Japan

China in the WTO – The U.S. View of China’s Compliance With Its Obligations

China became a member of the WTO on December 11, 2001. Because of the enormous differences in economic systems and the distance of needed reforms in China to make it a market economy, the Protocol of Accession and Working Party Report are exceptional in terms of topics covered, areas where China had significant work before being WTO compliant and the inclusion of special provisions to protect the interests of other WTO Members while China continued on its path of reform.

Because of China’s size and importance globally, the U.S. Congress passed legislation which includes a requirement for the U.S. Trade Representative to provide an annual report on the U.S. view of China’s Compliance with its WTO obligations. On March 6, 2020, USTR released its 18th report on China’s WTO compliance, a one hundred and ninety-two page document. The report consists of a executive summary, a section reviewing the U.S. assessment of China’s WTO membership, a section reviewing prior U.S. efforts to address trade distortions caused by China’s policies, a section on the new U.S. strategy to address China’s trade distortions, a section reviewing the mechanisms used to engage China, a section reviewing U.S. ongoing concerns and a lengthy appendix that provides greater detail on many issues. See 2019 Report to Congress on China’s WTO Compliance, https://ustr.gov/sites/default/files/2019_Report_on_China%E2%80%99s_WTO_Compliance.pdf.

The report provides a very good overview of the wide range of issues on which the United States has ongoing concerns about China’s actions and compliance with WTO obligations. While some of the concerns are supposed to be addressed in the Phase 1 Agreement the United States and China have entered into, many of the concerns are not yet addressed by China. Some of these remaining issues will be subject to upcoming negotiations on a Phase 2 Agreement. Others may be addressed through bilateral consultations, through specific dispute settlement cases , or through possible modifications to WTO rules or by other actions by the United States.

Executive Summary

The U.S. Administration views China as having a poor record on compliance with many parts of its WTO obligations. The Administration views such non-compliance and the continued nonmarket economic system in China as posing major distortions for China’s trading partners. The Executive Summary of this year’s report (pages 4-5) provides an overview of the concerns and actions being taken by the United States:

“In our 2017 and 2018 reports, we provided the Administration’s assessment of China’s WTO membership, the unique and very serious challenges that China’s trade policies and practices pose for the multilateral trading system and the effectiveness of the strategies that had been pursued to address the China problem in prior years. We also identified the critical need for new and more effective strategies – including taking actions outside the WTO where necessary – to address the challenges presented by China’s non-market economic system. In this year’s report, we focus on the positive outcomes to date of the Administration’s new and more effective strategy for engaging China, which has led to the signing of an historic trade agreement with China. We also highlight the important issues that remain to be addressed in our trade relationship with China.

“As we previously documented, China’s record of compliance with WTO rules has been poor. China has continued to embrace a state-led, mercantilist approach to the economy and trade, despite WTO members’ expectations – and China’s own representations – that China would transform its economy and pursue the open, market-oriented policies endorsed by the WTO. At the same time, China’s non-market approach has imposed, and continues to impose, substantial costs on WTO members.

“Over the past nearly two decades, a variety of bilateral and multilateral efforts were pursued by the United States and other WTO members to address the unique challenges presented by China’s WTO membership. However, even though these efforts were persistent, they did not result in meaningful changes in China’s approach to the economy and trade.

“In our past reports, we identified and explained the numerous policies and practices pursued by China that harm and disadvantage U.S. companies and workers, often severely. We also catalogued the United States’ persistent yet unsuccessful efforts to resolve the many concerns that have arisen in our trade relationship with China. We found that a consistent pattern existed where the United States raised a particular concern, China specifically promised to address that concern, and China’s promise was not fulfilled.

“The costs associated with China’s unfair and distortive policies and practices have been substantial. For example, China’s non-market economic system and the industrial policies that flow from it have systematically distorted critical sectors of the global economy such as steel and aluminum, devastating markets in the United States and other industrialized countries. China also continues to block valuable sectors of its economy from foreign competition, particularly services sectors. At the same time, China’s industrial policies are increasingly responsible for displacing companies in new, emerging sectors of the global economy, as the Chinese government and the Chinese Communist Party powerfully intervene on behalf of China’s domestic industries. Companies in economies disciplined by the market cannot effectively compete with both Chinese companies and the Chinese state.

“Faced with these realities, this Administration announced two years ago that it would be pursuing a new, more aggressive approach to the United States’ engagement of China. We explained that the Administration would defend U.S. companies and workers from China’s unfair trading practices and would seek to restore balance to the trade relationship between the United States and China. As part of these efforts, the United States would take all appropriate actions to ensure that the costs of China’s non-market economic system are borne by China, not by the United States. The United States also would continue to encourage China to make fundamental structural changes to its approach to the economy and trade consistent with the open, market-oriented approach pursued by other WTO members, which is rooted in the principles of non-discrimination, market access, reciprocity, fairness, and transparency. As we explained, if undertaken by China, these changes would do more than simply ease the growing trade tensions with its trading partners. These changes would also benefit China, by placing its economy on a more sustainable path, and would contribute to the growth of the U.S. economy and the global economy.

“The Administration based this new approach on the following assessments: (1) WTO membership comes with expectations that an acceding member not only will strictly adhere to WTO rules, but also will support and pursue open, market-oriented policies; (2) China has failed to comply with these expectations; (3) in recent years, China has moved further away from open, market-oriented policies and has more fully embraced a state-led, mercantilist approach to the economy and trade; and (4) China’s market-distorting policies and practices harm and disadvantage its fellow WTO members, even as China reaps enormous benefits from its WTO membership.

“Consistent with this more aggressive approach to China, the Administration is now using all available tools – including domestic trade remedies, bilateral negotiations, WTO litigation, and strategic engagement with like-minded trading partners – to respond to the unique and very serious challenges presented by China. But, the goal for the United States remains the same. The United States seeks a trade relationship with China that is fair, reciprocal, and balanced.

“Over the past year, the United States’ new approach to China began to demonstrate key progress with the signing of a “Phase One” economic and trade agreement in January 2020. This historic agreement requires structural reforms and other changes to China’s economic and trade regime in the areas of intellectual property, technology transfer, agriculture, financial services, and currency and foreign exchange. The agreement also includes a commitment by China that it will make substantial additional purchases of U.S. goods and services in the coming years. Importantly, the agreement establishes a strong dispute resolution system that ensures prompt and effective implementation and enforcement.

“Because the Phase One agreement does not cover all of the United States’ concerns, the United States will turn to Phase Two of its trade negotiations with China in order to secure resolutions to important outstanding issues. These discussions will focus on intellectual property, technology transfer, and services market access issues that were not addressed in the Phase One agreement as well as critical issues in areas such as excess capacity, subsidies, state-owned enterprises, cybersecurity, data localization and cross-border data transfers, pharmaceuticals and medical devices, competition law enforcement, regulatory transparency, and standards.”

Key U.S. Concerns

The bulk of the report lays out key U.S. concerns on a wide range of topics where China’s laws, regulations, policies and actions either deviate from WTO requirements or create significant market distortions. A list of the topics covered follows (pages 30-54 of the report) broken into six main topics and subtopics:

Industrial Policies including (1) Made In China 2025 Industrial Plan; (2) Subsidies; (3) Excess Capaciy; (4) Technology Transfer; (5) Indigenous Innovation; (6) Investment Restrictions; (7) Export Restraints; (8) Value-added Tax Rebates and Related Policies: (9) Import Ban on Remanufactured Products; (10) Import Ban on Recyclable Materials; (11) Standards; (12)
Secure and Controllable Policies; (13) Encryption; (14) Government Procurement; (15) Trade Remedies.

Intellectual Property Rights including (1) Trade Secrets; (2) Bad Faith Trademark Registration; (3) Pharmaceuticals; (4) Online Infringement; (5) Counterfeit Goods.

Agriculture including (1) Agricultural Domestic Support; (2) Tariff-rate Quota Administration; (3) Agricultural Biotechnology Approvals; (4) Food Safety Law; (5) Poultry; (6) Beef; (7) Pork; (8) Horticultural Products; (9)
Value-added Tax Rebates and Related Policies.

Services including (1) Banking Services; (2) Securities, Asset Management, and Future Services; (3) Insurance Services; (4) Electronic Payment Services; (5) Internet-enabled Payment Services; (6) Telecommunications Services; (7) Internet Regulatory Regime; (8) Voice-over-Internet Protocol Services; (9) Cloud Computing Services; (10) Theatrical Films; (11) Audio-visual and Related Services; (12) Online Video and Entertainment Software Services; (13) Express Delivery Services; (14) Legal Services; (15) Cross-border Data Transfers and Data Localization.

Transparency including (1) Publication of Trade-related Measures; (2)
Notice-and-comment Procedures; (3) Translations.

