WTO Panel issues Report in U.S.-India Dispute concerning Export Subsidies

On 31st October 2019, the report of the World Trade Organization (WTO) Panel in India – Export Related Measures (DS541) was released. This dispute concerned the United States’ challenge of certain alleged export subsidy measures in India under the WTO Agreement on Subsidies and Countervailing Measures (SCM Agreement).

Two interesting aspects of this proceeding included: (i) the Panel’s interpretation and application of its Working Procedures in the abbreviated proceedings under Article 4 of the SCM Agreement in the light of its obligation under Article 12.10 of the Understanding on Rules and Procedures Governing the Settlement of Disputes (DSU) to accord sufficient time to a developing country Member to prepare and present its argumentation; and (ii) the Panel’s distinction between “exceptions” and “excluding provisions” in WTO agreements for the purposes of determining the applicable burden of proof when a responding Member raises an “excluding provision” to defend a measure.

Overview of the Panel’s Report

The United States challenged the following schemes maintained by India: (a) the Export Oriented Units (EOU) Scheme and Sector-Specific Schemes, including the Electronics Hardware Technology Parks (EHTP) Scheme and the Bio-Technology Parks (BTP) Scheme (the EOU/EHTP/BTP Schemes); (b) the Merchandise Exports from India Scheme (MEIS); (c) the Export Promotion Capital Goods (EPCG) Scheme; (d) the Special Economic Zones (SEZ) Scheme; and (e) the Duty-Free Imports for Exporters Scheme. These measures provide certain exemptions from customs duties and taxes or grant freely transferable “scrips” that Indian exporters can use to satisfy certain liabilities vis-à-vis the Indian government.

The Panel concluded that certain exemptions from customs duties, taxes, and taxable income provided to Indian enterprises under the above-referenced measures constitute prohibited export subsidies (i.e., subsidies contingent upon export performance, either in law or in fact) within the meaning of Articles 3.1(a) and 3.2 of the SCM Agreement.

Accordingly, the Panel recommended that, pursuant to Article 4.7 of the SCM Agreement, India proceed “without delay” to: (a) withdraw within 120 days from adoption of the Panel’s Report the prohibited subsidies under the EOU/EHTP/BTP Schemes, EPCG Scheme, and MEIS; (b) withdraw within 90 days from adoption of the Panel’s Report the prohibited subsidies under DFIS; and (c) withdraw within 180 days from the date of adoption of the Report the prohibited subsidies under the SEZ Scheme.

Taking account of India’s status as a developing country Member

In accordance with Article 12.11 of the DSU, the Panel explained how it had taken account of India’s status as a developing country Member in adopting and reviewing its Working Procedures and timetable for this proceeding. Although the Panel had been established under the fast-track procedures contemplated in Article 4 of the SCM Agreement, it had allowed additional time for India to prepare each of its first and second written submissions and also its responses to the Panel’s questions following the substantive meeting. Although the Panel did not accede to India’s request to consider holding more than one meeting, it did consider India’s developing country Member status in the process of reconciling competing considerations in its decision to hold a single substantive meeting.

In addition, India argued as a preliminary matter that Articles 3 and 4 of the SCM Agreement do not apply to India by virtue of Article 27.2. Article 27.2(a) provides that the prohibition on export subsidies under Article 3.1(a) does not apply to developing country Members referred to in Annex VII (i.e., those designated as “least developed countries” by the United Nations). Article 27.2(b) provides the same exception to other developing country Members for a period of eight years from the date of the entry into force of the WTO Agreement. Annex VII(b) provides that when India’s GNP reaches US $1,000 per capita, it shall become subject to the provisions applicable to other developing country Members under Article 27.2(b).

The parties agreed that India has graduated from Annex VII(b) and that Article 27.2(a) no longer excludes India from the application of the prohibition of export subsidies under Article 3.1(a). However, India argued that the exemption under Article 27.2(b) continued to apply to India because the eight-year exemption period set out in that provision did not start for India on the date of the entry into force of the WTO Agreement, but rather on the date of India’s graduation from Annex VII(b) — i.e., starting in 2017 and ending in 2025. The Panel rejected India’s argument, finding instead that it was clear from the wording of Article 27.2(b) that the eight-year period had commenced on the date of the entry into force of the WTO Agreement and had therefore expired in January 2003. As a consequence, India was subject to the prohibition on export subsidies under Article 3.1(a).

