they understand that the — the system has not been functioning properly in many areas. That’s something that we’re trying to address.

“I’m very happy that, in the conversation today with President Trump, he agreed that this is something that needs to happen; the WTO has to change. We are committed to effect those changes. And this is something we are serious about.

“And I am going to be, together with President Trump, as soon as possible, discussing what needs to change, what needs to be effected in the WTO, and we are committed to doing that.

“And, of course, I will be talking to all of the other WTO members, making sure that they all understand that this is serious. This is a path that we all have to be on together if we want to make the WTO relevant and performing to today’s requirements, frankly.

“So thank you very much, Mr. President. It’s an honor to be with you and with everybody else.

“Thank you.”

https://www.whitehouse.gov/briefings-statements/remarks-president-trump-press-conference-davos-switzerland/

U.S. Objectives for WTO Reform – Articulated and Possible

In the first three years of the Trump Administration, the Administration has identified a range of areas for reform and provided some specifics as well as identifying areas of key negotiating interest.

Dispute Settlement

WTO dispute settlement reform has been a top priority for the Administration with a wide range of issues of importance but an overriding issue of preventing panels and the Appellate Body from creating rights or obligations not contained in the negotiated agreements. This is also an area of priority for other WTO members for the different reason of wanting to get the Appellate Body functioning again. While the U.S. has not articulated specifics in terms of what type of reform is needed, the problem areas are clear. The U.S. position has been that the existing DSU text is clear and that proposals to date do nothing more than restate the existing requirements. Without understanding why the system has deviated from the plain language of the DSU, it is not possible to identify the reforms that are needed has been the Administration’s position. Much has been written about this area and one can assume it will be an important part of the upcoming discussions between the Administration and the WTO Secretariat. Broader reform of the WTO is unlikely if reform of the dispute settlement system isn’t achieved. It would be unacceptable to many WTO Members not to find a solution to the dispute settlement system.

Improved transparency

Much of the value of the WTO flows from the requirement of WTO Members to provide notifications on a wide range of topics, notifications which are important for other WTO Members to understand what trading partners are doing and whether there are potential WTO problems with the actions of particular trading partners.

Unfortunately, many WTO Members have failed to file required notifications in a timely manner, and, in many cases, notifications that are filed are demonstrably incorrect. In the areas of subsidies, the United States has over the past decade filed counternotifications on subsidy programs on China and India believing that the notifications submitted by those two countries were woefully incomplete. The counternotifications were an effort to identify the magnitude of the problem of under reporting.

While the WTO Secretariat has been tasked with providing periodic updates on notifications by Members, the present system has no consequences for failure to file notifications in a timely manner or for filing incomplete notifications.

How to address the transparency issue is of importance to many WTO Members. Indeed, lack of transparency and full notifications can complicate efforts to move specific issues forward. For example, the United States has raised concerns about the lack of information on cotton subsidies from China and India within the discussions on addressing concerns of cotton producting Members in Africa.

The U.S. and other countries have put forward proposals on modifying notification requirements and potential consequences for failure to keep notifications up to date. Because of the importance to the overall operation of the WTO, one can expect some effort in any reform package to ensure greater likelihood of notification requirements being met in fact.

Who gets Special and Differential Treatment under New Agreements

During the history of the GATT and the WTO to date, whether a Member was a developing country was a matter of self-selection, and, as a result, there have never been criteria that would help Members decide on eligibility. Nor has the organization had any system for graduating Members as their economies grew. Over the years, this has led to the situation where some of the wealthiest countries, largest exporting countries and others have maintained developing country status and hence taken lower levels of commitments through special and differential treatment provisions contained in agreements for developing countries.

As the comments of President Trump indicate, the United States has felt that the WTO system has permitted a number of countries not to assume responsibilities commensurate with their state of development and importance to the global trading system.

The United States has put forward proposals to have various countries, based on objective criteria, be ineligible for special and differential treatment for new agreements. Three WTO Members have indicated that they will not seek special and differential treatment in future agreements, though not agreeing that they are not developing countries — Korea, Singapore and Brazil.

While the need to have advanced economies carry their weight as part of the system would seem to be obvious, this is a highly sensitive issue where a number of major economies will fight hard against modifications of the current system. China, India and South Africa are three who have opposed any changes.

Obviously there has been some positive movement by the actions of three WTO Members. At a minimum, hopefully more Members will make similar commitments. And the United States has indicated that special and differential treatment provisions will not be agreed to in future agreements if certain countries don’t opt out of receiving such benefits. Thus, this issue will be an important and ongoing one that will generate a great deal of debate within the WTO and, hopefully, a meaningful advancement through its outcome. As the United States has indicated in statements at the WTO’s General Council, failure of many Members to carry their proper weight in liberalization has frustrated the ability of the WTO’s negotiating function to achieve the types of success that the system needs.

Update Rules to Address Different Economic Systems

For the United States, the European Union and other countries, the GATT and now WTO rules were written for and are applicable to market economies. WTO Members with different economic systems historically were not significant players in the global economy or when they joined the GATT or WTO undertook obligations which held the promise of the Member’s economy shifting to market economy principles.

The rise in importance of non-market economies like China engaged in different versions of state capitalism has created major challenges for the global trading system and for the viability of the WTO. The size and extent of industrial subsidies, forced technology transfer, role of state-owned and state-invested enterprises, state planning and resulting massive global excess capacity and targeting of technologies are just a few of the challenges market economy countries around the world have been confronting. Existing WTO rules don’t adequately address the many distortions flowing from the actions of the WTO members with non-market economies.

The United States, European Union and Japan announced an initiative at the 11th Ministerial Conference in Buenos Aires to address some of these issues. They recently released a joint statement outlining actions needed on industrial subsidies in particular.

The United States has also indicated that there is need for the WTO to address the disconnect that flows from major economies being within the WTO without being market economies.

While one would hope that a major trading nation, like China, who has benefitted enormously from WTO membership would understand the need for their to be an understanding on how different economic systems can coexist and rules to deal with major distortions or differences, this is an area where it is hard to see meaningful reform under a consensus system such as that used in the WTO.

Updated Rule Book to Address Current Commercial Realities

The Uruguay Round was the last major update of the global trading system’s rule book and occurred over 1986-1994. Technology and the organization of much of business today is dramatically different than the world that existed in the 1980s. There are few rules within the WTO dealing with electronic commerce. The plurilateral effort underway to come up with rules for the e-commerce field is important and long overdue.

Similarly, the world is facing issues of critical importance to the maintenance of food supplies, commercial activity and survival of islands, coast lines and much more. For example, more than one third of fish species are overfished. The oceans of the world are suffering massive pollution with waste areas in some locations being the size of states or smaller countries. Similarly, water temperatures are rising and weather patterns are shifting with consequent effects on agricultural productivity, on human and animal health and much more.

A few of these issues are being pursued within the WTO at the present time, including fisheries subsidies (negotiations now in their 19th year) and the plurilateral talks on e-commerce. Other topics are receiving consideration as well including domestic regulation of services, facilitating investment, the role of women and of small and medium sized enterprises.

Much more can and should be done to address the changes we are currently facing and that can be predicted. Where trade is affected, the WTO should have an important role. But a system that takes decades to work through a single issue, like fishery subsidies, will need a serious review as to how to permit much more timely responses and rule setting that can be ahead of the curve.

Free Trade Agreements and MFN

While Article XXIV of GATT 1994 deals with customs unions and regional trade agreements, the reality is that there are now hundreds of free trade agreements that have been negotiated and are in place of various breadth and different levels of coverage. While such agreements can permit countries to address bilaterally or plurilaterally issues not covered by the WTO, there is no doubt that free trade agreements lead to significant trade diversion as large volumes of trade are done at tariff rates that are more advantageous that the most favored nation rates negotiated during the GATT rounds. For some countries, the bulk of their trade may be at non-MFN rates. Do such facts favor additional efforts at bilateral or plurilateral liberalization even if not on an MFN basis?

Moreover, as many WTO members are opting not to contribute to further liberalization on new topics, there is the challenge of Members willing to liberalize providing benefits to non-participating members. While this is not a new problem, WTO reform may need to explore whether MFN has continuing relevance in a world of bilateral and plurilateral deals and/or whether plurilateral deals on topics not presently covered by WTO agreements should permit participating Members only to be the beneficiaries of the texts.

Conclusion

Other countries have raised a series of topics that they would like to see addressed in WTO reform talks that are not addressed in this note. What is clear is that if the United States is going to find satisfaction in a WTO reform effort, some major changes to the system will be needed. Deputy Director-General Alan Wolff had indicated in the past that WTO reform by 2025 was possible (looking at being ready for adoption by the 15th WTO Ministerial). https://www.wto.org/english/news_e/news19_e/ddgaw_13nov19_e.htm That timeline, while ambitious for the WTO based on past experience, is almost certainly unacceptable to the current U.S. Administration.

U.S.-China Phase 1 Agreement – Details on the Expanding Trade Chapter

The retaliation that China has pursued against U.S. exports in response to the U.S. 301 investigation and resulting U.S. actions reduced total US domestic exports of goods by some $10 billion between 2017 and 2018 and a further $15 billion in the first eleven months of 2019.

While the U.S.-China Phase 1 Agreement does not include obligations for China to reduce retaliatory tariffs on U.S. exports, the Chapter 6 Expanding Trade obligations that China has assumed would not be plausible if China doesn’t unilaterally reduce retaliatory tariffs on many products. It has done that on some products in 2019 and it is assumed when the agreement takes effect in mid-February 2020 a significant number of retaliatory tariffs will be reduced at least temporarily to permit China to honor its purchase commitments.

The U.S. and China agreed to different levels of ambition in terms of increased U.S. exports depending on four broad categories of goods and services – manufactured goods, agriculture, energy and services. What isn’t immediately apparent is that the increases in goods exports does not cover all U.S. export categories but rather refers to levels of ambition for the categories shown in Annex I and detailed in the Attachment to Annex 6-1 of the Agreement (pages 6-4 to 6-23).

But in fact, manufactured goods (8 subcategories), agriculture (6 subcategories) and energy (4 subcategories) account for less than 60% of all U.S. domestic exports of goods to China in 2017 (59.17%). This suggests both larger percentage increases for the products that are covered to achieve the growth in goods exports and an unknown future for the 40.83% of export products not included in the Attachment, products which saw sharp declines in the first eleven months of 2019 of over $12 billion (a decline of 28.12% from the comparable period in 2018). While the service categories covered in the Attachment are also not inclusive of all service sectors, the select categories account for 98.97% of all service exports to China reflected in U.S. statistics for 2017.

Thus, the level of stretch in achieving the very ambitious figures in Annex 1 depends on a number of factors, including whether one compares increases to the products and services identified versus total goods and services and how one factors in U.S. exports of goods and service not covered by specific commitments.

For example, in 2017 total US domestic exports and U.S. service exports were $175.9 billion. From page 6-3 of the US-China Phase 1 Agreement, the total commitments for increased purchases by China over 2017 levels are $76.7 billion in the first year (Feb. 14, 2020-Feb. 13 2021) and $123.3 billion in the second year (Feb. 14, 2021 – Feb. 13, 2022). The level of increases versus 2017 total exports of goods and services would be 43.6% and 70.0%.