Legal Framework including (1) Administrative Licensing; (2) Competition Policy.

Most of the topics are longstanding areas of concern for U.S. businesses and the current and prior Administrations. Some are being addressed at least in part in the Phase 1 Agreement.

The mere fact that so many issues remain on the U.S. agenda with China despite years of high level meetings, WTO disputes and other engagements is a reflection of the challenges the U.S. and many other WTO Members have had with China honoring commitments it has made as a Member of the WTO.

Consider the electronic payment services topic as just one example of the areas of interest for the U.S. China made commitments to open this sector by 2006. Yet, despite consultations, a dispute at the WTO, a subsequent commitment by China to comply in 2013, the market remains closed to foreign service suppliers to the present time. China has new commitments to open the market as part of Phase 1 Agreement. Below is the USTR write-up in this year’s report (pages 48-49):

“In 2019, China continued to place unwarranted restrictions on foreign companies, including major U.S. credit and debit card processing companies, which have been seeking to supply electronic payment services to banks and other businesses that issue or accept credit and debit cards in China. In a WTO case that it launched in 2010, the United States argued that China had committed in its WTO accession agreement to open up this sector in 2006, and a WTO panel agreed with the United States in a decision issued in 2012. China subsequently agreed to comply with the WTO panel’s rulings in 2013, but China did not take needed steps even to allow foreign suppliers to apply for licenses until June 2017, when China’s regulator – the PBOC – finalized the establishment of a two-step licensing process in which a supplier must first complete one year of preparatory work before even being able to apply for an actual license.

“Currently, as of January 2020, over six years after China had promised to comply with the WTO’s rulings, no U.S. supplier of electronic payment services has been able to secure the license needed to operate in China’s market due largely to delays caused by PBOC. Indeed, at times, PBOC refused even to accept applications to begin preparatory work from U.S. suppliers, the first of two required steps in the licensing process.

“Throughout the time that China has actively delayed opening up its market to foreign suppliers, China’s national champion, China Union Pay, has used its exclusive access to domestic currency transactions in the China market, and the revenues that come with it, to support its efforts to build out its electronic payment services network abroad, including in the United States. This history shows how China has been able to maintain market-distorting practices that benefit its own companies, even in the face of adverse rulings at the WTO.

“In the U.S.-China Phase One agreement, China committed to ensure that PBOC operates an improved and timely licensing process for U.S. suppliers of electronic payment services so as to facilitate their access to China’s market. The United States will closely monitor PBOC’s licensing process going forward to ensure China’s compliance with its commitments in the Phase One agreement.”

Conclusion

The largest bilateral trade deficit (goods or goods and services) in the world is the U.S. deficit with China. For many years, the U.S. government has catalogued a large number of areas where the deficit is driven or exacerbated by distortions created by Chinese policies. Eighteen years after China’s becoming a WTO Member, the scope of the problems experienced by U.S. businesses attempting to export to China or participate in the Chinese market remains breathtaking.

China has a long history of promising reform that hasn’t occurred as documented in the 2019 and prior USTR reports to Congress on China’s WTO Compliance.

The current Administration has a lot of hope that the Phase 1 Agreement will address specific distortions in a wide range of areas and expand U.S. exports to China. The Administration believes that the enforcement provisions in the agreement will help avoid the lack of implementation by China that has characterized prior efforts.

A great deal more needs to be pursued to achieve true reciprocity with China. Some of the issues that need to be addressed are teed up for the Phase 2 negotiations but will be challenging to achieve agreement on as was reflected in China’s change of position on those same topics in 2019 which resulted in a partial agreement (Phase 1) being pursued instead of a comprehensive one.

The U.S. is actively pursuing WTO reform, working with other trading partners on certain items or going solo in raising major topics for discussion and reform. Unfortunately, China has shown little or no interest in addressing some of the core issues of concern to the U.S. with China’s economic system and policies at the WTO. For example, the U.S. is concerned about distortions created by non-market economies to the functioning of global trade for market economies. The U.S., EU and Japan are addressing the need for new rules to address distortions created by such economies (massive subsidies, state-owned or state-invested enterprises, creation of excess capacity, etc.). The U.S. has flagged the need to change how special and differential treatment works to reflect the changed market situation for countries like China and many others.

The coronavirus global challenge complicates the ability of the WTO or its major Members to pursue reform of the WTO or to achieve completion of negotiations on pending topics (e.g., fisheries subsidies). Concerns about the spread of the virus has led to the postponement of the 12th WTO Ministerial Conference which had been scheduled for early June in Kazakhstan. Restrictions on meetings in Geneva and travel from capitals will presumably slow down progress at the WTO.

One should expect the United States to continue to push major reforms at the WTO in 2020. Progress is unlikely to be meaningful in 2020 and some have estimated a reform timeline measured in years (e.g., 2025). Where the WTO is unable to address reform expeditiously, the United States, like other Members will pursue other avenues to address trade concerns. The United States will also pursue bilateral negotiations with China aggressively, seek timely enforcement of existing commitments and use U.S. laws to obtain movement where the other approaches are not delivering results.

As stated in the Executive Summary to this year’s report, “The United States seeks a trade relationship with China that is fair, reciprocal, and balanced.” The current relationship with China meets none of those characteristics in the view of the U.S. Administration. If such a relationship cannot be accomplished through the WTO, this Administration will pursue changes bilaterally or unilaterally if needed.

WTO Reform – U.S. Objectives from 2020 Trade Policy Agenda

The United States Trade Representative annually releases the Administration’s Trade Policy Agenda and prior year’s Annual Report. The report is released during February each year. On February 28, 2020, USTR released the 2020 Trade Policy Agenda and 2019 Annual Report of the President of the Untied States on the Trade Agreements Program. https://ustr.gov/sites/default/files/2020_Trade_Policy_Agenda_and_2019_Annual_Report.pdf.

This year’s trade policy agenda reviews activities at the WTO, including certain important disputes (pages 9-11), a review of where the U.S. perceives it led efforts to change the World Trade Organization (pages 13-15), and identifies priorities for 2020 at the WTO. Such priorities include pursuing disputes through the WTO where appropriate and pushing “for a WTO that reflects current economic realities and strengthens free-market economies”. Pages 18-19. As stated in the report,

“The United States will continue to lead the effort on WTO reform. In addition to addressing the Appellate Body, seeking a new fisheries agreement, pursuing a digital commerce agreement, enforcing notifications
obligations, and seeking reform of ‘special and differential treatment’ for “developing” countries, the United States will advocate for other changes at the WTO that will have the WTO working for its Members. A number of features at the WTO reflect out-of-date assumptions and do not reflect current realities. The United States has already submitted papers focused on market access and tariff issues with the intent of updating our understanding of the current state of agriculture trade and the challenges farmers are facing today. Through our agriculture ‘reset’ efforts, the United States is trying to break the bad habit of taking the same entrenched positions and expecting a different outcome.

“The United States will also explore a broader reset at the WTO. The WTO currently locks-in outdated tariff determinations that no longer reflect deliberate policy choices and economic realities. As a result, many countries that have large economies that have developed significantly over the past two decades continue to maintain very high bound tariff rates, far in excess of the rates applied by the United States or to which the United States is bound. For example, the U.S. average bound tariff rate and applied Most Favored Nation rate are both 3.4 percent. In comparison, Brazil’s bound tariff rate is 31.4 percent, and its applied rate is 13 percent. India’s bound and applied tariff rates are 48.5 percent and 17 percent, respectively.
Members need to fundamentally rethink tariffs and their role, recognizing that commitments on tariffs should reflect current economic conditions.

“In addition, the United States will continue to push for a close review of the WTO’s budget, which, as demonstrated by egregious Appellate Body member salaries, requires greater scrutiny. The WTO must ensure that there is accountability and that expenditures reflect the priorities of its Members.

“Finally, the United States will advocate for changes that allow for additional and more effective plurilateral agreements. There is an urgent need for a new political and legal understanding at the WTO that enables
the pursuit of less-than-fully multilateral outcomes while preserving the characteristics of the WTO.”

The importance of the U.S. focus on a “broader reset” to the functioning of the WTO should be obvious. The GATT and WTO have worked on a system of periodic enlargement of liberalization with members undertaking specific additional obligations through tariff bindings or service sector commitments or through changes to agreements. The U.S. is seeking a fundamental modification in the approach to obligations, one which reflects changing capacities of the members and one which reflects the organizing principle of agreements among market economies. In a consensus-based system, any of the fundamental reforms that the U.S. has been seeking are not achievable without a major crisis and most likely not even then.

The WTO dispute settlement system is in the throes of a crisis over the proper functioning of the Appellate Body. The United States has provided a detailed review of the problems over the last two years, the history of when problems developed and how the problems identified constitute deviations from the purpose and structure of the Dispute Settlement Understanding. Despite some efforts by other WTO Members, resolution of the impasse seems a long way off based on the different positions of major players.

