TEXTILES: PANEL RULINGS MAY CURB US ON ATC

11:28 AM Jan 10, 1997

TEXTILES: PANEL RULINGS MAY CURB US ON ATC
Geneva 10 Jan (Chakravarthi Raghavan) -- Two panel rulings on use of transitionary safeguards of the WTO Agreement on Textiles and Clothing, in restricting textiles and clothing imports, seem likely to force importing countries, and particularly the United States, to be more circumspect in invoking these provisions.

Both the panel rulings were against the United States, which has been quite free in invoking and using these provisions and imposing restraints on imports from developing countries.

Of the two rulings, the panel ruling in the complaint of Costa Rica, issued in November last, has been taken to the WTO's standing appellate body by both sides.

The second ruling, in the complaint of India, has been issued on 6 January this year, and there is a 60-day time limit for its automatic adoption at a meeting of the Dispute Settlement Body, unless before that date either party files an appeal.

On the Indian complaint, the US withdrew the restrictions on 4 December 1996 -- after the panel had circulated an interim report to the two parties on 12 November. But in the absence of an agreement between the parties to terminate the proceedings, the panel nevertheless issued its final ruling on 16 December, and this was circulated to all WTO members on 6 January.

The Appellate Body would only hear and give rulings on the legal interpretations, and not the facts.

But the facts of the US investigations of claims of serious damage or threat of serious damage to its domestic industry from the particular imports, as well as its assessments and calls for restraints that have been set out in the two panel reports show how little regard has been paid to the letter and spirit of the WTO and the ATC.

The two panel rulings have followed somewhat slightly different approaches in looking at the US actions, and declaring them to be contrary to the US obligations, and the relief provided.

But together they bear out the complaints of the exporting countries, about the way the importing countries, and particularly the United States, has approached the entire issue of the trade in this sector.

The complaint of the exporting countries about the way the ATC has been implemented, and the way the Textile Monitoring Body (TMB), mandated to supervise the implementation of the ATC, and ensure that all measures taken in this sector are in compliance with the ATC, has actually functioned figured in the run-up to the Singapore Ministerial Meeting. But the importing countries denied consensus to any recommendations from the Goods Council.

The issue figured in many speeches of developing countries at the Singapore Ministerial meeting.

But like all implementation problems, the developing exporting countries delivered speeches, largely to empty halls -- and the entire negotiating process at Singapore totally ignored these.

Both the panels have ducked the legal issues raised by the complainants about the functioning of the ten-member TMB, and its failures to issue any decisions or reasoned arguments because of lack of consensus.

Both the panels though have set out the different approaches that the TMB and the panels need to follow in deciding on the disputes.

The two panels have underscored the differences between the Multifibre Agreement (MFA) regime under the old GATT (a derogation from GATT obligations) and the new ATC regime in the WTO for a phased integration of the trade into the normal GATT disciplines.

A common element in the US actions has been the fact that almost within days of the entry into force of the WTO and its ATC, the US authorities issued indiscriminately calls on the exporting countries (over 30 calls were issued) claiming serious damage and asking them to restrain their exports. When the bilateral consultations failed, the US imposed restraints retrospectively, and in pleadings before the TMB seemed to be shifting its grounds for action.

The panel rulings, on the basis of the facts, have held that the US authorities have not carried out their obligations in demonstrating serious damage or threat of serious damage to the particular domestic industry, in applying the various tests of economic variables specified in the ATC, and in judging whether the serious damage or threat of serious damage arose because of increased quantities of imports from the particular exporting country.

In both cases, the US market statements (setting out the facts and determinations) provided in respect of the 'calls' for consultations and restraints said the increased imports had seriously damaged the domestic industry concerned. But the US diplomatic notes to the two countries seeking 'consultations' used both serious damage and threat of serious damage. And failing to prove the fact of serious damage, the US fell back (before the TMB and the panels) to the threat of serious damage.

The issue whether an importing country could use both pleas -- actual damage, or threat of serious damage -- has in effect been left open by both panels.

But analysts note that unless the TMB radically improves its functioning, the panel rulings will in effect encourage and force more and more of the exporting countries to have recourse to the dispute settlement procedures.

But in both cases, the basic weakness or failing of the WTO and its dispute settlement system are clear: when a strong partner takes such actions that may ultimately be held illegal, the weaker trading partner has no real remedy and its trade will suffer over the two-year period before its case can come up before a panel and is disposed off.

