World Trade Law Final Draft Analysis of the Unforeseen Developments

Introduction

One of the initial philosophies of the international trading system under the World Trade Organization has been that, member countries are bound by their settled concessions for imports, unless these concessions are modified according to the existing rules. The essentiality of this principle for the stabilization of the international trading system as well as for further endorsement of trade cannot be exaggerated. It may, therefore, appear to pose an enthralling irony that the same agreement that seeks to promote international trade allows WTO members to backpedal and place restrictions on imports in the form of safeguard measures in the case of an increase in such imports.

The justifications for safeguard measures that WTO members have come up with from time to time have attracted controversy. These measures are at their core meant to be instruments for use in times of emergency, and have been identified as such in the General Agreement on Tariffs and Trade (GATT) 1947. Safeguards are temporary in nature, explicitly designed to slow imports in order to enable a particular domestic industry to adjust to heightened competition from foreign suppliers [1] . The term “safeguards” is generally used to denote government actions in response to imports that are deemed to harm the importing country’s economy or domestic competing industries. These mechanisms often assume import-restraining forms, whether they are increased tariffs, quantitative restrictions, or other measures [2] .

Article XIX of the GATT and the Agreement on Safeguards (AS) authorize members to impose import restrictions, in the form of either tariffs or quotas, to prevent or remedy serious injury to domestic industry when such injury is caused by an increase in imports. [3] 4 Safeguard measures, unlike other measures such as those relating to antidumping, have to be imposed on the basis of the most-favoured nation (MFN) principle [4] .

Considering this sort of background, we must talk about two separate reasons suggested by Hoekman and Kostecki for including safeguard measures in the GATT/WTO system, viz. as insurance and as a safety valve. The insurance motive reflects that without such provisions, governments may be reluctant to sign trade agreements leading to substantial liberalization. The inclusion of an escape clause in said agreements may thus facilitate liberalization of trade by encouraging negotiators to be bolder while making their offers of concessions. The safety valve motive, on the other hand, portends that governments may at a subsequent point in time feel pressure to renege on certain negotiated liberalization commitments. By legalizing some backsliding under carefully specified circumstances, an escape clause can thus be instrumental in protecting the integrity of the remainder of the agreement and therefore improve the overall durability of a liberal trade administration. [5]

In view of the fact that the inceptions of the AS, the number of safeguard measures adopted by member countries has seen a rather steep rise. Aforementioned to the AS, countries mainly used measures other than safeguards to accord protection that would have been otherwise inconsistent with the GATT. The use of tariff renegotiations was also another prominent way of protecting domestic industries prior to 1995. Therefore, Article XIX protection in the pre-1995 era tended to affect only a negligible amount of world trade in relatively minor product categories. While Trebilcock and Howse have identified that most safeguard measures are imposed by the developed countries, which are able to flex their muscles in the global trading arena,9 the latest reports from the WTO Safeguards Committee suggest changes in the scenario, with developing countries being at the helm of the majority of safeguard initiations. [6] 10 In fact, India has become a leading user of safeguard initiations, with 15 to its credit already as of mid-2008. [7] 11 There is no dearth of explanations that can be put forward to account for this shift. It is possible that the industries of developed countries, facing the fiercest of competition, have either become more efficient or simply disappeared and therefore no longer require safeguards. Another explanation, which is tinged with a deeper political hue, is that consumers in developed countries, who are negatively affected by safeguards, have become better organized at opposing safeguard requests from domestic industry. As regards the rise in the use of safeguards by developing countries, one idea is that these countries and their domestic industries have reached the desired level of technical proficiency so as to enable them to wield the tools of the WTO for imposition of safeguards. Since the number of developing nations easily exceeds that of the developed ones, therefore, all other factors being equal, it is expected that there would more safeguards imposed by developing countries than those imposed by the developed ones. [8]

