Canada and the European Union Announce an Interim Bilateral Arbitration Solution for the WTO Appellate Body Deadlock

Canada and the European Union have formalized an interim bilateral arbitration solution for the current deadlock in appointing members to the Appellate Body of the World Trade Organization (WTO).

The Appellate Body is composed of seven members who are appointed to serve for four-year terms and may be reappointed for an additional four-year term. Currently, there are only three members, the minimum needed for the Appellate Body to function. The terms of two of those members (Ujal Singh Bhatia (India) and Thomas R. Graham (United States)) expire on 10th December 2019, leaving only a single member (Hong Zhao (China)). Unless new members are appointed, the Appellate Body will cease to function on 11th December. The United States has not responded to repeated calls by WTO Members to resolve the issues underlying its blocking of appointments, making it necessary for WTO Members to seek an interim solution.

Canada and the European Union are the first WTO members to announce a formal interim solution that will apply to disputes between them. Formalizing a solution in advance of 11th December is significant because, otherwise, the settlement of disputes in which panels issue reports close to and after 11th December could be blocked by the losing party simply by appealing the report to the non-functioning Appellate Body, which would prevent the panel report from being “adopted” and, in turn, from being enforced. In the absence of an advance agreement, it will be difficult to get the disputing parties in ongoing disputes to agree to such a solution. Once a panel report is issued, it might be impossible to get the losing party to agree to a procedure that will require it to give up its ability to block the report.

The bilateral agreement establishes an alternative appeal arbitration procedure “based on existing WTO rules”. It is intended “to replicate as closely as possible all substantive and procedural aspects as well as the practice of Appellate Review … including the provision of appropriate administrative and legal support to the arbitrators by the Appellate Body Secretariat”. The basis for the procedure “as an alternative means of dispute settlement” is provided in Article 25 of the WTO Understanding on Rules and Procedures Governing the Settlement of Disputes. This has long been considered an option to address the Appellate Body deadlock.

Under the procedure, Arbitrators will be selected from former Appellate Body members. To fit within the existing panel procedures, which are unaffected by the Appellate Body deadlock, panel proceedings will be suspended prior to the formal circulation of the panel’s report to the WTO Members. The new arbitration procedures will be initiated and findings of the panel which have not been appealed will be deemed to be an integral part of the arbitration award.  Although the panel report will not be formally circulated to the WTO Members, its confidentiality will be lifted, indicating that it will be made public in some other manner. The arbitration award will be final, and the normal WTO monitoring and enforcement mechanisms will apply.

Many WTO Members will be reflecting on this agreement and considering how it fits within the existing WTO dispute settlement mechanism and institutional framework. It might provide a template for similar bilateral and plurilateral agreements between other WTO members.

Tereposky & DeRose LLP regularly provides advice and acts as counsel in international trade disputes, including WTO dispute settlement proceedings. If you have any questions about the foregoing subject, please do not hesitate to contact us.

Greg Tereposky
613.237.1210
gtereposky@tradeisds.com

Daniel Hohnstein
613.237.9005
dhohnstein@tradeisds.com

15-Day Comment Period for Proposed Changes to Canada’s Trade Remedies Regulations Concerning Distorted Input Costs & “Particular Market Situations”

The 20 July 2019 edition of the Canada Gazette Part I (Vol. 153, No. 29) includes proposed Regulations Amending the Special Import Measures Regulations. The proposed amendments follow from recommendations of a working group comprising the Government of Canada, the Canadian steel industry, and the steel industry’s workers. The objective of the working group’s consultations was to determine what additional protections were needed in Canada’s existing trade remedies regime “to enhance the effectiveness of the trade remedy system in protecting Canadian producers and workers against the impacts of unfairly traded imports, while maintaining a fair and balanced approach to trade remedies and respecting Canada’s legal and trade obligations”.

The proposed amendments are intended to provide the CBSA with flexibility in how it calculates the costs of production in anti-dumping and countervailing duty investigations, specifically in order to: (i) address situations where inputs were acquired from associated parties at prices below cost or below a representative benchmark; and (ii) provide further scope to address cost distortions created by a particular market situation.

Where inputs are supplied by an associated supplier (e.g., a subsidiary or affiliated company), the CBSA will be empowered to use, for the purpose of calculating the cost of production of the products in question, the highest of (i) the transfer price between parties, (ii) the actual costs to the supplier, or (iii) a reasonable benchmark determined in the country of export if such information is available.

