LEGALIZATION OF SYSTEM BENEFITS THIRD WORLD

9:25 AM Dec 8, 1995

LEGALIZATION OF SYSTEM BENEFITS THIRD WORLD
Geneva 7 Dec (Chakravarthi Raghavan) -- The Uruguay Round Contingency Protection Agreements (on safeguards, anti-dumping and subsidies countervailing measures) represent a significant step towards 'legalization' of the international trading system, replacing the "flexible" trade regime grounded in diplomacy which favours the powerful.

While the new regime is thus beneficial to developing countries and their exporting firms, by improving their trading opportunities through greater security of market access, their governments would need to be watchful and active at the World Trade Organization WTO) to defend interests of their exporting firms.

This view of experts came across at an UNCTAD sponsored seminar (4-5 December) on contingency protection agreements. The seminar, organized within the framework of UNCTAD's Ad Hoc Working Group on Trading Opportunities in the New International Trading Context, was chaired by Amb. Seung HO of Korea, Chairman of the Ad Hoc working group.

The experts noted that the WTO agreements in this area, embodying international trade rules, required significant changes in domestic laws and practices of WTO members. But not all the changes effected in some of the major markets, where these contingency safeguards are often used, were those required by the accord and in some cases are inconsistent with the WTO rules.

While exporting country governments have little scope in the processes in importing countries against the exporting firms and their products, and decisions in such proceedings would be based on the domestic law of the importing countries, Third World governments would need to be vigilant and take up such matters at the WTO and its Dispute Settlement Mechanism to ensure observance of WTO rules and procedural safeguards and requirements, several of the experts stressed.

Participants in the seminar included leading trade lawyers and experts from the United States, Europe, Canada, Korea, Colombia and Egypt.

In opening the seminar, Amb. Ho said that the tightening of multilateral rules governing resort to contingency protection measures, to prevent their abuse as a means for "trade harassment" was one of the main objectives of developing countries during the Uruguay Round. The rules would improve trading opportunities by providing considerably greater security of market access, and making the system more predictable and transparent in areas where absence of international consensus and workable rules had given rise to frequent trade tensions and disputes in the past.

But the trade opportunities resulting from the agreements are to be defended primarily in the context of the domestic legislation of the importing country. An intimate understanding of such legislation is therefore needed for developing countries and economies in transition to enable them to identify and derive benefits from the opportunities arising from the multilateral rules.

Ho noted that the seminar coincided with meetings of the WTO's Committees on Anti-Dumping and Subsidies and Countervailing Measures to review notifications of legislation in this area by WTO members. The WTO Committees would look at the domestic legislation of members from the perspective of compliance with the WTO agreements, while the UNCTAD exercise would be looking at them from the perspective of developing countries and transition economies.

The Deputy to the UNCTAD Secretary-General, Carlos Fortin, noted that the trading opportunities were defended within the framework of domestic legislation of the importing countries and this emphasized the role of private practitioners, as those participating in the seminar, in defending the interest of exporting countries.

Many of the instruments, dating from laws enacted at the turn of the century, Fortin said, might be based on concepts no longer relevant to a world of globalized production. An examination of such traditional trade policy concepts and mechanisms against the background of globalization and liberalization would seem an appropriate task for UNCTAD.

The US expert, David Palmeter, said the Uruguay Round (UR) agreements represent a significant step towards "legalization" of the international trading system and required significant changes in trade protection laws of virtually all WTO signatories.

While the GATT began in late 1940s with few rules and regulations and settling disputes primarily through negotiations by diplomats, since then rules and regulations had multiplied and disputes were increasingly settled by lawyers' briefs.

There was some uneasiness over this increasing legalization of the trading system. Apart from usual fears of turning everything over to lawyers, many trade diplomats were concerned that legalities will drive flexibility out of the system.

Palmeter added: "Perhaps it will, but it remains to be seen whether

this is undesirable: one person's flexibility is another person's unbridled discretion. The power to be flexible includes the power to twist, if not to ignore, the rules. A flexible trade regime grounded in diplomacy is a regime dominated by the powerful. A system of rules, therefore, may well be better for developing countries than a system of interests pursued by strength on a dispute-by-dispute basis."

Complaints of dumping against Korea over imports of Polyvinyl Alcohol were terminated in the US on the ground that the imports were significantly below the three percent de minimis level. This would not have been under the old Anti-Dumping code, he notes.

But not all changes in US law were those required by the WTO agreement. The provision in the US law relating to 'captive production', in Palmeter's view would be inconsistent with the WTO accord.

Production is determined to be "captive" when it is consumed by the producer in the manufacture of a downstream article -- e.g. when hot-rolled steel is used to make cold-rolled steel.

