Guest Post: Talk the Talk and Walk the Walk: WTO Panel Rules against the U.S. in US — IRA (China)
This is a guest post from Jingyuan (Joey) Zhou of Chongqing University School of Law
Introduction
On January 30, 2026, a panel at the World Trade Organization (WTO) handed down another blow to the United States, finding the U.S. Inflation Reduction Act (“IRA”) inconsistent with the U.S.’s WTO commitments.[i] The panel found that the challenged measures were inconsistent with the national treatment provision of the General Agreement on Tariffs and Trade 1994 (GATT 1994), the Agreement on Trade-Related Investment Measures (TRIMs Agreement), and the Agreement on Subsidies and Countervailing Measures (SCM Agreement). The panel further concluded that these measures were not justified by the public morals exception under GATT Art. XX(a). It is the second loss the U.S. suffered in WTO disputes initiated by China since trade tensions heightened in 2018. In September 2020, another WTO panel ruled that tariffs imposed by the U.S. against Chinese goods under Section 301 were inconsistent with the U.S.’s WTO obligations under the Most-Favoured-Nation obligation and the tariff bindings under relevant GATT provisions, and that the public morals exception under GATT Art. XX(a) could not save the measures.[ii] The consequences of the ruling may be far-reaching, not just because the case attracted ten third-party submissions from members of various developmental statuses and the Addendum is longer than the Panel Report.[iii] The ruling—highly likely to be appealed to the void by the U.S.—will also likely prompt other WTO members to reconsider their own domestic measures seeking to achieve the same re-industrialization efforts.
The Challenged Measures
The challenged U.S. measures are tax credits and subsidies contingent upon the use of domestic goods, or that discriminate against goods of Chinese origin, under the IRA passed by the Biden Administration.[iv] Specifically, China has challenged two sets of subsidies, the Clean Vehicle Credit and the Renewable Energy Tax Credits, both of which were intended to “advance U.S. leadership in the development of cutting-edge clean energy technology”[v]. The challenge to the Clean Vehicle Credit was dropped after the One Big Beautiful Bill Act effectively terminated it.[vi] The remaining Renewable Energy Tax Credits challenge entails four sub-categories of credits, namely, the Investment Tax Credit for Energy Property, the Clean Electricity Investment Tax Credit (collectively, ITCs), the Production Tax Credit for Electricity from Renewables, and the Clean Electricity Production Tax Credit (collectively, PTCs). Both ITCs and PTCs carried over existing tax credits to reduce upfront investment and production costs for qualified facilities in the U.S. and introduced new incentives, including the challenged Domestic Bonus Credits (DBCs). ITCs and PTCs can be used in three ways: As a tax credit (Investor/Producer Credit), as payments of taxes due (the Elective Payment), or as a direct transfer for monetary compensation (the Assignment Credit). DBCs are given contingent upon the satisfaction of two domestic content requirements: (1) the Steel and Iron Requirement that requires the project to use 100% of domestic steel and iron and (2) the Manufactured Products Requirement that requires the threshold of an electricity generation facility must be domestically mined, produced, or manufactured, and such threshold will gradually increase over the years.
China claims that both ITCs and PTCs violate Art. III:4 of the GATT 1994, Art. 2.1 of the TRIMs Agreement, Art. 2.2(a) of the TRIMs Agreement (collectively, National Treatment Violations), and Arts. 3.1(b) and 3.2 of the SCM Agreement. The U.S. admitted inconsistencies between the challenged measures and relevant WTO rules. However, the U.S. defended the legality of these measures under Art. XX(a), the public morals exception clause of GATT 1994—an approach similar to its defense strategy in the Section 301 case.[vii]
National Treatment Violations
I. Art. III:4 of the GATT 1994 Violation
Since the U.S. chose not to contest China’s claims, the Panel found that China has satisfied the burden of proof in demonstrating that the challenged measures met the three-element framework for Art. III:4 violations. Because both ITCs and PTCs conditioned the qualification for DBCs on the use of domestic contents based on the plain text of the measures, the Panel concluded that the “like products” prong was satisfied as the grant of both ITCs and PTCs was exclusively on the basis of origin. The Panel also found that the “laws, regulations, or requirements” prong and the “less favourable treatment” prong were met because the challenged measures created incentives for the use of domestic products over foreign products (paras. 7.16-7.20).