Similarly, that the GATT and WTO are premised on market-based economies is hardly controversial. Yet, the rise in importance of nonmarket or state-directed economies as Members has created distortions in the functioning of markets and challenges the viability of the WTO and certainly the adequacy of current WTO rules. The issue of different economic systems within the WTO has created a second crisis in fact.

While the United States, the European Union and Japan have been working on proposals to address certain drivers of the distortions created by nonmarket economies, the recent General Council meeting shows the challenge to having movement even on the rules needed to address such distortions. Compare statements of the United States and China from the General Council meeting of March 3, 2020. https://geneva.usmission.gov/2020/03/03/statements-by-ambassador-dennis-shea-at-the-march-3-2020-general-council-meeting/ (agenda item 9); http://wto2.mofcom.gov.cn/article/chinaviewpoins/202003/20200302941477.shtml.

U.S. Views on the WTO at 25 and What are the U.S. Interests

The 2020 Trade Policy Agenda and 2019 Annual Report from USTR contains an important chapter, “The World Trade Organization at Twenty-Five and U.S. Interests”, which reviews the Trump Administration’s views of whether U.S. interests have been served by the WTO as it has functioned and what is needed to make the WTO function as intended. The sixteen page section of the report provides a concise review of U.S. concerns with the WTO and the Administration’s objectives for WTO reform. A lengthy excerpt (pages 4-8) follows:

2. Straying from the Original Mandate

“The past quarter century has demonstrated that the WTO fails to act in accordance with its aspirational goals and is incapable of dealing with many of the major challenges facing the modern international trading
system. This is due in large part to the difficulty the organization has faced when it has attempted to negotiate improvements to the system since the Uruguay Round in 1994.

“Under the GATT system, between 1947 and 1994, there were eight negotiating rounds – each of which led to lower tariffs and fewer trade barriers among all GATT Members. But in the twenty-five years since the
WTO began operation—though there have been some positive agreements that address discrete aspects of trade—Members have not reached a significant new multilateral market access agreement. As a result, most of the fundamental rules that govern global trade were negotiated before the WTO even came into existence.

“The last major effort to modernize these rules under the WTO – the Doha Round – started to collapse in 2008, and has now been dead for more than a decade. Despite all of the dramatic changes that have taken place in the last quarter century – the rise of China, the evolution of the Internet, and the emergence of new, potentially disruptive technologies – the WTO is still largely operating under the same framework from the early 1990s. This has resulted in several major failures of the WTO to live up to its mandate.

“a. Failure to Converge: The Challenge of Non-Market Economies

“The political, economic, and trade landscape in 2020 differs greatly from those that existed in 1994. At the time the WTO came into existence, many in the West hoped that most nations of the world would coalesce around a model of open societies, free markets, and democratic values. It was hoped that such a movement would usher in an era of relative peace in which geopolitical considerations would become less of a factor, and competition would exist primarily at the commercial rather than the political level. This optimism prevailed in Washington and other Western capitals despite warning signs that some nations were not committed to openness.

“Twenty-five years later, a starker reality has come into view as non-market economies like China continue to perceive advantages in maintaining state-directed economic policies. The growing influence of these non-market economies in world trade amplifies the need for the WTO to update its rulebook with new disciplines on industrial subsidies, state-owned and state-influenced enterprises, forced technology transfer, and intellectual property theft. The WTO must also meaningfully address issues like digital trade and labor and environmental standards.

“The WTO’s failure to keep pace with new developments in the global economy has resulted in significant advantages for non-market economies to the detriment of market economies like the United States. As just one example, scholars estimate that China’s accession to the WTO has contributed to the loss of millions of jobs in the United States, primarily in the manufacturing sector.

“Moreover, the establishment of the WTO has ushered in an era of massive global trade imbalances. While neutral market factors contribute to these long-running imbalances, that the imbalances remain unchanged for decades, despite varying periods of growth and recession, indicates there are other, non-market factors at play. Unfortunately, the global trade system under the WTO currently enables these distortions and imbalances, and the benefits enjoyed by some countries at the expense of others under the current system create serious barriers to reform.

“While China is not the only country that has benefitted from the WTO’s deficiencies, it remains the primary example of the non-market economies thriving under the current system. China’s economic practices are incompatible with the norms the WTO sought to establish at its founding,
and the organization has demonstrated an inability to respond effectively to the challenges it poses.

“b. Failure to Develop: Outdated Standards and Rules for Developing Countries

“No one expected in 1994 that the Uruguay Round and Marrakesh Agreement would be the final word on world trade policy. As with the previous era of world trade under the General Agreement on Tariffs and Trade of 1947, parties assumed there would be additional rounds of agreements to update rules and address new challenges in world trade over time. This process has not occurred, leaving in place outdated rules that have failed to keep pace with the changing world.

“The significant advantages some countries enjoy over others under the current system have completely undermined incentives for Members to agree to meaningful changes and reforms. While there are several examples of these unfair advantages, many stem from two structural issues.
First, current WTO rules allow large and advanced economies to claim special and differential treatment as “Developing Countries” during negotiations. Second, the bound tariff rates established at the time Members entered the agreement are essentially permanent under current rules.

“i. Treatment of Advanced Economies as “Developing Countries”

“Despite the substantial growth of the global economy since 1994, the WTO continues to rest on an outdated and oversimplified dichotomy between developed and developing countries. This framework has allowed some WTO Members to maintain unfair advantages in the international trade arena.

“Under the current system, countries merely need to self-declare as “developing” – regardless of their GDP or role in global trade – to seek flexibilities under WTO rules. This special and differential treatment can take the form of generous transition periods, higher tariff bindings, and the ability to use prohibited subsidies, among others.

“Today, nearly two-thirds of WTO Members claim developing-country status, arguing they are entitled to blanket special and differential treatment as a matter of right. While some developing-country designations are certainly legitimate, many are entirely unreasonable in light of current economic circumstances. For example, advanced economies like China,
India, Mexico, Saudi Arabia, South Africa, and Turkey continue to insist they are automatically entitled to special and differential treatment. A similar claim is made by some of the richest nations in the world, including Brunei, Kuwait, Qatar, and the United Arab Emirates.

“The clear purpose of special and differential treatment is to help truly disadvantaged countries ease their economies into the global trade system. This does not work if large or wealthy countries abuse this framework and seek to take advantage of benefits meant for countries whose economies are truly just getting off the ground.

“The lack of differentiation among self-declared developing countries has also severely hampered the WTO’s ability to achieve meaningful negotiated outcomes that expand market access, as certain large and advanced economies feel entitled to claim exemption from new rules, avoid engagement on substantive issues, and maintain outdated asymmetries that work to their advantage.

“ii. Permanent Disparate Tariff Rates

“The WTO has failed to harmonize tariffs over time. As a result, many significant global traders continue to have very high bound tariff rates, far in excess of U.S. bound or applied tariff rates.

“The U.S. average bound tariff rate and applied most-favored-nation (MFN) rate are both 3.4 percent. In comparison, Brazil’s bound tariff rate is 31.4 percent, and its applied rate is 13 percent. India’s bound and applied tariff rates are 48.5 percent and 17 percent, respectively.

“Under current WTO rules, these rates are locked in place with no sunset clause or meaningful mechanism to allow the United States and other Members to address enormous differences. It is not reasonable to accept that because the United States agreed to such disparities many years ago, when economic and geopolitical conditions were very different, that the United States should tolerate them in perpetuity. Commitments on tariffs should keep pace with the realities of the global economy rather than locking certain countries into nonreciprocal rates.

“c. Failure to Enforce: A Breakdown in the Rules as Originally Agreed

“The WTO has strayed from the system agreed to by WTO members and has appropriated to itself powers that WTO Members never intended to give it. This drift has primarily taken place in relation to transparency require- ments and the dispute settlement system.

“i. Transparency

“All WTO Members undertake significant commitments to provide regular notifications of subsidy programs and other information critical to assessing trade conditions around the world. Despite these clear obligations, many U.S. trading partners – including significant economies like China and India – choose to ignore them. As of December 2019, more than 70 percent of Members had not submitted their most recent questionnaire on their import licensing procedures, and over a quarter of agriculture notifications from 1995-2016 were outstanding. This poor adherence to notification obligations has created a lack of transparency at the WTO, which has led to the failure of many Members to implement
existing commitments and the breakdown of negotiations. When countries cannot adhere to these most basic of existing obligations, it is unsurprising that they cannot achieve consensus on new, more ambitious commitments.

“ii. The Dispute Settlement Process

“The United States signed on to the Uruguay Round Agreements with the understanding that its sovereignty would be respected and its existing domestic laws dealing with unfair foreign trade practices would remain fully effective. Instead, the WTO’s Appellate Body has imposed new rules never agreed by the United States or approved by the Congress, dramatically undermining this understanding.

