Safeguards under the WTO Regime - Realities and Problems

As taken up by the January 2002 edition of this magazine, I, who up to then had been a university researcher, was blessed with the opportunity to take part in the formulation and execution of trade policy at the Ministry of Economy, Trade and Industry for two years from September 2001. As soon as I assumed my post, I was thrown into the vortex of the Japan-China dispute over safeguards on agricultural products such as leeks, which at the time had become a political issue. I was initially confused by everything regarding my new work environment, but the change in environment was not the only reason for my bewilderment.
For a researcher who had been following developments in WTO law from the outside, amid the role I was playing, this confusion was rather born of the question "can the Japanese government impose safeguards appropriately?" This bilateral dispute was resolved through ministerial-level discussions at the end of 2001, but less than three months later, in early March 2002, Japan was slapped with steel safeguards imposed by the United States. My position changed and I found myself battling another country's safeguards at the World Trade Organization, and this reinforced my awareness of the difficulty in imposing safeguards in a way consistent with the Safeguards Agreement.
In August 2002 I became a consulting fellow at RIETI, and formed a research group with Senior Fellow Ichiro Araki (currently an associate professor at Yokohama National University), who shared my awareness of the issue. We recently published the results of our research as Safeguards under the WTO Agreement: Issues and Proposals for a More Effective Mechanism, as part of the RIETI's Policy Analysis Series (Toyo Keizai Inc., July 2004). This column aims to present the awareness of the issues of this project as an introduction to this book.

Thanks to the investigation into Chinese agricultural products, safeguards became a topic of national interest with roots in the daily life of ordinary Japanese. At the time, the issue not only appeared in newspapers and business magazines, but was also taken up in lifestyle magazines targeting housewives (*1). Therefore, while it may be self-evident to readers of this magazine, I would like to briefly explain the safeguard system.
After the General Agreement on Tariffs and Trade, the predecessor of the current WTO, took effect in 1948, tariff levels in signatory nations were reduced substantially as a result of eight rounds of multilateral trade liberalization negotiations. While there is no room to doubt that liberalization is beneficial to the general national economy, there are times where a surge in imports (especially during a short period of time) due to unpredictable circumstances leads to a drop in sales of competing domestic products, thereby hurting producers. In such cases, countries are allowed to temporarily limit imports to give domestic industries a breather, and this is what a safeguard is.
In the latter half of the 1980s, when I first studied the GATT as a student of law at university, the general view toward safeguards was that they were "a trump card that can never be used," and they were not a policy topic that attracted much attention. At the time, voluntary export restraints (VER) were at the height of their popularity, and Japan was no exception, limiting exports of key products such as automobiles, steel, machine tools and semiconductors to the U.S. and Europe. In the field of textiles, the VER concept was multilaterally systemized under the Multifibre Agreement (MFA), which led to the birth of a worldwide volume control system under a regime that was completely separate from the GATT. Furthermore, agriculture was effectively placed beyond the rule of law, with the U.S. securing waivers under the GATT and many other nations including Japan maintaining illegal import restrictions. Therefore, for these sectors that are by nature sensitive to the effects of import liberalization, safeguards were unnecessary.
At the same time, antidumping duties and countervailing duties were often used during this period for products that did not fall under such restrictions. In order to impose safeguards, it is necessary for there to be a surge of imports due to circumstances that were unforeseeable at the time of import liberalization or serious damage to domestic industry. Furthermore, because the importer retracts its liberalization commitments because of its own circumstances, it must make amends to the exporting country by opening its market to other products or resign itself to accepting trade curbs, similar to the safeguards, imposed by the exporter as a retaliatory measure. Because of this, safeguards were generally recognized as being more difficult to use compared to antidumping duties.

