DSB adopts ruling against US on wheat gluten safeguards

by Chakravarthi Raghavan

Geneva, 19 Jan 2001 --  The World Trade Organization’s Dispute Settlement Body (DSB) adopted Friday the recommendation and rulings of the panel, modified by the Appellate Body, on the US imposition of safeguards against imports of wheat gluten from the European Union.

The Appellate Body found that the US had acted inconsistently with the Safeguards Agreement in imposing the safeguards against wheat gluten imports from the EU, effective 1 June 1998, and asked the DSB to recommend that the US bring its safeguards action in line with the agreement.

Statements and interventions by the US and EU, suggested that the EU is going to impose within five days tariff quotas on wheat gluten imports from the US, but that this would be in terms of the exercise of its rights under Article 8.2 and 8.3 of the Safeguards Agreement to “rebalance” the concessions, and not retaliatory action in terms of Article 22 of the DSU (which involves a more elaborate procedure, including a period for the US to comply and the invoking by the EC of its right to withdraw equivalent concessions thereafter).

The US made a reference to the EC move to impose a tariff-rate quota and challenged it, while the EC said later that it had notified the WTO Goods Council as early as July 1998 of its intention to invoke its right of ‘rebalancing’ the concessions under the safeguards agreement (three years after the imposition of the safeguards).

The US initiated safeguards investigations on 1 October 1997, and imposed on 30 May 1998 definitive safeguard measures against the EC effective 1 June. In imposing the safeguards, the US excluded imports from Canada (a NAFTA partner of the US) and some other countries.

The EC took the issue to the dispute settlement panel, whose report was appealed by both the US and the EC.

The Appellate Body upheld the panel’s view that the US had acted inconsistently with its obligations under Art. 4.2 (a) and 4.2 (b) of the safeguards agreement by declining to evaluate the overall relationship between the protein content of wheat and the price of wheat gluten as a relevant factor.

But the Appellate Body reversed the panel view that in such investigations, the competent authority was required to  evaluate only the ‘relevant factors’ listed in Art.4.2 (a) of that agreement, as well as any other factors that were “clearly raised” before the authority by interested parties in the domestic investigation.

The Appellate Body also reversed the panel’s views on the requirements to judge ‘serious injury’ -  that is, increased imports ‘alone’, ‘in and of themselves’ or ‘per se’ as capable of causing serious injury -  and the issue of causation itself, namely increased imports and serious injury. Nevertheless, the Appellate Body held that the US had acted inconsistently with its obligations. The Appellate Body said that in any such investigation, the competent authorities should examine the injurious effects to domestic industry caused by increased imports, and that caused by other factors, and distinguish the former from the latter.

The Appellate Body, on the basis of the facts before the panel, went into the issue of the increase in capacity of the US industry and capacity utilization, and the impact of increased imports, and held that the US had not investigated fully and demonstrated that the injury caused to the US domestic industry by increased capacity had not been attributed to increased imports, and thus had not established a causal link between increased imports and serious injury. The US had thus acted inconsistently with its obligations under the safeguards agreement.

The panel had held that the US had taken account of imports from all sources (both from the EU, and from Canada) and its effects on the domestic industry, but in taking actions had excluded imports from Canada.

The US had contended in appeal that it had held a separate subsequent investigation on imports from Canada alone and had held that though imports from Canada accounted for a substantial share of the imports, they had not contributed importantly to the serious injury.

The Appellate Body had held that though the US had examined the importance of imports from Canada separately, it had made no explicit determination relating to increased imports, excluding the imports from Canada. Thus,  while the safeguard measure was applied to imports from all sources, excluding Canada, the US International Trade Commission (USITC) had not established explicitly that imports from these same sources, excluding Canada, satisfied the requirements for application of the safeguard measure.

The panel had held that in initiating an investigation on 1 October, but notifying the Committee on Safeguards on 17 October, the US had violated its obligation to notify ‘immediately’ under Art 12.1 (a). The panel had also held that similarly there was a violation of Art. 12.1.(b) in the USITC, making a determination of serious injury on 15 January 1998 but notifying the Committee only on 11 February.

The Appellate Body upheld both these findings, and noted that in respect of the initiation of investigation, it was a single page of a notice of the USITC that it was initiating an investigation; while the USITC published its notice in the Federal Register on 1 October, the Committee on Safeguards was provided this only on 17 October. And in the case of determination of serious injury, the 11 February 1988 notification was a single page indicating that the USITC report would follow at a later date. Thus there was no ‘immediate’ notification.

The Appellate Body set aside the panel view that the notification about the decision of the US President to take action was notified five days after it came into force was not ‘immediate’. However, the Appellate Body upheld the panel view that the notification decision and the particulars did not provide sufficient opportunity for interested parties to make representations for balancing the concessions had violated Art.12.3. Consequently, the Appellate Body also upheld the panel view that the US had violated Art. 8.1 of the agreement in not endeavouring to maintain a substantially equivalent level of concessions and other obligations between it and those against whom the safeguards action was being taken.

Another issue that figured in the dispute related to the fact that the panel had sought some information from the US relating to the investigation by the USITC, which was withheld on the ground of ‘confidentiality’. The panel did not however draw an adverse conclusion, though it held that a ‘serious systemic issue’ was raised on the question of procedure governing the protection of information requested by a panel, but which the member claims is  ‘confidential’.

The Appellate Body agreed that this issue needs to be addressed

The Appellate Body in its ruling “deplored” the conduct of the US in refusing to provide the information sought, but said that the drawing of an adverse inference was a ‘discretionary’ task of the panel, and that the inferences to be drawn by a panel would be on the basis of all the facts of record relevant to a particular determination.