The distinction between exceptions and excluding provisions

Another interesting aspect of this report is the Panel’s considerations related to the distinction between “exceptions” and “excluding provisions” for the purposes of determining the applicable burden of proof. The Panel considered this issue to be relevant in relation to the defensive arguments raised by India under footnote 1 to Article 1.1(a)(1)(ii) and Article 27 of the SCM Agreement.

The general rule in WTO dispute settlement is that the burden of proof rests upon the party who asserts the affirmative of a particular claim or defence. The Panel considered that while the application of this rule is obvious in many instances — e.g., where a responding Member invokes an exception under Article XX of the GATT 1994 — the dividing line is sometimes less clear in cases involving provisions which could potentially disqualify a claim but are not considered to be “exceptions” or “affirmative defences”.

The Panel considered that “exceptions” afford a justification for measures that are found to be inconsistent with other provisions of the WTO Agreements, while “excluding provisions” limit the scope of other provisions without there being a violation in the first place. The Panel explained that although the outcome of upholding an “exception” or an “excluding provision” is the same (i.e., the complaint fails), an “exception” presupposes a valid claim, to which it responds, whereas if an “excluding provision” applies, there is no valid claim under the provision that is excluded.

The Panel considered that the question of which party bears the burden of raising an “excluding provision” is different from the question of which party bears the burden of proof under an “excluding provision”. It also considered that the responding Member is best placed to know whether its measures fall under a particular “excluding provision”. On this basis, the Panel determined that the respondent bears the burden of raising “excluding provisions”, but once the respondent has properly raised an “excluding provision”, the complainant will bear the burden of proof under the “excluding provision”, i.e. the burden of proving that the “excluding provision” does not apply.

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

October-in-Review

OCTOBER-IN-REVIEW

International Trade


Investor-State Arbitration


New Anti-dumping Investigation


Be sure to purchase your copy of,
“Evolutionary Interpretation and International Law”

Edited by Georges Abi-Saab, Kenneth Keith, Gabrielle Marceau & Clement Marquet

With Chapter 25 “Investment Treaty Signatories’ Joint Interpretation and the Case of the NAFTA Free Trade Commission: Evolutionary Interpretation or Modification” by Tereposky & DeRose LLP’s very own Jennifer Radford, Greg Tereposky and Kun Hui


Tereposky & DeRose LLP_October-in-Review

CBSA Initiates Expiry Review Investigation concerning certain carbon steel fasteners from China and Chinese Taipei

On 29 October 2019, the Canada Border Services Agency (CBSA) published a Notice of Initiation of Expiry Review Investigation (FAS-2019-ER) concerning the dumping and subsidizing of certain carbon steel fasteners (including different types of screws that are usually classified under tariff subheadings 7318.11, 7318.12, 7318.14, and 7318.15) imported into Canada from the People’s Republic of China (China) and the dumping of such goods from the Separate Customs Territory of Taiwan, Penghu, Kinmen and Matsu (Chinese Taipei).

The initiation of the CBSA’s investigation follows one day after the Canadian International Trade Tribunal initiated its expiry review of the anti-dumping and countervailing measures that are currently in force with respect to the subject goods. These measures have been in place since January 2005 (see NQ-2004-005 and NQ-2004-005R) and have been extended in two previous expiry review proceedings (see RR-2009-001 and RR-2014-001).

The schedule of the CBSA’s investigation and the listing of exhibits have been posted online. Questionnaire responses must be filed by 5th December, and the record will close on 18th December. Interested parties may filed case briefs by 12 noon on 7th January 2020.

