Jun 29, 1989

SAFEGUARDS - CHAIRMAN'S TEXT AS BASIS FOR NEGOTIATIONS.

GENEVA, JUNE 27 (BY CHAKRAVARTHI RAGHAVAN) The Uruguay Round negotiating group on safeguards got from its chairman, George Maciel of Brazil, Tuesday a draft text of a comprehensive agreement to serve as a basis for negotiations.

The formulation of such a draft text by the chairman was one of the points agreed upon at the April meeting of the Trade Negotiations Committee (TNC).

Third world countries like Brazil and India, and the "pacific rim" countries have tabled last year their proposals and ideas in regard to safeguards agreement, seen as key to and crucial for survival and credibility of GATT and particularly for weaker trading partners like the third world.

The United States and the EEC have recently put forward papers, formulating some of their ideas in this area.

A key one in both is the demand to legitimise through GATT the idea of countries being able to take safeguard actions on a discriminatory or "selective" basis - an issue on which the talks in the Tokyo round in this area failed.

Both also want provisions that would enable them to continue "grey area" measures, the U.S. explicitly and the EEC implicitly. Third world countries want any safeguards agreement to proscribe such measures, which though called "voluntary" are forced by the strong trading partners on the weak.

The chairman's text (through a footnote) appears to meet U.S. and EEC viewpoints about "selective safeguards" partially by leaving the door open for negotiation of "selective safeguards" as an exception to the general GATT rule of non-discrimination, and suggesting negotiation of such "exceptions" as one of the "should" for the group.

It also appears to provide among the "objective criteria" for determining injury tests, such elements like share of imports in the market and relationship to domestic production, as well as about "import prices", pernicious theories borrowed, from the Multifibre Arrangements (MFA), where the idea of "low cost imports" as a source of unfair competition (and running against theories of free trade and comparative advantage) were introduced.

While the group, which is meeting this week, would perhaps receive some preliminary comments, GATT sources expect participants to react and/or start a negotiating process on that basis only at their next meeting on September 11-14.

However, in commenting on the U.S. and EEC papers on the table, the third world countries, and some of the smaller industrialised countries, would appear to have strongly criticised the concepts of "selectivity" in relation to safeguards, as also the U.S. and EEC attempts to legalise "grey area" measures.

Safeguards is the GATT term for emergency actions that countries can take under article XIX of GATT to protect their domestic producers.

These emergency trade restrictive measures against imports are permitted in specified circumstances and conditions. The provision is rarely invoked now by major industrialised economies, who have brought disrepute the entire GATT system to because of their preference for protective actions taken outside of GATT and the inability of the GATT to discipline them.

The traditional view in GATT has been that any safeguard action has to be on a non-discriminatory and most-favoured-nation basis i.e. any restraint on imports must apply to all sources of imports, and not be selective.

But in recent times, the EEC has been arguing that even as it 19 GATT enables selective safeguard actions. However, so far even the EEC has not asserted this right by taking selective safeguards action and notifying it to GATT, where it could be challenged and ruled upon.

Rather the EEC, and the U.S., have been having recourse to bilateral deals with their weaker trading partners providing for so-called "voluntary export restraints" and other "grey area" measures, at the exporting end.

The Punta del Este declaration has mandated a safeguards agreement to be based on the "basic principles of the general agreement".

Third world economies have insisted that this term "basic principles" mean the fundamental GATT requirement of non-discrimination or most-favoured-nation treatment enshrined in article I, a provision considered so basic that it can be amended only upon acceptance of all contracting parties.

While suggesting that one of the conditions for application of the measures should be its being applicable to imports from all sources, chairman Maciel has said that the negotiating group, "should examine" the possibility of exceptions to this, to be applied in special situations, and under adequate guarantees and stricter disciplines, on a mutually agreed and selective basis.

The "special circumstances" in his text are spelt out as serious injury caused by sudden increase in imports from a "very limited number of suppliers". But it does not stipulate whether

they are to "major" or "principal", suppliers or even minor ones aggressively cutting into market shares of domestic or established exporters.

GATT sources conceded Tuesday that the Maciel text on "selectivity" closely follows the EEC ideas.

Third world countries who for over 30 years have been victims of "selective safeguards" in the textiles and clothing sector through the Multifibre arrangement and its predecessors, have been generally opposed to such selectivity, realising that with "selectivity", GATT itself would become a "super-MFA" at a time when they are seeking the end to MFA.

