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Russell Smith

Russell Smith

KWR International

Russell Smith is Special Counsel and head of the Government Relations Practice Group in the Washington, DC office of Willkie Farr & Gallagher LLP.

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U.S.-CHINA Section 301 Case Concerning Green Technologies and Rare Earth Metals: Clash of the Titans?

WASHINGTON, DC (KWR) October 20, 2010 - On October 15, United States Trade Representative (USTR) Ron Kirk announced that he was accepting a petition filed by the United Steelworkers (USW) union under Section 301 of the Trade Act of 1974. The petition was filed on September 9, 2010. The petition alleges that China has violated WTO commitments in connection with the development of its "green technologies" sector through a range of unfair trade practices, as described below.

Section 301 authorizes the USTR to "investigate and sanction foreign countries that maintain acts, policies and practices that violate, or deny U.S. rights or benefits under trade agreements, or are unjustifiable, unreasonable or discriminatory and burden or restrict U.S. commerce." A Section 301 investigation may result from a petition filed by a U.S. business or labor union.

If USTR accepts a petition, the next step is an investigation, during which USTR reviews and verifies the claims in the petition. During this period, USTR is authorized to undertake consultations with the foreign country that is the subject of the petition in an effort to resolve the allegations of trade agreement violations or unfair trade practices, but USTR may delay these consultations for up to ninety days to complete its investigation. USTR invoked that delay with respect to the USW petition, so that any discussions with China regarding the allegations in the petition will not begin until mid-January 2011.

If the consultations fail to resolve the alleged unfair trade practices, Section 301 requires, with respect to claims of WTO violations, that the USTR file a complaint under the WTO dispute settlement process.

The USW petition is very broad in scope, and was accompanied by thousands of pages of materials that the USW argues supports its claims. Those claims fall into five categories, and the USW alleges "together, these practices have given Chinese producers an upper hand in accessing investment, technology, raw materials and markets, while foreclosing these same opportunities to U.S. producers." Those categories are:

1. Restrictions of Access to Critical Materials. The USW documents China's export quotas, taxes, and export licensing requirements as evidence of China's effort to dominate the production and distribution of "rare earth" elements and other minerals vital to such activities as petroleum refining, medical resonance imaging (MRI), wind turbines, battery-powered automobiles, and catalytic converters. This claim predates, but was undoubtedly strengthened by reports that China instituted a de facto embargo of rare earth exports to Japan in retaliation for Japanese actions in connection with disputed territorial waters claims. The USW cites China's commitment to eliminate such export restrictions as a condition of its accession to the WTO, stating that China did not include these critical materials in any exceptions to that commitment, and argues that China is therefore in violation of its WTO obligations in this regard.

2. Subsidies Contingent on Export Performance or Domestic Content. The petition describes five programs under which China grants preferential treatment to domestic producers of wind power equipment, hydro turbines, photovoltaic power systems, and advanced batteries, as well as substantial China Export-Import Bank credits focused on exports of green technology. The USW alleges this total package of assistance violates the prohibition on export performance subsidies or domestic content preferences in the WTO Agreement on Subsidies and Countervailing Measures.

3. Discrimination Against Imported Goods and Foreign Firms. The petition lists local content requirements and domestic bidding preferences for wind and solar plants, exclusion of foreign firms from access to carbon credits, and local production requirements in joint ventures as violations of WTO non-discrimination commitments.

4. Technology Transfer Requirements for Foreign Investors. The USW describes requirements that foreign firms agree to technology transfers as a condition to approval of joint ventures with Chinese companies. These are required to sell most green technology goods in China. This allegedly violates China's accession commitments not to condition investment approval on technology transfers.

5. Trade-Distorting Domestic Subsidies. The petition states U.S. exports of wind turbine sets and gears for those turbines fell by 81 and 67 percent, respectively, between 2006 and 2009, and there has been a similarly steep decline in U.S. wind and solar technology exports to Europe. In contrast, China's exports have growing exponentially. The USW claims Chinese subsidies have helped produce these results. Moreover, Chinese wind and solar exports to the United States have increased dramatically at the expense of U.S. producers, and subsidized Chinese companies have been able to drive down prices, causing production shifts and lost U.S. jobs.

While Section 301 was a powerful, unilateral U.S. trade policy weapon prior to the establishment of the WTO dispute settlement process, since 1995 it has rarely been invoked and has not produced any sanctions or WTO cases. In a post-WTO world, therefore, the USW petition could be said to be unprecedented. It is the first to be accepted by USTR that, if proven, would, invalidate for WTO purposes what amounts to a national industrial policy. It would seriously undermine the validity of China's efforts to create "national champions" in certain sectors, to focus on building domestic capacity to address its environmental and energy challenges, and to be a significant, and possibly the dominant, global player in green technologies. Beyond the impact on China, a successful U.S. challenge in the WTO would inevitably chill similar efforts in other countries to use the Chinese industrial development template in other sectors. All of these effects are above and beyond the question of the immediate fall-out that could result if China declines to implement an adverse WTO finding and the U.S. compensation and retaliation is authorized.

If, on the other hand, China should prevail in the WTO, both the immediate and precedential value of a determination that this type of industrial policy approach is permitted under world trade rules would be enormous. Nations would, at least for the foreseeable future, arguably return to a much more mercantilist approach to industrial policies, and the pressure of recent decades to move away from that approach would diminish or disappear.

At the specific industry level, many economic analysts believe the U.S. will only emerge from the current industrial slowdown, particularly the unemployment situation, as a result of a "technology leap" similar to the development of the Internet in the final two decades of the last century. The green technology sector is often identified for such a breakthrough. If China becomes the leading global competitor in this sector, the United States could forfeit the long-term economic benefits of technologies that it originated and perfected.

The stakes in this case are therefore very high--perhaps far higher than for any of more specific and "technical" trade disputes that have become the norm in U.S.-China relations. They pit two very different views of industrial policy against each other within the WTO arena. The United States has historically engaged in ad hoc efforts to facilitate private development initiatives, usually (but not always) taking care to assure equal opportunities for foreign participants (at least those with WTO rights). Europe, Japan, Korea, India and Brazil, among others, have been somewhat more structured in their efforts, and have perhaps been less careful about foreign participants, but in the last decade or so the clear trend has been toward open and inclusive participation. If the USW allegations are proven it will demonstrate China has chosen a much different path--deep governmental involvement in industrial development with subsidies and preferences on a massive scale, as well as coordination of complex raw materials production and export development initiatives.

As a result it is difficult to describe a "middle ground" under which the case would be settled before a WTO ruling. Any meaningful concessions by China could represent an unacceptable compromise of its unique mix of economic capitalism and political socialism. The United States, having moved forward, will be hard put to back down without obtaining such concessions. The coming months could therefore set the stage for a truly historic U.S.-China trade confrontation.

 

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