II. Art. 2.1 and Art. 2.2 of the TRIMs Agreement Violation
The Panel began its analysis of the TRIMs Agreement claims by holding that domestic content requirements fall within the scope of the TRIMS Agreement (para. 7.34). The Panel stated that “any trade-related investment measure that is inconsistent with Article III:4 of the GATT 1994 (or any other subparagraph of Article III) is ipso facto inconsistent with Article 2.1 of the TRIMs Agreement” (paras. 7.26-7.28). The Panel held that “[w]here a measure is a TRIM that falls within the scope of the illustrative list, it follows that the measure is a TRIM that is inconsistent with Article III:4 of the GATT 1994 and Article 2.1 of the TRIMs Agreement” (para. 7.31). Since the Panel has already found that ITCs and PTCs violated Art. III:4 of GATT 1994, and that compliance with the DBCs “is necessary to obtain an advantage” in terms of the increased benefits under ITCs and PTCs, the Panel concluded that the U.S. violated Art. 2.1 of the TRIMs Agreement (para. 7.39).
SCM Agreement Violation
The Panel first set forth the three-step analytical framework for assessing the existence of subsidies under SCM Agreement violation claims: There exists a financial contribution by a government, that financial contribution confers a benefit, and the financial contribution is specific. The Panel proceeded to analyze the three different use-cases of the DBCs and found subsidies exist under all three scenarios. With respect to the Investor/Producer Credit, the Panel agreed with China that the comparators are taxpayers that invest in or produce electricity but do not qualify for the ITCs and PTCs, or the Domestic Content Bonus Credits. The Panel then concluded that ITCs and PTCs reduce the tax liability under otherwise applicable tax rules for a specified subset of projects (para. 7.57). The Panel concluded that DBCs met the financial contribution requirement and DBCs conferred benefits that left the taxpayers better off than in the absence of such credits (para. 7.58). Regarding the Elective Payment scenario, the Panel again agreed with China’s claims that DBCs constitute either a direct transfer of funds or revenue foregone otherwise due (pars. 7.61-7.62). On the Assignment Credit, although the presence of the assignee as the intermediary attenuates the directness of the transfer of funds, the Panel nevertheless found that the flow of value, as mandated by the statutory provision, inevitably results in a transfer from the government to the assignor. The Panel further affirmatively found that the ITCs and PTCs, as well as the DBCs, are contingent on the use of domestic products under Art. 3.1(b) of the SCM Agreement.
Art. XX(a) Public Morals Exception under GATT 1994
Parties’ Arguments
The U.S. relies entirely on the Art. XX(a) Public Morals exception as its defense. GATT Art. XX(a) allows a member to impose measures “necessary to protect public morals” so long as the measures are applied in a non-discriminatory manner and are not a disguised trade restriction. The protected “public morals,” according to the U.S., are conduct or outcomes deemed morally objectionable—in this case, China’s non-market and trade-distorting behavior—within a Member’s territory. The U.S. contended that measures at issue were, therefore, to protect its public morals from China’s attainment of global dominance in the renewable energy sector. The dominance was allegedly gained through behaviors against U.S. norms against unfair competition, crimes under U.S. laws (including cyber-theft, economic espionage, and misappropriation of trade secrets), and violations of U.S. laws against forced labor. Ultimately, the U.S. believed that the challenged measures would protect public morals by reducing reliance on China and reclaiming market share from China’s dominance in certain industries in the U.S. market. Additionally, the U.S. argued that the measures were necessary because all previous efforts had failed. The U.S.’s arguments in this dispute were similar to those proffered in US – Tariff Measures (China).
China countered such arguments by pointing out that what the U.S. alleged to be public morals were not genuine public morals, that the measures were not designed to address any of the public morals concerns, and that the measures resulted in arbitrary or unjustifiable discrimination and constituted a disguised restriction on international trade. Specifically, China argued that economic concerns that are addressed by one or more of the WTO Agreements, or that are purely economic in nature (i.e. that are not ancillary to, or a consequence of, a genuine public moral), are not encompassed by the concept of “public morals” under Article XX(a), a proposition that is agreed by the European Union as a third party in the dispute.