However, only $126.9 billion of goods and services are included in the Attachment to Annex 6-1. If the increases presented are against those smaller numbers, the level of increase needed is obviously greater — 60.4% and 97.2%.

And there doesn’t appear to be any level of trade projected for the $49 billion of goods exports and $600 million services exports not included in the Attachment to Annex 6-1. Since many of the goods exports are subject to retaliatory tariffs, there is not likely to be a rebound in exports from the U.S. to China of these non-specified goods in the near term suggesting that the experience in 2019 (data through November) is likely the best scenario for those products. If so, total U.S. goods exports would be $12 billion lower (services not covered are minor and unlikely to be negatively affected). Increases over 2017 actual (adjusted for the decline for non-covered goods in 2019) would represent an increase of 40.02% in the first year and 68.62% in year two.

Below is a review of the four categories to see the level of ambition being undertaken in each.

Manufactured goods

The manufactured goods listed in the Attachment to Annex 6-1 are broken into the following eight subcategories: industrial machinery, electrical equipment and machinery, pharmaceutical products, aircraft (orders and deliveries), vehicles, optical and medical equipment, iron ad steel, and other manufactured goods. The HS categories listed show total U.S. domestic exports to China in 2017 of $42.521 billion (and most non-covered US exports of goods would be in this grouping). The level of increase in exports of manufactured goods is $32.9 billion in year one and $44.8 billion in year two – increases over actual 2017 of 77.37% and 105.36% respectively.

Agriculture

The agriculture category in Annex 6-1 has six subcategories: oilseeds, meats, cereals, cotton, other agricultural commodities, and seafood. The 2017 U.S. domestic exports for the HS categories included under agriculture in the Attachment to Annex 6-1 were $20.851 billion. Annex 6-1 calls for increased U.S. exports of $12.5 billion in year one and $19.5 billion in year two, increases of 59.95% and 93.52% respectively.

Energy

The energy group products is broken into four subcategories: liquefied natural gas, crude oil, refined products and coal. The increased exports are the largest percentage wise for this category as 2017 exports are relatively modest, just $7.57 billion. With growth of $18.5 billion in year one and $33.9 billion in year two, the rate of increase needs to be 244.23% in year one and 447.53% in year two over actual 2017 levels. Presumably the aggressive increases reflect China’s energy needs and the developments in the U.S. energy sector in recent years.

Data on each of the goods categories is contained in the table below. For simplicity, year 1 is referred to as 2020 and year 2 as 2021.

Services

Data on U.S. trade in services with China show growing U.S. exports from 2016 to 2017 and continuing to grow in 2018. Data for 2017 show U.S. exports to China of $56.009 billion growing to $57.140 billion in 2018.

The service sectors covered in Annex 6-1 include charges for use of intellectual property, business travel and tourism, financial services and insurance, other services, and cloud and related services. These categories in 2017 accounted for $55.434 billion with one of the BEA categories not showing exports to China to preserve confidentiality. The growth objectives included in Annex 6-1 are for $12.8 billion additional US exports in year one and $25.1 billion in year two representing growth rates over 2017 action of 22.85% and 44.81% respectively. U.S. data are presented below.

As reviewed in the post on January 15, there are significant commitments by China in a number of the chapters which should make a significant expansion of exports from the U.S. doable in the short run. Such a result is envisioned in Chapter 6 of the Phase 1 Agreement with specific commitments on Chinese purchases broken down by categories and possibly by subcategories. Such commitments will require a reduction or elimination of retaliatory tariff on many products to permit results in the first two years of the agreement.

While a lot of attention understandably is focused on what remains to be done with China on a host of critical issues (industrial subsidies, SOEs, China 2025 policies, etc.), a strong growth in demand from China for U.S. products and services is important if achieved. Let’s hope that the Agreement surprises many by its early and complete implementation.

U.S.-China Phase 1 Trade Agreement Signed on January 15 — An Impressive Agreement if Enforced

There has been a lot of anticipation for what the Phase 1 agreement between the U.S. and China actually contains. Earlier today, following the signing ceremony at the White House, The Economic and Trade Agreement Between the United States of America and the People’s Republic of China, Phase 1 was released. https://ustr.gov/sites/default/files/files/agreements/phase%20one%20agreement/Economic_And_Trade_Agreement_Between_The_United_States_And_China_Text.pdf

I’ve just finished reading through the agreement.  My first blush read is that the agreement has a lot of positive potential for the United States. While enforcability is always a critical consideration and particularly based on the U.S. experience with other commitments made by China in the past, there are some chapters which have both great specificity on obligations and specific timeline commitments that should make at least those chapters potential important improvements.

A quick overview of the agreement follows.

Intellectual Property

Chapter 1 on intellectual property is quite interesting as it lays out a large number of obligations China is taking on by individual IP issue and confirms that US system already has such obligations.  The chapter is broken into the following topics:

Trade secrets and confidential business information;

Pharmaceutical-related intellectual property;

Patents;

Geographical indications;

Manufacture and export of pirated and counterfeit goods;

Bad-faith trademarks;

Bilateral cooperation on intellectual property protection;

Implementation;

The specificity of commitments and timing for action are important in hopefully making this a really important chapter for companies with intellectual property needs and current concerns in China’s performance on such matters. USTR’s fact sheet on the IP chapter presents the Administration’s view of what was achieved. https://ustr.gov/sites/default/files/files/agreements/phase%20one%20agreement/Phase_One_Agreement-IP_Fact_Sheet.pdf. My own view is that Chapter 1 is an important plus for the U.S.

Forced Technology Transfer

The technology transfer chapter is limited and doesn’t appear to be more enforceable than the multiple laws, etc. China has had for years. While the chapter states the obligations, China has historically been of the view that technology transfer is not enforced in fact. The Administration understandably views the chapter as important, and the pressure of the 301 investigation and tariffs that remain may make the chapter more valuable than the general statements it consists of suggest. https://ustr.gov/sites/default/files/files/agreements/phase%20one%20agreement/Phase_One_Agreement-Technology_Transfer_Fact_Sheet.pdf In my view, this is more of a placeholder chapter. Hopefully it will be honored in fact but the past doesn’t show that as a high probability.

Trade in Food and Agricultural Products

The third chapter on agriculture could be very important for changing the U.S. agricultural export scene as the chapter goes through a large number of products, establishes timelines and standards against which US products will be evaluated and or requires acceptance of various US products that have met US standards. The Administration gets straight A’s for the breadth and depth of this chapter in my view. There are seventeen annexes that take up the following topics or products:

Annex 1, agricultural cooperation

Annex 2, dairy and infant formula

Annex 3, poultry

Annex 4, beef

Annex 5, live breeding cattle

Annex 6, pork

Annex 7, meat, poultry and processed meat

Annex 8, electronic meat and poultry information system

Annex 9, aquatic products

Annex 10, rice

Annex 11, plant health

Annex 12, feed additives, premixes, compound feed, distillers’ dried grains, and distillers’ dried grains with solubles

Annex 13, pet food and non-ruminant derived animal feed

Annex 14, tariff rate quotas

Annex 15, domestic support

Annex 16, agricultural biotechnology

Annex 17, food safety

The chapter also includes an Appendix which lists beef, pork and poultry products considered not eligible for import into China which US producers will need to review. There are also side letters released with the agreement that address products and producers who will have immediate access to China consistent with the chapter. The Administration has a fact sheet on agriculture chapter in total and then on individual products. The chapter fact sheet’s link follows. https://ustr.gov/sites/default/files/files/agreements/phase%20one%20agreement/Phase_One_Agreement-Ag_Summary_Long_Fact_Sheet.pdf

Financial Services

The fourth chapter on financial services is also quite interesting and is the one chapter where there are specific US obligations identified (typically considering expeditiously pending applications by Chinese financial service providers in specific areas).  US companies have had many problems for the last 20 years in terms of China’s permitting access.  Looks to me that the chapter, if implemented (and there are timelines, etc.) could be important for US companies. Subjects covered include banking services, credit rating services, electronic payment services, financial asset management (distressed debt) services, insurance services, and securities, fund management, futures services. The Administration’s fact sheet on financial services provides its views on the importance of the chapter. https://ustr.gov/sites/default/files/files/agreements/phase%20one%20agreement/Phase_One_Agreement-Financial_Services_Fact_Sheet.pdf

Macroeconomic Policies and Exchange Rate Matters and Transparency

The fifth chapter on currency contains four articles. One is on general provisions. The second is on exchange rate practices. The third addresses transparency. And the fourth article covers the enforcement mechanism. While China was widely viewed as engaging in reducing the value of its currency for many years and was last year found by the Trump Administration to be a currency manipulator, most economists have viewed China as less problematic on its currency in recent years.  It is important to have a chapter focused on transparency and currency practices. Unclear how effective the enforcement provisions outlined will be in fact. But hopefully, China’s actions will not raise concerns under this chapter going forward. The Administration’s fact sheet presents its views of what was accomplished in the chapter. https://ustr.gov/sites/default/files/files/agreements/phase%20one%20agreement/Phase_One_Agreement-Macroeconomic_Fact_Sheet.pdf

Expanding Trade

The sixth chapter is potentially commercially important as it addresses China’s commitments to increase purchases from the United States in both goods and services. The actual text clarifies that the $200 billion additional imports by China over 2017 levels are the combination of increases over 2017 in 2020 and 2021 versus being a requirement for each year.  Such growth is more achievable and less unrealistic in my view.

The targets for growth are presented in four groups – manufactured goods, agricultural goods, energy, services and then the categories that are considered within each of the four groups are shown on pages 6-4 – 6-23 of the Agreement.  The growth above 2017 levels for the four broad categories is shown below.

Products/Services20202021Total
manufactured goods$32.9 BN$44.8 BN$77.7 BN
agriculture$12.5 BN$19.5 BN$32.0 BN
energy$18.5 BN$33.9 BN$52.4 BN
services$12.8 BN$25.1 BN$37.9 BN
Total$76.7 BN$123.3 BN$200.0 BN

A lot of attention will be focused on whether the purchases actually happen.  Actions under Chapter 3 will directly improve US exports of agricultural goods and those of Chapter 4 will improve the financial services portion of the services target.  The IP chapter could be affect manufactured goods, etc. So much of the Phase 1 Agreement should result in a natural increase in imports from the U.S. as longstanding barriers are removed or otherwise overcome.

The Administration’s fact sheet on expanded trade can be found here. https://ustr.gov/sites/default/files/files/agreements/phase%20one%20agreement/Phase_One_Agreement-Expanding_Trade_Fact_Sheet.pdf

Bilateral Evaluation and Dispute Resolution

A lot of focus will be given to Chapter 7 because of the importance of enforcement. However, as noted above, enforcement should be easier where there has been the level of detail/specificity as to obligations and timelines for implementing individual obligations that exists in many of the chapters.

On enforcement, Chapter 7, lays out the basic purpose of the bilateral evaluation and dispute resolution arrangement in Article 7.1. Paragraph 2 of that Article provides the objectives, reflecting both the U.S. desire for speed and the Chinese desire for mutual respect and avoidance of escalation.

