The Office of the United States Trade Representative has requested consultations with China concerning that country’s alleged subsidization of its primary aluminum industry. The request, filed before the World Trade Organization, asserts that China’s support for the industry violates the WTO’s Agreement on Subsidies and Countervailing Measures. If it is successful, there is a possibility of tariff “retaliation” against Chinese imports into the United States.
“Consultations”, the first step toward invoking the dispute resolution process, is a procedure designed to settle trade controversies between WTO member states. USTR will present its evidence and arguments, and the Chinese side can respond. Behind the scenes negotiations will undoubtedly take place as well.
If the consultations fail to resolve the matter, the United States can ask that a dispute settlement panel be formed. The case will be resolved very quickly after that; the Subsidies Agreement requires that the panel issue its decision (“report”) 120 days after its formation. The time periods for WTO adoption of the report, and any proceedings before the WTO’s appellate body, are similarly streamlined. Things could get real ugly, real quick.
There Are Subsidies, and There Are Subsidies
The Subsidies Agreement defines a subsidy as a “financial contribution by a government or any public body” of a WTO country. Listed examples include “direct transfer of funds”, provision of goods or services and tax incentives. These must provide a benefit to specific industries, regions or companies.
Certain types of subsidies, such as benefits “contingent . . . upon export performance”, are “prohibited”, meaning they constitute a facial violation of the Subsidies Code.
Other types of subsidies are permitted unless they inflict “serious prejudice to the interests of another” WTO member. For example, if subsidies impart one country’s products with a competitive advantage over another’s in third-country markets, or let the subsidized industry grow to the point where there is an oversupply, they may be found inconsistent with WTO requirements in a dispute resolution proceeding. While subsidized imports into the complaining country’s territory may provide another form of “serious prejudice”, they are not required for a WTO case to proceed.
Based on USTR’s press release announcing commencement of the primary aluminum case, it appears that the second type of subsidies are alleged: “The complaint filed today begins a process to address U.S. concerns that China’s subsidies appear to have caused ‘serious prejudice’ under WTO rules to U.S. interests by artificially expanding Chinese capacity, production and market share and causing a significant lowering in the global price for primary aluminum.”
What Happens Next?
If the WTO ultimately rules in favor of the U.S. complaint, China will be given the option of revising or revoking the offensive subsidies. If it does not do so, the United States may seek “authorization . . . to take countermeasures, commensurate with the degree and nature of the adverse effects determined to exist.” Such countermeasures typically involve imposing tariff rate increases on imports from the other country. The products covered by the tariff increases may be the same ones that receive the subsidies, may be completely unrelated, or may be a mix of the two.
Also, to the extent that imports of Chinese primary aluminum into the United States are subsidized, the WTO case may be a harbinger of a countervailing duty action filed with the U.S. Commerce Department by the domestic primary aluminum industry. In that case, the fun is only getting started.