Tereposky & DeRose regularly provides advice on Canadian anti-dumping and countervailing duty matters. Should you have any questions regarding this matter or anti-dumping and countervailing duty issues more generally, 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

 

THIRD-PARTY FUNDING AT THE HEART OF ISDS REFORM

The increased reliance on third-party funding (“TPF”) in investment treaty arbitration in recent years has led States and arbitral tribunals to examine the phenomenon more closely. Both the United Nations Commission on International Trade Law (“UNCITRAL”) Working Group III on investor-state dispute settlement (“ISDS”) reform and the International Centre for Settlement of Investment Disputes (the “ICSID”) are considering for the first time the inclusion of provisions regulating the use of TPF, addressing concerns such as the lack or apparent lack of independence and impartiality of arbitrators, and the cost of ISDS proceedings and security for costs (see Security for Costs in Investment Treaty Arbitration: More Certainty Expected under the Proposed ICSID Rules Amendments).

Proponents of TPF see this as an access to justice tool, allowing otherwise financially constrained investors to bring claims against States. Opponents on the other hand see TPF as enabling investors to exploit the ISDS systems at the expense of developing countries and their taxpayers, incentivizing unmeritorious claims and raising additional conflict of interest issues for arbitrators. The reforms proposed by both the UNCITRAL and the ICSID seek to address these concerns.

A. UNCITRAL’s Working Group III on Investor-State Dispute Settlement Reform

On 14-18 October 2019, the UNCITRAL Working Group III on ISDS reform will hold its thirty-eight session in Vienna, Austria.

As part of its agenda, the Working Group is expected to continue its consideration of third-party funding in ISDS, based notably on document A/CN.9/WG.III/WP.172 on third-party funding. The document provides an overview of possible reform options in light of the suggestions made during the deliberations of the Working Group at its thirty-seventh session, including (1) prohibiting third-party funding entirely in ISDS; and (2) regulating third-party funding by introducing mechanisms to ensure a level of transparency including through disclosures (which could also assist in ensuring the impartiality of the arbitrators), by imposing sanctions for failure to disclose, and by providing rules on third-party funders and on when they could provide funding.

The Working Group will also consider the various means of implementation of a third-party funding reform in ISDS, such as a prohibition or regulation developed so as to be included in arbitration rules, as model clauses with variants for investment treaties, or through an opt-in convention that could be modelled after the Mauritius Convention on Transparency in Treaty-based Investor-State Arbitration and the OECD Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting.

We are following these developments closely. Please subscribe to our newsletter to receive regular updates on this issue.

B. The Proposed Amendments to the ICSID Rules

On 11-15 November 2019, the ICSID will hold its next in-person consultation with Member States regarding its third Working Paper (“Working Paper #3”) on the proposed amendments to the ICSID Rules.

Among the proposed changes is the inclusion of a provision regulating the use of third-party funding. Under proposed Rule 14, a party must file with the Secretary-General “a written notice disclosing the name of any non-party from which the party, its affiliate or its representative has received funds for the pursuit or defense of the proceeding through a donation or grant, or in return for remuneration dependent on the outcome of the dispute”. The notice must be filed “upon registration of the Request for arbitration, or immediately upon concluding a third-party funding arrangement after registration”.

In Working Paper #3, the ICSID maintains its position regarding the extent of initial disclosure, imposing a positive duty on parties to disclose funding. However, it does not create a general duty to disclose the funding agreement or the terms of the funding. To prevent conflict of interest, parties are only required to disclose the existence of funding and the identity of the funder throughout the proceedings. The identity of the funder is disclosed to the arbitrators prior to appointment to avoid inadvertent conflicts of interest. Additionally, arbitrators are required to confirm that there is no conflict with the named funder through the Arbitrator Declaration.

After the in-person consultation with Member States, the amended rules will be placed before the ICSID’s Administrative Council for a vote.

C. Third-party Funding in Investment Treaties

While arbitral tribunals are considering regulating the use of third-party funding in investment treaty arbitration, States should consider incorporating provisions on third-party funding into their investment treaties which would reflect their policy objectives.

