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The US Ad Valorem tariffs on steel and aluminium are in fact safeguard measures?

A Section 232 investigation led to the decision to impose duties/tariffs on steel and aluminium. The goal of these investigations, which are carried out under the authority of the Trade Expansion Act of 1962, is to establish the impact of imports on national security.[1] Investigations may be launched in response to applications from interested parties, requests from any department or agency, or the Secretary of Commerce's own initiative.[2] The President can decide whether to exercise his legislative authority to adjust imports based on the findings of the investigation.

The quantity of the commodity in question, as well as other conditions surrounding its import, must be examined when determining the influence on national security.
The following should also be taken into account:
  1. Domestic production needed for the projected national defense requirements;
  2. The capacity of domestic industries to meet projected national defense requirements;
  3. The existing and anticipated availabilities of human resources, products, raw materials, production equipment and facilities, and other supplies and services essential to the national defense;
  4. The growth requirements of domestic industries to meet national defense requirements and the supplies and services including the investment, exploration and development necessary to assure such growth; and
  5. Any other relevant factors.[3]

In addition, the Department will assess the following factors in relation to the quantity, availability, character, and uses of the imported object under investigation:
  1. The impact of foreign competition on the economic welfare of any domestic industry essential to our national security;
  2. The displacement of any domestic products causing substantial unemployment, decrease in the revenues of government, loss of investment or specialized skills and productive capacity, or other serious effects; and
  3. Any other relevant factors that are causing or will cause a weakening of our national economy.[4]

During the investigation, a determination of the quantity of imports, as well as other situations and elements such as the influence of foreign competition, unemployment, revenue decreases, and factors that cause the national economy to deteriorate, is made. Although the law was passed in 1962, the justifications for the changes listed above are similar to those found in contemporary Regional Trade Agreements (RTAs) when it comes to applying regional safeguard measures.[5]

The President has the option of taking "such measures as considered necessary to alter the article's imports such that such imports do not harm national security" or taking no further action.[6] In January 2018, the President decided to modify steel imports by imposing a 25% Ad valorem duty on steel items imported from all countries except Canada and Mexico, based on the conclusions of the investigation.[7]

Aluminum articles imported from all nations except Canada and Mexico were subjected to a 10% ad valorem levy.[8] However, the exemptions were later amended, and some of the countries that were previously exempt from tariffs are now subject to an absolute limit.[9]

The Department of Defense (DoD) believes "that the systematic deployment of unfair trade practises to purposely degrade our innovation and manufacturing industrial base constitutes a risk to our national security," according to a communication to the Department of Commerce. However, because the US military's requirements for steel and aluminium account for just around 3% of total US output, the Department of Defense does not feel that imports have an impact on DoD programmes' capacity to obtain steel and aluminium to meet national defence requirements.

Rather of targeting critical partners, they propose focusing on rectifying Chinese overproduction and combating their attempts to bypass existing antidumping levies. Since the Department of Commerce came to this decision, it's quite interesting. This conclusion is very interesting since the Department of Commerce concluded that protectionism is needed to protect national security.

This is however a two-edged sword, since availability of the products at issue is essential for national security while the US argues the "threat of further closures of domestic steel production facilities and the "shrinking [of our] ability to meet national security production requirements in a national emergency"." Thus, the US wants to rely on their own ability rather than imports. Also, the US is the world's largest steel importer.[10]

"The United States did not take action pursuant to Section 201 of the Trade Act of 1974, which is the provision under which the United States imposes safeguard measures," the US answered to China's request for consultation. [11]As stated in the wording of Article XXI of the GATT 1994, every "Member of the WTO has the ability to determine for itself those matters that it thinks relevant to the protection of its essential security interests."

If any, Article XXI b(ii) could be applicable in the case, however there is no guidance nor case law on whether the Article is applicable in this case. Nevertheless, even though the United States argues that they have not applied safeguard measures, it could still be the case.

