Introduction
The US-China trade war formally begun when the US accused China of unfair trade practices in technology transfer and intellectual property (“IP”), pursuant to an investigation under Section 301 of the US Trade Act,1974. Section 301, a highly controversial provision, authorizes the US government to take trade actions against a foreign country if it determines that the country has engaged in unreasonable or discriminatory policies or practices that burden or restrict US commerce.[i] Based on the findings of the Section 301 Report, the US levied retaliatory tariffs on Chinese products as a response to China’s unfair practices and as compensation for the loss of American IP (“Section 301 tariffs”).
These tariffs were levied in three rounds.[ii] The first round, announced on April 3, 2018, covered Chinese products worth $50 billions at the rate of 25% (“List 1”). The second round of tariffs covered an additional $200 billions worth of Chinese imports at a rate of 10% effective from September 24, 2018, which was later increased to 25% on May 10, 2019 (“List 2”). Finally, the third round of tariffs was announced in August 2019, covering an additional $300 billions of Chinese products (“List 3”).
China responded by imposing retaliatory tariffs and instituting multiple WTO complaints[iii] against the US over Section 301 tariffs.
WTO Panel Ruling in DS 543
United States — Tariff Measures on Certain Goods from China (“DS 543”)[iv] dealt with the Section 301 tariffs levied on Chinese imports under List 1 and 2. On September 15, 2020, a WTO panel ruled that these tariffs were inconsistent with the US obligations under the General Agreement on Tariffs and Trade (“GATT”) because:
They are prima facie in violation of the most favoured nation (“MFN”) principle enshrined in Article I:1 and of US tariff bindings under its schedules of concessions as per Article II:1(a) and (b); and
the tariffs are not justified under the ‘public morals’ exception in Article XX (a).
Arguments
China argued that under the MFN clause, the US could not impose tariffs unilaterally against another WTO member country. It contended that through the application of the Section 301 tariffs, that too only on Chinese products in excess of those contained in its schedule, the US had violated Articles I:1 and II:1(a) and (b) of GATT.
In response, the US raised two contentions: Firstly, since the parties had reached a ‘settlement of the matter’ within the meaning of Article 12.7 of the Understanding on Rules and Procedures Governing the Settlement of Disputes (“DSU”), the Panel should refrain from making any legal findings on the issue. Secondly, Section 301 tariffs were justified under Article XX(a) of the GATT as measures necessary to protect public morals. The US contended that the Chinese policies and practices, amounting to state-sanctioned theft and misappropriation of US technology, IP, and commercial secrets had violated the US public morals.
Ruling
Bilateral Negotiations do not Amount to the Settlement of the Issue
The Panel reasoned that the WTO dispute settlement process is compulsory and members are entitled to a ruling by a WTO panel.[v] Unless the parties relinquish their rights under WTO DSU, the Panel is required to discharge its adjudicative responsibilities.[vi] The Panel also noted that a ‘solution’ in terms of Article 12.7 has to be ‘mutually satisfactory’, rather than one based on a party’s unilateral assertion.[vii]
The Panel, thus, concluded that the bilateral negotiations between the US and China (resulting in the Economic and Trade Agreement between the two countries – ‘Phase One Agreement’) were parallel to the panel proceedings, and not intended to replace them. Such negotiations, which are an additional path encouraged by the DSU[viii], cannot be understood to deprive China of its entitlement to a ruling by a WTO panel.[ix]
Violation of MFN and Schedule of Concessions
The Panel found that the tariffs were prima facie inconsistent with Article I:1 because they applied only to products originating from China and thus failed to accord them the same treatment granted to like products originating in other WTO Members.[x] It also found the tariffs to be prima facie inconsistent with Articles II:1(a) and (b), because they were ordinary customs duties applied in excess of the rates to which the US had bound itself and thereby accorded Chinese imports ‘less favourable treatment’ than that provided for in the US schedule of concessions.
Public Morals
The Panel adopted a holistic analytical method to determine the validity of the US claim that Section 301 tariffs were necessary to protect US public morals.
The Panel recognized the deference that WTO Members enjoy when defining ‘public morals’ and found that the ‘standards of right and wrong’ invoked by the US could fall within the ambit of ‘public morals’.[xi] Measures having economic aspects may be found to be in pursuance of public pursuits.[xii] The absence of a reference to public morals in the legal instrument implementing the measures is not determinative of whether it falls under Article XX(a).[xiii] Therefore, the Panel determined that a ‘public morals’ objective within the meaning of Article XX(a) had been raised.