Conversely, regardless of this amplification in the use of safeguard measures, what is thought provoking is that, to date, every single safeguard measure challenged before the WTO Appellate Body has been struck down for failing to meet the necessary requirements. A host of reasons have been put forward as possible explanations. While some argue that the AS itself is a flawed document, with very complex concepts that need review, others feel that it is not the AS but rather the Appellate Body’s interpretation of the AS that has rendered validation of a safeguard measure virtually impossible. Yet others are of the view that countries are applying safeguard measures irresponsibly and as a means of protectionism, which is why such measures cannot hope to achieve sustainability. Provided one assumes that the Appellate Body’s aversion to safeguard measures is not entirely the fault of the applying state, there appears to be considerable cause for worry, more so because if the present framework renders it technically impossible for a country to impose safeguards, then the very purpose of allowing an “escape clause” stands defeated. [9]

CHAPTER ONE:

Unforeseen Developments: Article XIX and the Agreement on Safeguards

“Unforeseen developments” clause connotes those state of affairs in which unforeseen developments and the effect of GATT obligations result in increased quantities of imports, thereby either causing or threatening to cause serious injury and Article XIX of GATT addresses the exact type of circumstances. One cannot deny that this requirement was quite comprehensible in the early days of the GATT; compromises up till now unknown had been made in 1947 and there was an obvious possibility that such concession might result in an unexpected import surge. Article XIX was designed to address those unforeseen and at times politically awkward consequences of the original GATT bargain.

On the flipside, the thoughtful of the requirements of Article XIX attracts confrontations. For example, if one takes the example of an import rush decades after GATT had entered into force, could any such surge have been foreseen given the passage of so much time? With ongoing GATT negotiations and initiation of a new negotiating round every decade or so, does each round retune the clock on what is foreseen? The term “unforeseen developments” can thus no longer brag of a straightforward interpretation in an agreement that has lasted for decades rather than a few years and has been characterized by ever-changing commitments. [10] The requirement that a GATT member using safeguard measures has to demonstrate unforeseen developments as well as the effect of GATT obligations used to be taken seriously in the early days of the GATT. Both these issues have been discussed in substantial detail in the Hatters’ Fur case [11] , which is a leading precedent on safeguards in the early days of the GATT. However, over the course of time GATT practice evolved to the point that members no longer paid much notice to textual requirements. In this context, one can refer to the example put forward by Sykes of the U.S. statute authorizing safeguard measures under domestic law, making no mention whatsoever of these issues, and the United States International Trade Commission (USITC), which administers the law, ignoring the same in the course of its safeguard investigations. There has been a notable dearth of GATT members ever bringing a complaint in this regard.

By the time the Uruguay Round of negotiations had taken place, the unforeseen developments clause requirement posited by Article XIX had become little more than dead letters in GATT practice, which is evident from its conspicuous absence from the WTO Agreement on Safeguards. The text corresponding to Article XIX (1)(a) in the AS is Article 2.1, which simply states, A Member may apply a safeguard measure to a product only if that Member determined, pursuant to provisions set out below, that such product is being imported into its territory in such increased quantities, absolute or relative to domestic production, and under such conditions as to cause or threaten to cause serious injury to the domestic industry that produces like or directly competitive products.

Consequently, although Article 2.1 of the AS repeats all other circumstances of Article XIX, it makes no mention of the first part of paragraph 1 of Article XIX, that is, the unforeseen developments clause and the “effect of obligations incurred” requirement. Such omission from the otherwise parallel text hints that the Uruguay Round negotiators were content with them remaining little more than dead letters. However, the AS does not supplant Article XIX. On the contrary, at the conclusion of the Uruguay Round, GATT members withdrew from the old GATT treaty and the old GATT provisions were incorporated into Annex 1A of the WTO Agreement as “GATT 1994″. This incorporation signifies that the rules of the GATT comprise part of the WTO disciplines to the extent that there is no conflict with the new rules agreed in the Uruguay Round. [12]

Given such a scenario, the problem pertaining to the unforeseen developments clause appears to be two-fold. First, Article XIX of GATT 1994 requires that in order to adopt a safeguard measure, the competent national authority must demonstrate that an increase in imports has taken place due to unforeseen developments. In contrast, Article 2.1 of the AS makes no mention of unforeseen developments. If unforeseen developments create a condition for imposing a safeguard remedy, the two provisions are apparently in conflict. Second, no guidance has been provided as to what exactly constitutes an unforeseen development. This clause is not further elaborated or illustrated by examples either in Article XIX of GATT 1994 or in the AS. Its broad language is presumably meant to cover a wide range of unexpected circumstances, which by definition are difficult to anticipate precisely.

