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13 September 2018

Indonesia – Iron or Steel Products DS490, DS496 WTO Appellate Body Report

The dispute Indonesia – Iron or Steel Products DS490, DS496 deals with specific duties on imports of flat-rolled product of iron or non-alloy steel coated with aluminium-zinc alloys (galvalume)[1] that Indonesia had adopted as a result of a safeguard investigation.

Significance of the case

We believe that the decision in this dispute can be significant from three different points of view.

Firstly, it may have a great impact on WTO disputes initiated against the US regarding 25% and 10% import tariffs on steel and aluminium. Currently, nine WTO members filed requests with the WTO for consultations with the USA regarding “allegedly safeguard” import tariffs on steel and aluminium (this includes China (DS544)[2], India (DS547)[3], EU (DS548)[4], Canada (DS550)[5], Mexico (DS551)[6], Norway (DS552)[7], Russia (DS554)[8], Switzerland (DS556)[9] and Turkey (DS564)[10]).

In the case of Indonesia – Iron or Steel Products, both the Panel and the Appellate Body instead of analysing the compliance of Indonesian safeguard measures with the requirements of Art. ХІХ of the GATT 1994 and the Agreement on Safeguards, which was insisted on by both the complainants (Chinese Taipei (Taiwan) and Vietnam) and the respondent (Indonesia), focused on whether the applied measure belongs by its legal nature to safeguards. Both the Panel and the Appellate Body concluded that the measure is not a safeguard and for that reason refused to make findings regarding the compliance of the measure with Art. ХІХ of the GATT 1994 and the Agreement on Safeguards. Thus, Indonesia in this respect did not violate any WTO provisions.

Turning to American duties, let us recall that the USA has not imposed them as “safeguard” duties (there was no corresponding investigation, the measures have not been notified to the WTO), but referred to threats to national security envisaged in Section 232 of the Trade Expansion Act of 1962. In turn, all WTO Members challenging the above measures based their positions, among other things, on violations of Art. XIX of the GATT 1994 and the Agreement on Safeguards. Thus, Panels might be likely to find that the challenged measures are not safeguards and, therefore, decide not to analyse whether they comply with high standards provided in Art. XIX of the GATT 1994 and the Agreement on Safeguards or not. They might turn instead to analysing whether these measures can be justified as Security Exceptions (the corresponding exceptions are provided in Art. XXI of the GATT 1994).

Secondly, the dispute Indonesia – Iron or Steel Products is illustrative of situations when the complainants and respondents do not contest the legal nature of the challenged measure since the Panel and the Appellate body are entitled to independently assess the challenged measure itself and the applicability of WTO rules thereto.

Thirdly, both WTO Members and domestic producers shall be very attentive when deciding on the mechanism to protect their domestic markets. Thereby, the dispute Indonesia – Iron or Steel Products explicitly confirmed that besides traditional trade defence measures (antidumping, countervailing and safeguard) there are available other mechanisms.

What are safeguard measures under WTO law?

Safeguards are the least popular trade defence measures used by WTO Members to protect domestic industry.[11] However, the number of initiated safeguard investigations has increased lately mainly because of US protectionist policies.

Unlike antidumping and countervailing, safeguard measures are applied following safeguard investigation, conducted against fair import of certain goods regardless of country of origin or export, while countervailing and antidumping measures are applied against unfair import from a designated country whose producers are either being subsidized by the state or resort to harmful dumping practices and, thus, injure domestic producers.

Safeguard investigations are regulated by Art. XIX of the GATT 1994 and the Agreement on Safeguards together with the national legislature of corresponding countries. For instance, in Ukraine there is the Law “On application of special measures against imports to Ukraine”.

Safeguard investigations may result in application of import quotas or import duties on certain products at issue regardless of country of origin. Please note that safeguard duties are imposed additionally to custom duties and may exceed the bound import duty rate agreed by the country in its Schedule of Concessions when accessing the WTO. Developing countries may be excluded from application of safeguard measures pursuant to Art. 9.1 of the Agreement on Safeguards.

Safeguard measures are warranted when (1) the import of certain products is recent, sudden, sharp and significant enough; when (2) the increase of import is caused by unforeseen developments; and when (3) such import threatens to cause or causes serious injury to the domestic producer of like products. A causal link should be established between such increased import and serious injury to the domestic producer. Moreover, the injury analysis shall include all other factors that may contribute to the injury.