“Article 3.2 of the Dispute Settlement Understanding plainly states, ‘Recommendations and rulings of the Dispute Settlement Body cannot add to or diminish the rights and obligations provided in the [WTO] covered agreements.’ In other words, the dispute settlement process was never intended to make new rules that would become binding on Members. It
was instead designed to help Members resolve specific disputes among themselves about the application of existing rules, as set out in the text of the agreements. These limitations remain vital to U.S. sovereignty because they ensure the United States does not become bound by obligations that Congress has not approved.

“Over the last quarter century, the United States has become the chief target of litigation at the WTO, and has at least partially lost the overwhelming majority of cases brought against it. 155 disputes have been filed against the United States, while no other Member has faced even a hundred disputes. According to some analyses, up to 90 percent of the disputes pursued against the U.S. have resulted in a report finding that a U.S. law or other measure in question was inconsistent with WTO agreements. This averages out to five or six successful WTO disputes against the United States every year.

“In other words, the WTO has effectively treated one of the world’s freest and most open economies – with an enormous and growing trade deficit – as the world’s greatest trade outlaw. In so doing, the WTO’s Appellate Body has repeatedly created new obligations from whole cloth. For example:

“ The Appellate Body has attacked U.S. countervailing duty laws, making it easier for other countries to provide market distorting subsidies through non-market policies and practices.

“ The Appellate Body has interpreted WTO rules in a manner that puts the U.S. tax system at an unfair and illogical disadvantage compared to that of many trading partners.

“ The Appellate Body has interpreted the Agreement on Safeguards – an agreement critical to addressing global import surges that can overwhelm a particular industry – in a manner that significantly limits the ability of Members to use that vital provision.

“ The Appellate Body has interfered with the appropriations process by limiting Congress’s ability to spend money collected through antidumping and countervailing duties.

“In many cases, the Appellate Body’s interpretations of WTO rules would prevent the United States from taking action to address unfair trade practices that hurt U.S. workers In this sense, it has also usurped the U.S. government’s accountability to those who are truly sovereign – the American people.

“For many years, U.S. Administrations under both parties have warned trading partners of the harm resulting from Appellate Body activism. The Appellate Body simply cannot be allowed to flaunt basic rules of operation to which all Members have agreed. Thus far, U.S. concerns have largely been ignored.

“These lapses have incentivized WTO Members to rely on litigation through the Appellate Body to get results rather than negotiation. This, in turn, has greatly undermined the negotiating process at the WTO because countries now believe they can obtain better outcomes through litigation than through negotiation, especially with the United States. Such countries have no incentive to negotiate in good faith if they believe there are easier
avenues to pursue their interests.

“Furthermore, in its day-to-day operations, the Appellate Body has developed a troubling pattern of ignoring mandatory deadlines for deciding appeals, dragging some – such as those in the U.S.-EU Large Civil Aircraft disputes – out for over a year each; making impermissible findings on issues of fact, including fact-finding related to Member’s domestic laws; issuing unnecessary advisory opinions rather than facilitating negotiations
between parties; treating prior Appellate Body interpretations as binding precedent for dispute settlement panels; extending Appellate Body members’ terms without authority; and compensating Appellate Body members excessively and opaquely.

“These actions represent a tendency by the Appellate Body to both institute rules to which WTO Members have not agreed and ignore or evade existing rules written in plain language. This has led to a significant decline in trust in the Appellate Body, which has opened the entire dispute settlement system to serious vulnerabilities. The WTO simply cannot claim to stand for a rules-based trading system if its own institutions fail to follow clear and explicit rules. Any action beyond these rules undermines the WTO’s role as a negotiation forum, lacks legitimacy, and usurps Members’ sovereignty.

3. Summary

“Despite the serious challenges facing the World Trade Organization, the United States values the WTO and is working diligently within the organization to find solutions. For example, the United States is actively engaged in negotiations to discipline harmful fishing subsidies and to develop new rules to govern digital trade. The United States has called attention to unequal bound and applied tariff rates, and continues to press other Members for additional market access. The United States has also offered specific proposals to improve transparency, address the lack of compliance with existing notification obligations, and promote greater differentiation among self-declared developing countries. The United
States continues to press longstanding concerns with the Appellate Body and the dispute settlement system, including its lack of transparency. The United States has taken each of these steps in an attempt to ensure that the WTO retains its relevance to trading nations.”

Chances for Meaningful Reform are Slim at Best

Many WTO Members recognize that WTO reform is important. The WTO Director-General and his team have noted the need for reform and the fact that reform has become an important topic in the last year or so. See, e.g., DDG Wolff: An update of multilateral trade rules is needed to increase their relevance, https://www.wto.org/english/news_e/news20_e/ddgaw_03mar20_e.htm;

However, few, if any, Members other than the United States, have expressed the view that fundamental reform is needed to ensure the relevance of the WTO going forward. The U.S. objectives for reform are sweeping and would require many Members to accept broader liberalization, rules on nonmarket economy distortions, loss of historic privileges based on changed economic situations and a return to a system largely focused on negotiations to achieve changes in the status quo. Under rules of consensus and the views expressed by many Members, it is unlikely that the collective will for fundamental reform exists even if there is agreement that some reform is desirable.

For the Trump Administration fundamental reform is critical to making the WTO a viable organization and ensuring that trade relationships under multilateral rules are fair in an ongoing sense. What the U.S. seeks is an ambitious reform outcome. The USTR conclusion to its review of the WTO’s first 25 years (page 16, provided below) summarizes the concerns and indicates a continued U.S. commitment to the WTO. The U.S. is certain to continue to use all tools at its disposal to pursue meaningful reform or obtain reciprocity bilaterally. The message from the U.S. is clear. Let’s hope that meaningful reform will occur even if the likelihood of such reform seems remote.

CONCLUSION

“It is difficult now, twenty-five years after its inception, to declare the WTO a success for American interests. Indeed, the organization in many ways ignores and enables unbalanced trade and unfair trade practices. If the WTO is to be credible as a vibrant negotiating, implementation, and dispute settlement forum, it must be limited to its original mandate and address areas in need of structural reform. This means Members must recognize and reaffirm that the WTO is an organization committed to promoting the adoption of market-based policies by its Members. The goal of the organization must continue to be a greater convergence around market-based principles, not the co-existence of radically different economic systems. The WTO – and its dispute settlement system – must also respect the rules as agreed to by Members, embrace its role as a negotiating forum rather than a litigating entity, and stop its infringement on the sovereignty of the United States and other Members.

“Looking ahead to the Twelfth Ministerial Conference this year, the United States believes that Members must identify opportunities to make meaningful progress on these objectives. To remain a viable institution
that can fulfill all facets of its work, the WTO must also find a means of effectively pursuing negotiations between Ministerial Conferences, focus its work on structural reform, and adapt to address new challenges to the 21st Century world trade system. The United States looks forward to continuing its leadership role in advancing these changes and the broader mission of the World Trade Organization.”

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.

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 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.

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.

With the WTO Appellate Body Becoming Dysfunctional on December 11, What Happens to Pending Appeals and Other Open Issues?

There was another WTO Dispute Settlement Body (“DSB”) meeting on November 22, 2019. In addition to the normal agenda item of receiving reports and comments by other members on the status of implementation of recommendations on disputes where reports had previously been adopted by the DSB, there were a number of other agenda items, one of which was not addressed.

First, the United States had put on the agenda making a statement on what it considers systemic concerns on the compensation for Appellate Body.

Second, annually each body within the WTO prepared a report on activity during the year. Adoption of the 2019 draft annual report of the DSB was an agenda item for consideration.

Third, the topic of Appellate Body appointments was an agenda item based on the September 2019 proposal from 117 WTO members.

Finally, there was an agenda item entitled “Pending Appeals” which was meant to permit an examination of how the 13 pending appeals would be handled after December 10 when the number of current Appellate Body members would decline to 1 from 3.

This note looks at several of the agenda items with a focus towards the end on the thirteen appeals which are proceeding at the present time.

I. Compensation for Appellate Body members

As reviewed in a post from November 16, the United States had raised a series of questions on the handling of funds for the Appellate Body and its Secretariat (among other issues) and held up adoption of the 2020/2021 WTO budget at a November 12 meeting of the Committee on the Budget, Finance and Administration. Another meeting of the Committee has been scheduled for November 27, with efforts to provide answers and resolve concerns ahead of that meeting.

