2:30 PM Feb 14, 1997

TEXTILES: WTO APPELLATE BODY CURBS RETROACTIVE QUOTAS

Geneva 14 Feb (Chakravarthi Raghavan) -- The Appellate Body of the World Trade Organization has handed down a ruling that the Agreement on Textiles and Clothing (ATC) does not permit an importing country to impose retroactive restraint measures, save in "highly unusual and critical circumstances".

The ruling will further crib the United States and its free-wheeling style in invoking the transition safeguard provisions of the ATC and issue "calls" on exporting countries and routinely restrict their exports, and do so with retrospective effect.

The ruling, which is automatically applicable, came in an appeal in the dispute between Costa Rica and the United States involving US import restrictions of cotton and man-made fibre underwear from Costa Rica.

The US had imposed these restrictions on June 23, 1995, but with retrospective effect from 27 March 1995, when it had issued a "call" on Costa Rica for consultations, in terms of Art. 6. 10 of the ATC which enables an importing country to take transition safeguards. The US call was on the ground of 'serious damage' to the US domestic industry, and when consultations did not produce an agreement, the US imposed the restrictions, predating it to 27 March.

The issue was first considered in the Textiles Monitoring Body which gave a ruling against the US on the question of serious damage, but no ruling on the actual threat of serious damage. Costa Rica as a result held further consultations with the US, which too did not produce a satisfactory outcome.

Ultimately, Costa Rica took the issue as a dispute and the panel ruling handed down on 8 November, ruled mostly in favour of Costa Rica.

The panel held that the US had violated its obligations under Art. 6.2 and 6.4 of the ATC by imposing the restrictions "without having demonstrated that serious damage or actual threat thereof was caused by such imports to the US domestic industry." The US was also held to have violated its obligations in not granting more favourable treatment to Costa Rican re-imports (under Art. 6.6.d of the ATC), and under Art. 2.4 of the ATC in imposing restraints on Costa rica in a manner inconsistent with US obligations under Art. 6.

The panel also held that, while the US could not retroactively date the restraint to the date of request for consultations (as it had done), it could do so from the date of publication of information about the restraint.

The panel recommended that the WTO's Dispute Settlement Body (DSB) request the US to bring the measure challenged by Costa Rica into compliance with the US obligations under the ATC, and that this can best be achieved, and further nullification of benefits to Costa Rica best avoided, by "prompt removal" by the US of the measure inconsistent with its obligations, and by "immediately withdrawing" the restrictions.

Costa Rica appealed against the finding of the panel that allowed back-dating of the transitional safeguard measure to the date of publication in the US Federal Register of the request for consultations. Costa Rica also questioned the legal interpretations of the panel in reaching its finding. The US made an appellee's submission, but did not appeal against any of the findings of the panel. India as a third participant also made a submission to the panel on the retroactive issue.

The US before the panel had cited the practice of importing countries under the Multifibre Agreement to invoke consultations and apply restrictions from that date. Costa Rica, and other exporters who intervened before the panel, said the MFA practice, sanctioned by the text of the provisions of the MFA, could not be imported into the ATC when there was no such specific provision.

The Appellate body, while agreeing with the panel that Art. 6 10. of the ATC is "silent" on the question of backdating a safeguard restraint, this did not mean the issue was not addressed.

Citing the text of Art. 6.10, the Appellate body that under its express terms, restraints may be "applied" only "after the expiry of 60 days" for consultations, without success, and only within the "window" of 30 days immediately following this 60-day period.

In the absence of an express authorization in Art. 6.10 of the ATC to backdate the effectivity of a safeguard measure, a presumption arose that such a measure may be applied only prospectively.

Art 6.1. of the ATC directs members to apply transitional safeguards "as sparingly as possible" and also "consistently with the provisions [of Art. 6] and the effective implementation of the integration process under the ATC.

The appellate body said that to inject into Art. 6.10 an authorization for backdating the restraint measure would encourage a return to the practice of backdating which appeared to have been widespread under the MFA which had ended (with the entry into force of the ATC). This would loosen up the carefully negotiated language of Art. 6.10 of the ATC which reflected an equally carefully drawn balance of rights and obligations of Members -- by allowing the importing member an enhanced ability to restrict entry of goods in the exportation of which no unfair trade practice, such as dumping or fraud or decision as to origin, is alleged or proven.

