US MOVE ONE MORE BLOW AT CREDIBILITY OF SYSTEM

7:48 AM May 11, 1995

US MOVE ONE MORE BLOW AT CREDIBILITY OF SYSTEM
Geneva 11 May (Chakravarthi Raghavan) -- With its announcement of simultaneous moves -- of its intent to invoke the dispute settlement machinery of the World Trade Organization but also initiate trade retaliatory actions -- to pry open Japanese market for automobiles and auto-parts for its exporters -- the United States may or may not make some trade gains, but has struck one more blow at the credibility of the WTO multilateral trading system.

The rules of the General Agreement and the WTO agreement and its Dispute Settlement Understanding taken together make very clear that every member should have recourse to the dispute settlement mechanism and the procedures to settle disputes, and obtain the sanction of the WTO, before there can be any trade sanctions or in strict GATT legal terms "compensation or withdrawal of equivalent concessions".

A seven-line press statement promptly issued by WTO Director-General Renato Ruggiero (and faxed by the WTO press office to some, but not all news offices) claiming the US action to be a reaffirmation of US confidence in multilateral procedures and judgements on trade disputes, may have compounded problems of public perception faced by the WTO and its secretariat over its independence visavis majors like the US.

While WTO agreements and rules, including Dispute Settlement Understanding (DSU) are a detailed compendium of rules (though with many ambiguities), and the DSU provides for an independent quasi-judicial determination of rights and obligations, in actual practice the secretariat (its legal and substantive divisions concerned) play a very important role in guiding panels to conclusions.

The US moves (and the promised publication of a hit list against Japanese imports, expected to be made after the June Halifax G-7 meeting) and the Japanese reactions that it won't yield but would take its case to the WTO (after the trade measures are imposed, thus creating a cause of action), could all be part of a dangerous minuet between the two in which each hopes the other would blink at the last moment and avert a trade clash.

Most media despatches out of Washington suggest the US administration is hoping this would happen.

But whether Japan yields and there is no US trade actions or the US finds a face-saving way of retreat or Japan (as a strong major economy) stands up and US imposes unilateral trade retaliation, and both US and Japanese complaints land up before the WTO Dispute Settlement Body (DSB), the WTO claims of a rule-based system and ability to protect the rights of trade partners against trade harassments and bullying but "a central element in providing security and predictability in the multilateral trading system" (Art 3.2 of the DSU) have been damaged.

Ruggiero's statement was made soon after the US Representative to the WTO, Amb. Booth Gardner called on him and handed over a communication from the US Trade Representative Mickey Kantor (as he announced a little later in Washington) "indicating our intent" to invoke the dispute settlement mechanism of the WTO to "challenge the continuing discrimination against United States products in the market for automobiles and automotive parts in Japan".

The WTO press release was sent out just a few minutes after Kantor's press conference in Washington (carried live by CNN) and was ahead of the text of Kantor's statement that the US Mission put out to the press here and also made available to other WTO members.

The Ruggiero statement said: "I have today received a letter from Mr. Michael Kantor, US Trade Representative, giving notice of the intention of the United States to invoke the WTO dispute settlement procedures with respect to the market for automobiles and automotive parts in Japan. I am pleased that, in so doing, the US has reaffirmed its confidence in a multilateral procedures, through the World Trade Organization, to secure impartial judgements of trade disputes. At the same time, I would encourage the United States and Japan to redouble their efforts to resolve their differences bilaterally and amicably".

While Kantor's communication to the WTO head apparently made no references to trade retaliatory actions, the Kantor statement in Washington announcing the 'pre-filing notification' said the US believed Japan had failed to carry out its obligations under the WTO, and "continues to thwart open and equitable trade, which is the objective of the WTO. Japanese government actions have nullified and impaired benefits accruing to the US and other countries members of the WTO."

The Kantor statement added: "At the same time, pursuant to sections 301 and 304 of the Trade Act, USTR has made a determination that certain acts, policies and practices of Japan restrict or deny US auto parts suppliers access to the auto parts replacement and accessories market in Japan, and are unreasonable and discriminatory and burden or restrict US commerce.