“The purpose and madate of the Arrangaement are to effectively implement this Agreement, to resolve issues in the economic and trade relationship of the Parties in a fair, expeditious, and respectful manner, and to avoid the escalation of economic and trade disputes and their impact on other areas of the Parties’ relationship. The Parties recognize the importance of strengthened bilateral communications in this effort.”

There are various elements to the chapter including a high level Trade Framework Group (USTR and designated Vice Premier of the PRC).  Each country will have a Bilateral Evaluation and Dispute Resolution Office which will, inter alia, handle disputes and includes opportunities for appeals on short time lines, referral to USTR and the Vice Premier and the ability of the complaining party to take action if not resolved with either no retaliation (complained against party views action taken as in good faith) or the need to withdraw from the agreement for the party complained against if the belief is that the action was not taken in good faith.

I believe that the Chapter will effectively help the Parties resolve disputes particularly with regard to the commitments in Chapter 1, 3,  4 and 6. 

Conclusion

The Phase 1 Agreement is an important agreement that will achieve some significant market access opening for U.S. producers into the Chinese market, improved intellectual property protection in China, expanded market access for U.S. financial service providers and hopefully make some progress on reducing or eliminating forced technology transfer and limit concerns about currency misalignment. My hat’s off to the negotiators for an impressive result. There remain important issues not yet addressed bilaterally that will hopefully be taken up in Phase 2 talks, but Phase 1 is an important accomplishment.

WTO Reform – Joint Statement of January 14, 2020 of Japan, the U.S. and the EU

At the last WTO Ministerial Conference held in December 2017 in Buenos Aires, Argentina, the U.S., the EU and Japan announced efforts to cooperate to develop WTO reforms to address concerns in areas such as industrial excess capacity, massive government subsidies, state owned enterprises, forced technology transfers, local content requirements and other matters. The joint statement released on December 12, 2017 is included in a press release from USTR and is reproduced below:

“Joint Statement by the United States, European Union and Japan at MC11

“12/12/2017

“Mrs. Cecilia Malmström, European Commissioner for Trade, Mr. Hiroshige Seko, Minister of Economy, Trade and Industry of Japan and Ambassador Robert E. Lighthizer, United States Trade Representative met in Buenos Aires, Argentine Republic on the 12th of December 2017 and agreed to strengthen our commitment to ensure a global level playing field.

“They said:

“We shared the view that severe excess capacity in key sectors exacerbated by government-financed and supported capacity expansion, unfair competitive conditions caused by large market-distorting subsidies and state owned enterprises, forced technology transfer, and local content requirements and preferences are serious concerns for the proper functioning of international trade, the creation of innovative technologies and the sustainable growth of the global economy.

“We, to address this critical concern, agreed to enhance trilateral cooperation in the WTO and in other forums, as appropriate, to eliminate these and other unfair market distorting and protectionist practices by third countries.”

Japan, the EU and the U.S. have had a series of meeting over the last two years to seek agreement amongst themselves on reforms to the WTO to address the areas covered by the joint statement. There have also been other areas of cooperation including on working towards a more robust set of notification requirements and on how advanced developing countries can better contribute to the WTO by taking on full commitments and by not participating in special and differential treatment under new agreements or new negotiations.

On January 14, 2020, officials from Japan, the EU and the U.S. issued a joint statement that lays out some of the reforms, most in the area of subsidy disciplines, that the three have been able to agree on. While they are still working on proposed text, it is expected that the three major WTO Members will start an outreach process to broaden the support for the proposals. The USTR Press Release which contains the joint statement is attached below.

Joint-Statement-of-the-Trilateral-Meeting-of-the-Trade-Ministers-of-Japan-the-United-States-and-the-European-Union-_-United-States-Trade-Representative

One can expect a busy 2020 in Geneva and in capitals around the world as proposals for WTO reform are vetted with various members and the topics get taken up in the WTO. While it is unlikely that any significant movement will occur by the 12th WTO Ministerial scheduled for early June 2020 in Kazakhstan, the topic of WTO reform has seen increased interest and activity throughout 2019.

What are the proposed increased disciplines on subsidies?

Prohibited Subsidies

Industrial subsidies have been the focus of the trilateral discussions. The Joint Statement recommends expanding the list of prohibited subsidies in Article 3.1 of the Agreement on Subsidies and Countervailing Duty Measures (“ASCM”) to include the following four categories (and have indicated that they are still exploring whether additional categories should be added):

  1. “unlimited guarantees”;
  2. “subsidies to an insolvent or ailing enterprise in the absence of a credible restructuring plan”;
  3. “subsidies to enterprises unable to obtain long-term financing or investment from independent commercial sources operating in sectors or industries in overcapacity”;
  4. “certain direct forgiveness of debt”.

These types of subsidies have been major concerns in a number of industries and certainly would pertain to China, but would be applicable to all Members.

Reversal of burden on certain actionable subsidies

The Joint Statement also recommends reversing the burden of proof on certain actionable subsidies that are not prohibited but where the three Members believe the types of subsidies can cause significant harm to competing producers in other countries. The proposal would impose on the subsidizing Member the burden of demonstrating “that there are no serious negative trade or capacity effects and that there is effective transparency about the subsidy in question.” While the list of such subsidies is still being developed, the list currently includes four categories:

  1. “excessively large subsidies”;
  2. “subsidies that prop up uncompetitive firms and prevent their exit from the market”;
  3. “subsidies creating massive manufacturing capacity, without private commercial participation”; and
  4. “subsidies that lower input prices domestically in comparison to prices of the same goods when destined for export.”

China has been pouring vast subsidies into a range of manufacturing sectors, has created massive excess capacity in dozens of industries, has created “zombie” companies which are prevented from exiting the market, and engages in various practices which have the effect of lowering input prices domestically far below world prices. Similar problems have been experienced with other trading partners as well.

Additional example of serious prejudice

The joint statement also reviews the desire to expand the situations in which serious prejudice under Article 6.3 of the ASCM should be found. The joint statement proposes adding a provision that serious prejudice would exist where the subsidy under investigation distorts capacity. Again, while such a provision would be applicable to all WTO Members, it would obviously be important for economies with the large state role such as China.

Other subsidy proposals

There are three other important proposals contained in the joint statement.

First, the serious problem of inadequate notifications is addressed by proposing that any non-notified subsidies will be treated as prohibited subsidies where other WTO Members provide a counter-notification unless all required information is provided by the subsidizing Member within a certain period of time. The U.S. has provided counter-notifications of subsidies on China and on India in the past. There is still a belief that large numbers of subsidies are not reported by these two countries and others. Lack of complete notifications hampers the ability of trading partners to understand the competitive environment and whether particular Members are acting consistent with their ASCM obligations.

Second, the joint statement addresses one of the challenges flowing from the existing ASCM and dispute settlement decisions, namely the lack of clarity for determining benchmarks for evaluating whether benefits are provided when the home market is distorted. The U.S. and others have gone out of country in certain circumstances, and WTO disputes have limited options for investigating authorities. This has proven to be an important issue in countervailing duty cases looking at subsidies for a number of countries, though China is obviously a major concern. Clarification is very much needed.

Third, the joint statement proposed ensuring that subsidies provided by state owned enterprises can be captured by the term “public body” in ASCM Article 1.1(a)(1). Such clarification is needed in light of a WTO dispute settlement decision which limited the scope of public body. All WTO members with significant state-owned and state-invested enterprises would be affected. Again, China is a major focus of the concern.

Forced Technology Transfer

Forced technology transfer has been a matter of concern for all three of the trilateral Members issuing the joint statement. The joint statement reviews the harm such actions have on other trading partners but does not provide a proposal as yet on what steps need to be taken, including on enforcement. Obviously, as far as China is concerned, these concerns have been a central part of the Section 301 investigation and actions by the U.S. Administration and is reportedly being addressed in one of the chapters in the Phase 1 Agreement that will be signed on January 15. It is not clear if the EU, Japan and the U.S. will be looking to multilateralize whatever provisions the United States has negotiated with China into the WTO.

Other items mentioned in the joint statement

Japan, the EU and the United States have been active on a range of other reform issues and agreed to continue to cooperate on them going forward. There are four items flagged:

  1. “the importance of market oriented conditions for a free, fair, and mutually advantageous trading system”;
  2. “reform of the WTO, to include increasing WTO Member compliance with existing WTO notification obligations and pressing advanced WTO Members claiming developing country status to undertake full commitments in ongoing and future WTO negotiations”;
  3. “international rule-making on trade-related aspects of electronic commerce at the WTO”; and
  4. international forums such as the Global Forum on Steel Excess Capacity and the Governments/Authorities’ Meeting on Semiconductors.”

The WTO system was built by market economy countries and does not address many of the distortions that “state capitalism” such as that practiced by China creates. While proposals such as those on subsidies can address (potentially) some of the distortions that state capitalism systems create, pursuing greater coherence to market economy principles is undoubtedly to the benefit of global trade. If very different economic systems are to continue to coexist, major reform to the WTO will be needed to have any hope of reciprocal trade happening, and such trade may well need to be managed in part.

The second group of issues have been being pursued by the U.S. aggressively in Geneva and bilaterally with the support of various countries. Korea, Singapore and Brazil have all agreed not to seek special and differential treatment in future negotiations or agreements.

For the WTO to remain relevant going forward it needs to be able to address major changes in the global trade environment. The importance of e-commerce is one such example. The plurilateral negotiations that are underway by many WTO members need to be both ambitious and reach an early conclusion.

China has walked away from the Global Forum on Steel Excess Capacity without a resolution to the serious global excess capacity problem largely created by China. Separately, a recent OECD report on subsidies to the semiconductor industry globally shows the importance of addressing the challenges in that sector on a comprehensive basis to avoid massive distortions in outcomes. OECD (2019), “Measuring distortions in international markets: The semiconductor value chain”, OECD Trade Policy Papers, No. 234, OECD Publishing, Paris, https://doi.org/10.1787/8fe4491d-en.

Conclusion

The joint statement released today has an importance beyond the specific proposals it contains. It demonstrates that Japan, the EU and the U.S. have a large set of issues on which there is a common vision and willingness to work together for the good of the global system. The proposals on additional subsidy disciplines address real shortfalls in the existing ASCM and reflect the emergence of subsidy practices by state-capital countries like China that need to be addressed. They also identify important corrections to WTO dispute settlement decisions that need to be made to permit the ASCM to function as intended.

Many countries have concerns with forced technology transfer practices of some countries. While hopefully the U.S.-China Phase 1 Agreement to be signed on January 15, 2020 will provide a roadmap for a successful approach to these issues, the trilateral efforts will be important to multilateralize an approach that will address all permutations of forced technology transfer that are identified by Members.

Finally, the WTO has gone through its first 25 years and is in need of significant reforms to remain relevant as global trade moves forward. The issues covered by the Joint Statement represent a good group of issue to breathe life back into the WTO.

Fisheries Subsidies – Will the WTO Members Reach Agreement Before June 2020?

When WTO Members launched the Doha Development Agenda in November 2001, one of the topics to be explored was fisheries subsidies as outlined as part of the Rules paragraph 28:

“In the context of these negotiations, participants shall also aim to clarify and improve WTO disciplines on fisheries subsidies, taking into account
the importance of this sector to developing countries.” Ministerial Declaration, para. 28, WT/MIN(01)/Dec/1.

