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Ambassador Dennis Shea’s Statement at the WTO General Council
May 8, 2018

Statement as delivered by Ambassador Dennis Shea
Deputy U.S. Trade Representative and U.S. Permanent Representative to the WTO

WTO General Council
Geneva, May 8, 2018

Selection of New Appellate Body Members

The United States appreciates the opportunity afforded by this agenda item to address concerns surrounding the functioning of the WTO’s dispute settlement system in general, and of the Appellate Body in particular.

We have taken note of the expressions of concern on the part of the sponsor of this agenda item and other Members. I’m happy to have a chance to review briefly the perspectives of the United States, and I look forward to continue engaging with my colleagues on these important questions.

Members of this organization are fond of applauding the WTO as an international paragon of the rule of law. And indeed, the WTO’s rule-book has substantial value, including for the United States, and adherence to those rules has generally contributed to global economic stability.

But something has gone terribly wrong in this system when those charged with adjudicating the rules are so consistently disregarding those very rules. What we are dealing with, fundamentally, is a steadily worsening rupture of trust on the part of the Appellate Body.  That ruptured trust has, in turn, placed in jeopardy the political sustainability of our entire dispute settlement system. Despite years of warnings from my predecessors, and expressions of concern from respected WTO voices, including former Directors-General, the Appellate Body not only has rewritten our agreements to impose new substantive rules we Members never negotiated or agreed, but has also been ignoring or rewriting the rules governing the dispute settlement system, expanding its own capacity to write and impose new rules.

This unapproved rule-breaking and rule-making is obvious to anyone who looks honestly at how the system operates. Rules that we, as WTO Members, negotiated and approved domestically stipulate that the Appellate Body must render its decisions within 90 days – there are no exceptions given.  And yet the AB now almost never meets that deadline, breaking the rules without authorization from its bosses – namely, us, the Members of this Council and of the DSB. Similarly, the AB has decided that it can deem a person who “ceases to be a member of the Appellate Body” to continue to be a member, despite there being no basis whatsoever in the DSU for such actions.  I could go on with examples.

Beyond this flaunting of rules meant to govern its own activity, the Appellate Body has compiled a troubling track record of expansive interpretations that effectively create new WTO law, a function clearly reserved to Members through the process of negotiation.

But our lack of progress in negotiations bears a strong relationship to this culture in which many Members consider that certain outcomes can be most easily achieved through litigation rather than through the hard work of negotiation.

If the United States is now taking actions that some consider to be disruptive, it is important to understand that this comes only after many years of unheeded warnings. It is important to understand that a dispute settlement system that ignores existing rules and writes new rules undermines the WTO as a forum for negotiation and discussion.  It is important to understand that dispute settlement that goes beyond existing rules has not been approved by Members and does not have democratic legitimacy or support. Our goal is to ensure that any system of dispute settlement can sustain the support of all Members.  We do not see how perpetuating the existing dysfunctions through a complacent approach to the filling of Appellate Body vacancies can advance that objective.

As I stated yesterday in our informal Heads of Delegation meeting, the United States is deeply interested in working with those other Members who share our commitment to a better, more politically sustainable, and truly Member-driven World Trade Organization. That interest applies with no greater relevance than with respect to the issue currently being discussed in this Council.

Section 232 Investigations

Chairman, the United States finds it curious that China has asked to place this item on the agenda for today’s meeting.

For, in fact, we would not find ourselves in the current juncture were in not for China’s own self-interested policy of contributing to massive global overcapacity in steel and aluminum. This policy has been carried out over a period of many years, without regard to global impacts, and China has responded to mounting concerns with considerable talk but not much action.

Against this backdrop, we are perplexed that China now asserts its status as a victim. In any event, I am happy to have this opportunity to recall to Members’ attention the reasons underlying the United States’ defense of critical national security interests.

The United States has previously informed Members about the proclamations issued by the President pursuant to Section 232 of the Trade Expansion Act of 1962, as amended.