Even then, there is no specific remedy for the loss of trade.

The Costa Rican complaint arose over the US restrictions on imports of cotton and man-made fibre underwear from Costa Rica on the ground of threat of serious damage to the US domestic industry.

The Indian complaint arose over the US restrictions on imports of woven wool shirts and blouses from India.

The two panels have taken somewhat different, but not really contradictory, approaches on the burden of proof required before the panel.

Article 2 in principle prohibits recourse to new restrictions on imports of textiles and clothing beyond those that had prevailed before the entry into force of the WTO and notified to the WTO.

Article 6 of the ATC sets out the conditions for use of transitionary safeguards in respect of items not integrated into the GATT under the integration process.

The panel on the Costa Rican complaint has taken the view that any action for transitionary safeguards by an importing country under Art. 6 of the ATC is an invoking of an exception to the general rule for trade restrictions set out in Art. 2, and hence it is the importing country that has to justify its action and carries the burden of proof.

The panel on the Indian complaint has disagreed with the Indian argument that the entire ATC is an exception to the GATT 1994, and hence the entire burden of proof rests on the country imposing restraints. The panel said that the party initiating a complaint has to put forward factual and legal arguments that the restrictions imposed by the US under Art. 6 was inconsistent with Art. 2 of the ATC. Thereupon, it is for the defendant (the US) to demonstrate that it has complied with all the relevant conditions for the application of the transitionary safeguards under Art 6.2 and 6.3.

In terms of the 'standard of review' to be applied by panels in assessing the findings of authorities of an importing country, the Costa Rica panel has rejected the idea of 'a policy of total deference' to the findings of national authorities since this would not ensure an "objective assessment" of the issues as foreseen by Art. 11 of the WTO's Dispute Settlement Understanding.

The panel saw its review as not a substitute for the proceedings before the national investigatory authorities (before they made a determination) or by the TMB nor engage in a de novo review.

Rather, said the panel on Costa Rican complaint, "the task of the panel is to examine the consistency of the US action with the international obligations of the United States, and not the consistency of the US action with the US domestic statute implementing the international obligations of the United States."

The panel on the Indian complaint also cited Art. 11 of the DSU to make the point that a panel is required to make "an objective assessment of the matter before it, including an objective assessment of the facts of the case and the applicability of and conformity with the relevant covered agreements" (all emphasis by the panel).

The panel said in an overall assessment of the US determination of serious injury or threat of serious injury that all the eleven economic factors listed in Art. 6.3 had to be 'considered' or 'examined' by the importing Member in making its determination for the particular industry for which the measure is imposed -- in the complaint before it of woven wool shirts and blouses in (US trade) category 440. The factors are output, productivity, utilization of capacity, inventories, market share, exports, wages, employment, domestic prices, profits and investment.

The US, the panel said, did not examine eight of these factors -- productivity, utilization of capacity, inventories, exports, wages, employment, profits and investment -- in the context of the particular industry and the US gave no explanations for not doing this.

For five of the factors (utilization of capacity, wages, employment, profits and investment) some information was provided only for the broader shirt and blouse or woven shirt and blouse sectors without being adequately related to the woven wool short and blouse industry.

The absence of any data on exports also vitiated the statements on market shares, sales and utilization of capacity for purposes of demonstrating serious damage or actual threat thereof as well as causation.

In addition, the information provided is often vague and imprecise. Since the US did not include any specific information for the particular industry concerned, it therefore could not make any convincing analysis as to the causation of serous damage or actual threat thereof to that particular industry. In its market statement the US did assert that imports had resulted in serious losses for the US industry, but the US had failed to tie the effects of imports on those economic variables to the particular industry alleged to have been damaged by such imports.

The US did not also address the issue of whether the alleged state of the particular industry was caused by technological changes or changes in consumer preferences.

Finally, the US did not include any explanation as to why it was not able to collect specific or more precise information for the particular industry when making its determination, while it was able to develop such data a few months after.

The panel underlined that the right of importing members to take safeguard restraints must be exercised within the parameters laid down in Art. 6 of the ATC and for the reasons it had set out, the US determination did not respect the requirements of Art. 6.