Fisheries subsidies were also mentioned in paragraph 31 of the Declaration dealing with topics within trade and environment that would be explored.

More than 18 years later, WTO members are pushing to reach agreement on new disciplines on fisheries subsidies by the time of the 12th Ministerial Conference to be held in Nur-Sultan, Kazakhstan in early June 2020.

The push is related to the 2020 deadline included in the September 2015 UN Sustainable Development Goals (“SDG”) 14.6: “by 2020, prohibit certain forms of fisheries subsidies which contribute to overcapacity and overfishing, and eliminate subsidies that contribute to IUU fishing, and refrain from introducing new such subsidies, recognizing that appropriate and effective special and differential treatment for developing and least developed countries should be an integral part of the WTO fisheries subsidies negotiation.” The term “IUU” refers to “illegal, unreported, and unregulated” fishing.

At the 11th WTO Ministerial Conference, WTO members adopted a decision to complete fisheries subsidies negotiations by the next Ministerial Conference. See WT/MIN(17)/64; WT/L/1031:

“FISHERIES SUBSIDIES

“MINISTERIAL DECISION OF 13 DECEMBER 2017

“The Ministerial Conference

Decides as follows:

“1. Building on the progress made since the 10th Ministerial Conference as reflected in documents TN/RL/W/274/Rev.2, RD/TN/RL/29/Rev.3, Members agree to continue to engage constructively in the fisheries subsidies negotiations, with a view to adopting, by the Ministerial Conference in 2019, an agreement on comprehensive and effective disciplines that prohibit certain forms of fisheries subsidies that contribute to overcapacity and overfishing, and eliminate subsidies that contribute to IUU-fishing recognizing that appropriate and effective special and differential treatment for developing country Members and least developed country Members should be an integral part of these negotiations.

“2. Members re-commit to implementation of existing notification obligations under Article 25.3 of the Agreement on Subsidies and Countervailing Measures thus strengthening transparency with respect to fisheries subsidies.”

Why the interest in fisheries subsidies?

For decades, the world has been experiencing overfishing of various species of fish in different parts of the world. The U.N.Food and Agriculture Organization (FAO) reports that between 1974 and 2015 fish stocks that are not within biologically sustainable levels increased from 10% in 1974 to 33.1% in 2015. FAO, The State of World Fisheries and Aquaculture 2018 (“2018 Report) at 6. This decline has occurred despite efforts made by various countries to regulate capture/production.

“Despite the continuous increase in the percentage of stocks fished at biologically unsustainable levels, progress has been made in some regions. For example, the proportion of stocks fished within biologically sustainable levels increased from 53 percent in 2005 to 74 percent in 2016 in the United States of America, and from 27 percent in 2004 to 69 percent in 2015 in Australia.” 2018 Report at 6.

Because of, inter alia, the importance of the fishing industry to many countries and fish to the diets of many peoples, there has been concern for many years with actions needed by nations to ensure the sustainability of fish captures.

The FAO’s 2018 Report provides a great deal of information on the importance of fish to developing and least developed countries and the various actions being taken to address meeting the Sustainable Development Goals (“SDGs”) pertaining to fish and the oceans.

The WTO’s negotiations on fisheries subsidies are just one part of the much larger group of SDGs being pursued by countries as part of the UN targets and only deals with ocean/sea wild caught fish, not with aquaculture and not with inland caught fish. The FAO’s 2018 Report is attached below.

2018-FAO-the-state-of-world-fisheries-and-aquaculture

As Table 1 in the 2018 Report shows, there has been a rapid growth in aquaculture so that by 2016, there was greater volume from aquaculture than there was from “marine caught”. Specifically, in 2016 aquaculture accounted fro 80.0 million metric tons (46.8%) of the total production/ capture, marine capture was 79.3 million metric tons (46.4%) and inland capture was 11.6 million metric tons (6.8%) – for a total of 170.9 million metric tons. Data do not include information on aquatic mammals, crocodiles, alligators, caimans, seaweeds and other aquatic plants. 2018 Report, Table 1, page 4.

While aquaculture has grown, marine capture has declined or stagnated over time and with growing levels of overfishing, longer term decline will occur in this sector absent concerted steps to manage the volume pursued at sea. Overfishing is believed due to overbuilding of fishing fleets and the level of fishing that contravenes national laws, is unrecorded and/or unregulated. Thus, the efforts within the WTO to impose disciplines on subsidies benefiting IUU fishing and/or contributing to overfishing are an important element in achieving catch rates that are sustainable versus unsustainable and declining.

Importance of marine fishing to developed, developing and least developed countries

The FAO gathers information on the amount of marine capture (as well as inland capture and aquaculture) annually. The latest data available from FAO are for 2017. FAO, Fishery and Aquaculture Statistical Yearbook 2017, http://www.fao.org/fishery/static/Yearbook/YB2017_USBcard/index.htm. The average marine caught volumes for the years 2015-2017 from the FAO data base were summarized for WTO Members in a July 11, 2019 submission to the WTO rules negotiations addressing fisheries subsidies. The submission was made by Argentina, Australia, the United States and Uruguay. Top marine caught Members are presented below in millions of metric tons and percent of world production:

CountryProduction (mm tonnes)% of World Production
China13.8 17.30%
Indonesia 6.2 7.76%
European Union 5.3 6.68%
United States 5.0 6.25%
Russian Federation 4.4 5.53%
Peru 4.2 5.31%
India 4.6 4.57%
Japan 3.2 4.06%
Vietnam 3.0 3.71%
Norway 2.2 2.80%
Chile 1.7 2.18%
Malaysia 1.5 1.90%
Republic of Korea 1.4 1.82%
Morocco 1.4 1.73%
Mexico 1.4 1.73%
Thailand 1,3 1.65%
Myanmar 1.2 1.49%
Iceland 1.2 1.48%
Chinese Taipei 0.8 1.04%
Canada 0.8 1.03%
Argentina 0.8 0.98%
Ecuador 0.7 0.84%
Bangladesh 0.6 0.78%
Mauritania 0.6 0.74%
South Africa 0.6 0.71%
Subtotal 68.8 86.36%
All Other 10.9 13.64%
World Total 79.7 100.00%

TN/RL/GEN/197/Rev.2, pages 4-7, Annex I (11 July 2019). Data for the EU and the US contain data from various islands referenced on page 4 in fotnotes a and b. The Annex lists 136 of the 164 WTO members and their production/volumes although no data are available for 28 WTO members (some of which are landlocked and hence may have no marine caught fish). The full listing is attached below.

TNRLGEN197R2

As reviewed in the 2018 Report (page 2), fish make up an increasing share of animal protein for humans, with 100% of the increase being accounted for by expanding aquaculture:

“The expansion in consumption has been driven not only by increased production, but also by other factors, including reduced wastage. In 2015, fish accounted for about 17 percent of animal protein consumed by the
global population. Moreover, fish provided about 3.2 billion people with almost 20 percent of their average per capita intake of animal protein. Despite their relatively low levels of fish consumption, people in developing countries have a higher share of fish protein in their diets than those in developed countries. The highest per capita fish consumption, over 50 kg, is found in several small island developing States (SIDS), particularly in Oceania, while the lowest levels, just above 2 kg, are in Central Asia and some landlocked countries.”

Fishing/fisheries are an important source of employment for many countries, with the vast majority of such employment being in countries in Asia, Latin America and Africa. Specifically in 2016 worldwide fisheries employment was estimated at 40.338 million people (no breakout between marine and inland caught). Of this number, 31.990 million were in Asia ((79.3%), 5.367 million were in Africa (13.3%) and 2.085 million were in Latin America and the Caribbean (5.2%) , with just 896,000 jobs in North America, Europe and Oceania. Several important individual countries are shown in the 2018 Report — China with 14.5 million jobs in fisheries in 2016 (36% of global) and Indonesia with 2.7 million folks employed in fisheries (6.7% of global employment in the sector). 2018 Report at 32-33. Much of the employment in fisheries around the world is from family run operations, often subsistence in nature, and mainly using small boats (less than 12 meters in length and a large portion of which are not motorized).

The 2018 Report indicates that in 2016 the number of fishing vessels in the world were 4.6 million, 2.8 million of which were motorized. Of the 4.6 million vessels, 75.4% were in Asia, 14.0% in Africa, 6.4% in Latin America and the Caribbean, 2.1% in Europe, 1.8% in North America and 0.3% in Oceania. 100% of Europe’s vessels were motorized, more than 90% of those in North America, but only some 25% in Africa. See pages 36-38 of the 2018 Report.

WTO Efforts at Increasing Disciplines on Marine Fisheries Subsidies

Negotiations at the WTO have had periods of greater activity since 2001 than in other periods. 2005-2011 was a particularly active period according to the WTO webpage, with an uptick in efforts beginning in late 2016 and continuing to the present time. See https://www.wto.org/english/tratop_e/rulesneg_e/fish_e/fish_intro.htm.

The negotiations have been complicated by many issues that are not typical for trade negotiations. Here are a few of the perceived problem issues:

(a) problem being addressed relates to depletion of scarce global resources through overfishing flowing from subsidies that create excess capacity;

(b) production occurs not only in national waters but in the open seas and through contracts to capture fish in third countries’ waters;

(c) concerns about effect of negotiations on outstanding territorial disputes/claims;

(d) the challenge of disciplining subsidies provided by one country on fishing vessels which are flagged in a different country;

(e) the lack of meaningful data from many developing and least developed countries which complicates understanding the level of marine capture;

(f) for many developing and least developed countries, the large part of fishing fleets which are subsistence or artisanal in nature;

(g) the large portion of global capture which is developing and least developed country in origin vs. desire for special and differential treatment for such countries;

(h) challenge of whether traditional S&D provisions (exclusion from disciplines, lesser reductions, longer implementation periods) are actually harmful to developing and least developed countries where continued erosion of marine catch from overfishing will actually hurt the fishermen and fisherwomen of the countries receiving S&D consideration;

(i) whether dispute settlement as applicable to other WTO agreements (whether SCMA or other) will serve the underlying objectives of any negotiated agreement or needs to be modified to reflect the unique objectives of the agreement.

On the question of level of subsidization, there are the usual questions of what, if any, subsidies will be allowed as not causing concerns re growing capacity or overfishing and whether there is some level of acceptable subsidies even if adding to capacity.

While the set of public documents from the negotiations are reasonable through much of 2018, the resort to Room Documents (which are not made public) and other classification of documents, means that much of the current drafts of sections of a possible agreement are not publicly available. For example, there were ten documents identified as made available to WTO Members for the May 8, 2019 Informal Open-ended Negotiating Group on Rules (Fisheries Subsidies). Seven of the ten documents are not available to the public as “Room Documents” even if the documents were generated weeks or months before the meeting. See, e.g., RD/TN/RL/72 (17/12/2018); RD/TN/RL/81 (21/03/2019); RD/TN/RL/77/Rev.1 (21/03/2019); RD/TN/RL/82 (08/04/2019); RD/TN/RL/79/Rev.1 (18/04/2019); RD/TN/RL/83 (02/05/2019); RD/TN/RL/84 (06/05/2019).