To read Art. 6.10 as somehow authorizing the backdating as a matter of course, the Appellate body said, would tend to diminish the utility and significance of prior consultations with the identified exporting Member or Members. Art. 6.7 of the ATC provides for consultations in very substantial detail, and requires that the request be accompanied by specific, relevant and up-to-date information on facts that led the importing Member to make a determination of "serious damage" and the factors which led to the unilateral identification the exporting Member as the source of the damage.

A clear objective of the 60-day consultation period is "to give such Member or Members a real and fair, not merely a pro forma, opportunity to rebut or moderate these factors." The consultation requirement was thus ground, among others, on due process considerations and "should be protected from erosion by a treaty interpreter".

The Appellate body noted that the earlier MFA, in Art. 3 (5) (i), expressly permitted backdating of the effectivity of a restraint measure. This however disappeared with the suppression of the MFA by the new ATC, with no comparable clause carried over into Art. 6.10.

This strongly reinforces the presumption that such retroactive application of restraint is no longer permissible. "We are not entitled to assume that the disappearance was merely accidental or an inadvertent oversight on the part of either harassed negotiators or inattentive draftsmen," the Appellate body comment. The fact no official record may exist of discussions or statements of delegations on this point was no basis for making such an assumption. And while, as contended by the US, for 20 years under the MFA all importing countries "counted" imports after the date of request for consultations against the quota, if the WTO members had wanted the practice to continue, it was not difficult to understand why the same language had not been put into the ATC.

On the US view that the publication of a request for consultations and the restraint levels requested could bring in a "speculative flood" of imports, and that the panel had made such a "finding" of fact in allowing retroactivity, the appellate body said it found no such "broad-ranging 'factual finding' in the panel report."

The Appellate body recognized that in the world of international trade and commerce a speculative "flood of imports" could in fact materialize, but this would depend on a number of variables including the particular kind of textile or clothing item involved, the "high fashion", high-value or the fungible, low-value nature of the goods subject to a quota, the seasonality of demand, length of the production time, presence or absence of high inventories in the exporting country etc.

But if these turned out to be a serious problem to the importing country, the importing Member could take recourse to Art. 6.11 which authorized the importing Member, "in highly unusual and critical circumstances" to apply its measures immediately, but provisionally, and notify the TMB within five working days.

This meant that action under Art. 6.11 is not in lieu of, and does not supersede requirements of Art. 6.10, but such action is folded into the action under Art. 6.10.

The Appellate body said that the standards set under Art. 6.11 of "highly unusual and critical circumstances, where delay would cause damage which would be difficult to repair" are not susceptible of specific quantitative descriptions, and its appreciation must be on a case-to-case basis.

But, "giving retrospective effect to a safeguard restraint measure is no longer permissible under the regime of Art. 6 of the ATC and is in fact prohibited under Art. 6.10. This presumption of prospective effect has not been overturned, but "is a proposition not simply presumptively correct but one requiring our assent," the Appellate body ruled. The importing member is not defenceless against a "speculative flood of imports", but can take recourse to Art. 6.11, complying in the process with the requirements of Art. 6.10 and 6.11.

The provisions of Art. X:2 of the General Agreement (incorporating the principle of transparency and due process dimensions) before restraints are imposed generally, the Appellate Body said, did not resolve the issue of permissibility of retroactive effect to a safeguard restraint. Prior publication is required for all measures falling within the scope of Art. X:2, and not just ATC safeguard measures sought to be applied retroactively. While prior publication may be an autonomous condition for giving effect to any restraint measure, "where no authority exists to give retroactive effect to a restrictive governmental measure, that deficiency is not cured by publishing the measure sometime before its actual publication. The necessary authorization is not supplied by Art. X:2 of the General Agreement."

The Appellate therefore concluded that the Panel erred in giving a finding that the importing country could impose the restriction retroactively under Art. 6.10 of the ATC, if the importing country published the proposed restraint period and restraint level after the request for consultation.

The ruling left intact the conclusions of the panel on other findings.