The Panel, however, concluded that the US had failed to explain how the procedures for the exclusion of products in List I and List II were coherent with the policy objective invoked by it.[xiv] The Panel found that some products in List I were not closely related to the affected industrial policies identified in the Section 301 Report.[xv] Further, even though some products that benefitted from China’s alleged unfair practices were included in the initial list, such products were later granted exemptions as they were not of strategic importance to the Made in China 2025 programme.[xvi]
The Panel also rejected the US argument that the imposition of additional duties on List 2 products contributes to the public morals objective because it “re-enforces” the imposition of additional duties on List 1 products, and applies stronger economic pressure on China “in a comprehensive sense”[xvii] as the public morals objective could not be “derived” from the potential contribution of the imposition of additional duties on List 1 products.[xviii]
The Panel concluded that the US had failed to meet the burden of demonstrating that the measures are provisionally justified under Article XX(a).
Significance of the Decision
Practical Significance
The panel ruling is, at best, a victory on paper for China and is unlikely to yield any substantive resolution in the US-China trade war. As the panel itself regretfully suggested, the WTO is not operating in normal times.[xix] Should the US choose to appeal the Panel’s decision to the Appellate Body (which it has rendered dysfunctional by continuously blocking the appointment of members), the Panel’s findings would effectively be prevented from becoming final as its adoption by the WTO members will be indefinitely postponed.[xx] Moreover, a closer look at the Panel Report reveals a more nuanced verdict. The Panel notes that the US has not initiated complaints at the WTO for the retaliatory tariffs imposed by China, hinting that similar verdicts would be made against China if a case is launched against it.
The outcome could reinforce the animosity that the US houses towards the WTO. The USTR, Robert Lighthizer, has said that the decision proves WTO’s inability to provide any remedy for China’s harmful technology practices. He explicitly stated, “…United States must be allowed to defend itself against unfair trade practices… this report has no effect on the historic Phase One Agreement.”[xxi]
Rejecting Unilateralism
While the ruling may not have any practical significance, it is momentous so far as it rejects unilateralism. Washington must understand that the WTO will not become a handy tool to ratify unilateral actions by the US. The Panel implicitly voiced its disapproval of imposing unilateral retaliatory tariffs instead of using the multilateral authorization of the WTO.[xxii] Rather than contesting that they were not deviating from WTO rules, the US lodged a defense invoking the ‘public morals’ exception to justify the tariffs. In effect, this is an admission by the US that it is not playing by the multilateral rules. The US could have retaliated against China by using measures not governed by international trade rules — for example, by negotiating a multilateral alliance with other members to pressurize China, but its actions have been ruefully focused on unilateral tariff retaliation.[xxiii]
It is surprising that the Panel Report does not discuss the exclusive jurisdiction of the WTO dispute settlement body under Article XXIII of the GATT. In its initial request for the establishment of a panel, China had claimed that US violated Article XXIII by failing to seek recourse under the WTO DSU for disputes arising from the violations of the WTO covered agreements and instead levying unilateral tariffs.[xxiv] However, during panel proceedings, it seems like this claim was dropped, although no evidence can be found in the public domain which suggests an amendment to the initial complaint. Since the unilateral nature of actions under Section 301 is the root cause of the dispute, the only explanation to China dropping this claim is perhaps the fact that China itself has violated Article XXIII by imposing retaliatory tariffs.
Nevertheless, the Panel ruling serves as a reminder to all WTO members that when unilateral trade penalties resort to the outside of the rules-based system, it will be met with retaliation which has cascading effects on the entire global trading order. In a positive development, perhaps influenced by this ruling, the US has withdrawn the 10% tariffs that it had announced on Canadian aluminium imports.[xxv]
Further, America’s illegitimate unilateralism has not gone unnoticed by other countries, including its own allies. The third parties to this dispute reiterated their support for the WTO.[xxvi] Australia[xxvii] and Singapore[xxviii] underscored the role of a rules-based multilateral trading system in ensuring a stable and secure trading environment. New Zealand, without naming the US, stated that the multilateral trading system is “under threat by unilateral trade action, taken by multiple Members” and called such an action “antithetical to a stable and predictable trading system”.[xxix] The most notable argument, however, came from a traditional US ally, the European Union (“EU”). While reaffirming its pledge to the multilateral rules-based trading system, the EU concomitantly condemned the US’s actions by stating that no WTO member can “waive unilaterally its own WTO obligations whenever it considers that another Member is acting unfairly.”[xxx] Further, it averred that the US interpretation of ‘public morals’ could “trigger an endless spiral of measures, countermeasures, counter-countermeasures, etc.”, which in turn would put the multilateral trading system under threat.[xxxi] Despite the EU and Australia voicing their own concerns against China’s trading practices, it is evident that their commitment to the preservation of a multilateral trading system is deeper.
