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.