While the panel did not interpret the ATC as imposing on the importing member any specific method for collecting data or considering and weighing all the relevant economic factors, and the relative importance of particular factors including those listed in Art. 6 is for the importing member to assess in the light of circumstances of each case, "the importing member must comply in its determination with the requirements that at least all economic factors listed in Art. 6.3 are 'considered' and the importing member meet the explicit requirement to confirm that the increase in imports is the cause of the serious damage or actual threat thereof and that the state of the industry is not caused by such other factors as technological changes or changes in consumer preference.

The panel did not feel it necessary to consider whether serious damage or actual threat thereof was a single concept or differing concepts for determination. In either case, the panel said, the importing country would have had to demonstrate effects of imports on the particular domestic industry of the eleven factors and in view of the panel's findings on these, the US findings did not support a determination of serious damage or actual threat therefore, as a single or two separate concepts.

The panel rejected India's claim that an action could be maintained only when confirmed by the TMB, noting that under Art. 8.9 of the ATC, TMB recommendations are not binding.

The panel concluded, and asked the DSB to make such a ruling, that the US restraints on imports of woven wool shirts and blouses, category 440, from India and its extensions violated provisions of Art. 2 and 6 of the ATC, and the US measure nullified and impaired the benefits of India under the WTO agreement, in particular the ATC.

The panel on Costa Rican complaint in assessing conformity of the US restrictions with Art. 6.2 of the ATC, restricted its review to an examination of the March statement issued by the US investigating authorities (the CITA) when the US requested consultations. The panel evaluated the information contained in the March statement in light of the economic variables cited in Art. 6.3 of the ATC.

The Panel concluded that the information contained in the March statement suffered from important weaknesses: the information in some cases is inconsistent with other information later submitted by the US to the TMB (the March statement mentioning 395 US establishments manufacturing cotton and man-made fibre underwear, while the July statement corrected this figure to "approximately 302"); in other cases the information submitted is inadequate to demonstrate serious damage to the US industry (e.g. no statistics or analysis of evolution of investment in the US industry, and the March statement typically referring to the performance of one or two companies out of an industry of more than 300 establishments).

These weaknesses the panel said raised considerable doubts as to whether serious damage had been demonstrated. But the panel has refrained from making a finding on this point of law,since it considered that the factors listed in Art. 6.3 did not provide sufficient and exclusive guidance.

But examining the requirement of causality to be established between increased imports and serious damage to the domestic industry, the Costa Rica panel said the US March statement did not "demonstrably" show that serious damage was caused by increased level of imports. Thus the US had failed to comply with its obligations under Art. 6.2 of the ATC.

As to whether the US authorities had appropriately attributed serious damage to imports from Costa Rica (which along could justify actions aimed at Costa Rica), the panel noted that imports into the US from Costa Rica had reached 14,423,178 dozen units or an increase of 22% during the period of investigation.

The panel also noted that restraint at the level of 14,423,178 dozen units was imposed on Costa Rica on 22 June 1995.

At the same time bilateral agreements were concluded with Colombia on 27 June 1995, with the Dominican Republic on 25 June 1995, with El Salvador on 6 July 1995, and later with Honduras on 15 September 1995 and Turkey on 19 July 1995.

The US imposed restraints on underwear imports from Costa Rica while during the period that immediately ensued it reached agreements with five other exporters on quotas of 170,305,774 dozen or an increase of 478% compared to actual imports from these countries during the period of investigation.

The US, the panel said, could not enter into agreements permitting imports of 170,305,774 dozen units of a product (an increase of 478% over then current import levels) and at the same time claim that imports of 14,423,178 dozen units or an increase of 22% over then current import levels were contributing to serious damage.

The panel also noted that atleast 94% of underwear imports into the US from Costa Rica were re-imports from fabric cut in the US. And in implementing the restrictions, the US did not make allowance for reimports in a quantitative or other way, as it was obliged to do under Art. 6.6(d) of the ATC.

The panel also held that the US could not retroactively apply the restrictions to 27 March of 1995 (when it first sought consultations), as it could under the old MFA. While the ATC was silent on this, Art X:2 of the GATT required official publication of a restraint before it was enforced. As such the US could apply the restraint only from the date of its publication in its register on 21 April 1995.

The panel concluded that the US was in violation of its obligations under Articles 2.4, 6.2, 6.4, 6.6(d) and 6.10 of the ATC and recommended that the US bring the measure challenged by Costa Rica into compliance with its ATC obligations. The panel further suggested, that the US bring the measure into compliance by immediately withdrawing the restriction.