Pending Section 301 Investigations and Bilateral Negotiations
The Panel Report assumes great importance for nations that are currently subject to Section 301 investigations by the USTR or engaged in bilateral negotiations with the US. Digital services tax (“DST”) have become the latest trade war flashpoint for the US. In July 2020, the US announced Section 301 tariffs on France for its DST; however, the tariffs were suspended after France agreed to withdraw its DST to allow for a multilateral resolution at the OECD.[xxxii] Now that France has announced that it will collect taxes under its DST from December 2020,[xxxiii] the US may decide to re-instate the Section 301 tariffs. Further, Section 301 investigations are also underway into the DSTs proposed and/or adopted by ten other US trading partners, including the EU and India.[xxxiv] India has also been continuously identified by the US as a ‘priority watch list’ country and as one of the world’s most challenging major economies with respect to protection and enforcement of IP.[xxxv] The US has also initiated Section 301 investigations related to alleged currency undervaluation[xxxvi] and the import and use of illegal timber[xxxvii] by Vietnam. By holding that the “standards of right and wrong invoked by the United States (including norms against theft, misappropriation and unfair competition) could, at least at a conceptual level, be covered by the term ‘public morals’ within the meaning of Article XX(a)”[xxxviii] and concluding that public morals objective can be found even if a measure has economic aspects[xxxix], the Panel ruling has left open the possibility of justifying a wide range of measures including DSTs, monetary policies, rejecting patentability of minor improvements (evergreening) etc. under the public morals exception. If the US undertakes any unilateral measures pursuant to the above-mentioned investigations, it will have to be circumspect of the Panel’s decision. The ruling has also given the EU and India a shot in the arm going forward with their bilateral negotiations with the US. While the panel report will lay in limbo, it will definitely provide leverage in negotiating thorny issues bilaterally with the US.
Conclusion
The Panel decision is a setback for US trade policy under the Trump administration. It has indicated that unilateralism asserted by the US is pushing against its limits. Aggressive unilateralism is not favoured by the world, including traditional US allies. The results of the presidential election scheduled for next month will have major repercussions for the multilateral trading order. If Trump is re-elected, the Panel’s decision against Section 301 tariffs could fuel a call for overhauling the rules of the WTO or even a decision to withdraw the US from it. However, in case of a Biden presidency, one may hope for some respite from the confrontational style of US trade policy. If elected, Biden will have to deal with the WTO decision – does he lift the Section 301 tariffs and lose leverage against China or does he ignore the US global trading commitments for not looking weak against China?[xl] The best strategy would be to abandon the Section 301 tariffs, while pressurizing China by forging meaningful multilateral ties with allies like the EU, Australia, Japan and South Korea. The Panel decision ardently demonstrates that despite several shortcomings of the institution, the WTO membership, by and large, remains steadfast in defending a multilateral rules-based trading order embodied by the WTO. Hence, America’s new leadership (hopefully) must reverse the damage done by Trump to cooperative institutional relationships and reaffirm US commitment to multilateralism with utmost urgency.
[i] Title III of the US Trade Act of 1974 (Sections 301 through 310, 19 U.S.C. §§2411-2420), titled “Relief from Unfair Trade Practices,” is often collectively referred to as “Section 301.”
[ii] Office of the United States Trade Representative [hereinafter USTR], China Section 301 – Tariff Actions and Exclusion Process, available at: https://ustr.gov/issue-areas/enforcement/section-301-investigations/tariff-actions
[iii] United States – Tariff Measures on Certain Goods from China (DS 543); United States – Tariff Measures on Certain Goods from China II (DS 565); United States – Tariff Measures on Certain Goods from China III (DS 587)
[iv] WTO Panel Report, United States – Tariff Measures on Certain Goods from China, WT/DS543/R (September 15, 2020)
[v] WTO Appellate Body Report, Mexico – Tax Measures on Soft Drinks and Other Beverages, WT/DS308/AB/R, para. 52 (March 6, 2006)
[vi] Supra n.4, para 7.8
[vii] Supra n.4, para 7.12