Similarly, WTO Members have done a relatively poor job of notifying the subsidies provided to marine fisheries. Even with improvements in notifications in 2019, as late as November 2019, nine of the 26 largest providers of fisheries subsidies had not provided notifications and some who had done so in 2019 submitted the first notifications of such programs in 20 years. Members welcome progress in notification of fisheries subsidies, https://www.wto.org/english/news_e/news19_e/scm_19nov19_e.htm.

There is a draft document from the Chair of the negotiations from 14 November 2018, TN/RL/W/274/Rev.6 which lays out the Chair’s understanding of negotiations as of that date. The document is attached below and is heavily bracketed meaning that at the time of the draft there was not agreement on the bracketed text or options were shown.

TNRLW274R6

Some public submissions show that countries or groups of countries are still putting forward approaches on topics of importance. For example there are 2019 submissions on the following topics: fishing vessels not flying the member’s flag (e.g., TN/RL/GEN/201/Rev.1 (proposed prohibiting subsidies to such vessels)(Argentina, Australia, Indonesia, Japan, New Zealand, the United States, and Uruguay), on a cap-based approach to addressing certain fisheries subsidies [(TN/RL/GEN/197/Rev.2) and TN/RL/GEN/203)(Argentina, Australia, the United States, and Uruguay) vs. different approach put forward by China (TN/RL/199)], on whether different dispute settlement principles need to be considered (TN/RL/GEN/198, Canadian discussion paper), the breadth of special and differential treatment for developing and least developed countries (TN/RL/200, submission from India).

Interestingly, a submission from New Zealand and Iceland in 2018 warned other WTO members that a focus on fishing in international waters vs. marine catch in national waters would result in any agreement addressing very little of the marine catch volume as would other overly narrow scope approaches:

‘6.SDG Target 14.6 is clear that subsidies that contribute to both overcapacity and overfishing must be prohibited. An outcome which excluded the most harmful types of subsidies which contribute to overcapacity and overfishing would therefore not satisfy SDG Target 14.6. An outcome that addressed capacity or overfishing in just a hortatory way or in a manner that applied disciplines only to a small subset of subsidies or the world’s fishing fleet would similarly fail to meet the requirements of SDG Target 14.6.

“7. For example, the current emphasis on subsidies to fishing beyond national jurisdiction is warranted given the weaker governance and resource and development impacts of such fishing. This however must not be at the exclusion of waters under national jurisdiction where the vast majority of global catch – 88% – is taken.1 Similarly, the emphasis on overfished stocks should not equate to an exception for other stocks as doing so would exclude nearly 70% of the world’s fisheries.2 Taken together, these two approaches alone would result in barely 8% of the world’s fisheries being subject to subsidy prohibitions.3
“2 FAO. 2016. The State of World Fisheries and Aquaculture 2016.
“3 Two thirds of fish stocks managed by RFMOs are overfished or depleted: Cullis-Suzuki, S. & Pauly, D. (2010). Failing the high seas: a global evaluation of regional fisheries management organization. Marine Policy 34: 1036–1042.”

Advancing Fisheries Subsidies Prohibitions on Subsidies Contributing to Overcapacity and Overfishing, TN/RL/W/275 at 2 (8 May 2018)(New Zealand and Iceland).

Will WTO Members Deliver Meaningful Fisheries Subsidies Reform

The fact that the negotiations have taken more tan 18 years and that major countries appear to remain widely apart on many key issues suggests that the road to success will be challenging.

For example, India’s proposal for S&D would result in large amounts of fisheries subsidies not being addressed by the agreement (whatever the scope of subsidies addressed) rendering any agreement of minimal assistance in fact if adopted following that approach.

There are significant differences in approaches to limiting subsidies as can be seen in the different cap approaches presented by China and a group of other countries (Argentina, Australia, the United States and Uruguay).

Similarly, there is a disconnect between the problems being addressed (overcapacity and overfishing) and the traditional role of S&D to eliminate, reduce and/or delay obligations. For the fisheries subsidies negotiations to achieve a meaningful result, the WTO Members need to revisit what the role of special and differential needs to be to achieve better marine catch for developing and least developed countries. The focus needs to be on helping LDCs and developing countries develop accurate data on marine catch, developing the capacity to participate in regional management programs, finding assistance to fishermen and fisherwomen affected by depleted marine catches to survive/choose alternative work until such time as sustainable levels of wild caught fish are again available. But all countries need to contribute to limiting fisheries subsidies where excess capacity or overfishing are the likely result.

And there is the U.S. position that S&D will only be approved in any new agreement if it is limited to those countries with an actual need (i.e., certain countries would not take such benefits). Considering the role of major countries like China and India in marine catch, one can expect challenges in having those countries (and possibly others) agree to forego S&D provisions.

Net/net – as most Members seem to be focused on the wrong questions, there is a reasonable probability that the Kazakhstan Ministerial will not see a meaningful set of disciplines adopted on fisheries subsidies to address the challenges to marine catch from overcapacity and overfishing.

Let’s hope that the above forecast proves wrong.

U.S.-China Phase 1 Agreement — What to Look for When the Agreement is Released on January 15, 2020 after the signing

The U.S. Administration has indicated that the Phase One trade deal with China is “historic and enforceable”. President Trump tweeted on New Year’s Eve that the agreement would be signed by him and the Chinese at the White House on January 15. The Chinese have reportedly modified their travel schedule to accommodate the President’s desired signing date although the Chinese delegation will be headed by Vice-Premier Liu He, not President Xi Jinping. See South China Morning Post, 5 January, 2020, Trade war: China to travel to US on January 13 to sign phase one deal.

According to a fact sheet released by USTR on December 13, 2019, the Phase One agreement has at least seven chapters dealing with (1) intellectual property, (2) technology transfer, (3) agriculture, (4) financial services, (5) currency, (6) expanding trade and (7) dispute resolution. The fact sheet is attached below.

Dec.-13-2019-Fact-Sheet-from-USTR-on-Agreement-between-US-and-PRC

The agreement between the U.S. and China is reportedly 86 pages in length. This compares to the draft agreement that was being circulated in mid-2019 that was 150 pages before major revisions were made by China reducing the text to 105 pages and which led to increased tariffs being imposed by the United States and additional retaliation by China. Important issues remain for phase two including cybersecurity issues, China 2025 related issues on state owned or invested enterprises, state subsidization and other matters.

I. Chapters on Intellectual Property, Technology Transfer, Agriculture, Financial Services and Currency

Because the first five topics have been the subject of bilateral discussions and dispute settlement between the countries for years, the value of the chapters will depend both on the specificity of the obligations identified, the extent to which such obligations go to the provinces and local governments as well as the central government of China and, most importantly the nature and automaticity of the dispute settlement provisions that apply to the obligations undertaken. As reviewed in many USTR reports, China has a long history of making commitments in these areas which have not been implemented or only partially implemented. See, e.g., USTR, 2019 National Trade Estimate Report on Foreign Trade Barriers, pages 97-117, [“2019 NTE Report], https://ustr.gov/sites/default/files/2019_National_Trade_Estimate_Report.pdf.

II. Chapter on Expanding Trade

The expanding trade chapter as the Fact Sheet indicates “includes commitments from China to import various U.S. goods and services over the next two years in a total amount that exceeds China’s annual level of imports for those goods and services in 2017 by no less than $200 billion.” USTR’s 2019 NTE Report indicated that U.S. exports of goods to China were $129.9 billion in 2017 and the U.S. exports of services were $57.6 billion in 2017. Thus, the agreement apparently calls for US exports of goods and services in 2020 and 2021 of at least $387.5 billion/year vs. $187.5 billion in 2017, a level more than twice the 2017 actual levels. The fact sheet suggests that commitments are product specific in terms of increased purchases. Industries will be looking carefully at what is included in this chapter on products or services of interest, seeing whether China waives any retaliatory tariffs on particular products during 2020 and 2021, and evaluating early signs of improved market access. Presumably the Administration and Congress will be monitoring on a monthly basis how commitments are being implemented in both goods and services.

Considering the large decline in U.S. exports of goods to China during the first 10 months of 2019 ($16.1 billion or 17.17%) and for some products in 2018 vs. 2017 or 2016, one may expect “commitments” in a variety of products where a return to 2017 levels or significant increases would appear to be manageable. See e.g,. HS 8800, civil aircraft (2019 10 month decline of $5.3 billion in U.S. domestic exports); HS 1201, soybeans (decline 2016-2018 of $11.1 billion); HS 8701, motor vehicles for transporting people (decline 2017-2018 of $3.7 billion); HS 2709 petroleum oils from crude (2019 10 month decline of $2.7 billion); HS 2707, petroleum gases and other gaseous hydrocarbons (2019 10 month decline of $1.3 billion); HS 8708 parts of tractors and motor vehicles (2019 10 month decline of $813 million); HS 7404, copper waste and scrap (2019 10 month decline of $633 million); HS 4407. wood sawn or chipped more than 6 mm thick (2019 10 month decline of $612 million) ; HS 4403, wood in the rough (2019 10 month decline of $504 million); HS 1007, grain sorghum (2019 10 month decline of $403 million).

Other factors, such as existing or available expanded capacity, needs for worker expansion vs. greater utilization of existing workforce, competitiveness of U.S. products, diversion from third countries or from the U.S., will obviously all have some potential effect on whether commitments can be achieved at a micro level if purchase orders are placed.

For services, it is assumed that significant increases to China are possible with liberalized markets in China.

III. Dispute Resolution

The chapter of Dispute Resolution appears to contain consultation processes at “both the principal level and the working level” and procedures for handling disputes with provisions that “allow each party to take proportionate responsive actions” that a party views as appropriate. This chapter is important both for the specifics and timing of the consultation process and the specifics of how disputes will be handled, the timing of such disputes and any parameters on “responsive actions”. At the end of the day, an agreement with China that is not enforceable will lead back to increased tensions in the near future.

IV. Conclusion

The Phase I agreement has the potential to be an important step in the U.S. efforts to establish a more sustainable trade relationship with China. The Administration deserves credit for aggressively pursuing a reset. Breaking the negotiations into phases carries risks as the more difficult issues remain on the table and are very important in terms of long-term viability of the bilateral trade relationship. Not finding solutions in a single agreement will be viewed by many as weakening the chances for achieving a breakthrough on these critical issues that are left for phase 2.

At the same time, the chapter on “Expanding Trade” is highly unorthodox in terms of its (at least temporarily) invoking managed trade to address the hundreds of barriers that have haunted the ability of the U.S. and others to have market-based results in trade with China. Because several decades of efforts to get China to actually operate on market principles have been unsuccessful and because the WTO rules do not address many of China’s economic system distortions, the chapter and underlying commitments that have been made are an experiment is finding a way forward for economic systems that don’t rationally coexist where there are major countries employing each economic system. The next two years will show whether the experiment provides a possible approach to the coexistence of such different systems in a global economy where companies are already operating in both systems.