At the same time, the U.S. added the agenda item to provide its thoughts on “systemic issues” flowing from the Appellate Body compensation system. The comments on this agenda item were made by Ambassador Dennis Shea and laid out the various elements of the compensation package, the part time nature of the work of Appellate Body members, and the fact that compensation has been paid to individuals whose terms have expired but who continue to handle appeals. See pages 9-12 of Statements b the United States at the Meeting of the WTO Dispute Settlement Body, Geneva, November 22, 2019, https://geneva.usmission.gov/wp-content/uploads/sites/290/Nov22.DSB_.Stmt_.as-handed-out.fin_.public.pdf. U.S. concerns revolved around: (1) the total compensation (some 300,000 Swiss Francs tax free for part time work which is higher than compensation for Deputy Director Generals at the WTO whose work is full time; (2) whether the daily component of compensation contributed to delay in completing Appellate Body decisions, hence undermining prompt resolution of disputes; (3) lack of transparency on expenses; and (4) pay to former members who are continued after terms expire when working on appeals which they started prior to term expiration.

Press reports from the day of the DSB meeting indicated relatively little interest/sympathy by other trading partners on the U.S. concerns including on the size of the compensation. See, e.g., Inside U.S. Trade’s World Trade Online, U.S. Questions WTO Appellate Body compensation as others lament impending paralysis, https://insidetrade.com/daily-news/us-questions-wto-appellate-body-compensation-others-lament-impending-paralysis.

From the earlier U.S. statement of concerns on how to remedy the Appellate Body disregard of clear requirements under the Dispute Settlement Understanding, the U.S. statement provides a potential “why” answer to part of the disregard. Failing to meet the required 60-90 day deadline for appeals results in longer work on any given appeal and hence higher compensation, potentially encouraging longer decisions, coverage of additional issues, etc. and making timely delivery of AB decisions more difficult.

Should the U.S. insist that the AB compensation system be reviewed and potentially modified before agreeing to opening the Appellate Body nomination process, obviously a protracted and difficult process will become more complicated and presumably more drawn out.

II. Appellate Body Proposal to Start the Appointment Process

Not surprisingly, the same proposal to start the process of finding new Appellate Body members that had been presented in October by Mexico and 116 other WTO members was resubmitted for consideration at the November 22 DSB meeting. Once again the U.S. found itself unable to agree to moving ahead with the process for finding six Appellate Body members to fill the existing vacancies and the two that will occur when existing terms expire on December 10. So there is actually nothing new on this agenda item or the outcome at the recent DSB meeting.

Ambassador David Walker’s draft General Council Decision which is an effort to present a possible road forward to addressing U.S. concerns was not taken up within the DSB (other than a review of the effort at resolution contained in the draft annual report of the DSB) but will be on the agenda for the December 9-11 General Council meeting. As reviewed in an earlier post, the U.S. has already rejected the draft General Council Decision as not meeting its concerns. Thus, the General Council meeting in December is not likely to provide a breakthrough on the current impasse. So an obvious question is what happens on December 11?

The panel process of dispute settlement will continue as before. Thus, for the many cases proceeding through panel deliberations, one can expect those panels to continue without interruption. WTO Members have the option of agreeing to arbitration under Article 25 of the DSU, as the EU has done with Canada and with Norway. Similarly, WTO Members can agree not to take an appeal in a given dispute such that the panel report would be what is adopted absent a negative consensus. It is understood that some WTO members are considering this or have agreed to this approach. Thus, December 11 marks not the collapse of the dispute settlement system in its entirety, but rather a need to evaluate options for WTO members as they look at pending or future disputes or face a process where there is no automatic adoption.

A large number of WTO Members have participated in at least one dispute in the first 25 years of the WTO. Other WTO members, who have not been a complainant or a respondent have participated as a third party in one or more cases. While that is true, the number of cases where a Member is either a complainant or a respondent is very small for nearly all countries. The attached table looks at information from the WTO Dispute Settlement listing (looked at on November 22, but not reflecting the EU request for consultations filed against Indonesia on November 22). Six Members (U.S. (11.16/yr), EU and member states (9.44/yr), China (3.61/yr), Canada (2.52/yr), Russian Federation (2.42/year), and India (2.24/yr)) have seen two or more disputes filed each year of membership. Eight others have between one and two disputes each year (Brazil, Argentina, Japan, Mexico, Korea, Ukraine, Australia, and Indonesia). Everyone else (121 members) have less than one dispute per year including 81 who have never either filed a dispute or been a respondent in a dispute in the first twenty-five years of the WTO and 46 of whom have also never been a third party in a dispute.

WTO-Member

The EU’s agreements with Canada and Norway are important for Canada and Norway but relatively minor for the EU itself, other than creating what they hope will be an approach that other trading partners of theirs will agree to. For Canada, 23.81% of the disputes where Canada has been a complainant or respondent have been where the EU was the other party. For Norway, 3 of 5 cases they have been involved in have been with the EU (60%). However, for the EU, Canada and Norway represent less than 6% of the disputes in which they have been a party.

So how disruptive the reduction in Appellate Body membership to one member as of December 11, 2019 will be is uncertain and will depend on actions by a number of major players in terms of ongoing disputes..

III. Pending Appeals Before the Appellate Body

Agenda item 7 on the November 22, 2019 DSB meeting was “Pending Appeals. A. Statement by the Chairman.” WTO/AIR/DSB/89.

In the Dispute Settlement Body’s draft Annual Report (2019), the following brief discussion appears on what the Chair of the DSB was doing on the issue of pending appeals. WT/DSB/W/651 (8 November 2019) at 4:

” Finally, he said that he would be consulting with delegations who had pending appeals before the Appellate Body ahead of 10 December 2019 to see how to deal with those appeals. He said that he would revert to this matter at the November DSB meeting (WT/DSB/M/436).”

While the WTO does not have a summary of the November 22nd DSB meeting up on its webcite as of 11/24 2:30 p.m. (ET), a press article from the 22nd indicated that the agenda item wasn’t pursued as the Chair had not found agreement on how to deal with the 13 pending appeals. The U.S. was apparently the holdout in reaching agreement on how to proceed. Inside U.S. Trade’s World Trade Online, U.S. Questions WTO Appellate Body compensation as others lament impending paralysis, https://insidetrade.com/daily-news/us-questions-wto-appellate-body-compensation-others-lament-impending-paralysis.

In looking at the thirteen appeals that are understood to be underway and the relevant DSU articles on Appellate Body practice rules, there appear to be a number of potential issues that will need to be addressable if the issues are in fact present and the appeals are to proceed.

First, eight of the thirteen appeals were noticed by the appellant after 30 September 2018 the last day of Mr. Shree Baboo Chekitan Servansing’s four year term. See DS541, DS534, DS523, DS518, DS513, DS510, DS461, DS371. After that date, there have been only three Appellate Body members, all of whom would have to be hearing the appeal and no substitute would be possible if one of the two members whose terms end on December 10, 2019 decided not to continue on an appeal after that date. See DSU Art. 17.1; Working Procedures for Appellate Review, WT/AB/WP/6 16 August 2010, Rules 6.(3) and 12 and 13. It is understood that one of the two Appellate Body members whose second term expires on December 10 has indicated an unwillingness to continue to serve on the appeals after the expiration of his term. If correct, absent a decision by the DSB on how those appeals can proceed, the appeals will presumably terminate or be in a state of limbo pending restoration of the membership of the Appellate Body. The United States is a party in four of the eight cases.

Of the other five appeals, it is unclear if a similar situation exists in terms of the composition of the Division hearing the appeal (DSU Art. 17.1 has appeals heard on a rotation basis) and if so, if the remaining AB member would be available to maintain the appeal at three members (two former members and the remaining current member).

For all thirteen appeals, after December 10, 2019, the appeals could only be handled in two or all three of the people hearing the appeal were individuals whose terms expired, hence falling into the space that the U.S. has reviewed as to the lack of authority for the Appellate Body have non-AB members complete appeals that were started when they were members. The U.S. is a party in five of the thirteen pending appeals.

Expect that the DSB Chair David Walker will continue to search for an approach that is acceptable to all members. Don’t be surprised if no consensus is reached. Two known events in December are possible situations where better understanding of the issues will surface: the December 9-11 General Council and the December 18 DSB meeting.

Below is a reverse chronological listing of the thirteen pending appeals:

DS541, India-Export Related Measures (U.S. complainant); notice of appeal, Nov. 19, 2019.

DS534, United States – Anti-Dumping Measures Applying Differential Pricing Methodology to Softwood Lumber from Canada; notice of appeal, June 4, 2019.

DS523, United States – Countervailing Measures on Certain Pipe and Tube Products (Turkey complainant); notice of appeal, Jan. 25, 2019.

DS518, India – Certain Measures on Imports of Iron and Steel Products (Japan complainant); notice of appeal, Dec. 14, 2018.

DS513, Morocco – Anti-Dumping Measures on Certain Hot-Rolled Steel from Turkey; notice of appeal, November 20, 2018

DS510, United States – Certain Measures Relating to the Renewable Energy Sector (India complainant); notice of appeal, August 15, 2019.

