USITC delivers report to Trump: China’s circumvention unforeseen

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As the calendar turned to December, U.S. Trade Representative Robert Lighthizer asked the U.S. International Trade Commission (USITC) for a supplemental report to its initial finding in the Section 201 trade case, which concerns what petitioners Suniva and SolarWorld maintain were illegal business practices that caused their businesses to struggle (and, in Suniva’s case, fail completely).

At the time, speculation was that the request was an attempt to make sure whatever decision President Donald J. Trump makes in the case will not be overturned by the World Trade Organization (WTO), an international body to which 164 countries have agreed to submit trade disputes.

The letter pushed the deadline for President Donald J. Trump to impose sanctions back from January 12 to January 26, which would allow the president to give full consideration to what the USITC found.

Two days after Christmas, the USITC submitted its report and found that no one could have foreseen that China – the only country repeatedly named explicitly as violating the WTO rules – would circumvent WTO rules in exporting solar modules into the U.S. market.

Notably, the argument centers on what the definition of “unforeseen developments” is. Despite the fact that neither the WTO Agreement on Safeguards (Safeguards Agreement) and the corresponding U.S. implementing statute refer to the term “unforeseen developments,” its appellate body used the phrase when it interpreted the Safeguards Agreement.
Its ruling requires that any safeguard measure also comport with the unforeseen developments provision of Article XIX:1(a) of the General Agreement on Tariffs and Trade 1994 (GATT), to wit:

{i}f as a result of unforeseen developments and of the effect of the obligations incurred by a contracting party under this Agreement, including tariff concessions, any product is being imported into the territory of that contracting party in such increased quantities and under such conditions as to cause or threaten to cause serious injury to domestic producers in that territory of like or directly competitive products, the contracting party shall be free, in respect of such product, and to the extent and for such time as may be necessary to prevent or remedy such injury, to suspend the obligation in whole or in part or to withdraw or modify the concession.

Essentially, the supplemental’s argument is that U.S. negotiators could never have foreseen, when it “acceded to GATT 1947, at the time that the United States, acceded to the WTO, or at the time that the United States agreed to China’s accession to the WTO” (a phrase used repeatedly in the report), that China would cheat on its obligations under the international trade agreements.

The report accuses the Chinese government of putting governmental subsidies in place and expanding its module production beyond what it could possibly have used domestically, which gave them the ability to flood the market with inexpensive modules.

The conclusion at which the report arrives is that these “unforeseen developments” gives the U.S. the right to impose sanctions on the imports of international solar modules into the country, giving the president justification for imposing tough sanctions – something many in the industry think is increasingly likely.

Taken at face value, the argument is compelling, but there are some confusing elements of the report that could undermine its central argument.

First, one of the “unforeseen developments” the report cites is the Chinese government’s implementation of Five-Year Plans – historically the way socialist nations develop industrial policy.

China developed its first five-year plan in 1953 and has done so every five years since that time. One might wonder how something that has existed for 64 years could be considered “unforeseen”.

Second, the report cites SolarWorld’s two most recent trade actions against China in 2011 and 2015, suggesting there is no way U.S. negotiators could have foreseen the countervailing duties (CVD) and tariffs imposed in those cases would have little or no effect on the flood of inexpensive modules into the U.S. market.

If true, the United States needs better trade negotiators.

The initial decision in SolarWorld’s 2012 trade case left a loophole big enough to maneuver a cargo ship laden with Chinese solar modules through. In reaction to the imposition of tariffs that were limited to cell production on the Chinese mainland, Chinese PV makers began importing large volumes of cells from Taiwan for products destined for the U.S. market. Presto – the sanctions no longer applied.

By the time U.S. trade officials closed that loophole in 2014 by issuing imports on both cells and modules from China and Taiwan, the horse had not only left the barn but was several hundred miles away, and Chinese companies began moving production to Southeast Asia.

Lastly, the report focuses largely on what it contends is Chinese perfidy in its solar module production, while leaving aside actions from other countries that may have contributed to the failing of the two petitioners.

In a vacuum, that would not be unexpected because the Chinese module manufacturers are by and large considered the behemoths of the industry.

Here’s the rub, however: Suniva and SolarWorld are not just asking for “global safeguard protection” from Chinese manufacturers only, as the world “global” implies. It is fair to ask why other countries around the world are being punished for the apparent transgressions of one country.

What the USITC’s report really signifies is that the trade case battle that so dominated 2017 still has legs in 2018. It will be interesting to see how – or even whether – the opposition to the trade case will respond to the latest salvo.