Presidential Proclamation 9974 of December 26, 2019 – contains changes to countries eligible for aspects of Africa Growth and Opportunity Act, implements U.S. duty reduction commitments from U.S.-Japan trade agreement and other matters

On December 30, 2019, Presidential Proclamation 9974 was published in the U.S. Federal Register. 84 Fed. Reg. 72,187-72,211. The proclamation addresses a number of trade issues, including:

(1) removing Cameron from beneficial tariff treatment under the African Growth and Opportunity Act (“AGOA”), 19 U.S.C. 2466a, effective January 1, 2020 [see 84 FR 72,187, paragraphs 1-4];

(2) finding that Niger, the Central African Republic, and The Gambia are not eligible for certain preferential access on textiles and apparel under 19 U.S.C. 3721(a) for failure to establish “effective visa systems and related customs procedures” to minimize shipment of nonqualified goods, although Niger and Guinea-Biseau were found to qualify under 19 U.S.C. 3721(c) as lesser developed sub-Suharan countries [see 84 FR 72,187, paragraphs 4-6];

(3) extends through the close of December 31 2020, duty-free access of specified quantities of certain agricultural products (list of products is contained in Annex I to the Proclamation) [see 84 FR 72,187-72,188, paragraphs 7-14 and 84 FR 72, 192, Annex I];

(4) takes actions to implement U.S. obligations undertaken with Japan in the U.S.-Japan trade agreement [see 84 FR 72,188-72,189, paragraphs 15-18 and 84 FR 72,193-72,208, Annexes II and III];

(5) modifications to the tariff schedules in connection with the U.S.-Chile Free Trade Agreement [see 84 FR 72,189-72,190, paragraphs 19-15 and 84 FR 72,209-72,211, Annex IV].

After reviewing the issues and bases for designated actions, the Presidential Proclamation then lays out the actions being implemented by proclamation. 84 FR 72,190-72,211 (including Annexes). Proclamation 9974 is attached below.

12-26-2019-Presidential-Proclamation-to-take-Certain-Actions-under-the-AGOA-and-for-Other-Purposes

The significant trade issue for the United States is obviously implementing the U.S.-Japan trade agreement on tariff reductions and Japan’s participation in the TRQ on beef. As reviewed in prior posts (December 10 and October 26, 2019), the U.S.-Japan trade agreements affect a relatively small amount of U.S. trade with Japan and Japanese trade with the U.S., appear to be largely based on the U.S. desire to obtain parity for U.S. agricultural producers with CPTPP members following the U.S. withdrawal from the TPP agreement and establishing a strong agreement on digital trade with a trading partner with similar high standards as existing U.S. standards. The big question for U.S.companies and workers and their Japanese counterparts is whether either country has the current political bandwidth to put in place an FTA vs. the small market liberalization agreement and digital trade agreement achieved to date.

Turning to the actions on individual Sub-Saharan countries, the importance is almost certainly greater for the African countries than for the U.S. Specifically, for the individual African countries who are losing certain AGOA benefits or finding themselves now entitled, trade flows are relatively minor from a U.S. perspective; from the African country perspecitive, the importance may be significantly greater. For example, the United States in 2018 had imported $63 million of merchandise from Cameroon duty free under AGOA. This was out of total US imports from Cameroon of $212 million ($72 million were otherwise duty-free). U.S. imports from the other Sub-Saharan countries in 2018-2019 have been significantly smaller. Nonetheless, duty-free access remains important for all of these countries going forward.

The extension of the market access for Israeli agricultural products for another year has been occurring annually since the original agreement’s term expired. With all that is on the table for the Trump Administration, it is not clear if the 2004 agreement will be renegotiated in 2020 or simply rolled over for another year at the end of 2020.

Finally, the modifications to the tariff schedule for the US-Chile FTA seem to be largely technical in nature.

With the U.S.-China Phase 1 Agreement to be signed on January 15 (and expected to go into effect 30 days later) and with the USMCA awaiting Senate passage of implementing legislation, 2020 could see some significant reduction of barriers with China and the implementation of USMCA (assuming Canadian passage). But the Presidential Proclamation 9974 helped start 2020 with a modest trade liberalization agreement with Japan and the tweaking of a number of smaller agreements or country participation in parts of AGOA.

U.S. – China Phase 1 Agreement; Opportunities and Challenges for U.S. Agriculture

President Trump and Vice Premier Liu He will sign the Phase 1 Agreement between the U.S. and China on January 15, 2020 according to press reports. While the specifics of the phase 1 agreement are not yet public, the agreement has been reported as having China agree, among other provisions, to increase imports from the U.S. over two years by as much as $200 billion including upping agricultural imports to $40-50 billion/year. If achieved, such purchases would help reduce the massive trade deficit that the U.S. has with China.

There is no doubt that China’s retaliation against U.S. exports, including importantly U.S. agricultural exports has reduced the role of U.S. products in the Chinese market. Thus, Administration efforts to achieve movement by China on its purchases of goods is understandable, particularly with a country with an economic system so different than a market economy. Presumably, China will construe its purchasing obligations as a best efforts one, and the U.S, will view the commitments as more binding. While the latter construction indicates the U.S. is seeking at least partially managed trade with China, that outcome is understandable in light of the failure of China to actually become a market economy since joining the WTO.

To the extent that China in facts ramps up procurement of U.S. agricultural goods, that will obviously be helpful to U.S. agricultural interests. Questions have been raised as to whether $40-50 billion/year in purchases by China are achievable based on past procurement levels and U.S. existing production/exports.

For example, the highest exports of agricultural products from the U.S to China since 2003 were in 2013 and 2014 when domestic exports of HS Chapters 01-24 were $22.6 billion in each year. Soybeans accounted for some 67% of total U.S. agricultural exports in 2016 when U.S. domestic exports were $21 billion. U.S. exports of all agricultural products in 2018 were down to $7.8 billion with soybeans down from $14.2 billion in 2016 to $3.1 billion in 2018, thus accounting for the vast majority of the decline is U.S. agriculture exports to China. Because of some efforts by the Chinese to increase agricultural imports from the U.S. during the second half of 2019, U.S. exports will likely be around $12-13 billion for 2019 (possibly higher depending on actual levels of state directed purchases that ship in the last two months of the year).

The ability to generate exports to China of $40-50 billion depend on market demand in China, competitiveness of U.S. products (or state direction) and the capacity within the U.S. agricultural sector to either ramp up production, ship from inventory or divert product from third countries. With growing per capita GDP in China and with internal production issues on products like pork flowing from disease, it should be the case that Chinese demand for imported agricultural products will increase in the 2020-2021 period.

While U.S. producers have been suffering from low commodity prices for a number of years, total U.S. agricultural exports have not changed significantly during the 2016-October 2019 period, raising questions on the ability of the U.S. to dramatically expand exports to China without diverting product from third countries. For example, total U.S. agricultural exports were $134.9 billion in 2016, $137.1 billion in 2017, $138.5 billion in 2018 and $115.8 billion in the January-October period of 2018 down to $111.0 billion in the first ten months of 2019.

When the U.S. shipped $21.0 billion of agricultural products to China in 2016, China accounted for 15.6% of U.S. exports. For there not to be diversion of exports from other countries, U.S. exports in 2020 would need to $170.7 billion for the U.S. to export $40 billion of agricultural products to China and $180.7 billion for the U.S. to export $50 billion to China with China accounting for 23.4% – 27.7% of total exports. The total dollar value of exports can fluctuate based on level of commodity prices as well as changes in volume shipped. When commodity prices were higher, US exports had been as high as $149.2 billion in 2014. Moreover, when there was strong upward global demand and upward pressure on prices, U.S. agricultural exports increases from $69.0 billion in 2006 to $112.8 billion in 2008. Thus, there is at least one period where dramatic growth in US global exports of agricultural products was achieved over a two year period.

The U.S. will continue to face significant competition for sales in China of agricultural products, making the large growth identified in the press about the agreement more challenging, though partially offset by the role of the state in China particularly in many agricultural products. For example, a number of important agricultural exporting countries have FTAs with China (New Zealand and Australia) which will likely leave many U.S. agricultural products less competitive even assuming that retaliatory tariffs on particular products from the U.S. are waived to permit expanded U.S. exports. Beef and wheat would be two likely product areas affected by the FTA tariff differential. Similarly, other major exporters, like Brazil, have provided alternative sources for key agricultural products like soybeans and will likely compete hard to remain important suppliers based on their expanded production levels and supply record in the 2018-2019 time period.

USDA has published several GAIN reports looking at (1) 2020 reduced MFN tariff rates on agricultural products and (2) the current retaliatory tariffs on U.S. agricultural products. The latter can be waived by China if it chooses to increase U.S. competitiveness. The two GAIN reports are embedded below and show the relatively high MFN tariffs on many agricultural products applied by China and the large retaliatory tariffs U.S. agricultural producers currently face on many agricultural products.

China-Lowers-Applied-MFN-Tariff-Rates-on-Selected-Agricultural-Products_Beijing_China-Peoples-Republic-of_12-25-2019

China-Calls-Off-Additional-Tariffs-on-US-Products-Planned-for-December-15_Beijing_China-Peoples-Republic-of_12-15-2019-1

Changing weather patterns and the uncertainty of future direction on retaliatory tariffs (U.S. and China will have the ability to reimpose tariffs or add tariffs based on implementation) may make expanding U.S. production problematic at least in the immediate future.

Thus, there is at least a fair amount of uncertainty as to how the targeted purchase levels in agriculture by China will be achieved by U.S. producers/ exporters in 2020-2021 and what the agreement will mean for opportunities going into the future.

That said, there is no doubt that the Chinese market is an important one for agricultural goods. China has used retaliatory tariffs to drastically reduce U.S. exports in 2018-2019, and the U.S. has had many ongoing challenges with SPS (sanitary/phytosanitary) or TBT (technical barriers to trade) issues in China shutting out competitive U.S. products. The phase 1 agreement when signed and implemented offers important opportunities for U.S. producers. Soybean producers, wheat producers, pork and beef producers, tree nut producers and many others will hopefully find significantly expanded opportunities in China. The Administration has been clear that any agreement must be enforceable and has indicated that there are enforcement mechanisms in the new agreement. Time will tell how the new agreement, when it enters into force in the second half of February 2020, works in fact and whether the U.S. and China have managed to find a way forward that will work for both countries at least on the Phase 1 agreement issues.

WTO Reform – Will Limits on Who Enjoys Special and Differential Treatment Be Achieved?

The GATT had and now the WTO has a system of self-declared status as a developing country. The vast majority of WTO members have declared themselves to be developing countries. Some WTO members are categorized by the United Nations as Least Developed Countries (“LDCs”). Indeed the WTO webpage indicates that 36 of 47 LDCs are currently WTO members and that another eight countries who are listed as LDCs by the UN are in the process of negotiating accession to the WTO. “There are no WTO definitions of ‘developed’ or ‘developing’ countries. Developing countries in the WTO are designated on the basis of self-selection although this is not necessarily automatically accepted in all WTO bodies.” https://www.wto.org/english/thewto_e/whatis_e/tif_e/org7_e.htm.

The relevance of a WTO member declaring themselves to be a developing country has to do with access to special and differential treatment provisions in virtually every agreement and the likelihood of reduced trade liberalization obligations on the member and in any ongoing negotiations. Thus, in the Uruguay Round, developing countries typically faced lower percent reductions on tariffs and were given longer time periods to implement such reductions than were true for developed countries. A report by the WTO Secretariat reviews Special and Differential Treatment (“S&D”) by agreement and categorizes the S&D provisions under one of the following six groupings (WT/COMTD/W/239 at 4) which are quoted as presented:

  1. provisions aimed at increasing the trade opportunities of developing country Members;
  2. provisions under which WTO Members should safeguard the itnerests of developing country Members;
  3. flexibility of commitments, of action, and use of policy instruments;
  4. transitional time-periods;
  5. technical assistance;
  6. provisions relating to LDC members.