DS505, United States – Countervailing Measures on Supercalendered Paper from Canada; notice of appeal, August 27, 2018.

DS499, Russian Federation – Measures Affecting the Importation of Railway Equipment and Parts Thereof (Ukraine complainant); notice of appeal, August 27, 2018.

DS476, European Union – Certain Measures Relating to the Energy Sector (Russian Federation complainant); notice of appeal, September 21, 2018 [The WTO webpage shows this dispute still being on appeal before the Appellate Body, but the case is not included in the list of 13 pending appeals on the WTO webpage] .

DS441, Australia – Certain Measures Concerning Trademarks, Geographical Indicators and Other Plain Packaging Requirements Applicable to Tobacco Products (Dominican Republic complainant); notice of appeal, August 23, 2018.

DS435, Australia – Certain Measures Concerning Trademarks, Geographical Indicators and Other Plain Packaging Requirements Applicable to Tobacco Products (Honduars complainant); notice of appeal, July 19, 2018.

DS461, Colombia – Measures Relating to the Importation of Textiles, Apparel and Footwear (21.5, Panama complainant); notice of appeal, November 20, 2018.

DS371, Thailand – Custom and Fiscal Measures on Cigarettes from the Philippines; notice of appeal (2nd recourse to 21.5), September 9, 2019; notice appeal (1st recourse to 21.5), 9 January, 2019).

IV. Conclusion

WTO Members are continuing to look for alternatives to the present appeal process as they await further developments both at the General Council and the Dispute Settlement Body. The U.S. has been looking for adherence to the original DSU commitments and is unwilling to accept simple reaffirmation of those principles in light of the longstanding problems flagged by the United States. The core disagreement on the purpose of the dispute settlement system between the U.S. and the EU (and like minded Members) has made meaningful progress difficult.

What is certain is that the brave new world of a more complicated dispute settlement system within the WTO arrives in less than three weeks. How long the changed status will continue is unclear. Current indications are the wait will be long in fact before the Appellate Body is back functioning with the concerns of the U.S. at last addressed in an enforceable manner. For the U.S. a major concern should be achieving a restoration of the rights and obligations that were agreed to through negotiation and that have been lost through overreach actions by the Appellate Body.

The October 28, 2019 WTO Dispute Settlement Body Meeting – Another Systemic Problem Flagged by the United States

The United States has been raising concerns for many years on a range of issues with the operation of the dispute settlement system, particularly actions by the Appellate Body.  Time has run out to prevent some hiatus in the functioning of the Appellate Body after December 10 when the current membership of the Appellate Body goes from three to one with vacancies going from four to six of the seven member body.  There is a requirement within the Dispute Settlement Understanding to have three Appellate Body members handle any appeal from a panel report.  The likely process for finding replacements for Appellate Body vacancies, once authorized (see, e.g., WT/DSB/W/609 and revisions 1-14) will take a number of months.  With the continued impasse within the Dispute Settlement Body (“DSB”) as recently as the last DSB meeting on October 28, WTO members now certainly face a gap for appeals from panel decisions issued around or after December 10.  A few WTO members have formalized agreements among themselves for procedures to handle resolution of disputes for such time as the Appellate Body lacks adequate membership to conduct appeals relying on the authority for members to resolve disputes through arbitration.  The European Union and Norway have signed an agreement similar to the one that the EU and Canada had submitted previously (see post of Oct. 9).

Of interest in the press release on the October 28 DSB meeting from the WTO, was the issue raised by the United States on the problems posed by the Appellate Body’s past interpretation of Article 6.2 of the Dispute Settlement Understanding (“DSU”).  Article 6 of the DSU reads as follows:

“Article 6: Establishment of Panels

“1.     If the complaining party so requests, a panel shall be established at the latest at the DSB meeting following that at which the request first appears as an item on the DSB’s agenda, unless at that meeting the DSB decides by consensus not to establish a panel.

“2.     The request for the establishment of a panel shall be made in writing.  It shall indicate whether consultations were held, identify the specific measures at issue and provide a brief summary of the legal basis of the complaint sufficient to present the problem clearly.  In case the applicant requests the establishment of a panel with other than standard terms of reference, the written request shall include the proposed text of special terms of reference.”

The WTO press release on the DSB meeting indicated that the U.S. had claimed that the Appellate Body (“AB”) had “adopted an erroneous interpretation of Article 6.2 in past rulings which required a member to explain ‘how or why’ the measure at issue is considered to be violating WTO rules, a requirement that does not appear in the DSU text.”  The result of the AB interpretation was more complicated  disputes with a large number of procedural challenges which both increased the time to complete disputes and the uncertainty for parties.  https://www.wto.org/english/news_e/news10_e/dsb_28oct19_e.htm

One of the cases before the DSB on October 28 was a dispute brought by Japan against Korea (DS504, antidumping duties on pneumatic valves from Japan).  Korea had challenged whether Japan had satisfied the “who or why” construction identified in prior Appellate Body decisions.  The panel found a number of Japan’s claims to be outside the panel’s terms of reference.  While the Appellate Body in the particular dispute disagreed with the panel, the issues that had been found outside of the panel’s terms of reference were not capable of decision based on the record.  The United States used the pneumatic valve case and the interpretation of Article 6.2 as another example of the problems that have been created in the dispute settlement system by the Appellate Body not limiting itself to actual text of the DSU.

Japan agreed with the United States that the “how or why” requirement for panel requests was inconsistent with Art. 6.2.  Canada took a different view, agreeing that at a minimum the specific WTO provisions alleged to be infringed needed to be identified  “although there may be cases where just citing the provisions does not cover the requirements of the DSU; ultimately a judgment must be made on a case by case basis.”  Id.

As the WTO struggles to achieve agreement on the future of the dispute settlement system, the different perspectives on the correct interpretation of Article 6.2 of the DSU show the challenges that are faced to restore a fully functioning dispute settlement system at the WTO.  Moreover, when the Appellate Body adds obligations to Members’ ability to bring disputes, the AB contributes to the delay in achieving final resolution of disputes, making it more likely timelines for appeals will not be respected.

U.S. Statement at the DSB Meeting Provides More Detail

The U.S. statement at the October 28 DSB meeting on the issue of Article 6.2’s proper interpretation was 4 1/3 pages in length (pages 10-14.  https://geneva.usmission.gov/wp-content/uploads/sites/290/Oct28.DSB_.Stmt_.as-deliv.fin_.public.pdf). (“U.S. Statement”).

The U.S. identifies AB decisions that imposed the requirement on a complaining Member “to explain ‘how or why the measure at issue is considered by the complaining Member to be violating the WTO obligation in question.’”  Id. at 10 (referencing three AB decisions in footnote 2, EC -Selected Customs Matters, para. 130; China – Raw Materials, para. 226; US – Countervailing Measures (China), para. 4.9).  The consequences for Members can be significant, as issues plainly sought to be challenged are rejected as not properly before the panel and complaining parties face procedural issues resulting in delay and increased costs.  The U.S. noted that sixteen challenges had been brought by defending Members under Article 6.2’s construction put forward in earlier AB decisions. Indeed, “Over the past two years, over 30% of panel reports addressed Article 6.2 and the Appellate Body’s incorrect element of ‘how or why’.”  U.S. Statement at 12.  Defending parties seek to strike claims where the complaining party has not provided the basic arguments (the how or why) the complainant will be making in its later submissions.

To the extent that panels reject claims as not covered by the terms of reference, the complaining party is denied the opportunity to have its concerns examined.  Early termination of challenges to issues can result in truncated records before the panel, limiting what can be achieved through an appeal but also extending the time for final resolution (and to the extent rejection of claims are appealed) contributing to the inability of the AB to complete appeals within 90 days.

The U.S. also reviewed the history of the language in Article 6.2 of the DSU that had been interpreted by the AB as requiring an articulation of how or why the measure in dispute violated WTO obligations.  The language had been adopted in Montreal at the mid-term Uruguay Round meeting as part of improvements to the GATT dispute settlement rules (id. at footnote 8 citing GATT, Improvements to the GATT Dispute Settlement Rules and Procedures, Decision of 12 April 1989, L/6489, 13 April 1989, Section F(a)), and had never been construed to require a showing of “how” or “why” until the Appellate Body came up with that construction.  The first case cited in footnote 2 in the U.S. Statement (EC – Selected Customs Matters) was an Appellate Body decision issued in 2006.

While the apparent (at least partial) movement away from the “how or why” requirement in the recent Japan-Korea dispute by the Appellate Body decision is welcome, the continued confusion on what is required for a complaining party to have its issues considered  by a panel will both continue to challenge future panels and will complicate the ability to have a dispute settlement system that is operated to ensure it conforms to agreed rules by sovereign states – stated differently, permits the system to function as envisioned when created in the Uruguay Round. 

