The Future Of Section 201: Safeguard Actions In International Trade Law In Light Of WTO Review

Thursday, June 1, 2006 - 01:00

Introduction

A "Section 201" action is one of the strongest fundamental trade remedy actions under U.S. law. This provision of the Trade Act of 1974 authorizes the U.S. International Trade Commission ("ITC") to examine whether a given import is causing or threatening to cause injur y to the domestic industry. If the ITC determines that it is, Section 201 provides the President with a range of remedies to restore fair competition to the marketplace. Recent decisions by the World Trade Organization ("WTO") have undermined the effectiveness of this significant trade remedy action, and have raised important questions concerning U.S. obligations under international law. As anti-dumping measures come under increasing attack, the availability of safeguard provisions to preserve competitive trade is becoming increasingly important. Trade remedy actions are of central interest in the negotiations of the Doha Round. The United States would be wise to use this opportunity to push its trading partners to re-examine, clarify, and come to a consensus regarding these safeguard actions.

Other nations have challenged several Section 201 actions before the WTO. To date, the result has been the same every time: the WTO has struck down every action that has been challenged. The WTO has consistently found that the ITC's positions regarding "unforeseen developments," and the causation standard under U.S. law, are contrary to the United States' international legal obligations, as are various special provisions in U.S. trade law that pertain to NAFTA countries. This article examines safeguard actions under both domestic and international law and analyzes the three major areas of conflict between the U.S. and the WTO with an eye toward the serious and long-reaching political ramifications of the current trends.

Overview Of Section 201

As early as 1934, the United States acknowledged that if it liberalized its trade policies, U.S. producers could be harmed by the resulting increase in imports. Legislators further recognized that some form of relief should be provided to the injured sectors of the economy. Although foreign exporters did not necessarily unfairly trade their wares, as trade expanded across the globe, domestic companies needed some flexibility to adjust to the new levels of imports. Accordingly, in the 1940s, the United States began to enter into trade agreements that included "escape clause" or "safeguard" mechanisms to provide this type of relief.

These escape clause mechanisms have become firmly rooted in U.S. law. In the wake of World War II, the United States signed on to the General Agreement on Tariffs and Trade ("GATT"), which provides:

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 that 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 be free, 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.

Pursuant to this provision, Congress included Section 201 in the Trade Act of 1974. Commonly known as the "escape clause," Section 201 mirrors GATT Article XIX and allows the President to take action to facilitate efforts by a seriously injured domestic industry to adjust to import competition.

The federal agency responsible for conducting Section 201 safeguard investigations is the ITC, which is an independent federal quasi-judicial agency. One of the responsibilities of the ITC is to determine whether "an article is being imported into the United States in such increased quantities as to be a substantial cause of serious injury, or the threat thereof, to the domestic industry producing an article like or directly competitive with the imported article." A substantial cause is defined as "a cause which is important and not less than any other cause." If the ITC makes an affirmative injury determination under Section 201, the investigation proceeds to a remedy phase, during which the ITC recommends specific actions to address the serious injury to the domestic industry.

Once the ITC issues its recommendations, the President has 60 days to "take all appropriate and feasible action to facilitate efforts by the domestic industry to make a positive adjustment to import competition and provide greater economic and social benefits than costs." The actions that the President may authorize include increasing or imposing duties, imposing a tariff-rate quota, modifying or imposing quantitative restrictions, implementing adjustment measures, withdrawing or modifying concessions provided to U.S. trading partners, and commencing negotiations with foreign governments to limit exports into the United States.

The Problems With Section 201 In Light Of WTO Review

As previously noted, the United States has lost every safeguard action challenged at the WTO. There have been three consistent bases for striking down U.S. actions, namely: (1) unforeseen developments; (2) the causation standard used by the ITC; and (3) under the doctrine of parallelism. Each of these issues are addressed below.

Unforeseen Developments

Under Article XIX(1)(a) of the GATT, in order to serve as the basis for a safeguard action, a flood of damaging imports must be "a result of unforeseen developments." Both the GATT 1947 and the GATT 1994 include this "unforeseen developments" requirement, but the Agreement on Safeguards, which entered into force at the same time as the GATT 1994 and was intended to clarify it, conspicuously omits any mention of unforeseen developments. This omission is particularly glaring in Article 2.1 of the Agreement on Safeguards, which otherwise closely reflects the language of Article XIX(1)(a) of the GATT. Indeed, many believed that the "unforeseen developments" requirement was consciously eliminated in the negotiations for the Agreement on Safeguards. The conflict between the GATT and the Agreement on Safeguards had thus created doubt as to whether a Member implementing a safeguard action under the Agreement on Safeguards was still required to demonstrate that the damaging imports were the result of unforeseen developments.

The Panel decisions in Korea - Dairy and Argentina - Footwear (EC) squarely addressed the omission of the unforeseen developments requirement from the Agreement on Safeguards. The Panel on Argentina - Footwear (EC) found that "the express omission of the criterion of unforeseen developments in the new agreement (which otherwise transposes, reflects and refines in great detail the essential conditions for the imposition of safeguard measures provided for in Article XIX of GATT) musthave meaning." The Panel concluded that a demonstration of unforeseen developments was not required, since "conformity with the explicit requirements and conditions embodied in the Agreement on Safeguards must be sufficient for the application of safeguard measures within the meaning of Article XIX of GATT." The Panel on Korea - Dairy reached a similar conclusion.