Additionally, where the CBSA has determined that a particular market situation is affecting the price of the products sold in the domestic market of the exporting country, such that the CBSA has recourse to alternative methodologies to determine the margin of dumping (i.e., constructed costs), the proposed amendments would provide the CBSA with “alternative options” to use in determining the costs of inputs to the extent that “they do not allow for a proper comparison between the sale of goods in the country of export and the sale of goods exported to Canada”. The amended regulations will set out a “hierarchy of alternatives” to be applied in order to determine the costs of the inputs, depending on the information that is available on the record and whether the alternative being applied would allow for a proper comparison between the domestic sales price and the export price.

The proposed amendments introduce a new provision into the regulations that provides as follows: if the CBSA determines that “a particular market situation exists which does not permit a proper comparison of the sale of like goods with the sale of the goods to the importer in Canada, such that the acquisition cost of an input used in the production of the goods does not reasonably reflect the actual cost of that input, the cost of that input in the country of export shall be considered to be the first of the following amounts that reasonably reflect the actual cost of the input so as to permit a proper comparison of the sale of like goods with the sale of the goods to the importer in Canada:

  • (a) the price of the same or substantially the same inputs that are produced in the country of export and sold to the exporter or to other producers in the country of export;
  • (b) the price of the same or substantially the same inputs that are produced in the country of export and sold from the country of export to a third country;
  • (c) the price of the same or substantially the same inputs determined on the basis of the published prices of those inputs in the country of export;
  • (d) the price of the same or substantially the same inputs that are produced in a third country and sold to the exporter or to other producers in the country of export, adjusted to reflect the differences relating to price comparability between the third country and the country of export; or
  • (e) the price of the same or substantially the same inputs determined on the basis of the published prices of those inputs outside the country of export, adjusted to reflect the differences relating to price comparability with the country of export.”

The International Trade Policy Division of the Department of Finance has invited interested persons to submit representations concerning the proposed regulations by 4th August 2019, that is, within 15 days after the date of the publication of the notice (20 July 2019).

Tereposky & DeRose regularly provides advice on Canadian trade remedy matters, including anti-dumping and countervailing duty investigations and safeguard actions. Should you have any questions regarding these new procedures, we are at your disposal.

Greg Tereposky
613.237.1210
gtereposky@tradeisds.com

Vincent DeRose
613.237.8862
vderose@tradeisds.com

Daniel Hohnstein
613.237.9005
dhohnstein@tradeisds.com

New CBSA Procedures for Re-Investigations and Normal Value Reviews Relating to Canadian Trade Remedy Measures

On 19 July 2019 the Canada Border Services Agency (CBSA) issued revisions to Memorandum D14-1-8, Re-investigation and Normal Value Review Policy – Special Import Measures Act (SIMA) (19 July 2019) to reflect updated policies and a new administrative process for submitting and responding to representations concerning the need to initiate a re-investigation or a normal value review.

The revisions clarify the criteria that the CBSA will apply when determining whether to initiate either a full re-investigation or a “normal value review” to update normal values, export prices and/or amounts of subsidy applicable to imported goods that are subject to a trade remedies measure under the Special Import Measures Act (SIMA). The “normal value review” is a relatively new administrative process that the CBSA implemented in June 2018. It provides a more streamlined alternative to a full re-investigation when updated values are only needed for “a particular exporter or a limited number of exporters”.

The revised Memorandum D14-1-8 also provides guidance on the re-investigation and normal value review processes, including the factors that the CBSA will consider when determining whether retroactive SIMA duties should be assessed for past importations. These revisions are summarized in the following “backgrounder” document that was published today on the CBSA website: CBSA, “BACKGROUNDER: Re-investigation and Normal Value Review Policy – Memorandum D14-1-8 – Special Import Measures Act (SIMA), (19 July 2019).

In addition, the CBSA has implemented a “transparent process” for stakeholders to make representations, review representations, and respond to representations concerning the need to update normal values, export prices and/or amounts of subsidy established for exporters in the course of previous SIMA investigations. On a going forward basis, the CBSA will publish public, non-confidential versions of the representations filed by stakeholders on its website in order to “allow other stakeholders to view and make submissions in response”. The new web resource for these submissions is available online at CBSA, “Normal Values: Making Representations to the CBSA” (19 July 2019).

Tereposky & DeRose regularly provides advice on Canadian trade remedy matters, including anti-dumping and countervailing duty investigations and safeguard actions. Should you have any questions regarding these new procedures, we are at your disposal.

