The Problems Left by the U.S. Steel Safeguard Dispute - The Success of Rebalancing and the Limits of the Safeguard Agreement (Part 1)

KAWASE Tsuyoshi
Fellow, RIETI

Upon visiting Geneva, home to the secretariat of the World Trade Organization, when gathering research for a RIETI project in the last week of November 2003, I was greeted by an unexpected surprise. On Dec. 1, the WTO Dispute Settlement Body (DSB) was scheduled to adopt an Appellate Body report finding U.S. steel safeguard measures in violation of WTO rules. However, the United States requested this move to be postponed for 10 days (Inside US Trade, Nov. 28, 2003, at 1). Before setting out from Japan, I had made appointments to meet with officials from various countries dispatched to Geneva to handle WTO dispute settlement issues with whom I had become acquainted during my years working at the Ministry of Economy, Trade and Industry. However, I became increasingly frustrated as my appointment schedule fell apart due to cancellations by acquaintances that had to deal with the matter. At the time, they all grumbled, "What can be done in just 10 days? There is no way they are going to repeal the safeguards," and I wondered with disgust what could be behind this postponement request.

The meaning for the move became clear on Dec. 1 when I read an email from a friend immediately after returning home from Narita airport. Surprisingly (probably for everyone), sources said that President George W. Bush was considering repealing the safeguard measures. There was much speculation regarding the truth of the matter, but on Dec. 4 it really happened.

Interestingly, according to the President's statement, the termination of the safeguard measures was decided because they had "achieved their purpose, and as a result of changed economic circumstances" and, officially, it was not the result of the WTO's ruling that the U.S. measures were WTO-inconsistent, much less the pressure of proposed rebalancing measures (surprisingly, the president does not even mention these two points!). U.S. Trade Representative Robert Zoellick also stressed during a press conference that the decision to repeal the safeguard measures was not based on these two points, but this political performance, which was put on for domestic reasons, was so obvious as to be comical.

The repeal came as a result of the threat of rebalancing

No matter how the Bush administration tries to gloss things over, no one can deny that the rebalancing measures were the reason why the safeguard measures were repealed so quickly. The Safeguards Agreement has a unique rebalancing system that is not found in any of the other WTO agreements. Under the agreement, WTO members that see their profits from exports damaged by safeguard measures have the right to suspend the application of concessions or other obligations (in other words, raise tariffs or restrict imports) which are substantially equivalent to the amount of trade adversely affected by the safeguard measures (Article 8).

In this case, as many as 10 countries (eight co-complainants to the case before the WTO + Australia and Taiwan) threatened to take rebalancing measures, and the pressure applied by the European Community, which had prepared a list of items [PDF:129KB] worth some $2.2 billion, was particularly severe. The EC's list included textiles and citrus fruit, and would have had a huge impact on southern U.S. - a stronghold of the Bush administration - and especially Florida, where a fierce battle was fought in the last presidential election and the president's brother Jeb is governor (Nihon Keizai Shimbun, Dec. 6, 2003, page 7; Asahi Shimbun, Dec. 6, 2003, page 11).

In addition, the EC council regulation [PDF:129KB] on rebalancing measures, adopted in June 2002, provided that the measures would take effect automatically from five days after the date of a decision by the DSB that the safeguard measures imposed by the United States were incompatible with WTO agreements. Moreover, because this was stipulated in a council regulation, it meant it would require a political decision at a very high level by ministers, and not an administrative decision by the European Commission, to overturn it. In other words, the EC burned its own bridge on the rebalancing issue, and this plan of action proved successful.

Furthermore, it has been said that the tariff levels of rebalance measures set by the EC were equivalent to those of the U.S. safeguard measures, but in the end, the way in which the tariff rates were set was ingenious. It is said that prohibitive tariff levels (at which imports will effectively stop) are normally 20% or 30%, and while the EC varied tariff rates by taking the main items having an effect on member countries into consideration, its rebalancing list slapped additional tariffs of 30% on many products on the list. The total amount of rebalancing is usually calculated based on the amount of tariffs collected (recent trade value of the item in question x tariff rate). Since imports effectively stop at a rate of 20 to 30%, there will be a greater negative impact on the economy of the other country if more items are targeted rather than just slapping high tariffs on a smaller number of items. The EC followed this basic principle faithfully.

Meanwhile, the net around the U.S. grew steadily tighter as other nations also took action. While the rebalancing list presented to the WTO by Japan on Nov. 26 excluded agricultural products, it did include textiles, which were seen as being effective against southern U.S. - a key support base for Republicans. China, for its part, was angered by the U.S. imposition on Nov. 18 of special safeguard measures on its textiles, prompting Vice Minister of Commerce Ma Xiuhong to say on Nov. 20 that his country would consider taking rebalancing measures against the U.S. steel safeguard. Furthermore, on Nov. 21 the Norwegian government decided to adopt rebalancing measures.

Coupled with strong opposition to the continuation of the safeguard measures by steel users in the U.S., including automakers and industrial machinery manufacturers (Nihon Keizai Shimbun, Dec. 10, 2003, evening edition, page 3; Nihon Keizai Shimbun, Dec. 5, 2003, evening edition, page 3), the steel measures were repealed very quickly compared to past U.S. safeguard measures such as those on lamb meat, wheat gluten and welded line pipe.