The Appellate Body in Korea - Dairy, however, disagreed, concluding instead that "any safeguard measure imposed after the entry into force of the WTO Agreement must comply with the provisions of both the Agreement on Safeguards and Article XIX of the GATT 1994," including the unforeseen developments requirement. In reaching its conclusion, the Appellate Body relied on Article 11.1(a) of the Agreement on Safeguards, which states that "[a] Member shall not take or seek any emergency action on imports of particular products as set forth in Article XIX of GATT 1994 unless such action conforms with the provisions of that Article applied in accordance with this Agreement." According to the Appellate Body, the ordinary meaning of this requirement is that "any safeguard action must conform with the provisions of Article XIX of the GATT 1994 as well as with the provisions of the Agreement on Safeguards ." Thus, a Member implementing a safeguard action under the Agreement on Safeguards must also satisfy the "unforeseen developments" requirement of GATT Article XIX.

The Non-Attribution Requirement of Injury Causation

To serve as a basis for a safeguard action, U.S. law requires the ITC to find that the increase in imports is a substantial cause of serious injury or threat thereof. Article 4.2(b) of the Agreement on Safeguards also requires the aggrieved party to demonstrate "the existence of the causal link between increased imports of the product concerned and serious injury or threat thereof." However, the ITC and the WTO have interpreted this requirement quite differently. While the ITC requires that there be a causal link between imports and injury and that other sources of injury not be attributed to the imports at issue, the WTO has effectively established a requirement that the ITC must distinguish and weigh all of the possible alternative causes of injury other than the imports at issue. Commentators have criticized this requirement, pointing out that this type of separation and quantification of possible causes of injury is "realistically impossible."

NAFTA Provisions/Doctrine of Parallelism

The Doctrine of Parallelism provides, in essence, that all imports that are included in an injury analysis in a safeguard case must also be covered by the safeguard remedy. This requirement has proved to be yet another stumbling block for the ITC at the WTO with respect to its determinations affecting nations that have signed free trade agreements with the United States, such as the North America Free Trade Agreement ("NAFTA") co-signatories. This is because under U.S. law the President may exclude imports from NAFTA countries from a safeguard remedy as long as such imports do not account for a substantial share of total imports or do not "contribute importantly to the serious injury, or threat thereof, found by the [ITC]."

In Wheat Gluten , the ITC had determined that increased imports of wheat gluten from all sources were causing or threatening to cause serious injury to the domestic industry, but pursuant to 19 U.S.C. 3372, had excluded Canadian imports form the safeguard remedy. The ITC had included Canada in its initial investigation but also separately examined the impact of imports from Canada on the domestic industry and concluded "that imports from Canada are not contributing importantly to the serious injury caused by imports." The WTO Panel found that the United States acted inconsistently with Articles 2.1 and 4.2 of the Agreement on Safeguards by excluding imports from Canada from the application of the safeguard measure.

The WTO's decision in United States - Steel essentially affirmed Wheat Gluten's holding that imports that are included in the injury determination must correspond with those products covered in the remedy. If there is a "gap" between the imports that were determined to have caused injury and those covered in the remedy, then the relevant authority must explicitly demonstrate that the imports included in the safeguard remedy are in themselves sufficient to satisfy all of the conditions for a safeguard action.

Conclusion

Section 201 is an important and potentially very useful trade remedy tool, and has many strong supporters in the United States. However, given that the WTO has struck down every single safeguard action that the U.S. has taken, there is much concern regarding the ability of WTO trade dispute resolution procedures to function in harmony with this remedy, or even to coexist with it. There is at best a questionable level of political motivation to amend U.S. domestic law to bring it into line with Appellate Body safeguard decisions. Similarly, the prospect of amending the Agreement on Safeguards or the Dispute Settlement Understanding to such an extent as to uphold current ITC practice is highly unlikely.

Certain U.S. industries that have considerable influence over U.S. trade policy have been candid in their opinions regarding a lack of deference on the part of the WTO and the potential political backlash should it continue. Further decisions by the WTO striking down such safeguard actions, whether fair or not, may have significant and long-reaching negative political effects, both in the United States and in the international trading system. The Doha trade talks present a critical opportunity for the United States and its trading partners to resolve some of the above discussed issues and prevent some of these dangers from becoming a reality. The United States and the WTO need to work together to improve the existing system so that the ITC may bring valid safeguard actions that will not automatically be struck down, while the WTO retains its power to strike actions that do not comply with the agreed upon criteria. This opportunity will not last indefinitely; the United States should bring these issues to the fore as quickly as possible.

Daniel B. Pickard is a Partner of Wiley Rein & Fielding LLP who represents clients in a variety of international trade matters.

Please email the author at dpickard@wrf.com with questions about this article.