IBTBlog

The International Business Transactions Blog

WTO Panel Holds Trump’s Tariffs on China Unlawful

By Yinan Guo
Law Student Editor

On September 15th, in United States—Tariff Measures on Certain Goods from China, a WTO panel found that United States violated the most-favored-nation (“MFN”) rule under the WTO Agreements when the Trump Administration imposed punitive tariffs on billions of dollars worth of Chinese imports.

The Trump administration started imposing tariffs on imports from China in 2018, citing its authority under Section 301 of the Trade Act of 1974. The law gives the President wide latitude to take actions against a variety of allegedly unfair foreign trade practices. In an attempt to curb China’s intellectual property (“IP”) practices objectionable to the United States, the U.S. government unilaterally imposed tariffs on more than $250 billion worth of Chinese imports without seeking to resolve the dispute through the mandatory procedures under the WTO Dispute Settlement Agreement. The two governments entered to an executive trade deal earlier this year, but most of the tariffs imposed by the United States still remain in place.

Responding to the tariffs, China initiated a dispute settlement procedure with the WTO in 2018. China argued that the U.S. violated the MFN principle, which prohibits WTO contracting parties from discriminating between imports from different trading partners. The United States did not deny that it singled out Chinese goods, but it invoked an exception in Article XX(a) of the General Agreement on Tariffs and Trade (GATT), which allows countries to derogate from their obligations under GATT in order “to protect public morals.” The United States argued that China’s IP and forced technology transfer policies violated the “norms against theft, misappropriation and unfair competition.”

Last week, a panel of the WTO Dispute Settlement Body ruled that the increased tariffs on Chinese goods violate MFN, and it rejected the public morals argument, because the United States had simply invoked GATT article XX(a) and failed to explain how the “additional duties on selected imported products contributes to the achievement of public morals objectives by the United States.” Although the panel recognized the meaning of public morals may vary among WTO members, and such members are entitled to “a certain degree of deference,” it considered itself bound to make an “objective and independent assessment” of whether a moral concern credibly exists in the invoking state’s society and whether the measure is ”necessary” or “apt to contribute” to protecting public morals. Although the United States invoked many municipal laws forbidding theft, unfair competition, and IP infringement as the basis for the article XX(a) exception, the panel concluded that the United States had failed to articulate how the additional duties protected the public moral interest in fair competition, because the tariffs did not specifically target products that embodied U.S.-owned IP. Most fundamentally, the panel found fault with the United States’ failure to convincingly explain the connection between public morals and the punitive customs duties.

In theory, the United States has 60 days to appeal this decision, but the Appellate Body is shut down due to the Trump Administration’s decision to unilaterally block the appointment of Appellate Body panelists, discussed in an earlier IBTBlog post. Under the WTO Agreements, parties can still appeal a decision even when there is no functioning Appellate Body in place. Appealing a decision under this circumstance will effectively block the panel report from taking effect.  However, this maneuver would not much benefit the United States, because China already has its own retaliatory sanctions against U.S. imports in place.

The WTO Restores Dispute Resolution after Obstruction by Trump Administration

By Yinan Guo
Law Student Editor

Aaron Fellmeth
Faculty Co-Editor

Beginning in October 2019, the U.S. government unilaterally blocked the appointment of panelists to the WTO’s Appellate Body (“AB”). As a result, the WTO dispute settlement system had ceased to conclusively resolve trade disputes nearly one year ago.  Because AB judges are appointed by consensus, any WTO member can single-handedly shut down the appellate system.  Although technically within its legal rights, the United States was the first ever to obstruct the operation of the WTO’s Dispute Settlement Understanding (DSU) for all of the WTO’s 164 parties as a political maneuver.

To restore the AB’s functioning, WTO Members created an alternative appellate mechanism—the Multi-Party Interim Appeal Arbitration Arrangement (MPIA), which became operational on July 31, 2020.

The MPIA is an interim solution within the WTO framework created under Article 25 of the DSU. Article 25 allows Members to resolve disputes through arbitration, provided that the arbitration agreement is notified to all Members in advance. The MPIA was officially notified to the WTO on April 30, 2020. As of today, it has 23 Participating Members (PMs) and it is open for accession. The list of current PMs can be found here.

The MPIA contains three parts: a communication to the WTO Dispute Settlement Body (DSB) affirming Members’ commitment to the MPIA and setting out general rules; Annex 1 containing a template of an appeal arbitration agreement; and Annex 2 providing the procedure for selecting a pool of arbitrators. The MPIA becomes effective when PMs adopt ad hoc the appeal arbitration agreement in Annex 1 in any specific dispute.

