Panel Report on China – Publications/AV: New Jurisprudence on WTO-Plus Obligations

The Panel Report, released on August 12, has been briefly discussed on this blog (here and here). Among its many interesting aspects, the Panel report is the first to interpret a major “WTO-plus” obligation of China – the trading rights obligation. Almost half of the pages in the Panel’s findings were devoted to the claims on trading rights. (The other half dealt with the claims on the right to distribute imported cultural products under GATS and GATT Article III.)

The trading rights obligation requires China to allow everyone, domestic or foreign, to engage in imports and exports of all goods except for a list of products specified in the Accession Protocol. That list contains dozens of commodities, such as grains, cotton, and fertilizers, the importation of which is reserved for specific state trading enterprises. Cultural products (books, newspapers, AV products, etc.) are not on the exclusion list, but China has not allowed non-SOEs to import these products, for which the U.S. sued. The trading rights obligation is “WTO-plus” because WTO rules do not prohibit state trading or import monopolies, nor do they limit the scope of state trading in any specific products. The main WTO disciplines on state trading are GATT Article XVII (nondiscrimination requirements) and Article II:4 (no price markup by import monopolies).

 

The interpretation of the Accession Protocol presents a special challenge, mainly because the Protocol contains numerous China-only rules that differ from the requirements of WTO multilateral agreements, but does not explain how the China-only rules should fit into the WTO rule structure. Furthermore, the Protocol does not articulate any rationale, or purpose and object, of the China-only rules. The trading rights provisions are a typical example of such a problem. Given the difficulties, the Panel did a very respectable job. It was very careful to keep its analysis on narrow grounds. And its analysis on the relationship between imports and importers was well made in my view. 

One of the Panel’s tasks was to fill the “legislative” gap on the relationship between the trading rights provisions of the Protocol and the GATT. The Protocol does not contain any general policy exception, and China invoked GATT Article XX(a) as a defense for its apparent breach of the trading rights obligation. As Simon has already commented, the Panel avoided dealing with this systemic issue, and instead followed the AB’s method of using the arguendo technique. (See a recent post on this technique. This technique, however, will only work when the judges have predetermined that the defense should fail. There is therefore a limit on how long this technique can be used to avoid addressing an underlying systemic issue.) 

 

Nonetheless, the Panel did develop the “necessity” jurisprudence under Article XX in the context of the trading rights obligation. Specifically, the Panel added a new factor to the weighing and balancing process: the restrictive impact of the measures on the right to import (in addition to the three factors to be considered under exiting jurisprudence, namely, importance of the policy objective, restrictive impact on trade, and contribution of the measures to the objective.) The Panel stated in para. 7.788: 

[W]e think we should weigh not only the restrictive impact the measures at issue have on imports of relevant products, but also the restrictive effect they have on those wishing to engage in importing, in particular on their right to trade.  In our view, if Article XX is assumed to be a direct defence for measures in breach of trading rights commitments, it makes sense to consider how much these measures restrict the right to import.  This would appear to parallel a situation where a Member imposes a WTO-inconsistent ban on imports of products and where an Article XX defence requires examination of how much the ban restricts imports of those same products. Accordingly, we find it appropriate to consider two different types of restrictive impact in this case. (footnote omitted)

The consideration of this new factor appears to be critical, judging from the conclusion in para. 7.863:

Based on the above examination of the relevant factors, we can now come to a conclusion whether, overall, the requirement that publication import entities must be wholly state-owned enterprises is "necessary" within the meaning of Article XX(a).  In weighing and balancing the relevant factors, we note, first of all, that the protection of public morals is a highly important governmental interest and that China has adopted a high level of protection of public morals within its territory.  This said, as explained above, we have not been persuaded that the requirement in question makes a material contribution to the protection of public morals. Also, while it is unclear from the evidence on record to what extent, if any, the requirement in question limits imports of relevant products, it is clear that it completely excludes particular types of enterprise in China from the right to engage in importing.  Weighing these factors, we reach the conclusion that China has not demonstrated that the requirement in question is "necessary" to protect public morals in China. (emphasis added)

Apparently, the U.S. did not submit evidence on the adverse impact on trade, whereas China demonstrated that imports had been increasing significantly. Hence, if the Panel had considered the restrictive impact on imports alone, the balance could have tilted the other way. The lack of evidence may well be attributable to the inherently opaque nature of state trading, but it is also a fact that China does not maintain tariffs or quotas on cultural imports, and there was no accusation that the import monopolies engaged in price markups prohibited by GATT Article II:4. 

The limited impact on trade in this case is understandable if we realize that the restriction on the right to import cultural products was adopted for political, rather than economic/protectionist reasons, although it inevitably has economic consequences. By maintaining state monopoly in dealing foreign cultural products, the Chinese authorities can rely on the personnel of selected SOEs to police the imports. In other words, the Party can trust the personnel of selected SOEs in a way it cannot with private entities to carry out its opaque and capricious censorship policies. (Interesting, this crucial “trust” factor was not explicitly presented in China’s arguments before the Panel.) 

So, was the Panel correct to examine the restrictive impact on the right to trade, using an analogy to Article XI, in determining “necessity” under Article XX? The answer may depend on your understanding of the purpose of the trading rights obligation. (Note that the Panel did not discuss the object and purpose of the Protocol provisions at all.) If you think the right to trade is meant to ensure market access for cultural products, then the Panel’s approach may seem problematic since the market access for cultural imports does not appear to be impeded under the import monopoly (other than as a result of the censorship, but the Panel decision does not require China to reduce censorship, only the way it is conducted). On the other hand, if you see the purpose of the right to trade as not only to ensure market access for the products, but also to compel China to adopt a market-based economic system, then the Panel’s approach would seem correct. However, a further question needs to be considered: What is the purpose for the WTO to compel China to adopt a market-based system? Is it to ensure liberalization of trade, or something beyond trade and economic interests?

In this respect, the trading rights provisions raise a similar question as the SPS/TBT provisions on international standards, that is, whether the novel disciplines are intended to prevent protectionism, or to achieve something beyond that. This is ultimately a question about the mission of the WTO. Unfortunately, the WTO judiciary has a tendency to shun such systemic issues in their analyses. The Panel report in this case is no exception. 

Given the political nature of the trading rights measures (note that they are different from the measures restricting distribution rights under GATS and GATT, for which China did not invoke public morals defense), I would not be surprised should China refuse to comply with an adverse ruling upon appeal. In that event, the result could be similar to U.S.-Gambling, except that it is not clear how China could seek revision of its accession terms. A more feasible solution might be for the US and China to reach some kind of compromise regarding implementation. 

For discussions on these issues and more on the challenge of interpreting WTO-plus provisions, see my article here.