The U.S. has posted its responses to the panel's questions in U.S. - IRA (China) (DS623). I want to highlight two specific questions/responses: One relates to the meaning of "non-market" policies and practices, and the other relates to the availability of GATT exceptions in the context of SCM Agreement claims.
Non-Market Policies and Practices
First up, there was this question from the panel on what exactly the U.S. means by the terms "anti-competitive" and "non-market," as the U.S. accuses China of adopting these kinds of policies and practices, and then uses this as the basis for justifying its own measures under GATT Article XX(a) (public morals):
Question 9. To the United States: With respect to the United States' arguments concerning the justification of the measures at issue under Article XX(a) of the GATT 1994:
a. At paragraph 1 of its opening statement, the United States submitted that China "has adopted anti-competitive and non-market policies and practices to secure global dominance in" certain sectors. Please provide further details about the United States' understanding of the terms "anti-competitive" and "non-market". Please also elaborate on the relationship between "anti-competitive and non-market" policies and practices and the United States' "public morals against unfair competition, forced labor, theft, and coercion" (United States' opening statement, para. 27).
I'm curious about this too. How does the U.S. draw the line between what is acceptable and what is not in terms of government interventions in the economy? There are many U.S. policies and practices (especially in recent years) that could get caught up here, so how will the U.S. bring in China's measures but carve its own measures out? Here is the U.S. response:
19. As an initial matter, the term “non-market” may be used to describe policies that interfere with or displace market-oriented outcomes – that is, the results of fair competition in the marketplace between market-oriented actors operating at arm’s-length under market economic conditions. In this sense, “anti-competitive” may be considered an aspect of “non-market” policies or conditions. The United States maintains a market-oriented economic system and pursues market-oriented policies and practices, which promote fair competition and specifically prohibits targeting of global dominance that China pursues.
20. China’s “non-market” policies and practices in the clean vehicle and renewable energy sector include: targeting of sectors for dominance; non-market excess capacity; state-directed investment; forced labor; forced technology transfer; and theft of trade secrets.16 Below, the United States explains how each of these policies and practices are non-market. Further, in response to the latter half of the question, the United States also explains the relationship between each of China’s non-market policies and practices with the U.S. public morals against unfair competition, forced labor, theft, and coercion.
21. As explained previously, China’s targeting of the clean vehicle and renewable energy sectors for dominance is non-market because China sets quantitative targets for the clean vehicle and renewable energy sectors,17 leading Chinese economic actors to overinvest, to displace foreign companies in existing markets, and to take new markets as they develop.18 In effect, China’s policy of global dominance is an effort towards monopolization. Indeed, as the Information Technology and Innovation Foundation observed, “[China’s] entrenchment as the dominant photovoltaic manufacturer has corresponded with plummeting R&D intensity, patents, and new market entry in the United States”.19 Therefore, China’s targeting of the clean vehicle and renewable energy sectors is contrary to the U.S. public moral against unfair competition, including as reflected in the U.S. prohibition and criminalization of monopolization – or even attempts at monopolization – in any aspect of interstate trade or commerce.20
22. China’s excess capacity is non-market because the capacity created is in excess of what would have resulted under market-oriented conditions.21 That is, in line with its targeting of sectors for dominance, China creates excess capacity through investments and capacity expansion far in excess of what market-oriented actors, operating under market economy constraints, would create.22 Non-market excess capacity discourages market-based investment and hinders market-oriented workers and businesses. Therefore, China’s non-market excess capacity is also contrary to the U.S. public moral against unfair competition.