I won’t repeat our previous intervention on this issue, but will refer Members to our statement at the Council for Trade in Goods meeting on March 23 – a statement we provided consistent with the Decision Concerning Article XXI of the General Agreement taken by the GATT Council on 30 November 1982.[1]

Certain Members have since sought consultations with the United States with regard to the President’s proclamations. Those Members have our responses.

We note the attempt by some Members to cast the President’s actions in terms that suit their desire to pursue a particular WTO recourse. These attempts are without valid foundation and we will not entertain them.

We are, however, willing to discuss with any Member questions they may have about the President’s actions, as well as the circumstances of pernicious state intervention, market distortion, and massive and persistent overcapacity in certain economies that necessitated the actions.

The President issued the Steel and Aluminum Proclamations pursuant to Section 232 of the Trade Expansion Act of 1962, determining that tariffs are necessary to adjust imports of steel and aluminum articles that threaten to impair the national security of the United States.

The United States did not take action pursuant to Section 201 of the Trade Act of 1974, which is the law under which the United States imposes safeguard measures.And as evidenced by our recent notifications with respect to solar products and large residential washers, the United States is well aware of what constitutes a safeguard as well as what its notification obligations are under the Agreement on Safeguards.

Moreover, Article 12.3 of the Agreement on Safeguards states that a “Member proposing to apply or extend a safeguard measure shall provide adequate opportunity for prior consultations” with Members having a substantial interest in exports of the product concerned. However, the United States is not “proposing to apply or extend a safeguard measure” with respect to steel or aluminum and, therefore, Article 12.3 does not apply and China’s requests for consultations pursuant to Article 12.3, like its initial characterization of the tariffs, have no basis in the Agreement on Safeguards.

Because the steel and aluminum actions are not safeguard measures, the United States considers that Article 8.2 of the Agreement on Safeguards does not justify China’s suspension of concessions or other obligations. China has asserted no other justification for its measures, and the United States is aware of none.  Therefore, it appears that China’s actions have no basis under WTO rules.

Investigations and Measures Under Section 301 of the Trade Act of 1974

Chairman, we have now entered the realm of Alice in Wonderland.  White is black.  Up is down.  It is amazing to watch a country that is the world’s most protectionist, mercantilist economy position itself as the self-proclaimed defender of free trade and the global trading system.  The WTO must avoid falling down this rabbit hole into a fantasy world, lest it lose all credibility.

The truth is, it is China that is the unilateralist, consistently acting in ways that undermine the global system of open and fair trade.  Market access barriers too numerous to mention; forced technology transfers; intellectual property theft on an unprecedented scale; indigenous innovation policies and the Made in China 2025 program; discriminatory use of technical standards; massive government subsidies that have led to chronic overcapacity in key industrial sectors; and a highly restrictive foreign investment regime – these are the issues that should be on today’s agenda.  If the WTO wishes to remain relevant, it must – with urgency – confront the havoc created by China’s state capitalism.

This brings me to the Section 301 report that China has asked to be reflected on today’s agenda.

As Members are aware, the United States has issued a detailed factual report running nearly 200 pages with more than one thousand one hundred footnotes that details China’s distortive policies on technology transfer. China has not provided any evidence to refute the report’s facts or conclusions, only mere denials.  The report, containing extensive evidence, is available on the USTR website.

What are these policies? There are four types of practices involving technology transfer:

First, China uses foreign ownership restrictions, such as joint venture requirements and foreign equity limitations, and various administrative review and licensing processes, to require or pressure technology transfer from foreign companies.

These foreign ownership restrictions prohibit foreign investors from operating in certain industries unless they partner with a Chinese company, and in some cases, unless the Chinese partner is the controlling shareholder.

These requirements preclude foreign companies from entering the market on their own terms, and lay the foundation for China to require or pressure the transfer of technology.

China also uses its administrative licensing and approvals processes to force technology transfer in exchange for the numerous approvals needed to establish and operate a business in China.

Vague provisions and uncertainty about the applicable rules provide Chinese authorities with wide discretion to use administrative processes to pressure technology transfer or otherwise act in furtherance of China’s trade-distorting industrial policy objectives. And so I am compelled to ask:  is this unilateralism designed to benefit China at the expense of its trading partners?