Chapter Two:

The Significance of Unforeseen Developments: It’s Analysis

Up to now, modest direction has been given as to what precisely constitutes an unforeseen development. So far, the only case where the unforeseen developments requirement was held to have been satisfied is the U.S. – Hatters’ Fur case, which alarmed a measure taken by the United States against imports of women’s fur felt hats and hat bodies, challenged by Czechoslovakia.

Unforeseen Developments: An Analysis of The Hatters’ Fur Case

In October 1950, on the eve of the fifth session of the GATT in Torquay, England, the United States announced that it would be taking action pursuant to Article XIX of the GATT to protect domestic producers of women’s fur felt hats and bodies. The United States argued that, due to significant tariff reductions granted on these products by the United States in Geneva (1947), there had been a substantial increase in imports, which had caused injury to domestic producers. As a result, it chose to withdraw the tariff concessions made in Geneva and restore the level of protection previously available to domestic producers of the products in question. In effect, this resulted in imports being subjected to an import duty at an ad valorem rate between 67.80 percent and 73.65 percent instead of between 25.3 percent and 41.8 percent.34 Pursuant to its obligations under Article XIX, the United States entered into consultations with several contracting parties who were affected by this course of action and managed to reach an agreement with each of these, with the sole exception of Czechoslovakia. At the Torquay meeting the Czechoslovakian delegation lodged a protest against the U.S. action, claiming that certain conditions of Article XIX had not been complied with. The complaint was referred to a specially appointed working party that deliberated on the matter and presented its report on March 27, 1951. In its argument, the United Sates had claimed that the change in hats’ fashion that had led to the increase in import of felt hats and hat bodies was “‘unforeseen”, particularly in view of its magnitude. The working party found for the United States.

They concluded that “the fact that hat styles had changed did not constitute an ‘unforeseen development’ within the meaning of Article XIX.”35 However, they also concluded that “the effects of the circumstances indicated in the above, and particularly the degree to which the change in fashion affected the competitive situation, could not reasonably be expected to have been foreseen by the United States authorities in 1947.” [13]

In an attempt to resolve the matter of the nature of such developments, it was also observed by the working party that the term “unforeseen development” should be interpreted to mean developments occurring after the negotiation of the relevant tariff concession which it would not be reasonable to expect that the negotiators of the country making the concession could and should have foreseen at the time when the concession was negotiated. [14]

It has since been oft-argued that the aforesaid definition of “unforeseen development”, as mentioned in this case, is a mixture of subjective and objective factors. The term “reasonable” suggests that an objectively reasonable person could not have expected the negotiators of the country concerned to foresee the development at the time the negotiation had taken place. However, the fact that the phrase “negotiators of the country making the concession” has been spelled out suggests this objectively reasonable person must put him or herself in the position of the negotiators of the country concerned and see matters from their unique perspective. [15]

Chapter Three:

The Manifestation of Unforeseen Developments

It become evident that the decisions in the Argentina – Footwear and Korea – Dairy Products cases demonstrated that the AS “clarified and reinforced” Article XIX of GATT, these decisions, significantly, did not examine when, where, or how the manifestation of unforeseen developments should occur. In fact, in the U.S. – Wheat Gluten case, in the interest of judicial economy the panel saw no need at all to deal with the unforeseen developments clause. [16]