23. Further, China’s targeting of the clean vehicle and renewable energy sectors for dominance and non-market excess capacity does not occur in isolation. Rather, China’s targeting of sectors for dominance and non-market excess capacity is pursued and achieved through a variety of non-market means, such as use of state-directed investment, forced labor, forced technology transfer, and the theft of trade secrets.23 Accordingly, China’s targeting of sectors for dominance and non-market excess capacity are also contrary to the U.S. public morals, against unfair competition, forced labor, theft, and coercion, as reflected in U.S. law.24
24. China’s state-directed investment is non-market because China’s investment policy seeks to create dominance in the clean vehicle and renewable energy sectors through funding and investment strategies that are not market oriented, including by seeking to expand capacity in sectors in which China already has created massive excess capacity.25 The absence of a market-basis for funding is evident, for example, in China’s investment of an estimated $50 billion into solar production facilities between 2000 and 2010, despite China’s recognition that overcapacity was occurring.26 China’s also directs and encourages outbound investment by Chinese economic entities to acquire foreign companies in areas the government deems strategic, including in the renewable energy sector.27 Therefore, China’s state-directed investment is contrary to the U.S. public moral against unfair competition, including as reflected in the U.S. prohibition and criminalization of monopolization – or even attempts at monopolization – in any aspect of interstate trade or commerce.28
25. China’s use of forced labor in the processing of raw materials used in the clean vehicle and renewable energy sector is non-market because the use of unpaid or artificially cheap labor unfairly lowers the cost of production and deprives workers of fair, market-oriented compensation.29 Forced labor is contrary to basic conceptions of human dignity and autonomy.30 China’s use of forced labor is contrary to the U.S. public morals against unfair competition and forced labor, including as reflected in U.S. criminal and civil laws against the use of forced labor.31
26. China’s use of forced technology transfer is non-market because its imposes foreign ownership restrictions, such as joint venture requirements and foreign equity limitations, and various administrative review and licensing processes, to require or pressure technology transfer from foreign companies.32 That is, companies are forced to transfer technology that would not have occurred under normal market conditions.33 The use of forced technology transfer violates the U.S. public morals against unfair competition and coercion, as reflected in U.S. laws.34
27. China’s theft of trade secrets from foreign companies is non-market because commercially valuable business information, including trade secrets, technical data, negotiating positions, and sensitive and propriety internal communication, would not be released to competitors under market-oriented conditions.35 China’s conduct and support of unauthorized intrusions into, and theft from, the computer networks of foreign companies is contrary to the U.S. public morals against unfair competition and theft, including as reflected in the U.S. laws against cyber theft, economic espionage, and the misappropriation of trade secrets.36
28. Accordingly, as detailed above, China’s policies targeting the clean vehicle and renewable energy sectors for dominance, and in fact achieving dominance, are non-market, including through the means used to pursue and achieve that dominance. China’s non-market policies and practices are contrary to the identified U.S. public morals.
In the view of the U.S., a key element here is whether a government uses its measures to achieve global dominance in a sector. If that is the goal, the policies and practices are likely to be a problem; if that is not the goal, the policies are more likely to be OK. Here, because China's policies and practices are trying to achieve global dominance, the U.S. would say, they constitute anti-competitive and non-market policies and practices, and therefore are a problem. By contrast, U.S. policies and practices (such as the ones China is challenging in this case) do not go nearly as far, and in fact the U.S. system "specifically prohibit[s] [the] targeting of global dominance that China pursues," and therefore its policies and practices are not a problem.
It would be nice if the panel pushed the U.S. a bit on this, to get more clarity. For example, in what sense is the U.S. not pursuing global dominance of particular sectors through its subsidies, tariffs, and other government measures? If global dominance is not what it is pursuing, what exactly is it pursuing? I suspect the U.S. would say something like "economic security," but I'd like to hear it all laid out. Also, how exactly is pursuing global dominance prohibited in the U.S.? Some parts of the tech sector are examples of where the U.S. has arguably achieved this outcome. While it's true that the U.S. government can bring (and has brought) antitrust suits against specific companies, I'm not sure that will affect overall U.S. dominance of this sector.
If pursuit of global dominance is the key element the U.S. has in mind, I feel like this could be a difficult standard to enforce. Nevertheless, if this is a test other governments can get behind, I wonder if it could provide a workable basis for a compromise between China and the U.S. in the context of the current round of trade wars. If someone could come up with a way to define when policies and practices go so far as to be seen as pushing for global dominance of a sector, that could set the boundary for what is acceptable.
