Aside from the issue of public body blogged by Simon last week, the issue of market benchmarks under SCM 14(d) is at the center of the AB DS437 (21.5) report. In fact, the issue of benchmarking is more critical than that of public body in this case, since it is the benchmark that determines the existence and magnitude of the benefits conferred by financial contribution, whether the entity making such contribution is characterized as a public body. The benchmark issue has also generated a strong dissent in the AB report.
In the underlying CVD investigations over Chinese steel products, the USDOC rejected Chinese domestic prices as benchmarks, and used out-of-country prices instead, in making the benefit determination under SCM 14(d). China challenged the USDOC benefit determination in the original DS437 proceedings and won at the AB stage in December 2014. A highly significant development in the AB report in DS437 was that the AB recognized that government-related prices (including SOE prices) can also be market-determined and must be taken into account in making benchmark determinations. This position was first announced in the AB DS436 report (India v. US) issued a few days earlier. In other words, the AB treated China and India consistently in this regard.
Because the USDOC continued to use the same methodologies after the AB decision, China challenged the US for noncompliance in the 21.5 proceedings. The 21.5 Panel sided with China and the AB majority agreed. The AB majority faulted the USDOC for not having provided sufficient and reasonable explanations as to why China’s domestic prices of the steel products involved were not market-determined. Apparently, China had provided the USDOC with detailed price data for these products (the “Mysteel data”), as well as an expert report in the antitrust context (the “Ordover Report”) that attested to competitive market conditions for the relevant products in China. The USDOC essentially dismissed the price data and the expert report as irrelevant, on the grounds that the entire Chinese market is distorted due to extensive government control over the economy. The AB majority found the US explanation insufficient, whereas the dissenting judge felt otherwise.
Thus, it seems to me the key issue in this case is how China’s in-country competition should be treated under SCM 14(d). But neither the AB majority nor the dissenting judge characterizes the issue this way. In my view, while it is undeniable that the government maintains an extensive control over China’s economy, it is also undeniable that there exists fierce competition in many Chinese industries, including the steel industry,which had more than 1000 producers comprising both SOEs and private firms (this fact was acknowledged by the US and by the AB report in DS379). In fact, introducing and encouraging competition between SOEs and between local governments has been a major ingredient in China’s economic reform.
But how should China’s in-country competition be taken into account under SCM 14(d)? The AB 21.5 Report has triggered two thoughts.
First, as a technical matter, I think that the USDOC could have recognized the relevance of the Chinese domestic prices while reaching the same conclusion in the benefit determination. The way to do so would be to explain the effect of market competition in an economic structure that is fundamentally distorted in the view of the USDOC. It could be argued that competition in a fundamentally distorted economy can only exacerbate the adverse impact of government subsidies, since competition would drive the export prices even lower.
Second, I suspect this AB report may finally push the US and others to resort to China-specific rules in future CVD investigations. The AB opinions in this case (both the majority and the dissent) have highlighted certain “special difficulties” in dealing with China under the SCM provisions. The benchmark jurisprudence developed under SCM 14(d) concerning government-related entities may make sense for countries such as India, but may not work well in the case of China. The solution then may lie in Section 15(b) of China’s Accession Protocol, which provides:
“In proceedings under Parts II, III and V of the SCM Agreement, when addressing subsidies described in Articles 14(a), 14(b) 14(c) and 14(d), relevant provisions of the SCM Agreement shall apply; however, if there are special difficulties in that application, the importing WTO Member may then use methodologies for identifying and measuring the subsidy benefit which take into account the possibility that prevailing terms and conditions in China may not always be available as appropriate benchmarks. In applying such methodologies, where practicable, the importing WTO Member should adjust such prevailing terms and conditions before considering the use of terms and conditions prevailing outside China.”
Section 15(b) essentially allows an importing member to reject Chinese domestic prices as benchmarks under SCM article 14. It is important to note that Section 15(b) has no built-in expiration date (in contrast to the nonmarket economy provision for antidumping purposes in Section 15(a), which expired in December 2016). Thus far, Section 15(b) has not been invoked, as the importing members have been able to use out-of-country prices as benchmarks for Chinese subsidies under the prior SCM article 14 jurisprudence. In light of this AB report, however, the situation may change.