Finbarr Bermingham reported on Wednesday, April 23, 2024, that in the recent SCM Committee meeting, there were ‘sharp’ exchanges between the US and China related to Chinese ‘overcapacity’ in key sectors owing to subsidies. China objects to the term ‘overcapacity,’ arguing that there is no clear definition within the WTO treaty architecture. Some of the US’s (and other members’) concerns at the SCM Committee stem from a related problem: WTO members lack information about the extent of Chinese industrial subsidies, making it difficult to know which elements of so-called overcapacity issues require closer inspection and governance. For China, overcapacity is a cloak for concerns with domestic competitiveness and ‘an excuse for protectionism.’
Is the absence of consensus on the legal requirements of ‘overcapacity’ a problem for WTO members seeking to address Chinese policies? I’d argue no. In fact, there’s a long history of trading partners working through government interventions through the GATT’s nullification and impairment clause.
According to the Rhodium Group, '[t]he simplest and most widely accepted definition of overcapacity is when factories’ production capacity is under-utilized.' This has a knock-on effect on global markets. When domestic production capacity far exceeds demand, firms lower their prices and search for foreign markets for their excess capacity. In 2015, the OECD reviewed growing imbalances in steelmaking. The OECD noted that the problem of growing imbalances stemmed from both the extent of and variety of government interventions that distort markets, including government subsidies, foreign investment controls and administrative hurdles that limit entry of new steel facilities.
In addressing China’s continued subsidies, Simon proposes members bring adverse effects cases to the WTO, citing the key parts of Article 5.
Article 5: Adverse Effects
No Member should cause, through the use of any subsidy referred to in paragraphs 1 and 2 of Article 1, adverse effects to the interests of other Members, i.e.:
(a) injury to the domestic industry of another Member11;
(b) nullification or impairment of benefits accruing directly or indirectly to other Members under GATT 1994 in particular the benefits of concessions bound under Article II of GATT 199412;
(c) serious prejudice to the interests of another Member.13
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11The term "injury to the domestic industry" is used here in the same sense as it is used in Part V.
12The term "nullification or impairment" is used in this Agreement in the same sense as it is used in the relevant provisions of GATT 1994, and the existence of such nullification or impairment shall be established in accordance with the practice of application of these provisions.
13The term "serious prejudice to the interests of another Member" is used in this Agreement in the same sense as it is used in paragraph 1 of Article XVI of GATT 1994, and includes threat of serious prejudice.
Article 5(b) addresses nullification or impairment of benefits, with a note that connects this term to the relevant ‘practice of application’ of the GATT provisions.
As many of you know, the non-violation nullification and impairment clause enables members to deal with contract incompleteness - government measures not covered by any WTO agreement (see also Horn, Maggi, and Staiger (2010) and Hudec 1990 and 1993). As Alan Sykes and Robert Staiger (2013) observe, the clause played a critical role in facilitating the ‘shallow integration’ approach that the GATT adopted – a non-violation claim creates a legal right for a complainant to receive compensation, in response to which the responding member can either pay or remove the measure in question, eliminating the nullification or impairment of the complainant’s benefits. The origins of the nullification and impairment clause stemmed from interwar trade negotiations concerning a formula of equitable treatment for trade agreements. In the League of Nations’ economic work, an American negotiator proposed ‘nullification or impairment’ language for future trade agreements that recognised that when it came to uncertain or indirect forms of administrative protectionism, governments needed a formal right to address frustrations with anticipated commercial benefits of negotiations. Robert Hudec reflected on the GATT concept of ‘nullification or impairment’ from this history, noting that it provides ‘equitable remedies for trade injuries not involving a breach of legal obligations.’
The main purpose of the GATT is to facilitate a balanced exchange of tariff reductions, along with requiring all contracting parties (now WTO members) to act in a manner consistent with the principle of non-discrimination. However, if a government must act in a way that distorts markets, the GATT includes commitments that a government consider concepts of fairness and equitableness when participating in global markets. For example, Article XVI:3 of the GATT 1994 evolved into prohibiting export subsidies within the SCM Agreement. However, at its root, the contracting parties ‘seek to avoid’ export subsidies (on primary products). When a government does ‘directly or indirectly’ subsidise exports, the subsidising government cannot receive ‘more than an equitable share of world export trade.’ (Aside: as per Ad Article XVI:B.2, a “primary product” was vital to development and understood to be any product of farm, forest, fishery, or any mineral). Another reference is found in Article XX(j) of the GATT, whereby if members purchase products that are globally in short supply, that member must remain consistent with the principle that all members ‘are entitled to an equitable share of the international supply of such products.’
I do not want to mask the causality problems involved with the ‘equitable’ language. In 1982, Colin Phegan wrote about the political sensitivity captured by GATT XVI:3, raising questions about the disciplining of ‘equitable sharing’, such as the threshold by which a country’s share in global markets becomes ‘inequitable’ or demonstrating causality between a subsidy and the increase in the share of global export trade.
But I do want to suggest that, where there are concerns about overcapacity, it seems entirely possible for the US and other members to bring an adverse effects case and seek non-violation nullification and impairment remedies, resting on the idea that when a government’s subsidies create global imbalances, there is a legal foothold to question whether the situation is equitable, even drawing parallels to the early consideration of export subsidies for taking ‘more than an equitable share of world export trade.’ Could this apply to domestic surplus across many industrial sectors? Perhaps not. Yet it seems that the multilateral trading system did embed these principles into the GATT knowing that state trading economies existed and would trade in global markets, explaining why we have non-violation cases and references to commitments that such state trading economies accord to the trade of other members’ fair and equitable treatment. At the very least, raising the concept in a non-violation nullification and impairment case seems a starting point for WTO engagement.
Whether this could work in the current state of WTO dispute settlement remains crucial. At the bare minimum, it may be time to examine the origins of these subsidy commitments and consider whether the EU, US, and other members have legal footing to open a discussion in the SCM Committee.