Greg Tereposky
613.237.1210
gtereposky@tradeisds.com

Vincent DeRose
613.237.8862
vderose@tradeisds.com

Daniel Hohnstein
613.237.9005
dhohnstein@tradeisds.com

WTO Appellate Body Issues Report in the U.S.-China Dispute Concerning Countervailing Duty Measures on Certain Products from China

On 16 July 2019, the Appellate Body of the World Trade Organization (WTO) Dispute Settlement Body (DSB) issued its report in United States – Countervailing Duty Measures on Certain Products from China (Recourse to Article 21.5 of the DSU by China) (DS437). This appeal concerned China’s recourse to Article 21.5 of the Understanding on Rules and Procedures Governing the Settlement of Disputes (DSU) concerning the consistency with the WTO Agreement on Subsidies and Countervailing Measures (SCM Agreement) of measures taken by the United States to comply with the recommendations and rulings of the DSB in the original proceedings in US – Countervailing Measures (China). The dispute concerned countervailing duties imposed by the United States on a range of products from China and the underlying investigations and determinations of the U.S. Department of Commerce (USDOC).

In the original proceedings, the Appellate Body found that the USDOC’s countervailing duty determinations were inconsistent with Articles 14(d) and 1.1(b) of the SCM Agreement because the use of in-country prices in China as “benefit benchmarks” had been improperly rejected. As a consequence, the Appellate Body found that these determinations were also inconsistent with Articles 10 and 32.1 of the SCM Agreement. In addition, the Appellate Body reversed a number of the original panel’s findings of consistency under Article 2.1 with respect to the USDOC’s failure to identify a “subsidy programme” or a “granting authority”, but found that it was unable to complete the analysis of these issues on the record of the evidence before it.

Following the original proceedings, the United States revised the WTO-inconsistent determinations but maintained the corresponding countervailing duties. China challenged these measures taken to comply as well as related measures generally relevant to the USDOC countervailing duty determinations.

In this appeal, Both the United States and China raised claims challenging the compliance Panel’s reasoning and findings on issues of law and legal interpretation, including: (i) the interpretation and application of the legal standard for “public body” determinations under Article 1.1(a)(1) of the SCM Agreement; (ii) the interpretation and application of Articles 1.1(b) and 14(d) of the SCM Agreement, including the circumstances warranting recourse to out-of-country prices for the purposes of selecting a benchmark to determine whether the remuneration paid for a government-provided good is “less than adequate” (e.g., when the government “effectively determines” the price of the goods in question); and (iii) the interpretation and application of the legal analysis to determine whether a subsidy is de facto specific under Article 2.1(c) of the SCM Agreement, including the requirement to properly identify the relevant subsidy programmes.

With respect to the issues under Article 1.1(a)(1) of the SCM Agreement, the Appellate Body upheld the compliance Panel’s findings that: (i) the legal standard for “public body” determinations under Article 1.1(a)(1) does not require a connection of a particular degree or nature to be established between an identified government function and the particular financial contribution at issue; and (ii) China had failed to demonstrate that the USDOC’s “public body” determinations in the challenged countervailing duty determinations were inconsistent with Article 1.1(a)(1) because they were based on an improper legal standard.

With respect to the issues under Article 14(d) and 1.1(b) of the SCM Agreement, the Appellate Body upheld the Panel’s finding that Article 14(d) does not limit an investigating authority’s recourse to out-of-country prices to circumstances in which the government has effectively determined the price at which the goods are sold. The Appellate Body found that the United States had not established that the Panel erred in its interpretation and application of Article 14(d) and upheld the Panel’s findings that the United States had acted inconsistently with Articles 14(d) and 1.1(b).

With respect to the issues under Article 2.1 of the SCM Agreement, the Appellate Body upheld the Panel’s finding that China had demonstrated that the United States had acted inconsistently with Article 2.1(c), noting that, for the purposes of determining whether a subsidy is de facto granted to certain enterprises pursuant to a “plan or scheme”, information that merely indicates “repeated transactions” does not necessarily demonstrate “systematic activity … regarding the existence of an unwritten subsidy programme”.