In the past the US International Trade Commission (ITC), which hears such complaints, in judging whether a domestic industry is injured by dumped imports, had always considered 'captive production' of the product under investigation to be part of the total production of domestic industry and that the US law required the ITC to consider the impact of dumped imports "in relation to US production of a like product". The ITC reasoned in cases before it, and this was upheld by US appeal courts, that it was required to define domestic industry "in terms of productions", not in terms of markets, distribution channels or similar factors.

But in the Uruguay Round Implementation Act, the US Congress has asked the ITC to focus "primarily" on the "merchant market" -- the market for non-captive merchandise, in analysing the market share and financial performance of the domestic industry.

As a result, in the polyvinyl alcohol case, the ITC found significant quantities of this produced by the domestic industry were consumed in PVB, an adhesive film used in production of automotive safety glass, and thus a captive production. It hence analyzed market share and financial performance of domestic industry by excluding this captive production in making an affirmative determination of injury to domestic producers.

Under another change, required by the WTO agreement, the US now would use a one-year period, instead of the previous six months, to see whether foreign market sales were made at below cost prices. The change, brought about by UR negotiators, at the instance of their exporters who viewed the six-month period as 'unreasonable short time', could result in fewer low-priced foreign sales to be disregarded and thus could result in lower-dumping margins. But exporters would pay a price in being forced now to provide elaborate data for a year and it remained to be seen whether the substantive benefits of the 12-month rule would be offset by the additional administrative burden imposed on market-economy country exporters, particularly those in developing countries with limited resources.

Another liberalising change in US practice, as a result of the UR is in price comparisons for determination of the margin of dumping. In the past US practice, it was able to calculate dumping margins on basis of sales in the US market below the average, but giving no credit for those above. Now the US has to use either the average-to-average or the transaction-to-transaction methodology called for by Art.2:4.2 of the Anti-dumping agreement.

The UR Subsidies Agreement allows some "green light" exemptions from the subsidy prohibitions. It allows regional subsidy programs as part of "a generally applicable regional development policy". In a case involving Italian pasta exports from South Italy, the Italian government claim that its subsidy was a non-actionable 'green light' was disallowed. The Italian law which merely designated as a beneficiary of its subsidisation programme South of Italy, a region well known for its high unemployment and lowest per capita income, was held to be not qualified for green light treatment. To qualify, the Italian law for regional subsidies must specify a rate of unemployment or per capita income level which would benefit any region for benefits even if the levels actually set would qualify only the South.

"This elevation of form over substance reflects US displeasure with the entire concept of non-countervailable subsidies and an intention to limit the category as much as possible."

Most trade relief proceedings, the US expert says, involve private parties and the role of the government is limited - except in countervailing duty (CVD) investigations involving both government and private parties. In CVD proceedings, the US administration sends a questionnaire to the governments, seeking information about the alleged subsidy programme, and to the private parties over the extent of their participation in the programme. In AD proceedings, questionnaire is sent only to the private parties, while in safeguards proceedings, no information is sought from the foreign party.

Thus the role of the government (of the exporter) is limited, but important in AD and CVD proceedings which are governed by more exacting WTO's procedural and substantive requirements (than Tokyo Round codes). Compliance with them could be difficult.

"Governments," the US expert advises, "should insure that their producers and exporters obtain the full benefit of the even more complex and demanding WTO agreements, and that the authorities of the importing member strictly adhere to all the requirements of the WTO".

Many WTO members imposing antidumping and countervailing duties are likely to fall short of their WTO obligations. In some instances it would be because of inexperience, carelessness or oversight. But in other cases it would be because the domestic law they have to follow is inconsistent with the WTO. This last might well be the case with US law's captive production provisions as well as others, such as distinction between investigations and reviews for purpose of price averaging and currency conversion, discrepancy in trade adjustments between foreign and US markets, "conditions of competition" injury analysis, "minimal cause" in injury analysis, and the grant of standing to labour unions to bring cases without industry support.

In such cases only the government of the country of exporter could bring it up to the WTO to safeguard the exporter's interests.

In other comments at the seminar, both J.F.Bellis a Brussels-based lawyer and Mr. L. Wang from China said that countries such as China had adopted the market system, this had not been taken into account by the major developed countries which continued to apply discriminatory measures aimed at "non-market economies".

Mr Maamoun Abedl-Fattah of Egypt noted that the rapid liberalization of markets by developing countries had increased pressures on their governments to use WTO consistent measures.

Mr Carlos Vargas of Colombia said that the Uruguay Round agreements required establishment in their countries of independent institutions, setting of objective criteria and due process in addressing these problems. Their ability to use would be hampered by their lack of resources and experience, often resulting in successful procedural challenges against them at the WTO.

Mr. Young-Gak Yun, a lawyer based in Seoul, said that while developing countries could bring their national legislation into conformity with the UR agreements, their ability to correctly utilize them would be hampered by lack of resources and experiences. This left them open to successful challenges on procedural grounds.