Security Exceptions
Nothing in this Agreement shall be construed

(b) to prevent any contracting party from taking any action which it considers necessary for the protection of its essential security interests

(ii) relating to the traffic in arms, ammunition and implements of war and to such traffic in other goods and materials as is carried on directly or indirectly for the purpose of supplying a military establishment;

Apart from an investigation into oil in 1975, oil in 1979 that resulted in the termination of imports of oil from Iran, crude oil from Libya in 1982 that resulted in an embargo, and metal-cutting and metal-forming machine tools that resulted in voluntary restraint agreements in 1986, all other investigations under Section 232 have either shown that no threat to national security exists or that no actions are necessary.

Surprisingly, voluntary restraint agreements arose from a lack of provisions in GATT Article XIX, which generated problems with safeguard measure discipline. Among the issues were sloppy agreements that took precedence over safeguards. In most cases, such agreements were bilateral, and exporters were required to "voluntarily" agree on quantitative export restrictions. These pacts were dubbed "voluntary export agreements restraints", "voluntary restraint agreements" and "orderly marketing arrangements" and they became known as "grey area measures".[12]

Grey area measures were the alternative to safeguard measures and since they were often more beneficial in an economic sense, many exporting nations agreed to the restrictions they imposed.[13] In a sense, these grey area measures allowed the imposition of selective safeguard measures. At the same time, they circumvented the right to compensation for affected countries contained in the rules on safeguards.

As Nicolaides explains, these grey area measures were attractive to politicians since they were invisible to voters, legislators and judicial review. This was considered a problem for international trade that needed to be resolved. The problems of grey area measures contributed to the Uruguay Round negotiations on safeguards and resulted in a prohibition.[14]

Safeguard m easures or Ad valorem tariffs on steel and Aluminium?
India has, joined by China, Hong Kong, Thailand, Russia, and the EU, complained to the WTO about the US duties and stated that the measures at issue, operating independently and/or together, appear to be inconsistent with the United States' obligations under:
  • Articles XIX:1(a), XIX:2 of the GATT 1994 and Articles 2.1, 2.2, 3.1, 4.1, 4.2, 5.1, 7, 9.1, 11.1(a), 12.1, 12.2 and 12.3 of the Agreement on Safeguards because the measures at issue are, in effect and in substance, safeguard measures and the United States has adopted and implemented the measures at issue inconsistently with its obligations, both substantive and procedural, as set out under the said provisions of the GATT 1994 and the Agreement on Safeguards.
     
  • Article 11.1(b) of the Agreement on safeguards and Article XI:1 of the GATT 1994 to the extent that the United States seeks, through the adoption of the measures at issue, any voluntary export restraints, orderly marketing arrangements or any other similar measures on the export or the import side.
     
  • Article II:1(a) and (b) of the GATT 1994, because the United States has imposed import duties on certain steel and aluminium products in excess of the duties set forth and provided in Part -I of the United States' Schedule of Concessions and Commitments annexed to the GATT 1994.
     
  • Article I:1 of the GATT 1994, because the measures at issue do not apply uniformly to all imports of certain steel and aluminium products into the United States irrespective of their origin and thereby the measures at issue discriminate against imports of the said steel and aluminium products originating from India, with respect to the advantage, favour, privilege or immunity extended by the United States to certain selected WTO Members.
     
  • Article XI:1 of the GATT 1994, because the measures implicitly introduce restrictions in the form of quotas, as the said measures reduce the imports of steel and aluminium products from the trade levels as existed prior to these measures.

Object and purpose of the m ultilateral safeguards
Article XIX of the GATT authorises WTO members to implement emergency safeguard measures against the importation of specific products and defines the conditions that must be met. In a second WTO accord, the Agreement on Safeguards, the disciplines and norms of Article XIX have been defined and enlarged (SA).

Member countries are able to suspend their GATT obligations under the escape clause of GATT Article XIX if these commitments have harmed domestic industry.

GATT Article XIX:1(a) reads as follows:
"If, as a result of unforeseen developments and of the effect of the obligations incurred by a contracting party under this Agreement, including tariff concessions, any product is being imported into the territory of that contracting party in such increased quantities and under such conditions as to cause or threaten serious injury to domestic producers in that territory of like or directly competitive products, the contracting party shall befree, in respect of such product, and to the extent and for such time as may be necessary to prevent or remedy such injury, to suspend the obligation in whole or in part or to withdraw or modify the concession."

