As the United States mid-term elections draw near, we can expect greater protectionist measures from the US government in an effort to appease voters who are demanding an improvement in the US unemployment statistics. One such protectionist measure is the initiation of the recent 301 investigation relating to allegations that the Chinese clean technology and renewable energy sectors are being unfairly advantaged by government subsidies. Almost all countries are subsidizing the renewable sector in one form or another in hopes of easing the world’s dependence on fossil fuels. It seems however that the US has taken umbrage with the extent of Chinese programs supporting the clean technology and renewable energy industries.
As a Chinese company involved in this sector, there are a number of actions that you can take. The first step is to retain counsel to liaise with the Chinese Government to help the negotiators understand the issues and the potential impact to your business if sanctions are implemented. The current schedule permits comments by interested parties in the US on before November 15, 2010. You may consider reaching out to your customers and partners in the United States to encourage them to weigh into the debate. You may also wish to collaborate with others in the market to defray to the costs of the defense and lobbying efforts.
SECTION 301 OF THE TRADE ACT OF 1974
The United Steelworkers (USW) submitted a Section 301 petition to the United States Trade Representative (USTR) on Sept. 9, 2010 (19 U.S.C. 2411-2420; “Section 301”). The petition alleges that China employs a wide range of World Trade Organization (WTO)‐inconsistent policies that protect and unfairly support its domestic producers of wind and solar energy products, advanced batteries, energy-efficient vehicles, and other clean technology industries. Under Section 301, the USTR has 45 days to decide whether to respond to the petition by initiating an investigation or denying it. In this instance, the USTR initiated the investigation on Oct. 15, 2010. The USTR has elected to delay the government to government consultation for the purpose verifying or improving the petition to ensure to prepare for consultation with China. The USTR has published a summary of the petition and is seeking public comment (75 FR 64776-64778 October 20, 2010). During this time the USTR will also be seeking information and advice from petitioner and advisory committees. Public comments and advisory committee advice will be taken into account by the USTR to improve and verify the petition. Section 301 does not require the U.S. government to wait for authorization from the WTO before instituting remedial enforcement actions, but the U.S. has committed to abiding by the WTO dispute settlement mechanism. Failure to obtain approval by the WTO before issuing sanctions would be a violation of the US commitments to the WTO.
If the country to country consultation fails, the US is likely to proceed to the WTO Dispute Settlement Process.
WTO DISPUTE SETTLEMENT PROCESS
Consultation: The countries in the dispute must first meet and try to settle their differences through consultation. If they are unable to come to agreement, they may ask the WTO director-general to mediate the case. Only after mandatory consultation has failed can the complainant (USA) request adjudication by a panel. However, the parties are free to settle on a mutually agreed solution at any later stage of the proceeding, including after a panel has been selected.
The request for consultation formally initiates a dispute in the WTO by the complainant. Unless otherwise agreed, the respondent (China) must reply to the request for consultation within 10 days and must enter into consultation, in good faith, within a period of no more than 30 days after the date of receipt of the request. Failure to respond will allow the complainant to immediately proceed to the establishment of a panel. If the respondent complies with the consultation requirements, then the complainant must wait the minimum 60 days after the date the respondent received the request for consultations before requesting a panel. However the consultation period can end earlier if both parties agree that the consultations have failed to settle the dispute. The 60 day requirement is a minimum requirement and the parties may allow themselves more time for consultation.
Panel: The complaining party may request the establishment of a panel to adjudicate the dispute if a settlement is not reached during the consultation stage. The complainant may do so any time after the 60 day minimum period has elapsed, but also earlier if the respondent fails to respond or if both parties mutually agree. The respondent has the opportunity to defend itself during this stage if it disagrees with the complainant on either the facts or the correct interpretation of the obligations or benefits under the WTO agreement. The ruling of the Panel, once adopted by the DSB (Dispute Settlement Body), is binding.
The request for establishment of a panel initiates the adjudication phase. Once the panel is established, its first task is to draw up a calendar for the panel’s work. The panel will address each complaint on a case-by-case basis. During the panel review process, before the first hearing, each side presents its case in writing to the panel. The parties present their case at the panel’s first hearing. At the second hearing the countries submit written rebuttals and present oral arguments. Either side can present experts on scientific or other technical matters, but the panel may consult other experts or appoint an expert review group to prepare an advisory report. The panel then submits a first draft of the descriptive part to the countries and gives them two weeks to comment. After the first draft they submit an interim report, which includes findings and conclusions, to the countries, giving them one week to ask for a review. The review period must not exceed two weeks. During this period the panel may hold additional meetings with the countries in dispute. A final report is then submitted to the countries, and then circulated to all WTO members three weeks later.
As a general rule, a panel will issue the final report to the parties within six months from the date when it was established. Generally the reports should not exceed nine months from the date the panel is established; but in practice, panel proceedings take an average of 12 months.
The panel ruling is not binding until it is adopted by the DSB. The DSB must adopt the report no earlier than 20 days, but no later than 60 days after the date of its circulation to all members, unless a party to the dispute formally notifies the DSB of its decision to appeal or the DSB decides by consensus not to adopt the report.
Appeals: Either side can appeal a panel’s ruling, but the appeal must be based on points of law such as legal interpretation and not on reexamining existing evidence or new issues. There is no clear deadline of when the appeal must be filed, but the appellant must notify the DSB of the decision to appeal before it adopts the panel report (between 20-60 days after the report has been circulated). The appeal process begins when a party to the dispute formally notifies the DSB of its decision to appeal. The notice of appeal must include a brief statement of the nature of the appeal, including the allegations of errors in issues of law covered and legal interpretations of the panel. Appellate review proceedings must generally be completed within 60 days, and no longer than 90 days from the date when the appeal was filed.
Implementation: The losing country must inform the DSB, at a meeting within 30 days after the adoption of the report(s) that it intends to implement the recommendations and rulings of the DSB. They must then immediately comply with the rulings, but if immediate compliance is not possible they will be granted a reasonable period of time for compliance. In the event of prohibited subsidies, the subsidizing country must withdraw the subsidy without delay and specify the time-period for this withdrawal.
There is a risk that the US will proceed with a WTO action as to some portion of the renewables and cleantech industries in China. If you are a manufacturer at risk of losing business if sanctions are implemented, you need to proactively lobby against measures that may hurt your business. In addition to liaising early with the Chinese government, you should analyze your business model and assess what changes could be made to lessen the impact. We strongly suggest that you hire counsel to coordinate industry’s discussion with the government negotiators. At King and Wood, we have already begun to discuss the Section 301 petition with lawyers in Washington to better understand the US perspective. If you are interested, we can discuss with you a proactive plan to better protect your interests through this process.
King and Wood is a Chinese law firm and not qualified to render advice relating to US laws. To the extent specific US law is implicated, we coordinate with US counsel on such matters.