The problems with the current framework are now clear

However, on the other hand, we must also pay attention to the fact that this issue revealed the shortcomings of the current rebalancing system.

The procedure for taking rebalancing measures is unclear, because Article 8 of the Safeguards Agreement is poorly drafted. Under the article, no rebalancing may take place during the first three years if the safeguard measures have been taken as a result of an absolute increase in imports and are consistent with WTO agreements. Any decision on the WTO-consistency of certain measures must usually wait for the results of the dispute settlement procedures by a panel and the Appellate Body, because Article 23 of the Dispute Settlement Understanding bans a member country from unilaterally determining whether the measures violate WTO agreements.

However, at the same time, rebalancing measures must take effect not later than 90 days after the safeguard measures are implemented, and the exporting country will lose its right to retaliate if it waits for the conclusion of the dispute settlement process, which usually takes about 18 months. Therefore, the only way exporting nations can exercise this right appropriately is by independently determining whether the safeguard measures are in violation of WTO agreements - in other words, by violating Article 23 of the DSU, one of the WTO's most important basic principles.

In dealing with such inadequacies in the agreement, Japan presented its own interpretation claiming that it was possible to notify the WTO before the end of the dispute settlement process that it reserves its right to implement rebalancing measures and actually take such actions after the DSB's adoption of the panel/Appellate Body reports. Meanwhile, the EC, as a formality, said it had exercised its right within 90 days without actually raising tariffs (or to use the technical term, it only suspended tariff concessions), and waited for the dispute settlement process to end before actually imposing retaliatory tariff rates. This interpretation sparked debate even among trade law experts, and there is probably room for debate on whether this can be justified within the range of appropriate interpretation of the Safeguards Agreement. But fortunately, because the steel dispute did not trigger the actual implementation of rebalancing measures (and, as I mentioned at the outset, the U.S. ignored the rebalancing issue when announcing its repeal of the safeguard measures), the legitimacy of this interpretation did not become an issue at the WTO. However, regardless of the outcome this time, such a lack of legal stability threatens to undermine the fundamental function of rebalancing.

Even if Japan and the EC correctly interpreted Article 8 of the Safeguards Agreement, because the conclusion of the dispute settlement process is the prerequisite for implementing rebalancing measures, it would still be impossible to exercise them in a flexible and prompt manner. Even in this case, when the U.S. imposed the safeguard measures many experts said that the country may have violated WTO agreements, but the implementation of actual rebalancing had to wait some 21 months. Mexico presented a paper at a November 2003 meeting of the special session of the WTO's Dispute Settlement Body (the so-called DSU negotiations) that empirically said it takes four years from the start of bilateral negotiations over a trade dispute that goes through the full DSU procedure to be resolved, and that the damage to relevant parties during this time is enormous. Rebalancing can indeed be an effective tool to avoid such situations, but because it may be linked to the dispute settlement process by the aforementioned interpretation, it cannot be denied that its function has been greatly undermined.

Strengthen rebalancing to prevent the abuse of safeguard measures!

In view of the aforementioned, I believe that rebalancing should be strengthened in cases of such blatant WTO violation as the U.S. steel measures. The concept of rebalancing originates from Article XIX:3(a) of the General Agreement on Tariffs and Trade (GATT), but it was feared that it would raise the cost of implementing safeguard measures and prompt member nations to turn to voluntary export restraints (VER); thus some restrictions were placed on rebalancing in the current Safeguards Agreement. However, as early as 1991, Professor Alan O. Sykes of The University of Chicago Law School saw a draft of the current agreement and warned that restricting rebalancing, while reducing VER, would increase the abuse of safeguard measures (Alan O. Sykes, "Protectionism as a 'Safeguard': A Positive Analysis of the GATT 'Escape Clause' with Normative Speculations," Univ. Chicago Law Review Vol. 58, p.255 ff (1991)).

The current situation, in which the U.S. refuses to alter its domestic legal framework or practices regarding the application of safeguard measures regardless of repeated WTO rulings of their WTO inconsistency, is proof that one aspect of Professor Sykes' observations was correct. Because consistency is a condition for the three-year moratorium, rebalancing has become linked to the lengthy dispute settlement process, leading to the abuse of safeguard measures clearly in violation of WTO agreements until the panel and Appellate Body reach a conclusion.

The philosophy behind rebalancing in Article XIX of the GATT is a very value-neutral one that, apart from the consistency of safeguard measures with the agreements, simply entitles an exporting member to restore the balance of trade concessions that was lost solely as a result of the circumstances of a domestic industry in the importing party. Given the present situation, we should take the plunge and return to basics, separating the decision on WTO consistency stipulated in Article 8 of the Safeguards Agreement from Article 23 of the DSU.

However, on the other hand, the U.S. said when repealing the steel safeguard measures that it would maintain its licensing system for steel imports and monitor import trends. It is also rumored that it may in future implement antidumping measures more actively. The success of rebalancing, despite systematic shortcomings, has brought about such unexpected side-effects. In other words, WTO members are beginning to avoid safeguard measures and are turning to take more protectionist steps.

(To be continued)

December 16, 2003

December 16, 2003

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