The interpretation of GATT Article XIX has been the subject of several reports from various panels and the Appellate Body.[15] The Appellate Body stated in Argentina - Footwear (EC) that the intent and purpose of this article is to allow a member to "temporarily change the balance in the level of concessions between that Member and other exporting Members" when faced with "unexpected" and consequently "unforeseen" situations.[16] The remedy is of an emergency nature, and it is to be used in cases where a Member is confronted with events that it could not have anticipated when it took on the responsibility under the GATT 1994.[17] As a result, it's possible to argue that the US tariffs were implemented owing to unforeseeable circumstances.

Furthermore, the Appellate Body found that the object and purpose of GATT Article XIX also confirmed its interpretation. The Appellate Body held that since safeguard measures are a fair-trade remedy, and thereby different from anti-dumping and countervailing duties, they must only be used on extraordinary occasions. Accordingly, the prerequisites for taking such actions, their extraordinary nature, must be taken into account.

This view was later confirmed in the dispute US - Line Pipe in which the Appellate Body recognised that there is a tension between the appropriate scope of the right to apply safeguard measures and the need to ensure that safeguard measures are not applied against fair trade beyond what is necessary to provide extraordinary and temporary relief, i.e., some kind of proportionality is required.[18]

This view was later confirmed in the dispute US - Line Pipe, in which the Appellate Body acknowledged a tension between the appropriate scope of the right to apply safeguard measures and the need to ensure that safeguard measures are not used against fair trade beyond what is necessary to provide extraordinary and temporary relief, i.e., proportionality is required.

US tariffs on steel and aluminium are in fact safeguard measures
In Dominican Republic - Safeguard Measures, the difference between an ordinary customs duty and an extraordinary customs duty was examined. The Dominican Republic maintained that the WTO DSB lacked jurisdiction in this matter since the measure at issue was not higher than the binding stipulated in its schedule of concessions, even if it was more than the tariffs set forth in the regional free trade agreement. The panel, on the other hand, did not believe it was necessary to rule on the lack of jurisdiction request.[19]

The Dominican Republic contended that the duty was not an additional or alternative tariff, but rather an increase in the MFN tariff. Due to its intent and purpose, namely, to allow a member to temporarily rebalance the level of its concessions when faced with specific unforeseen circumstances, the tariff or measure at issue could not be implemented under Article XIX. Rather, a member can set its tariffs as low as it wants, up to the bound rate.

This is not atypical behaviour, according to the panel. The panel also recognised that certain deviations from the MFN concept are specifically authorised by the Agreement on Safeguards, particularly under Article 9. Even so, the panel did not believe there would be a conflict between Article XIX and the Agreement on Safeguards, as the Dominican Republic claimed, if Article GATT XIX:1(a) is construed to include the potential of stopping trade.

"The logical relationship between tariff concessions and increased imports causing significant injury is shown once there is proof that the importing Member has tariff concessions for the relevant goods," the Panel said in US - Steel Safeguards. 51 The Panel in Dominican Republic - Safeguard Measures emphasised the importance of a reasoned and acceptable explanation for the identification of the importing Member's obligation:

"It is not clear from this passage that the competent authority considered the tariff concession with respect to the products in question to be the obligation of the Dominican Republic under the GATT 1994 that caused the alleged increase in the imports in question. This passage does not contain any finding in this respect.

Consequently, and in the absence of any indication in the resolutions of the Commission, or in any other relevant document, it is not possible to conclude that the report of the competent authority contains a reasoned and adequate explanation of how the Dominican Republic incurred obligations under the GATT with respect to tubular fabric and polypropylene bags, within the meaning of Article XIX:1(a) of the GATT 1994."[20]

The Dominican Republic further claimed that the 38 percent Ad valorem tariff did not suspend commitments under Article II:1(b) of the GATT 1994 because it did not exceed WTO bound. Simply expressed, Article II:1(b) bans the imposition of ordinary customs duties in excess of the obligation, as well as the imposition of any other duties or charges. To assess whether this suspension of obligations under Article II.1(b) was the case, the panel looked to the Appellate Body Report on the Chile - Price Band System.