The listing of S&D provisions in the Secretariat document is provided as an attachment below along with a correction.

WTCOMTDW239

WTCOMTDW239C1

With the progress many countries or customs territories have made during their GATT and/or WTO membership, the self-selection designation process has raised concerns by other members about whether certain Members are carrying their weight in terms of market liberalization. Indeed, some have attributed the failure of the Doha Agenda to conclude in 2008 to what certain Members who have declared themselves to be developing countries were willing to do in terms of liberalization versus other major Members who are not “developing”. The issue of who should benefit from Special and Differential treatment takes as a given that all LDCs should receive such benefits. The issue is about whether those non-LDCs who have experienced strong growth and significant economic advancement since the start of the WTO should continue to enjoy those benefits in new agreements.

The United States at the beginning of 2019 made a major submission entitled “An Undifferentiated WTO: Self-Declared Development Status Risks Institutional Irrelevance”. WT/GC/W/757, 16 January 2019. A revision was submitted in February and was followed by a draft General Council Decision to limit who can claim S&D benefits in future negotiations and agreements. WT/GC/W/747/Rev.1; WT/GC/W/764. The U.S. proposal in February was as follows:

“The General Council,

Acknowledging that full implementation of WTO rules as negotiated by Members can contribute to economic growth and development and the need to take steps to facilitate full implementation;

Recognizing the great strides made by several WTO Members since the establishment of the WTO in accomplishing the goals set out in the Marrakesh Agreement Establishing the World Trade Organization, of ‘raising standards of living, ensuring full employment and a large and steadily growing volume of real income and effective demand, and expanding the production of and trade in goods and services, while allowing for the optimal use of the world’s resources in accordance with
the objective of sustainable development…;’

Recognizing that not all WTO Members have enjoyed equal rates of economic growth and development since the establishment of the WTO;

Recognizing the plight of the least-developed countries and the need to ensure their effective participation in the world trading system, and to take further measures to improve their trading opportunities;

Recognizing that reserving flexibilities for those WTO Members with the greatest difficulty integrating into the multilateral trading system can open new export opportunities for such countries; and

Desiring to strengthen the negotiating function of the WTO to produce high-standard, reciprocal and mutually advantageous arrangements directed to the substantial reduction of tariffs and other barriers to trade and to the elimination of discriminatory treatment in international trade relations;

Agrees as follows:

“To facilitate the full implementation of future WTO agreements and to ensure that the maximum benefits of trade accrue to those Members with the greatest difficulty integrating into the multilateral trading system, the following categories of Members will not avail themselves of special and
differential treatment in current and future WTO negotiations:

“i. A WTO Member that is a Member of the Organization for Economic Cooperation and Development (OECD), or a WTO Member that has begun the accession process to the OECD;

“ii. A WTO Member that is a member of the Group of 20 (G20);

“iii. A WTO Member that is classified as a “high income” country by the World Bank; or

“iv. A WTO Member that accounts for no less than 0.5 per cent of global merchandise trade (imports and exports).

“Nothing in this Decision precludes reaching agreement that in sector-specific negotiations other Members are also ineligible for special and differential treatment.”

The self-designation of developing country within the GATT and the WTO has generally been seen by Members and outside observers as a “third rail” that could not be modified because of the certain opposition from those enjoying S&D benefits. Not surprisingly, the U.S. proposal has met with opposition from some important WTO Members who have declared themselves to be developing countries, including China, India, South Africa, Venezuela, Bolivia, Kenya and Cuba. See, e.g., WT/GC/W/765 and 765/Rev.1 (it does not appear that the U.S. proposal would affect the last four Members listed).

The U.S. has included the topic in each General Council meeting since its submissions, has engaged in discussions with many WTO members, and submitted a revised proposal in November 2019, WT/GC/W/764/Rev.1, which incorporated language reflecting its arguments throughout the year that

(1) the proposal would not require any country to declare itself not a developing country, just limit whether they received blanket S&D coverage in new agreements;

(2) the change would affect new agreements/negotiations and not affect S&D from existing arrangements;

(3) Members had the right to seek special accommodations on issues of particular importance to them.

There was also clarification of the third and fourth criteria for non-eligibility to reflect a three year period of meeting the criteria.

A few WTO Members who would be subject to the elimination of automatic entitlement to new S&D provisions if the U.S. proposal were adopted by the General Council have indicated that they will forego automatic S&D from future negotiations/agreements. These Members to date are Korea, Singapore and Brazil.

While the strong opposition from major WTO Members such as China, India and South Africa would indicate the U.S. proposal is not likely to be adopted in the foreseeable future, the U.S. has also indicate that it will oppose S&D provisions in future agreements if they are applicable to certain Members.

Indeed, President Trump on July 26, 2019 issued a Memorandum on Reforming Developing-Country Status in the World Trade Organization. https://www.whitehouse.gov/presidential-actions/memorandum-reforming-developing-country-status-world-trade-organization/. The Memo notes that many WTO members who have declared themselves developing countries are “patently unsupportable in light of current economic circumstances. For example, 7 out of the 10 wealthiest economies in the world as measured by Gross Domestic Product per capita on a purchasing-power parity basis – Brunei, Hong Kong, Kuwait, Macao, Qatar, Singapore, and the United Arab Emirates – currently claim developing country status. Mexico, South Korea, and Turkey – members of both the G20 and the Organization for Economic Cooperation and Development (OECD) – also claim that status.” “China most dramatically illustrates the point.”

The memo goes on to instruct USTR to use all available means to secure changes at the WTO to prevent unwarranted use of S&D provisions and authorizes USTR to take action after 90 days if substantial progress is not made to no longer treat certain WTO members as developing countries and to not support any such country’s efforts to join the OECD.

USTR Robert Lighthizer issued a statement the day of the President’s Memo that reflected the position of the Administration:

“For far too long, wealthy countries have abused the WTO by exempting themselves from its rules through the use of special and differential treatment. This unfairness disadvantages Americans who ply by the rules, undermines negotiations at the WTO, and creates an unlevel playing field. I applaud the President’s leadership in demanding fairness and accountability at the WTO, and I look forward to implementing the President’s directive.” https://ustr.gov/about-us/policy-offices/press-office/press-releases/2019/july/ustr-robert-lighthizer-statement

Obviously trading partners have had an ongoing interest in the President’s Memo and how it is being implemented by the USTR. At the December 9, 2019 General Council meeting, as part of the U.S. discussion of its proposal, Ambassador Dennis Shea (Deputy USTR) stated as follows:

“Finally, I’d like to provide an update on the memorandum to USTR from the President of the United States in July.

“The President instructed USTR to no longer treat as a developing country for the purposes of the WTO any self-declared developing country that, in the USTR’s judgment, can inappropriately seek S&D in current and
future WTO negotiations. Some Members have asked how the USTR will carry this out.

“USTR consulted with the interagency Trade Policy Staff Committee on this issue. The interagency agreed that if a S&D provision is introduced in a WTO negotiation, the United States will indicate that it will not agree to that provision unless certain Members forego use of that provision. The United States will also use the TPR process to continue to press countries that we believe should not be claiming blanket S&D in future agreements. In addition, USTR is continuing to review additional steps that can be taken.

“The President issued two other instructions to the USTR.

“The USTR will not support the application for OECD membership of any self-declared developing country that, in the USTR’s judgment, can inappropriately seek S&D in current and future WTO negotiations.

“Also, USTR shall publish on its website a list of all self-declared developing countries that the USTR believes can inappropriately seek S&D in WTO negotiations.

“Members have asked when USTR will publish the list. USTR is consulting on this issue. The memo did not require USTR to publish the list by a speci􀃌c date.

“I’d like to emphasize two important aspects about the memo and the U.S. proposal that we would like Members to keep in mind.

“First, the President’s memo did not instruct USTR to ask any Member to change its self-declared development status. The U.S. proposal does not ask this of any Member, either.

“Second, the President’s memo did not instruct USTR to ask any Member to forego S&D in existing WTO agreements. The U.S. proposal does not ask this of any Member, either.”

https://geneva.usmission.gov/2019/12/09/ambassador-shea-procedures-to-strengthen-the-negotiating-function-of-the-wto/

As S&D provisions are part of every negotiation, the U.S. position obviously creates challenges to completing ongoing negotiations in any area, such as negotiations on fish subsidies, agriculture, digital trade without more countries agreeing not to seek S&D privileges or at least foregoing such privileges in certain agreements where there is U.S. opposition.

A quick look at some of the countries whom the U.S. proposal would remove from automatic S&D eligibility for new negotiations include the following:

Member of the OECD or in the accession process:

Chile, South Korea, Mexico, Turkey, Colombia, Costa Rica.

Member of the G-20:

India, South Africa, Turkey, Argentina, Brazil, Mexico, China, Indonesia, South Korea.

Classified by World Banks as “high income” for 2016-2018 (includes):

Antigua and Barbuda, Bahrain, Brunei Darussalam, Chile, Hong Kong, South Korea, Kuwait, Macao, Panama, Qatar, Seychelles, Singapore, St. Kitts and Nevis, Trinidad and Tobago, United Arab Emirates, Uruguay.

0.5% of Merchandise Trade (includes):

China, South Korea, Hong Kong, Mexico, Singapore, United Arab Emirates, Thailand, Malaysia, Vietnam, Brazil, Indonesia, Turkey, South Africa.

In light of the experience of the last two years on the need to reform the WTO Appellate Body, there should be little doubt that the United States will continue to push hard to achieve a more rational approach to the assumption of obligations at the WTO in terms of who should be eligible for S&D benefits in new agreements. Without movement by some major countries who currently enjoy S&D benefits to forego automatic eligibility in new agreements, the challenging negotiating environment at the WTO that has prevailed for many years now will become more challenging in 2020.

European Union Moves to Authorize Retaliation in Disputes Where There is No Alternative to the Appellate Body Pursued

With the WTO’s Appellate Body not able to handle appeals at the present time because of diminished membership, the EU has put forward a proposal that would authorize the EU to retaliate whenever a dispute where the EU has received what it views as a favorable ruling is appealed by the other party during the period when any such appeal cannot be considered by the Appellate Body. They have also proposed such actions in bilateral agreements where they view the other party as frustrating dispute settlement. https://ec.europa.eu/trade/policy/policy-making/enforcement-and-protection/. http://www.europarl.europa.eu/RegData/docs_autres_institutions/commission_europeenne/com/2019/0623/COM_COM(2019)0623_EN.pdf

The proposal is not adopted as yet, and the EU portrays the initiative as a way of protecting EU interests and consistent with its efforts to increase enforcement of its negotiated trading rights. This proposal, if adopted, will put pressure on smaller trading partners to join alternative dispute settlement approaches such as the arbitration approach the EU has agreed to with Canada and separately with Norway.