United States new line of action came in the U.S.-Lamb Meat case in which they worked out a new spat against the prerequisite that there ought to be a showing of unforeseen developments under Article XIX in order to apply safeguard measures. The United States argued that it was redundant for the competent authority to reach a specific conclusion finding unforeseen developments; as long as the said authority has developed a factual basis demonstrating unforeseen developments, as was the situation in that particular case, the conclusion does not have to be presented in the report. The author, in this respect, would like to point out that the obvious rationale for such an approach seems to be as follows: at the time of the determination, the respective panels and Appellate Body in the Argentina – Footwear and Korea – Dairy Products cases had not reintroduced the unforeseen developments pre-condition for safeguards measures, which had been dormant for at least three decades. [17] The United States, relying on the 1951 Hatters’ Fur GATT panel verdict, suggested that specific developments in the marketplace leading to an injurious import surge will not normally be “foreseen” by negotiators at the time of making tariff concessions. Once the competent authority has provided a factual basis for a finding of unforeseen developments, the complaining parties have the burden of proving that the factual basis is insufficient, and here they had failed to do so.

In the U.S. – Lamb Meat case, the Appellate Body lectured the issue of “when” and “where” the demonstration of unforeseen developments should occur, but once again avoided deciding the matter of “how”. As to the aforesaid questions of “when” and “where”, since a determination of whether a development is unforeseen or not is a prerequisite for the imposition of safeguard measures, it logically follows that the demonstration has to be made before such measures are applied, that is, in the competent authority’s report. In the case under consideration, however, the same did not occur, since the United States International Trade Commission (USITC) did not consider the matter of unforeseen developments at all. The Appellate Body noted that the USITC report in the U.S. – Lamb Meat case was completed seven months before the Appellate Body reports in the two aforementioned cases, viz. the Argentina – Footwear case and the Korea – Dairy Products case, had been circulated, which could also explain why the USITC’s report omitted to address the issue of unforeseen developments. Regardless, these considerations can scarcely be regarded as a valid excuse. The Appellate Body clarified that the published report of the competent authority, in this case the USITC, must contain a finding or reasoned conclusion on unforeseen developments. This finding having been made, the Appellate Body again deftly sidestepped the substantive issue as to what was required for a showing of unforeseen developments. Accordingly, it remains indistinguishable from the Appellate Body decisions as to what exactly constitutes an “unforeseen development”. Even in later cases like U.S. – Steel Products, the Appellate Body failed to clarify the meaning of this clause, instead repeating the position that the United States must make obvious that unforeseen developments were the cause behind the increase in imports, as well as the ensuing wound.

Chapter Four:

Evils of Unforeseen Development Clause

Amongst the several complications associated with the discipline on safeguards, perhaps the most problematic aspect is the addition of a legal requirement that is not explicitly mentioned in the Agreement on Safeguards. First, as Lee argues, the unforeseen developments clause is too ambiguous to be considered as an objective legal requirement. In the Hatters’ Fur case, the working party report stated that the term “unforeseen developments” should be interpreted to mean developments occurring after the negotiation of the relevant tariff concession and which it would not be reasonable to expect the negotiators of the country making the concession to have foreseen at the time when the concession was negotiated. According to this interpretation, the “foreseeability” of those developments should act as the requisite standard to determine the existence of “unforeseen developments”. Again, to understand the foreseeability, one has to determine the point in time at which the relevant tariff concession was negotiated. At the time of the Hatters’ Fur case, it was easy to determine the same, as there had been only one negotiating round in 1947. However, many of the tariff concessions now in place within the WTO were negotiated under the GATT and are decades old. [18] Many were also modified over a series of GATT negotiating rounds. In such instances, a void continues to exist as to the criteria necessary to determine the relevant point in time for assessing expectations.

