In two recent disputes, the World Trade Organization (WTO) Appellate Body issued reports that make the world safer for subsidized exports.  Following decisions that restrict the Department of Commerce’s (“Commerce”) ability to identify state-owned enterprises as “public entities,” these reports raise important questions, including: Why is the Appellate Body issuing decisions that arguably safeguard state intervention in trade and the ability of governments to subsidize exporting industries?

The reports in United States – Countervailing Measures on Certain Hot-Rolled Carbon Steel Flat Products from India and United States – Countervailing Duty Measures on Certain Products from China question Commerce’s practice for selecting countervailing duty benchmarks.  Commerce has traditionally declined to use the prices of state-owned or controlled firms in the country under investigation because these prices reflect the very subsidies that it intends to remedy.  In addition, where state-owned or controlled firms account for a significant share of the market for the good or service, Commerce typically relies on external world market prices in order to find a truly market-determined benchmark.  This reflects a traditional U.S. suspicion regarding the distortive effects of state participation in market competition.

In U.S. – Carbon Steel India and U.S. – CVD China, however, the Appellate Body ruled that Commerce should not apply a presumption that government-related prices are not market-determined, or that domestic prices in general are distorted when the government accounts for a significant share of the market.  According to the Appellate Body, the key issue is not the source of the prices, but whether the prices are, in fact, market-determined.  That a firm is government-related, or that government-related firms account for a significant share of the market, is relevant, but not sufficient, for a decision to reject prices for use as a benchmark.

Tellingly, in neither dispute did the Appellate Body explain in detail what types of additional evidence or explanation are necessary, laying the groundwork for a potentially endless string of “as applied” challenges to every investigation in which Commerce resorts to a tier-two benchmark.  It only explained that:

What an investigating authority must do . . . will vary depending upon the circumstances of the case, the characteristics of the market being examined, and the nature, quantity and quality of the information supplied by petitioners and respondents, including such additional information an investigating authority seeks so that it may base its determination on positive evidence on the record.

The burden appears to be on everyone and no one at the same time, to produce evidence of an unspecified nature, so that Commerce may undertake a nebulous analysis to determine whether government-related prices are market-determined prices.

While the litany of WTO challenges likely to arise from this standard may clarify things over the coming decades, for now, it appears that the Appellate Body has unnecessarily questioned a common-sense conclusion, resulting in an unclear standard that runs contrary to the spirit, if not the letter, of the WTO’s rules on subsidies.