In response to such a situation, the Safeguards Agreement was drawn up during the Uruguay Round in an effort to make the international trade regime sound through the revitalization of the safeguards system. In other words, it was an attempt to clamp down on the abuse of antidumping duties and so-called gray area measures that existed outside the WTO framework, and accelerate trade liberalization in sensitive sectors such as textiles and agriculture by incorporating existing trade orders for the sectors into the WTO regime. (The Agreements on Textiles and Clothing, and Agriculture call for the abolition and gradual elimination of restrictions.) On the other hand, the Safeguards Agreement was drawn up so that safeguards might be appropriately imposed as a temporary and transparent way of protecting domestic industry by clarifying the requirements for their imposition and partially restricting compensation and retaliatory measures.
This has resulted in more frequent recourse to safeguards by the Members since the WTO's establishment, but on the other hand, their rampant use, especially for core industries and sensitive sectors, has triggered disputes among the Memebers. For example, the 1996-1997 safeguard investigation over U.S. tomatoes became a political issue between the U.S. and Mexico due to pressure from winter tomato farmers in Florida. In the aforementioned case of Japan's investigation and temporary imposition of safeguards on leeks and other Chinese produce, the matter was taken up during talks between Prime Minister Junichiro Koizumi and Chinese President Jiang Zemin in the fall of 2001, even though it was "rare" for such individual issues to be mentioned at summit meetings. Furthermore, the U.S. steel safeguards triggered sharp criticism from various countries including Japan, the European Communities and China, and led to retaliatory rebalancing as well as a string of other safeguard measures in the name of defense to trade diversion. Meanwhile, stemming from the belief that China's entry into the WTO posed a "threat" due to its competitiveness, domestic producers and politicians in both Japan and the U.S. have very high expectations for the special safeguards prescribed in the protocol for China's accession.
As these examples show, the imposition of safeguards (especially by major trading countries) has become a topic that attracts attention on television and in newspapers, and as I mentioned earlier, the issue of whether to support the imposition of safeguards has been widely debated among the public at a household level. Furthermore, as for the two cases I brought up earlier, the fact that they became political issues at such a high level also resulted in increasing the importance of safeguards as a trade policy tool.

When safeguards attract such attention and are expected to fulfill their original role, it cannot be helped that the seams in the current system become conspicuous. The conditions for the imposition of safeguards as stipulated under Article 19 of the GATT are abstract and difficult to interprete, and when the WTO was established, the Safeguards Agreement was drawn up to "establish(es) rules for the application" (Article 1) of this article. However, even though the Safeguards Agreement functions as a set of detailed rules for their implementation, it itself is written in general and abstract wording.
As I mentioned earlier, the increased use of safeguards triggers disputes among the Members, but because the WTO's launch boosted the effectiveness of the dispute settlement process through juridification and automation, matters concerning safeguards were referred to the WTO one after the other. Of course, ambiguities in positive law should be supplemented by interpretation through the judicial process to a certain extent, and the WTO's dispute settlement process functions to clarify the rights and obligations of the Members through interpretation of the agreement (*2). However, not a few people have been critical of whether the dispute settlement panels and appellate bodies are interpreting and implementing the agreement in a rational way in terms of policy, whether their decisions are serving as appropriate guidelines for investigating authorities in the Members when they impose safeguards, and whether the agreement's wording has been properly set forth so that it can be appropriately implemented with just supplementary interpretation in the first place. The "confusion" that I felt when working for the ministry, mentioned at the start of this column, was nothing but the fact that when trying to specifically implement the Safeguards Agreement in Japan, there were no clear guidelines for application either in its text or in precedents.
Let me explain this point more specifically. For example, an increase in imports is necessary to impose safeguards. Precedents provide the interpretation that this increase should be "recent, sudden, sharp and significant," but how much of a percentage increase in what period of time is required? The Safeguards Agreement defines "serious injury" as "significant overall impairment in the position of a domestic industry," but, for example, how much should unemployment rise or earnings deteriorate to suffice? Furthermore, the panels and appellate bodies do not require that all economic indicators cited in the Safeguards Agreement for evaluation show deterioration, but if such is the case, which indicators should be regarded as being the most relevant?
Of course, there are no uniform standards with which to answer these questions, and basically, investigating authorities must explain that a situation that corresponds with these qualitative definitions of increase and injury has occurred to a certain degree and back their findings with rational evidence. However, when a panel conducts an ex post facto review into whether a member's imposing of safeguards is consistent with the agreement, the extent to which it demands that the evidence examined by the investigating authorities of that member be able to explain their recognition of the fact (the panel's so-called "standards of review") is not necessarily clear. There can be many ways to interpret one figure or document, or link it to a fact.
Next, safeguards require that serious injury is inflicted on "domestic industry," but how should "domestic industry" be defined? Especially, how should the relationship between upstream industries and downstream industries be interpreted? For example, if lamb meat imports rise, it will be a blow to domestic lamb farmers. In this case, it may at first glance seem logical to define the industries that are injured by the increase in lamb meat imports as including not just the meat industry but also the lamb farming industry. However, the WTO panels and appellate bodies reject this argument, saying that live lamb and lamb meat are different products (without judging whether they are in a competitive relationship in the same market). A similar problem was put forward regarding the U.S. steel safeguards case, but the Appellate Body avoided judgment on this point.
The biggest problem in the current system is the issue of causal relationship. Even if imports have increased and there is "serious injury," safeguards cannot be imposed unless there is a causal relationship between the two. Injury to domestic industry can be the result of factors other than the import surge, such as irresponsible management, excessive equipment investment or a fall in demand due to recession. Because of this, rigid distinctions must be made regarding the reasons for the injury, and it is forbidden to attribute the injury caused by other factors to an increase in imports. However, it is not an easy task to determine how to separate the intricately intertwined factors and decide how much of the total injury is the result of each factor. Nevertheless, the appellate body simply criticizes the investigating authorities for "not drawing strict lines among the various factors" and does not show any specific methodology, and there is considerable dissatisfaction among defendant countries that lose their case.
So far, decisions have been made on eight disputes regarding safeguards (11 when textile safeguards are included), but in all cases the safeguard measures in question were ruled inconsistent with the agreement. Nevertheless, the Members cannot learn how to appropriately impose safeguards from these rulings. As this shows, interpretations of the current agreement have strayed off course, and Professor Alan O. Sykes of the University of Chicago Law School has slammed this situation as "a policy at sea" (*3).
In addition, there are conflicts in the agreement's text that can only be considered as mistakes in its drafting and errors in the design of the system itself. For example, the way the current agreement is written is contradictory in terms of the deadline for imposing retaliatory measures, and the memory of how this became a point of contention among the countries involved in the U.S. steel safeguard dispute is still fresh in our minds (*4). Also, while the Safeguards Agreement states in its preamble the importance of structural adjustment and the need to enhance competition in international markets, it does not clearly impose structural adjustment obligations and there is no systematic guarantee that the safeguards will fulfill their designated policy objectives.
As it is now clear to everyone, the current Safeguards Agreement is inadequate and needs to be revised.