It must also be shown that the importing Member is subject to the necessary GATT requirements, including the ability to provide tariff concessions. The Dominican Republic - Safeguard Measures discussed this necessity. The panel looked at the Appellate Body's report on Argentina - Footwear, which stated that "safeguard mechanisms, such as those in Article II and Article XI of the GATT 1994, result in the temporary suspension of concessions or removal of commitments."

In the case at hand, the Dominican Republic had not imposed tariffs that were greater than those stipulated in the concession schedule. However, it did I implement a measure aimed at resolving a serious injury situation caused by an increase in imports; and (ii) implement a measure aimed at resolving a serious injury situation caused by an increase in imports procedure used was based on Article XIX and the Agreement on Safeguards; and (iii) notify the measure taken as a safeguard measure to the WTO Committee on Safeguards. The panel examined the context, object and purpose of the relevant agreements and concluded that the challenged measures were applicable under GATT Article XIX and the Agreement on Safeguards. The fact that the measures did not suspend any obligation under the Agreement or withdrew or modified concessions was considered of no practical relevance for resolving the dispute at issue.[21]

The Trade Expansion Act came in a time where grey area measures were allowed, and so far, no cases on Section 232 have ruled that it is inconsistent with WTO law but it is highly likely that the steel and aluminium tariffs will change that. The tariffs are also argued to resemble voluntary export restraints, orderly marketing arrangements, or any other similar measures on the export or the import side through the measures at issue. Thus, it can also be argued that the US tries to bring back the grey area measures. Clearly, the aim to restore multilateral control over safeguards and eliminate all measures that are not included in the Agreement on Safeguards has not been upheld in this case.

Selective safeguard measures
The US ad valorem tariffs on steel and aluminium are in reality safeguard measures, and the final point covered in this article is whether nations can be excluded from safeguard measures and, ultimately, if safeguard measures are consistent with WTO law.

Safeguard measures are to be applied on a non-discriminatory basis even though the trade is fair as mentioned. The US tariffs target all states apart from Argentina, Australia, Brazil, and South Korea when it comes to steel, and Argentina and Australia when it comes to aluminium, 65 and as such thus violate Article I:1 of the GATT 1994 (Most Favoured Nation principle). It is in this case irrelevant that all exempted countries except Australia are subject to quotas.

Whether exclusion of countries is allowed according to the Agreement on Safeguards has not been ruled upon, but it is stated in Article 2.2 in the Agreement, that safeguard measures shall be applied to a product being imported irrespective of its source. There is however a footnote to Article 2.1 which give customs union the possibility to apply the measures on behalf of the whole customs union. In Argentina - Footwear the panel concluded on the basis of footnote 1 to Article 2.1 of the Agreement on Safeguards and Article XXIV:8 of the GATT 1994 that

"� in the case of a customs union the imposition of a safeguard measure only on third country sources of supply cannot be justified on the basis of a member-state-specific investigation that finds serious injury or threat thereof caused by imports from all sources of supply from within and outside a customs union".[22]

The findings of the panel were appealed and later reversed by the Appellate Body which found that footnote 1 to Article 2.1 was not applicable in this case. There is no mentioning of free trade agreements, thus indicating that only customs unions are allowed to apply safeguard measures based on the conditions existing in the customs union.

If a customs union applies a measure based on the conditions in the customs union it indicates that regional imports are excluded and thus the regional imports shall be excluded in the application of a safeguard measure in order to comply with the Agreement on Safeguards. This means that a free trade agreement cannot apply a safeguard measure on behalf of the free trade area and consequently cannot base the injury calculation on third party imports.

Only the individual members of the free trade area can apply safeguard measures and accordingly should apply the measure irrespective of its source since it ought to make the injury calculation on all sources of imports. Consequently, the US tariffs are in fact safeguard measures and as such violate at the least both Article I:1 and Article 2.1 and 2.2. in the Agreement on Safeguards.