MPIA arbitrations will be conducted by three arbitrators selected from a pool of ten standing appeal arbitrators on a rotating basis. Earlier this year, PMs had the opportunity to each nominate one candidate for the pool of arbitrators, which are chosen in a separate procedure set forth in Annex 2 of the agreement. The pool of standing arbitrators was selected on July 31, 2020.

The MPIA procedures largely mirror AB procedures. Both the AB and the MPIA limit the scope of review “to issues of law covered by the panel report and legal interpretations developed by the panel.” One notable difference is that the MPIA goes one step further, requiring arbitrators to “only address those issues that are necessary for the resolution of the dispute” and “only those issues that have been raised by the parties.”

Another key difference is that decisions of the MPIA arbitration panel are final. Unlike Panel Reports and AB Reports, which must be adopted by the DSB to be binding, MPIA decisions only need to be notified to the DSB.  A Panel Report that has been appealed under the MPIA can no longer be adopted by the DSB, because the panel proceeding must be suspended before the MPIA arbitration. The DSU provisions regarding the DSB surveillance mechanism and suspension of concessions will be applied mutatis mutandis. In other words, within the MPIA framework, the DSB still has the authority to keep under surveillance the implementation of decisions, and suspension of concessions is still allowed in the event that decisions are not implemented.

As of today, the procedures contemplated in the MPIA have been adopted in at least four proceedings, several of which are still in the dispute resolution process.  If the Trump Administration hoped to lower the United States’ international standing by disappointing its trading partners, it has accomplished that goal.  Through cooperation and diplomacy, the other WTO members have ensured that it achieved no other objective.

International Trade Court Holds Trump’s Turkish Steel Tariff Unlawful

By Yinan Guo
Law Student Editor

In an extraordinary ruling this summer, the U.S. Court of International Trade (CIT) has held that President Trump’s decision to increase tariffs on Turkish steel products violated both a statute in force and the Constitution’s Fifth Amendment Equal Protection clause.

Section 232 of the Trade Expansion Act of 1962, 19 U.S.C. § 1862, allows the President to “adjust” imports that pose a threat to national security by imposing additional customs duties or import restrictions. However, the statute imposes certain procedural requirements on the Executive Branch. First, the Secretary of Commerce must investigate, consult with the Secretary of Defense, and submit a report regarding the national security impact of the targeted imports. Within 90 days of receiving the report, the President must determine what action to take basing on its findings and recommendations. Once a determination is made, the President should implement it within 15 days and inform Congress within 30 days.

On January 11, 2018, the Secretary submitted a report (“Steel Report”) on the collective impact of global steel imports on national security, with no finding on Turkish imports individually. In March 2018, President Trump issued Proclamation No. 9705, imposing a 25% tariff on steel imports from a range of non-allied countries. In August 2018, the President issued Proclamation No. 9772, increasing the tariff specifically on Turkish steel to 50%.

The court held that Proclamation No. 9772 was unlawful on three grounds. First, it violated the statutorily mandated time restraint because it was made more than 90 days of receiving the Steel Report. The court disagreed with the government’s argument that the first proclamation was made within the 90-day period, and that the President should have the authority to make modifications. Such expansive reading of the statute is “at odds with the language of the statute, its legislative history, and its purpose.” Any possibility of interpreting the statute as granting the President continuing authority to modify was clearly foreclosed after the 1988 amendments to the statute. Furthermore, the court noted that because of the time-sensitive nature of national security issues, having a strict temporal requirement “ensures that the President is acting on up-to-date national security guidance.”

Second, the Proclamation was not properly based on a report by the Commerce Secretary. The Steel Report evaluated steel imports collectively; it made no specific finding regarding imports from Turkey. Although the Proclamation mentioned informal discussions between the President and the Commerce Secretary about Turkish steel imports, the statute strictly requires the President to act on formal reports.

Finally, and most unexpectedly, the Proclamation violated the Constitution’s Fifth Amendment Equal Protection guarantees. The key issue is whether there is a rational relationship between the disparate treatment and some legitimate governmental purposes. National security is obviously a legitimate purpose. But there was no apparent reason that increasing tariffs on Turkish steel imports could serve this purpose, because the Steel Report made no such finding. Thus, the court held that treating Turkish imports differently was “arbitrary and irrational.”

The full judicial opinion is available on Justia.com.