Second, negotiations on tariff reductions broadly take place in accordance with either of the following two approaches: product-by-product negotiation based on requests and offers among countries, and reduction based on some general formula or principle for an across-the-board tariff cut, also commonly known as the formula approach. [19] In the first GATT rounds, tariffs were cut on a selective, product-byproduct basis through requests and offers made between participants. However, subsequent contracting parties decided to use formulas to cut tariffs across the board. In the Ministerial Declaration in Hong Kong, the members decided to adopt the Swiss formula for further tariff reduction. Given such circumstances, it is difficult to assume that a country’s commitment to tariff reductions reflects a considered opinion on its part that the trade scenario with regard to any particular product among hundreds would remain the same or undergo modifications. Therefore, it will certainly be oversimplification to make a presumption that a negotiator is always minutely analyzing world production and trade trends and only then bargaining and making a commitment according to the classical comparative advantage model. In the nerve-wracking bargaining process involved, there is little scope and independence for a country to analyze the trade trend of each of its products. Therefore, to say that “unforeseen developments” means unexpected developments after the tariff concessions are granted, renders the entire procedure of proof to the realm of the hypothetical, without any relation to the realities of the bargaining process under the WTO.

Third, the addition of such a requirement does not appear to be at all consistent with the intent of the negotiators in the Uruguay Round. In fact, a perusal of the negotiating history reveals that the draft version of the AS did contain the unforeseen developments clause. By mid-1990, however, the clause was omitted from the draft, while other conditions of Article XIX were repeated almost verbatim. Therefore, it is only reasonable to conclude that this omission was intentional. Moreover, the preamble to the AS also indicates the intent of the Uruguay Round negotiators to this effect, while recognizing the AS to be a comprehensive agreement. Finally, the requirement of unforeseen developments does not seem to serve much of a useful purpose. It is highly unlikely that any member would have granted import concessions had they foresee any developments that would lead to serious injury or threat thereof to their domestic industry.

Epilogue

University circles in general seem to have the same opinion that resurgence of the unforeseen developments clause was a mistake from a purely legal point of view. The clause is too vague to endure inspection and it creates a considerable stumbling block for WTO members who desire to use safeguard measures. Additional, the clause has also lost meaning since its inception, considering the changes in the nature of negotiations and tariff reductions. The put into practice of product-byproduct negotiation is becoming obsolete in the context of the WTO. Hence, it is difficult for any country to prove why exactly it could not foresee during the negotiations a particular development that led to an increase in imports. The national laws of most regimes, for example the United States and even India do not have this requirement. The draft version of the AS did contain the unforeseen developments clause. However, by the mid-nineties this clause was omitted while the other conditions of Article XIX were repeated almost verbatim, as has been stated above. It ought to be mentioned here that both the EC and the United States had rejected this clause as being too difficult or restrictive for effective application. Even after the implementation of the AS, the demonstration of unforeseen developments has been omitted in the vast majority of safeguard applications since, thereby leading one to the suggestion that many members have not perceived the demonstration of unforeseen developments to be a legal requirement for the application of a safeguard measure. Therefore, it may be concluded that revival of the unforeseen developments clause by the Appellate Body was a legal mistake, and it should thus be removed from the discipline on safeguards. Yet, seeing as the Appellate Body decisions linger unbothered and applicable to future safeguard cases, members remain duty-bound to demonstrate the existence of unforeseen developments. Another probable solution is that the text of the AS could be amended to define “unforeseen developments”, or at least to outline the parameters of the term. Several scholarly opinions have been voiced regarding the feasibility of this solution. Sykes suggests tat an event that is beyond the reasonable expectations of trade negotiators during the prior negotiating round could be an unforeseen development. Horn and Mavroidis, on the other hand, suggest that to qualify as an unforeseen development the event in question must be outside the control of the importing nation. Though these definitions/qualifications leave room for subjectivity, as long as the Appellate Body insists on unforeseen developments, defining this clause could be a possible way out. In conclusion, it may be said that the concept of the escape clause was always intended to be flexible, so as to allow for a case-by-case analysis. However, if safeguards are to be a workable remedy at all, the author sincerely believes that some guidelines urgently need to be laid down with respect to the prerequisite of unforeseen developments.