Given such circumstances, there is much interest in safeguards among academicians and practitioners of international economic law. For example, the bibliography service for WTO-related material at the Peace Palace Library in The Hague (*5) shows a clear increase in the number of essays and academic books published on safeguards since the late 1990s. The same can be said in Japan, and in the fall of 2002 the Japan Association of International Economic Law organized a symposium on safeguards and published its results last autumn (*6).
Against the backdrop of this thriving interest in research on safeguards, our research project attempted to systematically sort out and clarify the aforementioned problems of the current Safeguards Agreement from the standpoint of legal positivist law interpretation. By doing so, we strove to provide suggestions on not only how Japan should impose safeguards in future but also how to approach the issue of revising the agreement at the WTO. There are also places where we stepped beyond the analytical framework of legal interpretation whenever necessary to present the proper interpretation of the agreement from the viewpoint of policymaking and suggested the construction of new systems.
Of course, this book does not offer answers to all the problems, but I am confident that it has presented an argument that has covered all the major points of debate regarding the Safeguards Agreement that have been pointed out over the past decade or so. I await criticism and comments from readers upon its publication.

>> Original text in Japanese

• *1 As one example, Tsuhan Seikatsu, Winter 2001 edition, Page 3 f.
• *2 Akira Kotera, Legal Structure of the WTO System (in Japanese), Pages 87-93 (2001).
• *3 Alan O. Sykes, The Safeguards Mess: A Critique of WTO Jurisprudence. University of Chicago Law School John M. Olin Program in Law & Economics Working Papers (2nd Series) No. 187 (2003). http://www.law.uchicago.edu/Lawecon/WkngPprs_176-200/187.aos.safeguards.pdf [PDF:531KB]
• *4 Tsuyoshi Kawase, "The Problems Left Behind by the U.S. Steel Safeguard Dispute - The Success of Rebalancing and the Limits of the Safeguards Agreement (Part 1)," RIETI Columns No. 80, 2003.
• *5 http://www.ppl.nl/bibliographies/wto/
• *6 "The Significance and Problems of Safeguards - The Intermingling of International Economic Law and Economic Law," The Annual Report of the Japan Association of International Economic Law, Edition No. 12, P. 1 f. (2003).