The Appellate Body however said that the panel had been able to make an ‘objective assessment’ in the dispute on the basis of the other relevant facts before it, and thus the Appellate Body had no basis in appeal to draw the conclusion that the panel had ‘erred’ in not drawing an adverse inference, and thus there was an ‘error in law’.

[A similar question had arisen in the dispute between Brazil and Canada over Canada’s aircraft export subsidies, and the Appellate Body in that case had said that such a refusal seriously undermined the ability of the other Members of the WTO to seek prompt and satisfactory resolution of disputes.]

[In the Brazil/Canada case, as a result of the confidential information being withheld, Brazil was unable to provide its contentions, and the panel had held that it was Brazil’s responsibility to prove its case.  In that result, Brazil lost the case.]

[In this dispute, though the panel refused to draw an inference against the US over its refusal to provide confidential information, the panel found against the US, and in favour of the EC, on other grounds.]

The EC, before the panel, had also raised issues relating to Art.XIX:1 (a)  of the GATT and ‘unforeseen circumstances’ for taking safeguards actions, but the panel having determined the US actions were contrary to its obligations under the Safeguards Agreement exercised ‘judicial economy’ and did not go into this.

The Appellate Body upheld the panel in its exercise of ‘judicial economy’ and not going into this.

In interventions at the DSB Friday, The EC said that the WTO-incompatible US measure should be withdrawn immediately and that there was no other option for the US. The US investigating authority should also stop immediately, the procedures being used for extension of the safeguard measure for a further two years. The US, the EC said, must stop ‘abusing trade defence instruments’.

The EC also expressed its concern over the “increasing and worrying practice” of panels applying judicial economy, particularly as in this case, issues of a systemic nature, and in particular the proportionality of the measure needed to be addressed.

The US in its intervention said it was troubled by the observations of the panel and the Appellate Body on the issue of confidentiality of information, and said this was an important issue which the WTO members must address. However, the US regretted the Appellate Body’s statement that it “deplored the conduct of the US” in withholding confidential information, and said this was not a legal finding nor based on the text of any agreement, but a “gratuitous observation”.

“We believe,” said the US, “that panels and the Appellate Body overstep their bounds when they arrogate to themselves the right to censure particular Members for any reason, let alone for seeking to protect confidential information from disclosure.... there is nothing in the mandate of either a panel or the Appellate Body that would provide such a role.”

The US said that based on the Appellate Body report, the EC had already announced it would apply a retaliatory tariff-rate quota of imports of corn gluten from the US, and this would take effect five days from now. The EC had also claimed that this action was consistent with Art. 8.2 and 8.3 of the Safeguards Agreement.

The US questioned that assertion. Art.8.2 required a member applying safeguards to compensate a member affected by the measure, and authorized an affected member to suspend concessions if the two cannot reach an agreement on compensation. But the suspension could not occur until 30 days after notification to the Council on Goods, during which period the Goods Council could disapprove the measure. Art. 8.3 suspended for three years this authorization, if the safeguards measure is consistent with the agreement.

While the EC did notify the Goods Council and the Committee on Safeguards of its proposal to suspend the concessions, the minutes of the Goods Council showed that this matter had never been placed on its agenda or considered by it.  The US hence questioned the EC’s authority to suspend concessions. If the EC did take action as proposed in its announcement, the US would request consultations, the US said.

In response, the EC said that its action had nothing to do with the DSU provisions and Art.22, but would be within its rights under Art.8.2 and 8.3 of the safeguards agreement. The EC also said that it had notified the Goods Council and the Safeguards Committee in 1998.

In other comments, New Zealand regretted that the Appellate Body had not gone far enough in explaining its approach to the causal link between increased imports and serious injury or the standard to be applied by members.  This was an issue on which further elaboration from the Appellate Body would be necessary to ensure that members had appropriate guidance. The safeguards agreement enabled countries to derogate from their commitments under the WTO, and thus allowed restrictions on fair trade.  It had to be interpreted narrowly, as the Appellate Body had ruled.

Australia supported the view that the rigour of the obligations set out in the safeguards agreement and Art. XIX of the GATT should be maintained, and any weakening of these obligations would risk a breakout of safeguards. But Australia was disappointed that the panel’s articulation of the approach to the determination of causation had not been confirmed by the Appellate Body. While the substantial obligation to demonstrate causation had not changed, further guidance would be required to ensure that competent authorities make a proper finding on the causal link so that recourse to safeguards is limited strictly to the exceptional circumstances.

Hong Kong-China said that while the Appellate Body ruling had helped to clarify a number of procedural requirements,  Hong Kong-China was concerned with the lack of clarity in the Appellate Body’s ruling on Art.4.2(b) about the causal link between increased imports and serious injury. The Appellate Body had reversed the panel ruling that increased imports must be sufficient, in and of themselves, to cause serious injury. The Appellate Body then has set out a three-step procedure under Art.4.2(b) on examination of the causation, but is unclear how competent authorities attribute the injuries to various factors including increased imports. The Appellate Body ruling was also unclear on what constitutes “a genuine and substantial relationship of cause and effect.” The Appellate Body’s “loose interpretations” do little to prevent the authorities from manoeuvring or even abusing the ‘grey area’ in Art.4.2.(b) in contradiction with the original purpose of the Agreement. Hong Kong-China hoped the Appellate Body could fully take into account the systemic implications of its rulings as well as members’ views in further rulings.

The above article first appeared in the South-North Development Monitor (SUNS) of which Chakravarthi Raghavan is the Chief Editor.

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