Some points of interest in the reasoning provided by the majority of the Appellate Body Division include the following:

  • The absence of an express statutory delegation of governmental authority does not necessarily preclude a finding that an entity is a “public body” within the meaning of Article 1.1(a)(1) of the SCM Agreement. Instead, a public body determination must be conducted on a case by case basis, having due regard to: (a) evidence that an entity is, in fact, exercising governmental functions, especially where such evidence points to a sustained and systematic practice; (b) evidence regarding the scope and content of government policies relating to the relevant sector; (c) evidence that a government exercises meaningful control over an entity and its conduct; and (d) whether the conduct or functions of an entity are of a kind that are ordinarily classified as governmental in the legal order of the relevant Member.
  • Article 1.1(a)(1) does not prescribe a “connection” of a particular degree or nature that must be established between an identified government function and a financial contribution. Instead, an investigating authority must provide a reasoned and adequate explanation, based on a holistic assessment of the evidence on the investigation record.
  • Once it has been established that an entity is a public body, then the conduct of that entity shall be directly attributable to the Member concerned for purposes of Article 1.1(a)(1). While the conduct of an entity may constitute relevant evidence to assess its core characteristics, an investigating authority need not necessarily focus on every instance of conduct in which that relevant entity may engage, or on whether each such instance of conduct is connected to a specific “government function”.
  • Central to the inquiry under Article 14(d) in identifying an appropriate benefit benchmark is the question of whether in-country prices are distorted as a result of government intervention. An investigating authority may reject in-country prices on a finding of price distortion resulting from government intervention in the market, not the presence of government intervention itself.
  • In an Article 14(d) inquiry, there may be different ways to demonstrate that prices are actually distorted, including a quantitative assessment, price comparison methodology, a counterfactual, or a qualitative analysis. The determination of whether in-country prices are distorted must be made case by case, based on the relevant evidence in the particular investigation and taking into account the characteristics of the market being examined, and the nature, quantity, and quality of the information on the record.
  • Where an investigating authority makes a finding of de facto specificity under Article 2.1(c) based on an analysis of whether there has been “use of a subsidy programme by a limited number of certain enterprises”, consideration of the length of time during which the subsidy programme has been in operation pre-supposes that the relevant programme has been properly identified.
  • The mere grant of financial contributions is not necessarily enough to demonstrate the existence of a subsidy programme. An investigating authority may demonstrate the existence of a subsidy programme based on evidence of: (a) the existence of a subsidy within the meaning of Article 1.1; and (b) a plan or scheme pursuant to which this subsidy has been provided to certain enterprises.

In a dissenting opinion, one Division Member of the Appellate Body disagreed with the majority on a number of points, expressing the following views (among others):

  • The majority has repeated an unclear and inaccurate statement of the criteria for determining whether an entity is a “public body”, and a clearer articulation of the criteria is neither warranted nor necessary. Whether an entity is a public body must be determined on a case-by-case basis with due regard being had for the characteristics of the relevant entity, its relationship with the government, and the legal and economic environment prevailing in the country in which the entity operates. There is no requirement for an investigating authority to determine in each case whether the investigated entity “possesses, exercises or is vested with governmental authority”.
  • It is well settled that the requirement in Article 14(d) to determine the adequacy of remuneration “in relation to prevailing market conditions for the good or service in question in the country of provision” does not require a domestic authority to rely on in-country prices in all circumstances. However, by faulting the USDOC for not providing an “explanation of how government intervention actually results in price distortion”, the majority is effectively reading Article 14(d) as imposing an obligation on investigating authorities to always justify recourse to out-of-country prices through a quantitative analysis of in-country prices themselves, regardless of whether those prices have already been found to be distorted, including in cases where they have not even been placed on the record. There is no basis in Article 14(d) for this approach, and it is unclear what the majority considered the USDOC was required to do in order to establish that government intervention resulted in price distortion.
  • The majority has fundamentally misunderstood the role of Article 2.1 within the SCM Agreement, has given the term “subsidy programme” a meaning that is not supported by the text and that is unreasonable, and has ignored reasoning and analysis by the USDOC that was part of the case and should have been considered. The majority’s decision “is wrong in several important respects” and, if followed in the future, would enable circumvention of the disciplines of the SCM Agreement and even discourage the transparent management of subsidies.

Tereposky & DeRose LLP regularly provides advice and acts as counsel in international trade disputes, including WTO dispute settlement proceedings.

Greg Tereposky
613.237.1210
gtereposky@tradeisds.com

Daniel Hohnstein
613.237.9005
dhohnstein@tradeisds.com

WTO Compliance Panel Issues Report in Philippines-Thailand Dispute Concerning Certain Measures Relating to the Customs Value of Imported Cigarettes

On 12 July 2019, a World Trade Organization (WTO) Panel issued its report in the second compliance proceeding in Thailand – Customs and Fiscal Measures on Cigarettes from the Philippines (Second Recourse to Article 21.5 of the DSU by the Philippines) (DS371). This was the Philippines’ second recourse to Article 21.5 of the Understanding on Rules and Procedures Governing the Settlement of Disputes (DSU) concerning the alleged failure by Thailand to comply with the recommendations and rulings of the Dispute Settlement Body (DSB) in the original proceeding. Specifically, the Philippines challenged the consistency of certain Thai measures relating to the customs valuation of imported cigarettes (for the purposes of levying ad valorem customs duties) with the WTO Agreement on Implementation of Article VII of the General Agreement on Tariffs and Trade 1994 (i.e., the “Customs Valuation Agreement” or CVA).

