Mar 31, 1990

EEC LEVIES ON "SCREW-DRIVER" PLANTS HELD GATT ILLEGAL.

GENEVA, MARCH 28 (BY CHAKRAVARTHI RAGHAVAN) -- A GATT panel has ruled that the "anti-circumvention" duties levied by the European Community on products from so-called Japanese "screw-driver" assembly plants established within the Community - products assembled by Japanese manufacturers or affiliates out of components largely imported from Japan - are violative of the GATT.

The EEC duties on such products had been levied under regulations purportedly aimed at preventing "circumvention" of the antidumping duties on some products (electronic typewriters, electronic weighing scales, hydraulic excavators, plain paper photocopiers and ball bearings) exported by the Japanese manufacturers.

The report of the panel is due to come up before the GATT Council at its next meeting on April 3. But it is likely that the EEC, as well as U.S. and Canada might stall adoption. Even other members might wish to have some time for considering the implications of the ruling. The report dated March 22, was circulated to the CPs only on Wednesday, though it had been available on a confidential basis to Japan and EEC a month earlier, when news of the ruling had leaked out of Tokyo. The report of the panel would be made public only after the Council adopts it.

In mid-80’s, after investigations, the EEC had levied AD/CV duties on these products imported from Japan, and/or obtained price undertakings from the exporters to withdraw the duties or terminate the investigations. But soon after the investigations were begun, Japanese manufacturers concerned either set up plants or expanded operations of existing plants (by wholly owned subsidiaries or with some EC capital) to produce these same products from components imported from Japan.

In Japan, the manufacturers of the final products obtain the parts from component suppliers, and seldom make it themselves.

The EEC, in 1987, amended its regulations to incorporate the "anti-circumvention provisions", to enable imposition of duties on the products made in the EEC from imported Japanese components by the same Japanese manufacturers or related parties.

The amended regulations enable levy of the "anti-circumvention" duties if the assembly or production is by a related or associated party to manufacturers whose exports had been subject to anti-dumping duty, the assembly or production was started or substantially increased after the start of the AD investigations into the original product and more than 50% of the parts used are imported from the manufacturers' country.

The EC started proceedings under these provisions against the six Japanese products (involving 21 Japanese enterprises) produced inside the EEC from imported components, but without any investigations on whether the imported components were being "dumped". Also, the proceedings were started not on basis of complaints from component producers, but from producers of finished products, one of whom was the Xerox corporation which had part Japanese collaboration and used imported Japanese components.

While in some cases final determinations are yet to be made, in others the duties have been withdrawn or proceedings terminated on the basis of undertakings to use larger percentage of local or non-Japanese origin components.

The panel did not rule against the "anti-circumvention" provisions as such, but against the duties imposed in application of the regulations, and has said that the GATT Contracting Parties should request the EEC to bring its application of the regulations in line with its obligations under the General Agreement.

The panel has said that while it would be "desirable" if the EEC were to withdraw the "anti-circumvention" provisions of its AD/CV regulations, it would suffice (in terms of its GATT obligations) if the EEC were to cease to apply the provisions in respect of GATT Contracting Parties.

The U.S. and Canada have similar so-called "anti-circumvention" provisions in their domestic laws and, as interested parties, appeared before the panel to justify the provisions.

In recent years, major ICs have been using AD/CV investigations and duties as a thinly disguised instrument for protecting local industries. Japanese manufacturers have used investments as a way of starting production inside a country with components imported from their Japanese suppliers and then sell them on the local market. Many of the same component suppliers are also often suppliers for the domestic enterprises in the country concerned, which produce competing products.

The U.S., Canada and EEC have been using the anti-circumvention provisions of their anti-dumping laws to hit such operations and protect their own domestic industry against Japanese owned ones.

Interestingly, all the major ICs promote and justify such globalisation of production, distribution and trade by their TNCs in relation to Third World countries insisting on untrammelled rights of the investors to decide what and when to manufacture locally, by what technology, and whether to use local inputs or imported ones.