Second, China’s regime of technology regulations forces U.S. companies seeking to license technologies to Chinese entities to do so on non-market-based terms that favor Chinese recipients.

China imposes a different set of rules for imported technology transfers originating from outside China, such as from foreign entities attempting to do business in China. These rules do not apply to technology transfers occurring between two domestic Chinese companies.

China’s mandatory requirements for importation of foreign technology are discriminatory and clearly more burdensome than the requirements applicable to domestic Chinese companies.

Specifically, China mandates that all indemnity risks be borne by the foreign technology transferor. Parties cannot negotiate the allocation of this risk, even if the transferee would be willing to bear the risk under the contract.

China also mandates that all improvements belong to the party making the improvement and that a foreign licensor cannot stop the Chinese licensee from making improvements to the technology. China further requires that joint ventures, mandated under Chinese law, may continue to use transferred technology after the conclusion of any licensing contract.

These restrictions tip the technology transfer regime in favor of Chinese entities before a foreign company even attempts to enter the market in China. And so I am compelled to ask:  is this unilateralism designed to benefit China at the expense of its trading partners?

Third, China directs and unfairly facilitates the systematic investment in, and acquisition of, foreign companies and assets by Chinese companies to obtain cutting-edge technologies and intellectual property and generate the transfer of technology to Chinese companies.

The role of the state in directing and supporting this outbound investment strategy is pervasive, and evident at multiple levels of government – central, regional, and local.

China has devoted massive amounts of financing to encourage and facilitate outbound investment in areas it deems strategic.

To implement these policies, China employs tools such as investment approval mechanisms and a system of “encouraged” sectors to channel and support outbound investment.

These investments and acquisitions align with state objectives and policies, and are often undertaken by state-owned enterprises that are, by definition, owned and controlled by the government.

Even when undertaken by companies in which the government does not own an observable controlling stake, these transactions are frequently guided and directed by the state.

In addition, many of these transactions are funded by state-owned entities or banks, often in situations where comparable commercial financing would have been unavailable. And so I am compelled to ask: is this unilateralism designed to benefit China at the expense of its trading partners?

Fourth, China conducts and supports unauthorized intrusions into, and theft from, the computer networks of foreign companies to access their sensitive commercial information and trade secrets.

For over a decade, China has conducted and supported cyber intrusions into U.S. commercial networks, targeting confidential business information held by U.S. firms.

Through these cyber intrusions, China has gained unauthorized access to a wide range of commercially-valuable business information, including trade secrets, technical data, negotiating positions, and sensitive and proprietary internal communications.

China has used cyber-enabled theft and cyber intrusions to serve its strategic economic objectives. Documented incidents of China’s cyber intrusions against U.S. commercial entities align closely with China’s industrial policy objectives.  And so I am compelled to ask: is this unilateralism designed to benefit China at the expense of its trading partners?

These four technology transfer policies harm every Member, and every industry in every Member, that relies on technology for maintaining competitiveness in world markets and increasing its people’s standard of living.

Instead of addressing its damaging and discriminatory policies, China accuses the United States of “unilateralism.”

This criticism has absolutely no validity. To the contrary, the four policies and practices I have outlined are examples of unilateralism by China, advancing its own interests at the expense of all of ours, and causing economic harm worth tens of billions of dollars annually to the United States, and multiples of that to WTO Members collectively.

The WTO system is not threatened – as China claims – where a Member takes steps to address harmful, trade distorting policies not directly covered by WTO rules.To the contrary, what does threaten the WTO is that China is asserting that the mere existence of the WTO prevents any action by any Member to address its unfair, trade-distorting practices and policies – unless those policies are currently subject to WTO dispute settlement.

If the WTO is seen as a shield protecting those Members that choose to adopt policies that can be shown to undermine the fairness and balance of the international trading system, then the WTO and the international trading system will lose all credibility and support among our citizens.

[1]GATT Council, Decision Concerning Article XXI of the General Agreement – Decision of 30 November 1982, L/5426 (2 December 1982).