GATT Exceptions to SCM Agreement Claims
With regard to the invocation of GATT exceptions as a defense to claims under the SCM Agreement, which I talked about here, the panel asked the following question:
Question 21. To both parties: Does the negotiating history (whether from the Uruguay Round or earlier) shed any light on whether Article XX of the GATT 1994 is applicable to the SCM Agreement?
The response is a bit long, and I'm just going to include here the part that relates to the Uruguay Round:
Uruguay Round Negotiations
103. Negotiation of the SCM Agreement during the Uruguay Round similarly reflects an elaboration upon the core principles and objectives of the GATT 1947,146 including the foundational exceptions reflected in Articles XX and XXI. In the Ministerial Declaration on the Uruguay Round, which launched the negotiations of the SCM Agreement, parties agreed that the negotiations would seek to “improve the multilateral trading system based on the principles and rules of the GATT.”147 Such principles and rules were foundational to the negotiation.
104. The parties expressly agreed that the GATT 1947 disciplines and exceptions would be addressed through negotiations only to the extent necessary. In other words, to the extent the contracting parties considered that the status quo application of certain exceptions to GATT 1947 disciplines was satisfactory, no further discussion was needed or had. The contracting parties stated: “Participants shall review existing GATT Articles, provisions and disciplines as requested by interested contracting parties, and, as appropriate, undertake negotiations.”148 Contracting parties with an interest in narrowing the application of the GATT 1947 exceptions from their well-recognized, comprehensive application had an opportunity to do so, and did not.
105. Throughout the negotiation of the SCM Agreement, the contracting parties never contemplated excluding application of the GATT 1947 exceptions to the subsidies disciplines. At the start of the Uruguay Round, the Secretariat circulated a note titled “Problems in the Area of Subsidies and Countervailing Measures,” in which the Secretariat “list[ed] problems which have arisen in the operation of Articles VI and XVI of the General Agreement and the Agreement on Subsidies and Countervailing Measures.”149 The note contains a comprehensive list of concerns raised by parties on provisions from both the GATT 1947 and the Subsidies Code – for example the notification requirements under Article XVI:1 of the GATT 1947 and the special and differential treatment granted to developing countries under Article 14 of the Subsidies Code.
106. The document makes clear that the negotiators were considering the GATT 1947 provisions and the Tokyo Round Subsidies Code collectively – including the exceptions – and that no contracting party had identified the GATT 1947 exceptions as a “problem” to have arisen in the operation of the subsidies provisions.
107. The negotiators subsequently confirmed their desire to focus the negotiations on these and other “problem” areas – and not on the existing applicability of the GATT 1947 exceptions. After soliciting from contracting parties the issues proposed for negotiations, the Chair of the negotiation circulated a “checklist of issues for negotiations” that served as the framework for the negotiations that would lead to the SCM Agreement.150 Again, this comprehensive document identifies issues from the GATT 1947 and the Tokyo Round Subsidies Code, including the issue of special and differential treatment in Article 14 of the Subsidies Code, but does not make any reference to the GATT 1947 exceptions – which apply to the GATT 1947 subsidies disciplines and, in turn, to the Tokyo Round Subsidies Code disciplines. The contracting parties did not consider it necessary to revisit this issue in the context of these negotiations. Instead, as that Checklist explicitly states, the “point of departure” for those discussions “should be the existing GATT rules, particularly the [Tokyo Round Subsidies] Code.”151
108. The SCM Agreement reflects this understanding. The negotiators sought to further elaborate upon the existing subsidies disciplines, while preserving the foundational elements of the GATT 1947 disciplines and exceptions, except where expressly provided. Importantly, the SCM Agreement ultimately incorporated – at Article 32.1 and footnote 56 – Article 19 and footnote 1 of the Tokyo Round subsidies code which, read in conjunction, confirm that where an article is not interpreted by the SCM Agreement, the authority to take action under the GATT 1994 provisions remain unchanged.152
As I've noted before on this issue, I think I'm more sympathetic than most people to the argument that GATT exceptions can apply to non-GATT goods agreement. Having said that, I'd love to hear from some Uruguay Round negotiators on this. Did they talk about, or even think about, the question of whether GATT exceptions would apply to these other agreements? What did people have in mind back then?