Two Initial U.S. Trade Agreements with Japan – What They Cover and What Will Follow

On October 16, 2018, US Trade Representative Robert Lighthizer sent letters to Congress informing Congress of the President’s intent to enter trade negotiations with Japan.  Section 105(a)(1)(A) of the Bipartisan Congressional Trade Priorities and Accountability Act of 2015 was referenced in the letters.  The letters indicated that negotiations with Japan could proceed in phases, that the administration would consult with Congress and that Administration negotiating positions were consistent with the priorities and objectives contained in section 102 of the 2015 law.  In December 2018, USTR published a summary of the Administration’s specific negotiating objectives with Japan.

Less than one year later, on September 25, 2019, President Trump and Prime Minister Abe announced that agreements had been reached on certain market access issues (agriculture and some other products by Japan; a large number of industrial goods and a few agricultural products by the U.S.) and a digital trade agreement between the two countries.  The two agreements and a series of side letters were signed on October 7.  It is expected that the two agreements will take effect on January 1, 2020, following action by the Diet in Japan and the publication of tariff reductions by the Administration in the U.S. pursuant to existing tariff reduction authority (and assuming the obligations of the U.S. under the digital trade agreement do not require any changes to U.S. law).   As indicated in the original notification, the negotiations are being undertaken in phases, with additional negotiations to commence four months after the two initial agreements take effect as reviewed in language on USTR’s webpage.

On October 7, 2019, USTR Robert Lighthizer and Ambassador of Japan to the United States Shinsuke J. Sugiyama signed the U.S.-Japan Trade Agreement and U.S.-Japan Digital Trade Agreement. In addition, as announced in the September 25, 2019, Joint Statement of the United States and Japan, the United States and Japan intend to conclude consultations within 4 months after the date of entry into force of the United States-Japan Trade Agreement and enter into negotiations thereafter in the areas of customs duties and other restrictions on trade, barriers to trade in services and investment, and other issues in order to promote mutually beneficial, fair, and reciprocal trade. Entry into force of the U.S.-Japan Trade Agreement and U.S.-Japan Digital Trade Agreement is currently pending finalization of domestic procedures in both countries.

https://ustr.gov/countries-regions/japan-korea-apec/japan/us-japan-trade-agreement-negotiations

Help for U.S. Agriculture

Having pulled out of the Trans Pacific Partnership [“TPP”] agreement in 2017, the U.S. has been anxious to achieve an agreement with Japan – a country that the Administration has indicated accounts for 95% of GDP of countries within the Comprehensive and Progressive Agreement for Trans-Pacific Partnership [“CPTPP”] with whom the U.S. does not presently have an FTA.  Japan has been a large market for U.S. beef, pork and wheat among other agricultural products.  With the CPTPP having entered into force on December 31, 2018 for Japan and many of the major agricultural export members of the CPTPP (Australia, Canada, Mexico and New Zealand) and with the Japan-EU FTA (entered into force February 1, 2019), U.S. agriculture has been concerned with loss of market share with the significant differences in tariff rates applicable to imports from Japan’s CPTPP partners and available to the EU.  In addition, U.S. agriculture has been buffeted over the last two years by retaliation by various countries in retaliation for US actions under section 232 on steel and aluminum products (China, EU, Canada, Mexico, India, Turkey, Russia) and under section 301 for intellectual property and other issues by China.

Looking at domestic exports to Japan of a few U.S. agricultural products, it is clear that U.S. exporters were seeing reduced volume and value of products in 2019.  Volume data are shown below along with the percent change between the first eight months of 2018 and 2019 (quantities are in metric tons):

Product 2016 2017 2018 Jan.-Aug. 2018 Jan-Aug. 2019 % Change
Beef –HS 0201 & 0202 203,852.8 258,193.7 278,800.7 191,672.7 173,023.5 -9.73%
Pork – HS 0203 361,530.9 365,130.6 366,626.0 245,970.0 233,698.2 -4.99%
Wheat – HS 1001 2,700,066 3,049,369 2,860,624 1,942,929 1,678,292 -13.62%
Corn – HS 1005 11,891,952 12,390,152 15,276,106 10,972,609 8,874,393 -19.12%

In contrast to declining U.S. exports to Japan in the first eight months of 2019 compared to the comparable period in 2018, total imports into Japan from all countries increased for three of the four products reviewed.  For beef, Japan imports increased by 1.13% on a volume basis.  Similarly, imports of pork products into Japan increased by 4.29% on a volume basis.  Total imports of corn into Japan also increased slightly (0.79%) on a volume basis.  While the volume of wheat imports from all countries declined by 7.91%, the rate of decline was significantly smaller than the contraction of US exports to Japan of wheat.  Thus, the U.S. saw reduced market share in all four of these major product categories and in many others as well.  Indeed US domestic exports of all agricultural products (HS Chapters 1-24) grew 15.28% on a value basis between 2016 and 2018 from $11.89 billion to $13.71 billion before declining 7.75% in the first eight months of 2019.  There were many US export categories that saw declines in value  during the first eight months of 2019 (HS 0201, fresh or chilled beef, -6.7%; HS 0202, frozen beef, -18.8%; HS 0203, fresh, chilled or frozen pork, -6.2%; HS 0303, frozen fish other than fish fillets, -28.4%; HS 0802, nuts, -8.0%; HS 1001, wheat, -18.3%; HS 1005, corn, -16.2%; HS 1201, soybeans, -1.7%).

Annex I to the U.S.-Japan Trade Agreement identifies the various commitments on liberalization that Japan is making, almost all on agricultural products. 

https://ustr.gov/sites/default/files/files/agreements/japan/Annex_I_Tariffs_and_Tariff-Related_Provisions_of_Japan.pdf 

USTR’s fact sheet provides the following summary of benefits for U.S. agriculture:

“In the U.S.-Japan Trade Agreement, Japan has committed to provide substantial market access to American food and agricultural products by eliminating tariffs, enacting meaningful tariff reductions, or allowing a specific quantity of imports at a low duty (generally zero). Importantly, the tariff treatment for the products covered in this agreement will match the tariffs that Japan provides preferentially to countries in the CP-TPP agreement.

“Out of the $14.1 billion in U.S. food and agricultural products imported by Japan in 2018, $5.2 billion were already duty free. Under this first-stage initial tariff agreement, Japan will eliminate or reduce tariffs on an additional $7.2 billion of U.S. food and agricultural products. Over 90 percent of U.S. food and agricultural imports into Japan will either be duty free or receive preferential tariff access once the Agreement is implemented.

KEY ELEMENTS: U.S. AG EXPORTS TO JAPAN

Tariff Reduction:  For products valued at $2.9 billion, Japan will reduce tariffs in stages. Among the products benefitting from this enhanced access will be:

  • fresh beef
  • frozen beef
  • fresh pork
  • frozen pork

Tariff Elimination: Tariffs will be eliminated immediately on over $1.3 billion of U.S. farm products including, for example:

  • almonds
  • blueberries
  • cranberries
  • walnuts
  • sweet corn
  • grain sorghum
  • food supplements
  • broccoli
  • prunes

“Other products valued at $3.0 billion will benefit from staged tariff elimination. This group of products includes, for example:

  • wine
  • cheese and whey
  • ethanol
  • frozen poultry
  • processed pork
  • fresh cherries
  • beef offal
  • frozen potatoes
  • oranges
  • egg products
  • tomato paste

Country Specific Quotas (CSQs): For some products, preferential market access will be provided through the creation of CSQs, which provide access for a specified quantity of imports from the United States at a preferential tariff rate, generally zero. CSQ access will cover:

  • wheat
  • wheat products
  • malt
  • glucose
  • fructose
  • corn starch
  • potato starch
  • inulin

Mark Up: Exports to Japan of wheat and barley will benefit from a reduction to Japan’s “mark up” on those products. Japan’s imports of U.S. wheat and barley were valued at more than $800 million in 2018.

Safeguards: This agreement provides for the limited use of safeguards by Japan for surges in imports of beef, pork, whey, oranges, and race horses, which will be phased out over time.”

https://ustr.gov/about-us/policy-offices/press-office/fact-sheets/2019/september/fact-sheet-agriculture%E2%80%90related

There are also five side letters on specific agricultural products and one on safeguard provisions.  The specific products covered by such letters are alcoholic beverages, beef, rice, skimmed milk, and whey.  These side letters can be found here:  https://ustr.gov/countries-regions/japan-korea-apec/japan/us-japan-trade-agreement-negotiations/us-japan-trade-agreement-text.