"In the next several days, USTR will publish a proposed retaliation list under section 301 (b) and will seek public comment. In taking these steps we are acting on behalf of US companies and US workers in the automotive sector... But I believe that we are also seeking objectives that are in the interests of Japan and Japanese consumers, who will benefit from open markets, greater choice, and lower prices. And we are building support for the international trading system. Because if the inequities of the sort that exist in this sector are allowed to continue, the public will understandably come to doubt the fairness of the system and lose faith in it...."

As the London-based Financial Times (a staunch WTO supporter and its secretariat's favourite newspaper) said editorially, the first (Kantor move of invoking the WTO) assumes "the WTO embodies legitimacy in world trade while the second will almost certainly violate the WTO."

In response to questions, Kantor made clear US trade actions would be simultaneous to the moves to invoke WTO dispute settlement processes, but that the two may not follow the same time-table.

Other media reports sourced to US trade officials and observers in Washington, indicate that the USTR will take a few days to compile the "hit list" of 5-10 billion dollars worth of imports from Japan (from out of which ultimately a 2-5 billion imports would be hit), that the proposed list (on which the US public and interests would have 30 days to comment before the administration can act) may not even be made public until the mid-June Halifax meeting of the Group of Seven.

Some media reports also suggest that the administration's hands was forced by the Congress (as if that absolves the US of its obligations) and that it was felt that by approaching the WTO itself, the US has tried to blunt the unilateralism and uphold the multilateral system - a process of convoluted, confused and circular thinking.

In terms of the WTO processes, the US has to officially notify and seek consultations with Japan under Art. XXII and failing any outcome, invoke Art XXIII for a dispute settlement on the ground of nullification and impairment of its rights.

Contrary to some Washington press reports about the US invoking a little known provision of the GATT, every complaint by a member against another is a complaint about "nullification and impairment" which is the heading of that Article (and provides for invoking its provisions to have a panel set up and give a ruling and for its implementation) provides for it to be invoked: "If a contracting party should consider that any benefit accruing to it directly or indirectly under this Agreement is being nullified or impaired as a result of

(a) the failure of another contracting party to carry out its obligations under this Agreement, or

(b) the application by another contracting party of any measure, whether or not it conflicts with the provisions of this Agreement, or

The DSU is one of the Uruguay Round agreements (and Annex 2 to the WTO agreement), codifies and sets out several of the agreed procedures and understandings in this area developed during the 47-year history of GATT, but also incorporates some additional procedures that in effect create rights and obligations.

DSU's Art 1:1 makes clear that its rules and procedures apply to disputes brought pursuant to the consultation and dispute settlement provisions of the various WTO agreements, the WTO, and of the DSU "taken in isolation or in combination with any other covered Agreement".

Thus failure to carry out an obligation under an agreement (a cause of action) hereafter also includes failure to carry out the DSU provisions.

Under Art 3:1, WTO members "affirm their adherence" to the principles for the management of disputes so far applied under Articles XXII and XXIII of GATT 1947, and the rules and procedures elaborated and modified in the DSU. Art 3:2 says the WTO's dispute settlement system "is a central element in providing security and predictability" to the multilateral trading system and that it serves to preserve rights and obligations of Members under the agreements and to clarify existing provisions, but that recommendations and rulings of the DSB could not add to or diminish rights and obligations in the agreements.

All complaints, under any of the three grounds of 'nullification and impairment' have a common built-in procedure and time-table until the stage of recommendations a panel can make and its adoption.

The DSU requires (Art 4:3) a complainant to give notice and request consultation, with a requirement for a 10 day notice (within which the other party must agree to consult), a further 30-day period for "consultations in good faith". Failing these, the complainant can seek establishment of a panel. If consultations are held, but don't resolve the dispute within 60 days, the complainant can ask for a panel. The panel is automatically to be established at the meeting of the Dispute Settlement Body (DSB) which follows the one where the subject figures on the agenda. This time-schedule provides for the establishment within a maximum 90 day period after request for consultation notice is issued, and a further 20 days for settling terms of reference and nomination of panellists.

