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25 April 2018

US – Coated Paper (Indonesia) DS 491

What is the case about?

The dispute US-Coated Paper deals with countervailing measures on subsidies that the government of Indonesia de facto provided to local Indonesian paper producers. The anti-subsidy investigation conducted by the US with regard to coated paper originating from Indonesia[1], resulted in the imposition of 17.94% countervailing duty on import of certain types of coated paper.

Indonesia requested the WTO Panel to find some of the actions of the US Department of Commerce and the US International Trade Commission during the anti-subsidy investigation inconsistent with WTO law. In particular, this related to the Agreement on Subsidies and Countervailing Measures. The Panel in its report supported the decisions of the US Department of Commerce and the US International Trade Commission regarding each measure taken in the course of the investigation as well as the decision on the imposition of the countervailing duty.

What is a subsidy under WTO law?

The WTO law defines subsidies very broadly and its definition usually carries a negative context. Although not all subsidies may be subject to measures (for example, earlier governments were allowed to provide subsidies in the form of assistance for research activities or input in environmental protection),[2] but experts usually find state subsidizing detrimental to fair competition development.

WTO law divides subsidies into two categories: 1) prohibited subsidies and 2) actionable subsidies.

Prohibited subsidies are (1) export subsidies, directly or indirectly aimed at export volume increase (for example, rewards for log export), and (2) subsidies aimed at increase of sales of domestic products over imported alternatives (for example, monetary bonuses provided to consumers for buying domestic metallurgy products).

For a subsidy to be either prohibited or actionable under WTO law, it must include the following elements:

  1. be a financial contribution;
  2. be provided either by government or by any public body of a WTO member;
  3. confer a benefit to the recipient of the subsidy;
  4. be specific.

The subsidy is specific, when the government or any public body provides it either (1) to a certain number of enterprises, or (2) to a distinguished industry, or (3) to producers of a certain region.

Together with all the above elements, a subsidy[3] may be subject to measures when it causes adverse effects to the interests of another Member (inter alia, injury to the domestic producer).

Which countervailing measures Indonesia challenged in the case US – Coated Paper?

Indonesia challenged countervailing measures imposed by the USA as a result of an anti-subsidy investigation regarding three kinds of subsidies provided by Indonesia to companies of Asia Pulp & Paper Co., Ltd (hereinafter– “APP”). These subsidies include: (1) provision of standing timber for less than adequate remuneration (2) government prohibition of log exports (3) debt forgiveness through APP buyback of its own debt from the government.

  • provision of standing timber for less than adequate remuneration

The US Department of Commerce established during their anti-subsidy investigation that the provision of standing timber to coated paper producers constituted a financial contribution made by the Indonesian government.

US investigating authorities found that 93.73% of harvested timber in Indonesia grows on government-owned lands. Furthermore, the Indonesian government sets and administrates all possible stumpage fees and, thus, controls the supply of standing timber.

The subsidy provided by the Indonesian government allowed Indonesian producers of coated paper to receive standing timber at a very low price, de facto controlled by the government. Considering the existing log export prohibition, timber producers were forced to sell their timber only within the domestic market of Indonesia at suppressed prices.  While receiving cheap raw materials, Indonesian producers of coated paper easily managed to export low-priced coated paper to the customs territory of the US. The US Department of Commerce calculated the benefit conferred by Indonesian producers relying on world timber prices.

The Indonesian government argued that even if the subsidy existed, the investigating authorities should have calculated the amount of benefit based on in-country prices for raw materials and not out-of-country prices.[4] The WTO Panel found that when there are no available market-determined in-country prices for timber, it is not possible to calculate the amount of benefit relying on in-country prices.

  • government prohibition of log exports

The US Department of Commerce established that by prohibition of log exports, the Indonesian government directed standing timber producers to supply their products to pulp and paper producers. US investigating authorities found that standing timber prices were less than adequate (less than timber market prices). The above facts allowed APP companies to buy timber for coated paper production at very low prices, which de facto constituted a subsidy.

In its complaint, Indonesia challenged, in particular, whether the subsidy was specific. The Panel Report confirmed the conclusions of the US Department of Commerce regarding the specificity of the subsidy because only a limited number of industries were able to profit from it.

Furthermore, Indonesia unsuccessfully argued that prohibition of log exports was a possible solution to mitigate deforestation and illegal logging.

  • debt forgiveness through APP buyback of its own debt from the government

By law, the Indonesian bank[5] was not allowed to sell assets to companies which previously owned such assets or their affiliates. However, an affiliate of APP, Orleans,[6] bought the APP’s debt for a quite beneficial price which constituted a financial contribution and a benefit at the same time. The benefit was the difference between the total debt and the price paid for APP’s debt by Orleans. In practice, the APP bought its own debt, since APP and Orleans were affiliated companies.

The US Department of Commerce, in order to prove the fact of this subsidy, found that the Indonesian government made this financial contribution through an Indonesian state-owned bank.

To prove that the Indonesian government indeed provided this financial contribution, the US Department of Commerce investigated the fact of affiliation between the APP and Orleans.  In its questionnaires, the US Department of Commerce repeatedly asked APP and the government of Indonesia to provide information on affiliation between APP and Orleans. However, the US Department of Commerce did not receive any information in this regard.