What Japan Gets from the U.S. in terms of Tariff Reductions

Annex II contains the list of liberalization commitments on tariffs on goods the U.S. is providing Japan under the agreement.

 https://ustr.gov/sites/default/files/files/agreements/japan/Annex_II_Tariffs_and_Tariff-Related_Provisions_of_the_United_States.pdf 

The U.S. agreed to some liberalization of a limited number (42) of six-digit HS categories.  USTR indicated in its fact sheet that imports from Japan in these 42 categories had been $40 million in 2018.  Twelve of the forty-two categories involve plants and cut flowers, two deal with yams, six deal with melons of various types, one covers fresh persimmons, two with green tea, ten with confectionery products, one with chewing gum, one covers soy sauce, and seven cover various other items.

The bulk of what Japan obtains in tariff liberalization occurs in industrial goods (chapters 25-99) though motor vehicles and parts are not part of the liberalization.  There are some chemicals, a few rubber products, mirrors, some steel products and the vast majority from HS Chapters 84 and 85. 

As the Administration is not intending to submit implementing legislation, the Administration is limited to the tariff reduction authority contained in Section 103(a)(3) of the Bipartisan Congressional Trade Priorities and Accountability Act, 19 U.S.C. 4202(a)(3).  Thus, for  any of the products on which liberalization is to occur where Column 1 tariffs are greater than five percent ad valorem,  tariffs will be reduced but not eliminated.  Most products in HS Chapters 84 and 85 included for tariff reductions are below 5% but many agricultural products and certain industrial tariffs (e.g., bicycles and parts, HS 8712 and HS 8714) are above 5%.

WTO Compatibility

Both the U.S. and Japan intend to pursue further negotiations starting in early May 2020.  Certainly the Administration summary of negotiating objectives articulate aims which comport with obtaining a comprehensive trade agreement that would be comparable to other FTAs in terms of trade in goods coverage.  But the U.S.-Japan Trade Agreement dealing with tariffs does not by itself qualify as a Free Trade Agreement (“FTA”) within the meaning of GATT Article XXIV:8(b) where substantially all tariffs on goods trade are eliminated within a reasonable period of time.  The Agreement’s failure to provide for duty-free treatment for substantially all trade in goods is true for Japan’s treatment of imports from the U.S. as well as the U.S.’s treatment of imports from Japan.  For example, U.S. exports to Japan in 2018 were only 20% in agricultural goods, with fully 80% of exports in industrial goods.  With few exceptions, industrial goods are not the subject of the current agreement in terms of Japanese liberalization (though Japan has zero tariffs on many industrial goods already).  Similarly, motor vehicle goods and parts are not part of the trade liberalization.  There are Column 1 tariffs for most HS Chapter 87 goods.  Excluding bicycles and parts which are part of the current agreements, imports from Japan under just Chapter 87 were more than $53 billion in 2018 or some 37% of total imports.  Thus, the current agreement, absent a future enlargement would likely be viewed as violating MFN requirements of the WTO as not a permissible FTA under GATT Art. XXIV:8(b).

There have been no disputes over whether particular FTAs  fail to satisfy the requirements of Article XXIV, and it is novel for a trade agreement to be done in phases.  Assuming the U.S. and Japan complete their negotiations and implement the resulting enlarged agreement in the next year or two, the final agreement will likely be WTO consistent, regardless of views of the phase approach and initial agreement reached.

U.S.-Japan Digital Trade Agreement

Digital trade is a rapidly growing part of international commerce.  The U.S. has been seeking either a digital trade chapter (e.g., U.S.-Mexico-Canada Agreement [“USMCA”]) or where negotiations are done in phases, as a stand-alone agreement.  The latter is what has emerged from the talks to date with Japan.  The U.S.-Japan Digital Trade Agreement has been described by the Administration as the “gold standard” and similar to the chapter in the USMCA.  The USTR fact sheet lays out what the agreement achieves as perceived by the Administration:

“FACT SHEET U.S.-Japan Digital Trade Agreement

“As two of the most digitally-advanced countries in the world, the United States and Japan share a deep common interest in establishing enforceable rules that will support digitally-enabled suppliers from every sector of their economies to innovate and prosper, and in setting standards for other economies to emulate.

“The United States-Japan Digital Trade Agreement parallels the United States-Mexico-Canada Agreement (USMCA) as the most comprehensive and high-standard trade agreement addressing digital trade barriers ever negotiated. This agreement will help drive economic prosperity, promote fairer and more balanced trade, and help ensure that shared rules support businesses in key sectors where both countries lead the world in innovation.

“Key outcomes of this agreement include rules that achieve the following:

  • Prohibiting application of customs duties to digital products distributed electronically, such as e-books, videos, music, software, and games.
  • Ensuring non-discriminatory treatment of digital products, including coverage of tax measures.
  • Ensuring that data can be transferred across borders, by all suppliers, including financial service suppliers.
  • Facilitating digital transactions by permitting the use of electronic authentication and electronic signatures, while protecting consumers’ and businesses’ confidential information and guaranteeing that enforceable consumer protections are applied to the digital marketplace.
  • Prohibiting data localization measures that restrict where data can be stored and processed, enhancing and protecting the global digital ecosystem; and extending these rules to financial service suppliers, in circumstances where a financial regulator has the access to data needed to fulfill its regulatory and supervisory mandate.
  • Promoting government-to-government collaboration and supplier adherence to common principles in addressing cybersecurity challenges.
  • Protecting against forced disclosure of proprietary computer source code and algorithms.
  • Promoting open access to government-generated public data.
  • Recognizing rules on civil liability with respect to third-party content for Internet platforms that depend on interaction with users.
  • Guaranteeing enforceable consumer protections, including for privacy and unsolicited communication, that apply to the digital marketplace, and promoting the interoperability of enforcement regimes, such as the APEC Cross-Border Privacy Rules system (CBPR).
  • Ensuring companies’ effective use of encryption technologies and protecting innovation for commercial products that use cryptography, consistent with applicable law.

“Together, these provisions will set predictable rules of the road and encourage a robust market in digital trade between the two countries – developments that should support increased prosperity and well-paying jobs in the United States and Japan.”

https://ustr.gov/about-us/policy-offices/press-office/fact-sheets/2019/october/fact-sheet-us-japan-digital-trade-agreement

The agreement represents the U.S. achieving the negotiating objectives that it identified for digital trade in USTR’s summary of negotiating objectives (page 6) – no customs duties on digital trade (Art. 7 of Agreement), non-discriminatory treatment of digit trade in Japan (Art. 8 of Agreement), rules to limit interference with transborder flows of data (Art. 11 of Agreement), rules preventing governments from disclosing computer codes or algorithms (Art. 17 of Agreement), and limiting non-IPR civil liability for online platforms for third party content (Art. 18 of Agreement).  https://ustr.gov/sites/default/files/2018.12.21_Summary_of_U.S.-Japan_Negotiating_Objectives.pdf

There are, of course, many other provisions in the Agreement, some dealing with privacy, some dealing with access to government information, some dealing with cybersecurity.  In light of the stand-alone nature of the Agreement, the U.S. has also included exclusion provisions for national security and other purposes (e.g., GATT Art. XX, prudential purposes).

The Administration’s ability to enter into the agreement and have it take effect on January 1 is premised presumably on the agreement being consistent with existing U.S. law and practice and hence not needing legislative amendments to address.

WTO Consistency

Because the WTO’s primary agreements flow from the Uruguay Round, there is limited coverage of digital trade within the WTO (there has been a moratorium, extended at each Ministerial on imposition of customs duties on digital goods).  Thus, there are no WTO-consistency issues with the Agreement Between the United States and Japan Concerning Digital Trade Agreement.

Conclusion

Japan is the world’s third largest economy and an important trading partner for the United States.  The intention to start negotiations with Japan was one of three notifications of intended negotiations sent to Congress by the Trump Administration (Canada and Mexico, the EU being the others).  USMCA is awaiting final amendments to permit a Congressional vote and the EU talks have not advanced significantly at this point.  The Administration has adopted the novel approach of doing negotiations with Japan in phases.  The first phase of tariff liberalization has focused on U.S. agricultural interests and offsetting disadvantages for US agricultural exporters from the CPTPP entering into force at the beginning of the year and the Japan-EU agreement which took effect on February 1, 2019.  The agreement appears to move U.S. agricultural producers back to a competitive position with the other major agricultural exporters covered by the CPTPP and Japan-EU agreements.  The legitimacy of the first agreement depends on there being a broader agreement with Japan that the U.S. reaches in reasonably prompt fashion. 

The second agreement on digital trade reflects the continued growth and importance of digital trade to both the U.S. and Japan and the adoption of provisions the U.S. has been pursuing in recent years.

In short, concluding the two agreements should be helpful to U.S. trade interests.  However, there is a lot of work left to do with our important trading partner and ally, Japan, to achieve an overall result that is consistent with our WTO obligations.