For instance, the European Union-Viet Nam Investment Protection Agreement and the Canada-European Union Comprehensive Economic and Trade Agreement both regulate the use of third-party funding, using similar language as ICSID’s proposed Rule 14.

However, other treaties such as the Argentina-United Arab Emirates Bilateral Investment Treaty have gone one step further by including a prohibition on the use of third-party funding in ISDS. Similarly, the United States restricts TPF of domestic claims against the federal government.

Addressing third-party funding in investment treaties therefore allows States to prohibit or regulate its use in ISDS by, for example, including mechanisms that place the burden on the claimant to demonstrate that it meets certain criteria such as impecuniosity, exhaustion or local remedies, and clean hands, among other.

Tereposky & DeRose LLP regularly provides advice and counsel on investment arbitration disputes and treaty negotiation. Should you have any questions regarding investor-state dispute settlement, we are at your disposal.

Jennifer Radford
613.237.9777
jradford@tradeisds.com

Stephanie Desjardins
613.237.8680
sdesjardins@tradeisds.com

Graciela Jasa
613.237.4742
gjasa@tradeisds.com

WTO Arbitration Authorizes United States to Impose $7.5 Billion in Countermeasures against Imports of EU Goods

On 2nd October 2019, the decision of a World Trade Organization (WTO) Arbitrator was released in the long-running European Communities and Certain Member States – Measures Affecting Trade in Large Civil Aircraft (DS316) dispute. The purpose of the arbitration was to determine the exact amount of the countermeasures that the United States is authorized to take against the European Union, further to the Appellate Body’s findings in May 2018 that certain subsidies provided by the European Union and certain EU Member States to the large civil aircraft (LCA) manufacturer Airbus have caused serious prejudice to the US industry within the meaning of the Agreement on Subsidies and Countervailing Duties (SCM Agreement).

The Arbitrator’s decision authorizes the United States to take countermeasures against the European Union in the amount of almost US $7.5 billion annually (i.e., US $7,496,623,000). The countermeasures may take the form of (i) the suspension of tariff concessions and related obligations under the General Agreement on Tariffs and Trade, 1994 (GATT 1994), and/or (ii) the suspension of horizontal or sectoral commitments and obligations contained in the United States’ schedule to the General Agreement on Trade in Services (GATS) with regard to all services defined in the Services Sectoral Classification List, except for financial services.

The United States has announced its intention to impose the countermeasures, as authorized, on 18th October (see Office of the United States Trade Representative (USTR), “U.S. Wins $7.5 Billion Award in Airbus Subsidies Case”, Press Release (2 October 2019), and Notice of Determination and Action Pursuant to Section 301: Enforcement of U.S. WTO Rights in Large Civil Aircraft Dispute). The countermeasures will take the form of additional duties applied to imports of new EU aircraft (10 percent) and a range of other EU products (25 percent), including certain dairy, fruit, shellfish, processed food, and manufactured goods (see the Final Product List published on the USTR website). The United States intends to apply the “bulk of the tariffs” to goods imported from “France, Germany, Spain, and the United Kingdom” on the basis that these are “the four countries responsible for the illegal subsidies”.

The arbitration was conducted under Article 22.6 of the Understanding on Rules and Procedures Governing the Settlement of Disputes (DSU) (i.e., “if the Member concerned objects to the level of suspension proposed, or claims that the principles and procedures set forth in [Article 22.3] have not been followed …, the matter shall be referred to arbitration”) and Article 7.10 of the SCM Agreement (i.e., “[i]n the event that a party to the dispute requests arbitration under paragraph 6 of Article 22 of the DSU, the arbitrator shall determine whether the countermeasures are commensurate with the degree and nature of the adverse effects determined to exist”).

The legal issues in dispute required the Arbitrator to consider (i) the role of Article 7.10 of the SCM Agreement in an arbitration pursuant to Article 22.6 of the DSU, and (ii) whether adverse effects that are first determined to exist in a compliance report prior to the arbitration can be included in the proposed level of countermeasures.