The measures at issue in this second compliance proceeding included: (i) criminal charges filed by the Public Prosecutor in Thailand against an importer of cigarettes from the Philippines, alleging that the importer under-declared the customs values of cigarettes imported in 780 entries between 2002-2003 (the “2002-2003 Charges”); and (ii) 1,052 revised Notices of Assessment (NoAs) issued by Thailand’s Customs Department which rejected the importer’s declared transaction values for cigarettes imported in 1,052 entries between 2001-2003 and determined revised customs values for same.

The Panel found that the 2002-2003 Charges were inconsistent with Articles 1.1, 1.2(a), 6.1, and 7.1 of the CVA due to defects in both (i) the examination of the customs value of the imported cigarettes, and (ii) the information had been used for this purpose. In addition, the Panel found that the Public Prosecutor had acted inconsistently with the obligation to sequentially apply the customs valuation methods in Articles 2 through 7 of the CVA when determining the revised customs values of the imported cigarettes.

Thailand attempted to argue that the 2002-2003 Charges were nonetheless justified under Article XX(d) of the General Agreement on Tariffs and Trade 1994 (GATT 1994) as measures “necessary to secure compliance with laws or regulations” and under Article XX(a) as measures “necessary to protect public morals”. However, this was the same defence that Thailand had raised unsuccessfully in the first compliance proceeding, and the Panel again ruled that the general exceptions in Article XX of the GATT 1994 are not applicable to the obligations set forth in the CVA.

Finally, the Panel declined to rule on the 1,052 NoAs because they had all been withdrawn prior to the Panel’s establishment or within a few months thereafter.

Some of the points of interest in the Panel’s reasoning include the following:

  • The procedural obligation in the third sentence of Article 1.2(a) of the CVA applies to any entity making a customs valuation determination (including, e.g., a public prosecutor). However, the nature of the agency and the circumstances in which a determination was made (e.g., a criminal investigation related to alleged fraud) could be highly germane to the appraisal of whether or not this obligation was discharged.
  • To comply with the procedural obligation in the third sentence of Article 1.2(a) of the CVA, a customs authority must: (a) give the importer sufficient information regarding the authority’s grounds for doubting the transaction value, such that the importer is able to meaningfully respond to those grounds; and (b) give the importer an opportunity to respond.
  • The requirement to adhere to the hierarchical order of the sequential valuation methods set forth in Articles 1 through 7 of the CVA is a legal obligation. The failure to comply with this obligation would constitute an independent basis for finding a violation of the CVA. If a customs authority decides to reject the transaction value under Article 1 of the CVA, another valuation method must be used by observing the sequential order of the methods stipulated in Articles 2, 3, 5, 6 and 7.
  • Although there is no express provision that the sequential ordering of the valuation methods in Articles 1 through 6 should be followed again in the context of having recourse to the reasonable flexibilities in Article 7.1, the same sequence should also be observed in applying Article 7, to the extent that it is reasonably possible to do so.
  • The balance reflected in the specific provisions of Articles 7.1 and 7.2 of the CVA indicates that the drafters did not intend for another layer of general exceptions in Article XX of the GATT 1994 to also apply. Interpolating the general exceptions in Article XX of the GATT 1994 into the CVA would create additional policy space for Members to use one or more of the valuation bases that go beyond the “reasonable flexibility” already provided for in Article 7.1 and/or which are categorically prohibited by the text of Article 7.2(a) through (g).
  • Procedurally, in disputes where the complaining Member is unable to obtain from the responding Member certain information regarding the content of the measures at issue, this will naturally have a bearing on the degree of specificity that could reasonably be expected in identifying the legal basis for the complaint for the purposes of satisfying Article 6.2 of the DSU.

Tereposky & DeRose LLP regularly provides advice and acts as counsel in international trade disputes, including WTO dispute settlement proceedings.

Greg Tereposky
613.237.1210
gtereposky@tradeisds.com

Daniel Hohnstein
613.237.9005
dhohnstein@tradeisds.com