During verification visits,[7] the US Department of Commerce established that the sale of APP’s debt to Orleans was one of five sales made within Strategic Asset Sales Program (“SASP”). The Indonesian government created SASP to control the assets of the companies identified as being of special social and economic importance for Indonesia.

The US investigating authorities were not able either to confirm or deny the affiliation between APP and Orleans during verification. Therefore, the US Department of Commerce used the facts provided during the investigation by other interested parties, in particular, a newspaper article and World Bank report to prove that APP and Orleans were affiliated. Thus, the US Department of Commerce proved the specificity of this subsidy by presenting the best facts available instead of the information which APP and the Indonesian government failed to provide.  The WTO Panel confirmed the reasonableness of this US approach, considering the missing information from the Indonesian government on the companies’ affiliation.

Does the US procedural law violate the decision-making process on injury determination under WTO law?

Indonesia also challenged within the WTO some procedural questions regarding the decision-making process of the US International Trade Commission. The US International Trade Commission usually consists of six members. By voting, they make either positive or negative determination of injury inflicted to domestic producers in both antidumping and anti-subsidy investigations. According to the relevant US law,[8] when there is an equal amount of votes (tie vote), the members of the US International Trade Commission make a positive determination on injury caused to domestic producers by either dumping or subsidy before them. The above determination serves as the basis for further trade remedies (either countervailing or antidumping measures).

In Indonesia’s opinion, when the votes “for” the existence of injury and “against” it are equal, a positive injury determination is not possible.[9] The Panel concluded that the provisions of agreements referred to by Indonesia concern only the general material approaches to injury calculation, while the decision-making process is governed by the domestic procedural rules of a WTO member.

What was the decision of the Panel?

The US International Trade Commission calculated that each subsidy by itself, jointly constituting a subsidy program, injures US domestic producers of coated paper, and thus  decided to impose 17.94% countervailing duty on the import of certain types of coated paper originating from Indonesia. The decision was made even though the Indonesian government provided all the subsidies separately, not within a coordinated program to support the paper and pulp industry. The Panel confirmed the lawfulness of the decision made by the US International Trade Commission.

Why is this case important for Ukraine?

The case US – Coated Paper is relevant to Ukraine since the logging industry and timber trade is subject to state control in Ukraine.

Untreated timber materials (from 1 November 2015), including pipe (from 1 January 2017) are subject to an effective ten-year export ban in Ukraine.[10]  This ban forces Ukrainian timber companies to sell untreated timber materials only on the Ukrainian market. Furthermore, the State Forestry Agency of Ukraine strengthened control over timber harvesting and sales by establishing control over timber purchase-sale contracts, banning the sale of oak wood logs to consumers and monitoring the differentiation between technical and fuel timber. [11]

The case US – Coated Paper shows that the Ukrainian export ban for untreated timber materials might constitute a subsidy in the form of government support provided to the Ukrainian timber industry. Furthermore, such measures might constitute a breach of the EU-Ukraine Association Agreement. The European Commission has repeatedly raised its concerns over this issue. According to the mass media, on 28 February 2018, the European Commission announced of its intention to resolve the dispute in an arbitration procedure envisaged by the Association Agreement.  If the dispute fails to be resolved in such procedure, it may be filed to the WTO Dispute Settlement Body.

Ukraine, of course, needs measures to protect natural resources and to prevent deforestation. Certain legal measures allow for the protection of Ukrainian forests and ecology without violation of international obligations. However, such measures should be reasonable and legally grounded. When adopting such measures, Ukraine should take into consideration all the possible risks associated with potential consideration of this issue by the WTO.

Please contact Anzhela Makhinova or Ivan Baranenko for further information.

 


[1] Coated Paper is used for printing multicolour graphics of catalogues, books, journals, wrappings, envelopes, postcards and other commercial prints with high graphic quality.

[2] Non-actionable subsidies were terminated in 1999, but experts in WTO law find the subsidies which used to be non-actionable as the ones that can be justified under Art. XX of the GATT, in particular paras. (b) necessary to protect human, animal or plant life or health and (g) relating to the conservation of exhaustible natural resources.

[3]Countervailing measure indemnify the domestic producer for injury caused by a subsidy.

[4] According to Art. 14(d) of the Agreement on Subsidies and Countervailing Measures.

[5] Indonesian bank’s name – Indonesian Bank Restructuring Agency

[6] Company’s full name Orleans Offshore Investment Limited

[7] Verification is the part of the investigation when the investigating authority verifies the data provided by the enterprise during the investigation at the registered office of the enterprise.  For example, the investigating authority may compare the sales data provided in the questionnaires with the basic source documents such as invoices, bills of lading, consignment notes etc.

[8] Regulated by Section 711(11) (B), US Tariff Act 1930 (codified in Title 9, United States Code, Section 1677 (11) (B))

[9] Indonesia explained this by referring to Art. 15.8 of the Agreement on Subsidies and Countervailing Measures and Art. 3.8 of the  Agreement on Implementation of Article VI of the General Agreement on Tariffs and Trade 1994

[10] The temporary timber export ban was introduced according to Art.2-1 of the Law of Ukraine “On peculiarities of state regulation of business activities in timber sale and export ”, available at: http://zakon2.rada.gov.ua/laws/show/2860-15

[11] According to the Decree No. 49 of the State Forestry Agency of Ukraine dated 30 January 2018

 

 

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