In this regard, the Arbitrator’s reasoning includes the following notable considerations:

  • The Arbitrator’s mandate is determined under Article 7.10 of the SCM Agreement because this is a special or additional rule and procedure that prevails over Article 22.6 of the DSU.
  • In determining whether the proposed countermeasures are commensurate with the degree and nature of the adverse effects determined to exist, the standard in Article 7.10 has three basic elements:
    • (a) “countermeasures” (i.e., a temporary suspension of concessions or other obligations), which defines the type of measures that the United States may take;
    • (b) “commensurate with” (i.e., a less precise degree of equivalence than exact numerical correspondence, but a relationship of correspondence and proportionality between the other two elements that may be qualitative as well as quantitative), which defines the relationship that must exist between the level of countermeasures and the degree and nature of adverse effects determined to exist; and
    • (c) “the degree and nature of the adverse effects determined to exist” (i.e., the adverse effects within the meaning of Articles 5 and 6 of the SCM Agreement, with the term “degree” corresponding to a quantitative element and the term “nature” corresponding to a qualitative element), which is the metric for determining the permissible level of countermeasures.
  • Requests pursuant to Article 22.2 of the DSU for authorization to take countermeasures are comparable to requests for the establishment of a panel in the following respects:
    • (a) Such requests must comply with the applicable requirements “on their face”;
    • (b) The text of such requests must be examined “as a whole, and in the light of attendant circumstances”; and
    • (c) The analyses of such requests must be made “on the merits of each case”.
  • Where a request to take countermeasures is made before a compliance proceeding is conducted (i.e., under Article 21.5 of the DSU) in the same dispute, findings of adverse effects in the compliance proceeding can fall within the terms of reference in an arbitration under Article 22.6 of the DSU.
  • The maximum level of countermeasures can be determined by reference to a past reference period and may take the form of an annual level of suspension (i.e., of concessions or other obligations under the covered agreements) that might have to be adjusted over time.
  • With respect to the timeframe of the reference period, there is no fixed time period that arbitrators are required to use. Rather, the reference period must be representative of the adverse effects determined to exist, taking into account all circumstances. In order to place as accurate a value as possible on the adverse effects, a panel may take into account evidence that was not available during the reference period, provided that this does not alter the adverse effects established in the underlying proceedings or establish any additional adverse effects. In this respect, there is no categorical bar to considering facts that were not placed on the record in the previous proceedings of the dispute.
  • In determining the level of countermeasures, it is acceptable to include the value of the components used in the production of the like product at issue (i.e., in this case, Boeing LCA produced in the United States) that were supplied from outside the Member requesting authorization (e.g., inputs secured through international supply chains). To exclude the value of such components from the maximum level of countermeasures would weaken the effectiveness of the WTO dispute settlement mechanism and diminish the compliance-inducement function of authorized countermeasures. The more internationalized the production of an export good is, the more difficult it would be, in practice, for the Member exporting the final good to induce compliance through countermeasures.
  • Finally, the value of adverse effects found to exist during the reference period does not have to be adjusted for inflation up until the year in which the countermeasures or suspension could be authorized.

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

CBSA Initiates Anti-Dumping Investigation Concerning Oil Pump Sucker Rods from Argentina, Brazil and Mexico

On 30 September 2019, the Canada Border Services Agency (CBSA) published a Notice of Initiation of Investigation (SR2-2019-IN) concerning allegations that dumped imports of certain sucker rods designed for oilfield pumps (usually classified under tariff classification no. 8413.91.00.10) from Argentina, Brazil and Mexico are causing or threatening to cause material injury to the domestic industry.

This investigation was triggered by a formal complaint filed by Apergy Canada ULC – Alberta Oil Tool Division (Apergy). In December 2018, Apergy was successful in litigating a similar complaint against certain sucker rods from China (see Inquiry No. NQ-2018-001).

It is expected that the CBSA will publish its Statement of Reasons for its decision to initiate the investigation by Tuesday 15 October 2019.

Tereposky & DeRose regularly provides advice on Canadian anti-dumping and countervailing duty matters. Should you have any questions regarding this matter or anti-dumping and countervailing duty issues more generally, 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