The proposal doesn’t address what the EU expects trading partners to take against EU products where it files an appeal (such as the EU did against the second 21.5 panel decision on December 6 which found against the EU in terms of compliance with its obligations on Airbus). WT/DS316/43 (11 December 2019)(notice of appeal); WT/DS316/RW2 (2 December 2019)(panel report on 2nd 21.5 request). But at least for larger WTO members, if the EU files an appeal that will not be heard during this interim period while Members seek ways to resolve open issues, the EU proposal invites similar action by such other Members. Retaliation has, of course, already been authorized for the U.S. against the EU for its WTO-inconsistent actions on Airbus. But should there be other cases that the US (or other countries who opt not to use arbitration under DSU Article 25 or not to simply adopt panel decisions without appeal) brings against the EU which the EU loses in part or whole, the EU is inviting retaliation without opportunity to correct its practices and without arbitration of the amount of retaliation being available. Virtually every Member who has been authorized to take retaliation has been subject to arbitration with amount authorized typically significantly less than the retaliating Member has sought. Thus, the EU may find its approach has costs for EU industry as well.

At the last Dispute Settlement Body (“DSB”) meeting of 2019 held on December 18, the effort to get the process for selecting Appellate Body members started was again unsuccessful because of opposition from the United States. So there will be some considerable period when there is no functioning Appellate Body and only four of the appeals pending on December 10 will be completed by the AB members who were involved in appeals prior to December 10. However, besides the EU efforts with Canada and Norway (which is reportedly being pursued with additional countries), there are alternative approaches being explored by other WTO Members including agreeing to adopt panel decisions without appeals or developing a different arbitration approach to that presented by the EU (e.g., reports that Australia and Brazil are exploring a different system).

For the United States, the U.S. indicated that it had filed on December 18th an appeal from a panel report in DS436, India’s resort to Article 21.5 of the DSU in its challenge to U.S. countervailing duty orders on hot-rolled steel products. The notice of appeal from the U.S. (WT/DS436/21) is not yet available on the WTO webpage. At the DSB meeting, the U.S. made the following comments on the WTO dispute settlement system:

“And the United States is determined to bring about real WTO reform, including to ensure that the WTO dispute settlement system reinforces the WTO’s critical negotiating and monitoring functions, and does not undermine those functions by overreaching gap-filling.

“As discussions among Members continue, the dispute settlement system continues to function.

“The central objective of that system remains unchanged: to assist the parties in the resolution of a dispute. As before, Members have many methods to resolve a dispute, including through bilateral engagement and mutually agreed solutions.

“For instance, today, the United States appealed the compliance Panel’s report in DS436.

“While no division can be established to hear this appeal at this time, the United States will confer with India so the parties may determine the way forward in this dispute, including whether the matters at issue may be resolved at this stage or to consider alternatives to the appellate process.

“Consistent with the aim of the WTO dispute settlement system, the parties should make efforts to find a positive solution to their dispute, and this remains the U.S. preference.

“And the United States will continue to insist that WTO rules be followed by the WTO dispute settlement system. We will continue our efforts and our discussions with Members to seek a solution on these important issues.”

Statements by the United States at the Meeting of the WTO Dispute Settlement Body, Geneva, December 18, 2019, “6. Appellate Body Appointments, Proposal by Some WTO Members (WT/DSB/W/609/Rev.15), https://geneva.usmission.gov/wp-content/uploads/sites/290/Dec18.DSB_.Stmt_.as-deliv.fin_.public-1.pdf.

It is certainly the case that the U.S. and the EU have very different views of the role of dispute settlement and the Appellate Body in particular and whether there are major problems with the operation of dispute settlement over the first twenty-five years of WTO operation. But the EU is traveling down a path of increasingly ignoring WTO limitations on its actions, a charge that they make with regard to the United States.

For example, when a WTO member disagrees with an action of a trading partner, it is expected to seek consultations and, if necessary, file a dispute, await resolution of the dispute, permit a reasonable period of time for implementation if a violation was found before retaliation is permitted. Yet the EU (followed by many other countries — Canada, Mexico, China, Russia, Turkey, India) created a facially false basis for retaliating against the United States without pursuing the required steps, when the U.S. took action under a domestic law (Section 232 of the Trade Expansion Act of 1962, as amended) on imports of steel and aluminum based on a report finding threats to U.S. national security from such imports. The EU and the other countries have claimed the action was a disguised safeguard action permitting immediate retaliation. WTO members don’t have to agree with another Member’s actions, but unilateral action is not authorized and the creation of false predicates to justify retaliation don’t change the action from being unilateral and unjustified.

The proposed regulation represents one more step by the EU to create its own system of enforcement regardless of the agreements to which it is a party using circumstances it does not like to justify its own unilateral actions. Let’s hope that whether adopted or not, the EU proceeds cautiously and reflects on its own actions consistency with international agreements.

Revisions to the US-Mexico-Canada Agreement Gains Support of Labor and House Democrats

The Trump Administration has sought to replace/update NAFTA as a priority since taking office. The Obama Administration also wanted to update NAFTA but viewed that as doable within the context of the Trans Pacific Partnership agreement talks. When the Trump Administration withdrew from the TPP in 2017, updating/revising NAFTA became the preferred approach.

In a post from November 16, 2019, I reviewed the possibility that USMCA, if revisions were made to address Democratic concerns, could be an example of bipartisan trade legislation. See https://currentthoughtsontrade.com/2019/11/16/usmca-a-return-to-bipartisan-trade-legislation/.

For roughly a year, the Trump Administration through USTR Lighthizer and the House Democrats have been pursuing negotiations on changes deemed necessary by the Democrats for the USMCA to be acceptable to them. Enforcement of labor and environment provisions and issues surrounding biologics have been at the core of the concerns being explored. Labor and environmental groups have pressed hard for changes that would address their concerns, and the problems they have experienced under other agreements.

In recent weeks, lead negotiators from Mexico and Canada were in Washington to review changes the Administration was seeking and providing further feedback/reactions to whether such changes were acceptable. A meeting in Mexico City today between the main negotiators is intended to permit agreement on revisions acceptable to the three countries.

Earlier today, the President of the AFL-CIO, Richard Trumka, expressed support for the modifications to the USMCA that had been negotiated by the Democratic team with the Trump Administration. Speaker of the House Nancy Pelosi and House Ways and Means Chairman Richard Neal indicated that the House Democrats believed the revised agreement (as reflected in the modifications negotiated with the Trump Administration) was far superior to both NAFTA and the USMCA that had previously been signed by the governments. Indeed, assuming agreement by the three countries to the revisions this afternoon, USMCA as revised, will be ready for Congressional consideration as early as next week.

While the text of the modifications is not yet public, the House Ways and Means Committee Chairman has released a fact sheet which reviews issues pursued by the Democrats that they perceive have been successfully resolved. The text of the fact sheet is included as a PDF below.

USMCA-win-factsheet-

If the USMCA is revised as expected, the timetable in the Congress will likely be expedited and will be supported by large parts of the business community whether agriculture, manufacturing, services and will include support from labor and other groups.

When the text of the agreed modifications is available, the revisions will be added to the comparison documents provided in the prior post that compare USMCA to NAFTA and the TPP agreement that the U.S. had signed (before withdrawing).

To the extent that the USMCA becomes a model for other agreements going forward, there should be greater likelihood of bipartisan support for future agreements just as has developed for USMCA.

U.S.-Japan Trade Agreements to Go Into Effect on January 1, 2020

The two trade agreements that Prime Minister Abe and President Trump announced on September 25, 2019 and that were signed on October 7, 2019 will go into effect at the beginning of 2020.

The U.S. having notified Congress of its intent to enter into negotiations with Japan in 2018, limited what it negotiated in these current agreements to tariff reductions and digital trade (presumably requiring no U.S. law changes) and thus will be handled by Presidential Proclamation. Questions about compliance with consultation requirements have been raised by House Ways and Means Democrats, and there are questions about whether such partial agreements are consistent with U.S. and Japanese obligations under the WTO (GATT 1994 Art. XXIV). Nonetheless, USTR Lighthizer has indicated that following completion of the Japanese approval process last week that President Trump will be issuing a Proclamation this week (week of December 9).

In Japan, the Lower House of the Diet approved the deal in November and the Upper House last week.

The two countries will implement the agreements on some tariff reductions/eliminations and on digital trade on January 1, 2020.

As reported in the Japanese press, Japan is lowering or removing tariffs on various agricultural products to put the U.S. on a level playing field with other countries who continued with the Trans Pacific Partnership agreement after the U.S. withdrew. The value of U.S. agriculture exports covered by reductions or eliminations was listed at $7.2 billion. See The Japan Times, Upper House approves U.S.-Japan trade deal, https://www.japantimes.co.jp/news/2019/12/04/business/economy-business/upper-house-approves-united-states-japan-trade-deal/#.Xe-8w-hKiUk.

In an earlier post, the loss of market share by U.S. agriculture exporters of key commodities in 2019 because of the disadvantage in tariff rates vs. other major agricultural exporters was reviewed. The reduction in US exports has continued through October based on data now available. Thus, U.S. exports of corn (HS 1005) to Japan are down 24.7% in the first ten months of 2019; pork exports (HS 0203) are down 7.58%; fresh or chilled beef exports (HS 0201) are down 8.55%; wheat/meslin exports (HS 1001) are down 13.25%; frozen beef exports (HS 0202) are down 18.05%; frozen fish exports (HS 0303) are down 29.85% and fresh or dried nut exports (HS 0802) are down 7.39%.

The United States is reducing or eliminating tariffs on imports from Japan that in 2018 were around $7.1 billion. There are a few agriculture products but most are manufactured goods. The two countries have committed to starting negotiations on a broader deal (phase 2) to begin in April or May 2020. Total imports from Japan in 2018 were $143.7 billion, so the phase 1 coverage addresses only 4.9% of U.S. imports from Japan. Many other imports from Japan are already duty free. Thus, the products from Japan covered by the phase 1 agreement subject to reductions or eliminations in tariffs accounted for 9.8% of the calculated duties on total U.S. imports from Japan in 2018.

Nearly half of all duties the U.S. collected on imports from Japan occurred on motor vehicles and parts (HS Chapter 87)(49.1% of total collected duties in 2018). While elimination of duties on motor vehicles is a high priority for Japan, any reduction will be part of the phase 2 negotiations.

For U.S. agriculture producers who have had a very difficult time from trade retaliation by many trading partners over the last two years. the phase 1 tariff agreement is welcome news.

As both the U.S. and Japan have high level digital trade systems, the main importance of the digital trade agreement will be as a model for efforts with other countries going forward.

Conclusion

The Trump Administration’s push for a phase 1 deal with Japan to offset significant disadvantages suffered by U.S. agriculture exporters from the U.S. withdrawal from the TPP has received buy-in from Japan (presumably in part to limit the likelihood of action against Japan from the Section 232 investigations on automobiles and parts)and despite the questions on how this piecemeal approach comports with international obligations of both countries.

In what is looking to be a busy finish to 2019 for the United States on trade issues — USMCA appearing close to consideration by the U.S. Congress (the revisions to the agreement to be addressed in Mexico today (Dec. 10) and reportedly sufficient to have the revised agreement go to the House next week); a possible phase 1 US-China deal still possible ahead of new tariffs kicking in on imports from China on December 15 — the U.S.-Japan trade agreement is a market opening event of some importance for U.S. agriculture and the agreement on digital trade is one with a major trading partner and reflects U.S. ambitions.