Panel’s Finding
The Panel employed a three-step analytical framework to assessing the Art. XX(a) claim. Under the framework, the Member invoking Art. XX(a) must first establish that the measure was designed or taken “to protect public morals.” Then the Member must demonstrate that the measure is “necessary” to protect such public morals. Lastly, the Member must show that the measures are not applied in a manner that would constitute arbitrary or unjustifiable discrimination between countries where the same conditions prevail, or a disguised restriction on international trade.
At the outset, the Panel reiterated that the assessment of whether the challenged measures were “designed to” and whether such measures were “necessary” to protect public morals is legally and conceptually distinct; the same or similar evidence or considerations may be relevant to both inquiries. The Panel defended the “holistic approach” employed in US – Tariff Measures (China), which combined the assessment of “designed to” with “necessity” as warranted by the arguments and evidence submitted by the parties, and not a deviation from the separate analysis framework (para. 7.84).
The Panel reiterated the considerable deference Members enjoy in articulating public morals (para. 7.105), and reaffirmed the US – Tariff Measures (China) panel’s conclusion that norms having economic aspects could be covered by “public morals” (para. 7.106). The Panel, however, emphasized that “public morals” refer to right or wrong according to moral principles or norms, as opposed to principles or norms tied solely to economic values. The Panel refrained from setting an interpretative framework for the scope of public morals in this case or specifying the types of values that may qualify as public morals. Instead, the Panel focused its analysis on the four sets of public morals the U.S. articulated, namely, public morals against unfair competition, forced labor, theft, and coercion. The Panel found that the U.S. proved—and China accepted—that forced labor and theft are protected public morals.
With respect to whether public morals against unfair competition and coercion existed, the Panel again looked to domestic legislation, executive orders, presidential memoranda, and statements made in international fora. The Panel reaffirmed that domestic laws criminalizing or prohibiting certain acts may constitute prima facie evidence of the impermissibility of such regulated acts. The Panel, however, like the US – Tariff Measures (China) panel, held that the U.S. failed to explain why the aggrieved Chinese behavior, which was broader in scope than that criminalized or prohibited under U.S. domestic laws, fell within the alleged public morals. The Panel declined to expand the scope of public morals beyond what was regulated by the Sherman Act and the Federal Trade Commission Act. The Panel, however, appeared to leave such a possibility open, were the U.S. to demonstrate the existence of a common set of underlying values reflecting a broader, unified public morality across different pieces of domestic legislation. Moreover, the Panel held that the categorization of concerns matters, concluding that concerns labeled as economic or security were not moral concerns.
The Panel further found evidence submitted by China based on, inter alia, U.S. executive orders granting subsidies and allowing government intervention to reestablish the U.S. dominance in certain sectors undermined the U.S. contention that public morals against unfair competition existed.
Regarding whether public morals against coercion existed, the Panel concluded that the U.S. failed to articulate the scope and content of those morals. The Panel thus concluded that the U.S. failed to prove public morals encompass the alleged Chinese conduct.
Next, the Panel examined whether the challenged U.S. measures were designed to protect public morals and concluded that they were not. The Panel stressed that the explicit reference of public morals in the challenged measures was pertinent but not essential. The Panel found the lack thereof, together with the explicit reference tying the challenged U.S. measures to address economic and security concerns, rather suggested the challenged measures were not adopted with protecting public morals in mind.
The Panel then examined the design, structure, and expected operation of the challenged measures and again refuted the U.S. allegation that they were intended to protect public morals. Regarding the Steel and Iron Requirement, the Panel found that its operation as bonus credits did not disincentivize the use of Chinese steel and iron, nor did it send any signal of disapproval of Chinese alleged non-market behavior. To the Panel, the “choice by consumers (i.e. electricity production facilities) to use 100% domestic steel could therefore be motivated only by economic considerations disconnected from the perception or actualization of [‘]standards of right and wrong conduct[’] prevailing in the United States” (footnote 287). The Panel similarly dismissed the U.S. justification for the Manufactured Products Requirement. Thus, the Panel’s “global assessment” returned the verdict that the U.S. failed to show the challenged measures were necessary to protect public morals.