End-Notes:
  1. 5 II Statute, Title 19 Customs Duties, Chapter 7 Trade Expansion Program Trade Agreements 19 U.S.C. � 1862
  2. III Regulations, Title 15, Commerce and Foreign Trade, Effect of imported articles on the National Security, 15 CFR 705.3.
  3. III Regulations, Title 15, Commerce and Foreign Trade, Effect of imported articles on the National Security, 15 CFR 705.4 (a).
  4. III Regulations, Title 15, Commerce and Foreign Trade, Effect of imported articles on the National Security, 15 CFR 705.4 (b).
  5. Section 232 Investigations, program guide, The Effect of imports on the National Security, Investigations conducted under the Trade Expansion Act of 1962, as amended June 2007. Bureau of Industry and Security Office of Technology evaluation. See also See for example Partnership Agreement between the Members of the African, Caribbean and pacific Group of States of the one part, and the European Community and its Member States, of the other part, (The Cotonou Agreement) ACP/CE/en55. Annex V. Article 8 and Article 25 (2) Economic Partnership Agreement between the CARIFORUM States, of the one part, and the European Community and its Member States, of the other part, (30.10.2008), Official Journal of the European Union, L 289/I/3.
  6. III Regulations, Title 15, Commerce and Foreign Trade, Effect of imported articles on the National Security, 15 CFR 705.11 (b)
  7. https://www.whitehouse.gov/presidential-actions/presidential-proclamation-adjusting-imports-steel-united-states/ visited on 14th June 2018.
  8. https://www.whitehouse.gov/presidential-actions/presidential-proclamation-adjusting-imports-aluminum-united-states/ visited on 14th June 2018.
  9. https://www.cbp.gov/trade/programs-administration/entry-summary/232-tariffs-aluminum-and-steel visited on 14th June 2018.
  10. https://www.trade.gov/steel/countries/pdfs/imports-us.pdf
  11. Communication from United States in United States - certain measures on steel and aluminium products request for consultations by China, WT/DS544/1, G/L/1222, G/SG/D50/1, 9 April 2018
  12. Sykes, Alan O., The WTO Agreement on safeguards, Oxford University press, (2006), pages 21-22.
  13. Sykes, Alan O., The WTO Agreement on safeguards, Oxford University press, (2006), page 23
  14. Ibid, page 245 and 249.
  15. See for example Appellate Body Report on Argentina - Safeguard Measures on Imports of Footwear, (Argentina - Footwear (EC)), WT/DS121/AB/R, (14 December 1999), and Appellate Body Report on Korea - Definitive Safeguard Measures on Imports of Certain Dairy Products, (Korea - Dairy), WT/DS98/AB/R, (14 December 1999), see also Supplement B.
  16. Appellate Body Report on Argentina - safeguard measures on imports of footwear (EC), (Argentina - Footwear (EC)), WT/DS121/AB/R, (14 December 1999), para. 87.
  17. Ibid, para. 93. See also Appellate Body Report on Korea - Definitive safeguard measure on imports of certain dairy products, (Korea � Dairy), WT/DS98/AB/R, (14 December 2009), para. 86
  18. Appellate Body Report on Argentina - Safeguard Measures on Imports of Footwear (EC), (Argentina - Footwear (EC)), WT/DS121/AB/R, (14 December 1999), para. 93. See also Appellate Body Report on Korea - Definitive Safeguard Measures on Imports of Certain Dairy Products, (Korea - Dairy), WT/DS98/AB/R, (14 December 1999), para. 86.
  19. Panel Report on Dominican Republic - Safeguard measures on imports of polypropylene bags and tubular fabric, (Dominican Republic - Bags), WT/DS415/R, WT/DS416/R, WT/DS417/R, WT/DS418/R, (31 January 2012), para. 8.1(b).
  20. 2 Panel Report on Dominican Republic - Safeguard measures on imports of polypropylene bags and tubular fabric, (Dominican Republic - Bags), WT/DS415/R, WT/DS416/R, WT/DS417/R, WT/DS418/R, (31 January 2012), para 7.
  21. Ibid, para. 7.90.
  22. Panel Report on Argentina - Safeguard Measures on Imports of Footwear (EC), (Argentina - Footwear (EC)), WT/DS121/R, (25 June 1999), para. 8.76

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