Straightforward Third World efforts in these areas through investment measures are being sought to be prohibited, while with their capacity for sophistication, the ICs have been using AD/CV instruments to protect their own industry.

The panel said that the "policy purpose" behind the levy on the imported Japanese components (namely the anti-circumvention) was not relevant to a determination whether the "charge" violated Article II: 1(b). Nor could the fact that the EEC, by a "legal fiction" treated imported parts and materials subject to the anti-circumvention duties as not being "in free circulation" inside the EEC, be used to support the conclusion that the anti-circumvention duties were duties levied on goods in connection with their importation. They were thus not customs duties.

The panel also found that the anti-circumvention duties on the finished products subjected the imported parts and materials to an internal charge in excess of that applied on like domestic products and hence contrary to Article III: 2.

Since the EEC itself had not sought to justify the violations of Articles I, II and III on the basis of its right under Article Vi to impose the AD duties, the Panel did not examine this issue raised by the U.S. and Canada.

The EC had justified its actions (contrary to Article I, II, and III) on the basis of the General Exceptions in Article XX (d), which enabled CPs to adopt or enforce measures "necessary to secure compliance with laws or regulations, which are not inconsistent with the provisions of this Agreement". The only part of the EC AD regulations needing enforcement was the obligation to pay AD duties, and the anti-circumvention provisions did not relate to this.

Article XX (d), the panel ruled, only covered measures to secure compliance with laws and regulations and not the objectives of such laws. The laws and regulations had hence to be consistent with the General Agreement. Hence the duties imposed under the anti-circumvention provisions could not be justified under Article XX (d).

The panel also found that acceptance by the EC of undertakings to limit the use of imported parts and materials (to end the investigations and/or levy of AD duties) was a violation of Article III: 2.

Since the General Agreement, and the protocol of provisional application, only required CPs to avoid certain measures but set no obligations to avoid legislation under which the executive authorities "may" impose such measures, the mere existence of the anti-circumvention provisions in the EC regulations did not violate the General Agreement, the panel ruled.

The Panel noted that a number of participants in the Uruguay Round MTNs had considered that increased internationalisation of production processes had led to certain problems in the administration of their AD laws, and these issues were presently the subject of negotiations. However, the panel said, its tasks were limited to examination of issues under existing GATT provisions.

But when Japan has sought to use the FDI route to get inside the protected market (inside the EC, U.S. or Canada) in such sophisticated goods, it has been sought to be hit by the anti-circumvention provisions, related to the proportion (in final value of the merchandise) of imported components.

In its arguments on need for "anti-circumvention" provisions, the U.S. said that this arose directly out of the changing nature of international commercial reality, namely increasing international integration of manufacturing operations and ease of multinational sourcing of parts and location of assembly operations.

The globalisation of business, the U.S. said, had been accelerated both by the push for industrial growth in countries with lower customs costs and advances in production technology. While in most cases these were "a healthy and natural consequence", it also presented authorities with special challenges at ensuring that international trade rules to advance economic progress.

Apart from the arguments used by the EEC to defend its regulations, U.S. had also claimed that Article VI of the General Agreement on AD/CV duties to a certain extent provided a legal basis for the anti-circumvention, provisions.

The EEC had said it would not disagree with such an approach if the panel found "anti-circumvention" duties justifiable under Article VI. However, the EEC itself did not present arguments to justify its regulations in terms of Article VI.

In line with GATT practice of not examining issues raised by third parties, the panel decided not to examine whether the anti-circumvention duties could be justified under Article VI.

However, the panel, without any explanation, appears to have gone along with the Canadian plea, and one that the EEC had not raised, namely, not to rule against the EEC regulation but only on levy of the duties.

Canada specifically suggested that the panel not rule against the regulations (which would have automatically invalidated its own regulations) but against the application of the regulations.

Japan argued before the panel that the imposition of the AD/CV duties on the goods produced in the EEC, the acceptance of "undertakings" from the producers, and the regulations themselves were violative of the GATT obligations for MFN treatment under Article I, the duties levied an the imported components were higher than the EEC's bound tariffs under Article II, and the requirement for national treatment in Article III.