Thereafter, there is a 6-month period for panels to hear disputes and issue rulings, and for circulation of its report to the DSB members and its automatic adoption within 60 days of that, unless one of the parties prefers an appeal to the Appellate Body on issues of law. The Appellate Body has a 60-day time to give its ruling -- an overall period of about 10 months.

After adoption by the DSB, and a "reasonable time" given for implementation, the complaint can go before the DSB seeking implementation, compensation or failing all these authority to withdraw equivalent concessions from the other party (the socalled trade-retaliation right). Art 22 of the DSU leaves little doubt that the withdrawal of concessions can only be done after authorization.

In any dispute under XXIII:1 (a) and (b), the rulings are to be adopted automatically, unless it is decided otherwise by consensus. But in a dispute under XXIII:1. (c), the automaticity ends with the issue of reports and/or appellate body appeals. They can be adopted only by consensus.

And in the case of a complaint under XXIII:1 (a) (which is a complaint about violation of an obligation), the complainant has only to show the other party's rule or measure that is violative of the WTO and the agreement concerned. Nullification and impairment is assumed to be automatic, without any need to show actual trade damage (though the latter may be necessary to get sanction for the level of retaliation). The panels too have to recommend withdrawal or modification of the trade law or measure.

In Art XXIII:1 (b) complaints - involving no violation of the provision of GATT (or any other agreement as the case may be), but nevertheless a government ordained measure -- the complainant has to show how its trade rights and expectations have nevertheless been affected and thus the extent of it. The panel ruling, and the subsequent acceptance by the DSB cannot demand any change law or measure of the country against whom there is a complaint, but only 'compensation' for the damage being suffered.

Art XXIII:1 (c) is totally unchartered territory. There has never been a complaint under (c).

The negotiating history of Art XXIII:1 and its three sub-clauses (available in public records of the Havana Conference), shows that XXIII:1 (c) was put in at Havana (and became part of the GATT) at the instance of New Zealand whose delegation, when asked what it had in mind, suggested that if a country embarked deliberately on a recessionary or contractionary policy and this resulted in another trading partners exports being affected, it would be "any other situation" that could be invoked.

Given the "full employment" objectives that everyone accepted at that time at Havana no one found this "unreasonable" or cause for "objection".

That was more than three decades before the invention of the non-accelerating inflationary rate of unemployment concept by the OECD and deliberately-created recessions and unemployment became an instrument of State policy and no one has challenged it on grounds of trade interests being affected. But if a precedent is now established (by the US invoking it against Japan on any ground), it could perhaps help to prize open a chink in the neo-liberal order and save the trade order before it collapses under neo-liberalism.

Given the history of XXIII: 1 (c), when the Uruguay Round and its DSU was negotiated (and made an automatic process at the instance of the US to begin with), everyone agreed that disputes under this subclause should not become part of the automatic process, and prior-consensus should be needed for a ruling to be accepted.

The DSU hence requires not only that recommendations and rulings on complaints under the first two sub-sections have different results (in terms of change of law and measure or merely payment of compensation for a measure not violating the GATT law), but that, given the lack of automaticity in adoption of rulings under the third sub-clause, the rulings, arguments and recommendations under sub-clause (c) should be separated by the panels from those of the first two -- even if all of them are heard together -- before circulation to the DSB.

Despite the vast outpourings out of Washington and elsewhere on this particular US-Japan dispute, it is not very clear whether the US is complaining of any particular Japanese trade law provision or measure conflicting with the GATT provision -- under 1 (a) -- or a measure not against the GATT, but affecting US rights and expectations -- or is a case of "any other situation".

Some references by the US to the Japanese government's toleration of restrictive business practices of its auto-trade and manufacturers (in purchases of parts etc) would suggest that it would have to be a XXIII:1 (c) complaint, since at present RBPs and actions against them are not an obligation.

The Japanese complaint against the US would be under XXX:1 (a), but it can be invoked only after an actual hit list is announced -- though there is now a minority of view that trade harassment and threat of sanctions, to the extent they affect trade, could be covered by the sub-clause (b).

Kantor's has said the US complaint and Japan's could and would be clubbed together (and from the US view hopefully, sufficiently confuse the public, if not the panellists).

Welcome to the rule-based system and its trade security!