[viii] Supra n.4, para 7.17
[ix] Supra n.4, para 7.15
[x] Supra n.4, para 7.86
[xi] Supra n.4, para 7.140
[xii] Supra n.4, para 7.137
[xiii]Supra n.4, para 7.125
[xiv] Supra n.4, para 7.212
[xv] Supra n.4, para 7.194
[xvi] Supra n.4, para 7.211
[xvii] Supra n.4, para 7.221
[xviii] Supra n.4, para 7.231
[xix] The Panel in its concluding comments stated, “The Panel is very much aware of the wider context in which the WTO system currently operates, which is one reflecting a range of unprecedented global trade tensions.”, supra n.4, para 9.2
[xx] Understanding on Rules and Procedures Governing the Settlement of Disputes, art. 16, April 15, 1994, Marrakesh Agreement Establishing the World Trade Organization, Annex 2, 1869 U.N.T.S. 401 [hereinafter DSU]
[xxi] Office of USTR, WTO Report on US Action Against China Shows Necessity for Reform, September 15, 2020, available at: https://ustr.gov/about-us/policy-offices/press-office/press-releases/2020/september/wto-report-us-action-against-china-shows-necessity-reform
[xxii]Supra n.4, para 7.223, footnote 456
[xxiii] Jon Healy, Opinion: The World Trade Organization just bared its toothless gums in ruling for China, Los Angeles Times, September 15, 2020, available at: https://www.latimes.com/opinion/story/2020-09-15/wto-china-us-trade-war
[xxiv] Point 3,Part C -Legal Basis of the Complaint in Request for Establishment of a Panel by China, United States – Tariff Measures on Certain Goods from China, WT/DS543/7, December 2018, available at: https://docs.wto.org/dol2fe/Pages/FE_Search/FE_S_S009-DP.aspx?language=E&CatalogueIdList=250378&CurrentCatalogueIdIndex=0&FullTextHash=&HasEnglishRecord=True&HasFrenchRecord=True&HasSpanishRecord=True
[xxv] Office of the USTR, USTR Statement on Canadian Aluminum, September 15, 2020, available at: https://ustr.gov/about-us/policy-offices/press-office/press-releases/2020/september/ustr-statement-canadian-aluminum
[xxvi] Addendum to the WTO Panel Report, United States – Tariff Measures on Certain Goods from China, WT/DS543/R/Add.1 (September 15, 2020)
[xxvii] Supra n. 26, Annex C-1, para 3
[xxviii] Supra n. 26, Annex C-6, para 1
[xxix] Supra n. 26, Annex C-4, para 4
[xxx] Supra n. 26, Annex C-3, para 4
[xxxi] Supra n. 26, Annex C-3, para 14
[xxxii] Office of the USTR, Notice of Action in the Section 301 Investigation of France’s Digital Services Tax, Federal Register/ Volume 85, No. 137, July 16, 2020, available at: https://ustr.gov/sites/default/files/enforcement/301Investigations/France_Digital_Services_Tax_Notice_July_2020.pdf
[xxxiii] Bjarke Smith- Meyer, Elisa Braun, France reinstates digital tax, courting trade war, Politico, October 14, 2020, available at: https://www.politico.eu/article/france-reinstates-digital-tax-courting-trade-war/
[xxxiv] Office of the USTR, Initiation of Section 301 Investigation of Digital Services Tax, Federal Register/ Volume 85, No. 109, June 5, 2020, available at: https://ustr.gov/sites/default/files/enforcement/301Investigations/DST_Initiation_Notice_June_2020.pdf
[xxxv] Office of the USTR, 2020 Special 301 Report, April 2020, page 48, available at: https://ustr.gov/sites/default/files/2020_Special_301_Report.pdf
[xxxvi]Office of the USTR, Initiation of Section 301 Investigation: Vietnam’s Acts, Policies, and Practices Related to the Import and Use of Illegal Timber, Federal Register/ Volume 85, No. 196, October 8, 2020, available at: https://ustr.gov/sites/default/files/enforcement/301Investigations/Vietnam_Timber_Initiation_Notice_October_2020.pdf
[xxxvii] Office of the USTR, Initiation of Section 301 Investigation: Vietnam’s Acts, Policies, and Practices Related to Currency Valuation, Federal Register/ Volume 85, No. 196, October 8, 2020, available at https://ustr.gov/sites/default/files/enforcement/301Investigations/Vietnam_Currency_Initiation_Notice_October_2020.pdf
[xxxviii] Supra n.4, para 7.140
[xxxix] Supra n.4, para 7.137
[xl] Kenneth Rapoza, What The WTO Ruling Against Trump’s China Tariffs Mean For a Potential President Biden, Forbes, September 16, 2020, available at: https://www.forbes.com/sites/kenrapoza/2020/09/16/what-the-wto-ruling-against-trumps-china-tariffs-means-for-a-president-biden/#68eee204b020
Authored by Ms. Aakanksha Mishra, a dual-qualified lawyer (India & New York) based out of Bengaluru, India. She holds a Master of Laws degree in International Legal Studies (specializing in International Trade Law) from Georgetown University Law Centre, Washington DC. She was assisted by Ms. Kavya Jha, a student of RGNUL, Punjab. This blog is a part of the RSRR Excerpts from Experts Blog Series, initiated to bring forth discussion by experts on contemporary legal issues.