For judicial economy, the Panel declined to address the “necessity” element and the compliance with the chapeau, and recommended that the U.S. withdraw the challenged measures by Oct. 1, 2026.
What Are the Implications?
While China has quickly welcomed and praised the Panel report,[viii] the Panel Report only deepens the U.S. criticism over the WTO dispute settlement mechanism, and the U.S. is unlikely to withdraw the challenged IRA measures as recommended.[ix] As a result, the immediate effects between the two parties may be minimal. However, this outcome could potentially influence the parties’ positions in the ongoing negotiation, especially ahead of the much-anticipated meeting between President Xi and President Trump.[x]
Beyond the two disputing members, the Panel Report has wider ramifications for WTO members who plan to use industrial policies favoring certain products or producers to secure economic independence.[xi] Already, the consistency between industrial policies in critical minerals[xii] and electric vehicles[xiii], on the one hand, and the WTO rules against discrimination and trade distortion, on the other, has been questioned. Besides China, the EU has also accused the U.S. IRA of violating WTO rules at its expense, though it stopped short of filing a formal WTO complaint.[xiv] The EU further developed its own Green Deal Industrial Plan as its response to the IRA, which loosens the state aid rules to hand out subsidies but does not outright require local manufacturing or local content. [xv] Instead, through public procurement, the EU attempts to secure “resilient supply chains” and reach a set European capacity target. The EU’s Green Deal Industrial Plan has been similarly criticized for its protectionist and trade-distorting effects.[xvi] Therefore, one key takeaway from the Panel Report appears to be that to successfully invoke the public morals exception, the invoking member must talk the talk and walk the walk. In other words, the invoking member cannot adopt internal measures similar to those it claims violate public morals simultaneously.
This case further touches on the important question of the core function of the WTO and the purpose of the dispute settlement mechanism. A recent piece by Joost Pauwelyn suggests a “less law and more politics” approach would be better suited for the WTO going forward.[xvii] Pauwelyn emphasizes the function of “settling disputes and maintaining a balance of concessions, not abstract rule compliance and the further development of [‘]trade law[’]” and encourages deal-making between the disputing parties, while calling for resistance to more legislation. Other scholars have also opined on how to adjust the WTO and the dispute settlement mechanism to better handle the new trade reality. For instance, Gregory Shaffer called for more flexibility in rules interpretation, especially concerning the safeguard.[xviii] Simon Lester pointed to the built-in flexibility in anti-dumping and countervailing duties investigations and similarly argued for loosening restrictions on safeguard measures.[xix] Sergio Puig and his co-authors, on the other hand, called for patience with the incremental rule changes through adjudication.[xx] Though from different angles, they all stem from the harsh reality of the changing environment in which governmental actions and counteractions are prompted by the quest for independence rather than dependence. As indicated by members’ proposals on WTO reform,[xxi] fundamental principles and practices—such as the most-favoured-nation principle—that underpin the creation of the WTO institution are called into question, and bilateral dealings appear to be regaining popularity.[xxii] Issued at this critical juncture, the case allows all members to reflect on how best to (re)balance domestic economy and foreign competition, trade and economic security, as well as international cooperation and development.
[i] Panel Report, United States – Certain Tax Credits under the Inflation Reduction Act, WTO Doc. WT/DS623/R (circulated Jan. 30, 2026), https://www.wto.org/english/news_e/news_docs/623_e.pdf (hereinafter “Panel Report”)
[ii] Panel Report, United States—Tariff Measures on Certain Goods from China, WTO Doc. WT/DS543/R (adopted Sept. 15, 2020), https://docs.wto.org/dol2fe/Pages/SS/directdoc.aspx?filename=q:/WT/DS/543R.pdf&Open=True (hereinafter “US – Tariff Measures (China)”)
[iii] Addendum, United States – Certain Tax Credits under the Inflation Reduction Act, WTO Doc. WT/DS623/R/Add.1, https://www.wto.org/english/news_e/news_docs/623a_E.pdf.
[iv] Public Law 117-169, An Act To Provide for Reconciliation Pursuant to Title II of the S. Con. Res. 14 (16 August 2022)
[v] Statement by Ambassador Katherine Tai Following Congressional Passage of the Inflation Reduction Act of 2022, Office of the United States Trade Representative, Aug. 12, 2022.
