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Sungjoon Cho
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What I meant by the “traditional” WTO rules on subsidies based on territoriality is that subsidies must be provided by the government where a product in question was manufactured and exported. It has been the conventional interpretation of SCM Article 1.1 (a) (1) (“there is a financial contribution by a government or any public body within the territory of a Member”). Here, “a” Member refers to the country where a subsidy was granted AND a product was exported. However, the EU argued, and the United States now seems to agree, that “a” Member could refer to the country where a subsidy was granted (China) but not necessarily where a product was exported (Egypt).
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Many thanks, Asher, for drawing our attention to the recent ECJ decision on the same dispute. I agree with you that the ECJ identified the “attribution” (from China’s subsidization to Egypt’s subsidization) without involving any significant analysis on the ILC Draft Articles on State Responsibility. The ECJ simply inferred the ostensible logic of collusive subsidization simply from the factual circumstances: “The Government of China and the Government of Egypt therefore worked closely together to establish the SETC-Zone as a zone with special legal and economic features which enabled the government authorities of China to confer directly all the facilities inherent in China’s ‘Belt and Road’ initiative on the Chinese undertakings established in that zone” (para. 58); “In those circumstances, it cannot be accepted that an economic and legal construct such as that of the SETC-Zone, conceived in close collaboration between the Government of China and the Government of Egypt at the highest level, is not covered by the basic anti-subsidy regulation, without this undermining that regulation’s effectiveness or its purpose and objectives.” (para. 59). Interestingly, the ECJ attempted to justify its expansive interpretation on the meaning of a “subsidy” in the EU anti-subsidy regulation in light of the WTO subsidy rules. The ECJ viewed that “it is for the Courts of the European Union to review the legality of the EU measure in question in the light of the WTO rules” (para. 63). Then, it ruled that “as regards Article 1.1(a)(1) of the SCM Agreement, it should be noted, first, that the latter defines a subsidy as a financial contribution by a government or any public body within the territory of ‘a’ Member of the WTO. That wording does not therefore preclude the possibility that a financial contribution granted by a third country may be attributed to the government of the country of origin or export, since it is sufficient that the financial contribution of the government or any public body is within the territory of ‘a’ Member of the WTO.” (para. 68) Obviously, such an expansive interpretation departs from the traditional WTO case law based on the territoriality principle. Domestic subsidy regulations by both the EU and the United States had followed the same position before they have recently changed the course.
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Many thanks for letting me know, Bregt. What a coincidence! This most recent WTO dispute (DS 616) concerns the issue of a transnational subsidy “in connection with the provision of preferential financing and other support by Chinese grantors to Indonesian SSCRFP producers.” Predictably, the Indonesian claim relied on the conventional WTO subsidy rules based largely on territoriality. (“The EU's attribution of financial contributions by Chinese grantors to the Government of Indonesia, and the EU's decision to consider these attributed financial contributions as subsidies within the meaning of Article 1.1(a)(1) of the SCM Agreement”; “The EU's determination of a benefit and the EU's calculations of such benefit regarding, amongst others, the use of benchmarks that do not reflect prevailing market conditions in the country of provision and the absence of proper "pass through" determinations, as required by Articles 1.1(b), 10, 14, and 32.1 of the SCM Agreement.”)
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The problem is that such a “creative” interpretation might open a Pandora’s box regarding whether and/or how to regulate input (upstream) subsidies in the age of global value chains (GVCs). This is not just about China. Under the logic of transnational subsidies, the EU might impose countervailing duties on the Ford EVs, manufactured in Mexico, which received grants from the U.S. government on its batteries. As the titular “friend-shoring” phenomenon intensifies, more transnational subsidies could be subject to possible countervailing duties. I do not pass judgment on the legal merits of such a doctrinal move. My point is that the WTO, as well as its members, should know what is at the stake here. Do the WTO members share any common grounds on this novel situation? Is adversarial legalism the best way to resolve this kind of dispute?
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You are correct, in a technical sense. However, what remained most controversial in this dispute was not those subsidies directly coming from the Egyptian government. Rather, it was the Chinese subsidies that the European Commission “attributed” to the Egyptian government. China had granted preferential financing to the Chinese subsidiaries (Jushi Egypt and Hengshi Egypt) operating in the China-Egypt Economic and Trade Cooperation zone located in Egypt. The Commission viewed that Egypt had “actively sought, acknowledged and adopted [Chinese] subsidies for the benefit of the products made [in Egypt].” Drawing on the rules of customary international law regarding state responsibility, the Commission basically treated China and Egypt as “partners” in subsidization.
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The U.S. Department of Commerce has proposed a new agential interpretation on the countervailability of the so-called “transnational subsidy.” What is a transnational subsidy? Wentong Zheng and I have recently discussed this issue in an article. Here are some relevant... Continue reading
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I agree with you and do hope the current trade wars will be over soon. At the same time, however, I am afraid that issues more than trade are involved here. Perhaps we should rethink global governance in general, in a way which can strengthen the competence of multilateral organizations. To achieve this goal, “public” awareness must be raised to a lot higher level than now, possibly via education and social marketing. Without some kind of change at a “cultural” dimension, this kind of big change would not happen.
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