Recent GATT estimates suggest there are now some 270 "voluntary" export restraint arrangements, usually referred to as "grey area" measures, signifying their questionable GATT validity.

Four-fifths of these arrangements protect the U.S. and EEC markets, and many of the restraints are directed against the South Korea and Japan.

According to a GATT count, 77 of them cover imports of textiles and products, 64 cover agriculture and food products, 52 are in the steel sector, 32 in the electronics, 21 in automobiles and parts, 17 in footwear and 14 in machine tools.

The conclusion of a comprehensive safeguards agreement to bring all safeguard actions under effective multilateral disciplines has been an item on the GATT agenda since the launching of the Tokyo round.

However an agreement eluded negotiators in the Tokyo round and so far in the Uruguay round, mainly because of the insistence of the major economies like the European communities, and recently of the United States, for some provisions to enable them to take "selective" safeguards actions against some and not all sources of imports.

A major argument used by its supporters for provisions, under multilateral disciplines, to enable "selective safeguards" is that this is the only way that powerful trading partners would be persuaded to bring their safeguard actions under scrutiny and control, and this would be needed to protect the interests of the weaker trading partners.

But with the experience of how such "selective" safeguards have worked under the MFA, and how effective the textile surveillance body under the MFA has been in protecting the rights of weaker partners and in disciplining the major economies, the argument appears to be an invitation to the third world to place reliance on faith as opposed to experience.

The Maciel text suggests that its provisions should apply to all safeguard measures designed to give protection to domestic industries in specified circumstances and could be used by a contracting party only in situations where other GATT provisions and their specific remedies do not apply.

The reference is to article VI, covering dumped goods, article XVI covering subsidised exports, and XXVIII which deals with renegotiations of tariffs which have been bound in GATT schedules.

The conditions for application of safeguards are to be "unforeseen, sharp and substantial" increase in quantity of the products and establishment by competent national authorities of importing countries that such increase is causing "serious injury" to domestic producers of like or competitive domestic products.

The determination whether or not "serious injury" is being caused or threatened, under the text, is thus left to the national authorities.

The draft text specifies the meaning of "serious injury", a term that has been a cause of considerable differences within GATT, and the elements or factors to be taken into account in determining the existence or otherwise of serious injury or threat.

The draft provides for safeguard measures to be applied for limited duration, with the duration of "X" years to be negotiated, and for the coupling of such safeguard measures with "adjustment" measures by the importing country.

Safeguards are normally to be for limited periods, whose term is to be agreed upon. But under exceptional circumstances, safeguard measures can be extended in time, provided there is a demonstrated justification, adjustment measures are taken and other disciplines are observed.

Where the safeguard measures are maintained for more than a year, there is to be progressive liberalisation. No safeguard measures are to be applied in respect of a product, which has been already subject to such measures before the lapse of a stipulated period to be agreed upon.

Countries applying safeguard provisions can adopt structural adjustment assistance measures to help industry concerned or provide such assistance independently of safeguards or in place.

Without a specific GATT provision, such structural adjustment assistance could attract GATT prohibitions of government assistance or impermissible protection.

There are provisions for notifications and consultations before such actions are taken, and in critical circumstances for safeguard actions being-taken provisionally before such consultations, and for consultations within a stipulated number of months.

Under current GATT provisions, safeguard actions by any contracting party, would enable those CPS whose exports are thus hit to "retaliate" or withdraw equivalent concessions.

Under the proposed draft, such retaliation would be possible only in stipulated circumstances: absence of consultations, no agreement in consultations, no adjustment measures, expiry of maximum period, and ruling by the safeguards committee or GATT dispute settlement mechanism that the measures did not conform to the rules in force.

There are also provisions to enable a CP taking safeguards to offer compensation to those affected.

Among other provisions, exports of the least developed countries or of other developing countries whose market shares are minimal are not to be the subject of safeguard action. Third world countries are also to be allowed flexibility in conditions under which they might take safeguard actions and structural adjustment measures as required by their individual development, financial or trade situations.

Another provision in the draft requires CPS to agree to promptly phase-out all safeguards measures inconsistent with the agreement or bring them into conformity with the agreement.

A safeguard committee is to be set up charged with monitoring and surveillance of the safeguard measures and their phase-out and settle disputes.

Both the U.S. and EEC in their papers have flagged the issue of having special safeguard provisions to be put in place to cover the imports of textiles and clothing, and to cover the period of "gradual integration", in terms of any agreement that might be reached for integrating that trade into the general agreement and its disciplines.

The Maciel paper is silent on this.