Bridges Weekly Trade News Digest • Volume 12 • Number 29 • 10th September 2008

US Mulls WTO Case over Chinese Export Restrictions

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The US government may soon initiate a WTO case against China’s export restrictions on a range of raw materials used mainly in the steel industry, arguing that by depressing domestic input costs, the restrictions effectively subsidise Chinese steel producers in contravention of multilateral trade rules.

According to a report in the Financial Times last week, the US could request consultations with China - the first step in WTO dispute procedures - “within weeks,” although a decision actually to do so has not been finalised.

The same report, citing sources close to the US’ internal deliberations, said that Washington would likely challenge Chinese export quotas and taxes on steel industry inputs such as metallurgical coke, molybdenum, and fluorspar. The restrictions lower domestic prices and raise export costs, the claim would argue, benefiting Chinese industry at the expense of its competitors abroad. US officials are said to be confident that for the raw materials in question, China is in violation of the commitments it made in order to accede to the WTO.

Other sources familiar with the developments say that the filing of a case is not imminent. The export restrictions are one of several irritants in US-China trade relations that officials are working to resolve bilaterally, although the matter could indeed go to litigation in the coming months.

The office of the US trade representative declined to comment on how Washington would structure its case.

One avenue would be to seek a ruling on whether the export restrictions violate the terms of the ‘protocol of accession’ that China signed upon its entry to the WTO in 2001.

China’s protocol of accession commits it to eliminate “all taxes and charges applied to exports” (apart from customs-related fees) on all but 84 specific products. Most of those exceptions, listed in an annex, concern metallurgical industry, providing for export levies of 20 to 40 percent on products ranging from lead and zinc ores to scrap iron. The raw materials that the US is targeting are not among those on the list.

Brendan McGivern, a Geneva-based partner with White and Case, the international law firm, said that a recent WTO ruling suggested that China’s accession protocol was “as enforceable as” any standard WTO rule.

The US could take a broader approach, arguing that the export restrictions benefit domestic steel producers in ways that meet the WTO definition of a subsidy, and that they cause “serious prejudice” to the interests of overseas competitors.

WTO rules define a subsidy as either a “financial contribution” by government entities that confers benefits on the recipient, whether through direct payments or tax breaks, or “any form of income or price support” that promotes exports or reduces imports. Industrial subsidies directly linked to export performance and import use are prohibited. But ordinarily allowable subsidies cease to be legal if they have adverse effects on other countries, such as by undercutting the competitiveness of their industries in other markets.

Many developing countries use export taxes in order to raise revenue and encourage the processing of raw materials at home. They have resisted efforts to constrain the use of such measures in negotiations at the WTO.

The US has long held the view that export restraints can constitute a subsidy to industry, McGivern noted. In fact, Washington has had similar disagreements with a number of its other trading partners in the past.

One such disagreement even went as far as a WTO dispute. But the panel in that case was unconvinced by the US’ argument that Canadian export restrictions on some lumber products effectively constituted a “financial contribution” that merited a countervailing duty. Washington did not appeal the decision.

That panel, which issued its ruling in 2001, limited its analysis to the question of whether an export restraint could constitute a “financial contribution” as per the definition of a subsidy in the WTO Agreement on Subsidies and Countervailing measures.

Specifically, it disagreed with the US’ argument that the existence of an export restraint that has the effect of encouraging the sale of affected products to domestic purchasers was “the same as if the government had explicitly and affirmatively ordered” that the products be sold to domestic purchasers. The panel said that extending the US’ logic would mean that high import tariffs on coal, for example, could count as ‘financial contributions’ to a country’s domestic coal industry.

The US has launched a spate of WTO cases against China since 2007, targeting Beijing’s policies on issues such as copyright rules and counterfeiting and duties on automotive components. The Democrat-controlled Congress has pushed for the Bush administration to step up efforts to enforce trade rules, particularly with regard to China, which has a massive trade surplus vis-à-vis the US.

Inside US Trade, a Washington-based publication, last week reported that the US trade representative’s office preparation of the case was intended more to mollify Congress, to convince lawmakers that new legislation making enforcement mandatory was unnecessary.

ICTSD reporting; “US set to challenge China over steel prices,” FINANCIAL TIMES, 4 September 2008; “USTR Considers Case On Chinese Export Restrictions For Steel Inputs,” INSIDE US TRADE, 5 September 2008.

One response to “US Mulls WTO Case over Chinese Export Restrictions”

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