Within the last two weeks, the Appellate Body has issued two important decisions interpreting the SCM Agreement: US-Carbon Steel (India) (DS436), and US-CVD (China) (DS437). In DS436, India raised numerous complex issues under SCM; in DS437, China mounted a systematic challenge to more than a dozen US CVD investigations. While the facts and the range of specific issues of the two cases differ, a key issue in both cases is the relationship between government ownership and benchmarking under SCM article 14. The two AB decisions have significantly developed its prior jurisprudence.
Previously, the AB had established under US-Softwood Lumber IV that when the government is the predominant provider of goods or services, private prices in the country of provision are likely to be distorted; in such a situation, alternative benchmarks, such as out-of-country prices, may be used to determine the existence and size of “benefit” conferred by government. The AB expanded this jurisprudence in US-AD/CVD (China)(DS379), in which it accepted the US position that when state-owned enterprises (SOEs) input producers had a dominant market share in China, private prices in the Chinese market were distorted so that the US may use out-of-country prices as benchmarks to determine the benefits conferred by SOEs. Thus, the AB equated SOE input producers with government for purposes of SCM Article 14(d), without making an analysis of the relationship between the SOEs and the Chinese government. This was so despite its holding in the same case that the US acted inconsistently with SCM in finding the SOE input producers were “public bodies” under SCM 1.1.
DS436 and DS437 both involve SOE input producers. In both cases, the panels upheld the US’s use of out-of-country benchmarks to determine benefits conferred by SOE provisions of goods. The AB reversed the panels’ relevant rulings, and in the process has done the following:
1. Introduced the concepts of “government-related entities” and “government-related prices”. These two concepts are used for the first time in DS436. The AB explained:
We use the term "government-related entities" to refer to all government bodies (whether national or regional), public bodies, and any other government-owned entities for which there has not been a "public body" determination. (Fn. 740)
In other words, “government-related entities” are SOEs that have not been found to be “public body” under SCM 1.1. And “government-related prices” are prices charged by government-related entities. In comparison with the binary distinction between “public body” and “private body” under SCM 1.1, the AB has introduced “government-related entities” as a third type of entity to be taken into account in the context of SCM article 14.
2. Established a new position that “government-related prices” other than the financial contribution at issue can form part of in-country prices if they are market determined. The AB stated that in-country prices could emanate from a variety of potential sources, including private or government-related entities, and that there is no hierarchy in the abstract between in-country prices from different sources that can be relied upon in arriving at a proper benchmark. (DS437 para. 4.48) It explained:
[T]he issue of "whether a price may be relied upon for benchmarking purposes under Article 14(d) is not a function of its source, but rather, whether it is a market-determined price reflective of prevailing market conditions in the country of provision. As a consequence, prices of government-related entities other than those of the entity providing the financial contribution at issue need to be examined to determine whether they are market determined and can therefore form part of a proper benchmark. (DS437 para. 4.64, quoting DS436 para. 4.154)
In addition, a finding of government ownership and control of certain entities alone cannot serve as the sole basis for establishing price distortion. Furthermore, government-related prices cannot be discarded in a benchmark analysis without an examination of whether or not they are market determined. (DS437 para. 4.105)
This new position appears to be a major departure from DS379, where the AB simply accepted that prices of Chinese SOE input producers should be discarded, without requiring an examination of whether the SOE prices are market determined.
3. Suggested new criteria for a market analysis under SCM 14. Given the new position above, the AB suggested (rather than mandated) a number of criteria for benchmarking under SCM 14:
In conducting the analysis required under Article 14(d), investigating authorities may have to examine the structure of the relevant market, including the nature of the entities operating in that market, their respective market shares, as well as any entry barriers. … In addition, investigating authorities may be required to assess "the behaviour of the entities operating in that market in order to determine whether the government itself, or acting through government-related entities, exerts market power so as to distort in-country prices". Thus, investigating authorities may be called upon to examine the conditions of competition in the relevant market in order to assess whether the government is influencing the pricing conduct of any government-related or private entities. (DS437 para. 4.62, quoting DS436 para. 4.157)
In a footnote to this paragraph, the AB noted: “depending of the particular circumstances at hand, an investigating authority may not be required to conduct a market analysis addressing all the elements mentioned above as examples of relevant inquiries. Such situations may include where the government is the sole provider of the good in question, and where the government administratively controls all of the prices for the goods at issue.” (DS437, fn. 552)
Significantly, the AB mentioned for the first time “the conditions of competition in the relevant market” as one potential factor to be examined in the benchmarking analysis.
In my opinion, these new developments in the benchmarking jurisprudence represent major progress in the right direction. In practice, the impact could be huge – the US will be required to significantly change its CVD methodologies where SOEs are involved, especially in the China cases. It will be very interesting to watch how this line of cases evolves.