[vi] China’s comments on the United States’ responses to questions from the Panel after the second meeting, para. 1.
[vii] Jingyuan Zhou, No Unilateral Action—WTO Panel Ruled U.S. Section 301 Tariffs on Chinese Imports Inconsistent with WTO Obligations, ASIL:Insights, Volume: 24 Issue: 26, Oct. 5, 2020, https://www.asil.org/sites/default/files/ASIL_Insights_2020_V24_I26.pdf.
[viii] Jan. 30, 2026, https://www.mofcom.gov.cn/xwfb/xwfyrth/art/2026/art_517c913ad32e4af588eb54a461c688b9.html (original in Chinese)
[ix] USTR Statement on WTO Report Faulting U.S. Actions to Reindustrialize Our Economy, Office of the United States Trade Representative (Jan. 30, 2026), https://ustr.gov/about/policy-offices/press-office/press-releases/2026/january/ustr-statement-wto-report-faulting-us-actions-reindustrialize-our-economy (stating that “[t]his report only underscores the serious doubts that the United States has long expressed regarding the capacity of the WTO to regulate trade in a world marked by severe and sustained trade imbalances”).
[x] President Xi Jinping Speaks with U.S. President Donald J. Trump on the Phone, Ministry of Foreign Affairs People’s Republic of China (Feb. 4, 2026), https://www.mfa.gov.cn/eng/xw/zyxw/202602/t20260205_11851262.html
[xi] Ana Elena Sancho and Johannes Fritz, State is Back in Business, Global Trade Alert (Feb. 4, 2026), https://globaltradealert.org/blog/government-is-back-in-business
[xii] 2026 Critical Minerals Ministerial Fact Sheet, U.S. Department of State (Feb. 4, 2026), https://www.state.gov/releases/office-of-the-spokesperson/2026/02/2026-critical-minerals-ministerial/. See also, EO 14241, Immediate Measures to Increase American Mineral Production (March 20, 2025)
[xiii] See Gil Lan, Electric Vehicle Tariffs by the US, EU, and Canada: Different Approaches and Implications for the WTO, ASIL:Insights, Volume: 28, Issue:12, https://www.asil.org/insights/volume/28/issue/12
[xiv] Andy Bounds, EU accuses US of Breaking WTO rules with green energy incentives, Financial Times (Nov. 6, 2022), https://www.ft.com/content/de1ec769-a76c-474a-927c-b7e5aeff7d9e
[xv] The Green Deal Industrial Plan Putting Europe's net-zero industry in the lead, European Commission, https://commission.europa.eu/topics/competitiveness/green-deal-industrial-plan_en
[xvi] N. Poitiers et al., The EU Net Zero Industry Act and the Risk of Reviving Past Failures, Brugel (Mar. 9 2023). See also Trevor Sutton and Sagatom Saha, The risk and opportunities of the EU’s green trade agenda, Brookings (Mar. 26, 2025).
[xvii] Joost Pauwelyn, A framework for WTO reform: Less law and more politics, Hinrich Foundation (Feb. 2026),
[xviii] Gregory Shaffer, Governing the Interface of U.S.-China Trade Relations, 115 AJIL 622 (2021).
[xix] Simon Lester, Joost Pauwelyn on Politics and Law in the World Trading System, IELP Blog (Feb. 5, 2026), https://ielp.worldtradelaw.net/2026/02/joost-pauwelyn-on-politics-and-law-in-the-world-trading-system/
[xx] Jeffrey Kucik, Lauren Peritz, & Sergio Puig, Rewriting Precedent: How International Adjudicators Influence Compliance, 46 Mich. J. Int’l L. 283 (2025)
[xxi] See e.g., On WTO Reform Communication from the United States, World Trade Organization, WT/GC/W/984 (Dec. 15, 2025), EU Submission on WTO Reform Communication from the European Union, WT/GC/W/986 (Jan. 21, 2026).
[xxii] Mona Paulsen, Is this the end of MFN as we know it? The EU submission on WTO reform and the meaning of development, IELP Blog (Jan. 23, 2026), https://ielp.worldtradelaw.net/2026/01/is-this-the-end-of-mfn-as-we-know-it-the-eu-submission-on-wto-reform-and-the-meaning-of-development/