Safeguard measures are applied for a period of 4 years and can be extended at most up to 8 years.

Background of the case

From 19 December 2012 until 15 July 2014, Indonesia conducted a safeguard investigation on imports of flat-rolled products of iron or non-alloy steel coated with aluminium-zinc alloys (galvalume) (the “product”), classified under HS code 7210.61.11.00.

Importantly, Indonesia conducted a safeguard investigation with regard to a product not included in its Schedule of Concessions[12] when accessing the WTO. In other words, Indonesia does not have any obligations not to exceed the bound duty rate with regard to this product. Bearing this in mind, Indonesia could lawfully increase import duties without any safeguard investigation.

On 28 July 2014, Indonesia notified WTO on the application of the safeguard measure on imports of the product regardless of country of origin as a result of the safeguard investigation. Safeguard measures were applied in a form of a specific duty[13] for the period of 3 years from 22 July 2014 until 22 July 2017 with progressive liberalization envisaged by the Agreement on Safeguards. 120 developing countries and 6 developed countries among them were excluded from the application of this safeguard duty. For instance, the list included Ukraine, Romania and Poland.[14]

In 2015, Chinese Taipei (Taiwan) and Vietnam (the “complainants“) initiated a WTO dispute with Indonesia (the “respondent“) to challenge compliance of safeguard measures with Art. I:1, XIX:1 (а), XIX:2 of the GATT 1994 and Art. 2.1, 3.1, 4.1 (a), 4.1 (b), 4.1 (с), 4.2(а), 4.2 (b), 4.2 (с), 12.2, 12.3 of the Agreement on Safeguards. The complainants, among other things, insisted in their claims that Indonesia (1) has not properly determined unforeseen developments that led to increased imports; (2) has not provided adequate explanation for how the imports were increased ;(3) has not properly analysed other factors, except for import, that injured domestic industry; (4) applied safeguard duty only to certain countries, since 120 developing countries were excluded from application; (5) has violated a few WTO obligations on notification of the safeguard; (6) has not conducted consultations with WTO Members on the application of the safeguard; and (7) has notified the WTO on a bad time on the application of the safeguard after its actual application.

Position of the Panel

The Panel started first to analyse whether Indonesia applied the measures which by their legal nature constituted safeguards according to Art. 1 of the Agreement on Safeguards and Art. XIX of the GATT 1994. Consequently, the Panel determined that the specific duty applied by Indonesia was not a safeguard and, thus, there was no need to examine the alleged violations of other Article of the Agreement on Safeguards, referred to by the complainants.

At the same time, the Panel concluded that the Indonesian specific duty violated MFN (the most-favoured nation) of Art. I:1 of the GATT 1994. The MFN principle of Art. I:1 of the GATT 1994 implies that any WTO Member shall provide immediately and unconditionally the same advantages to like products originated from WTO Members without any discrimination. Thus, since Indonesia excluded 120 countries from application of the challenged duty, it constituted a violation of Art. I:1 of the GATT 1994.

Both complainants and the respondent challenged the Panel Report in appeal.

Was the Panel entitled to assess the safeguard measure on its own?

Indonesia in its appeal insisted that the Panel violated Art. 6.2, 7.1 and 11 of the WTO Understanding on Rules and Procedures Governing the Settlement of Disputes (the“DSU”) by exceeding its terms of reference when interpreting the legal nature of the challenged measure. Indonesia stated that the Panel should not exceed its terms of reference, which are determined by the requests for the establishment of the Panel. To support its position, Indonesia brought up examples that the previous Panels had never interpreted the challenged measure itself pursuant to the Agreement on Safeguards, but rather its application as long as the measure itself had not been challenged. In this dispute, the complainants challenged notably the application of the measure in their requests for the establishment of the Panel.

Both complainants also insisted that the challenged measure is a safeguard and that the Panel was not entitled to analyse its legal nature since for complainants it was important to analyse violations committed during the safeguard investigation in Indonesia. Thus, they asked the Appellate Body to reverse the Panel’s finding that the measure is not a safeguard and to complete legal analysis of the alleged violations of the Agreement on Safeguards.

The Appellate Body stressed that the Panel is not only entitled, but indeed required, under Article 11 of the DSU to carry out an independent and objective assessment of the applicability of the provisions of the covered agreements invoked by a complainant as the basis for its claims, regardless of whether such applicability has been disputed by the parties to the dispute.[15] Therefore, the Appellate Body found that the Panel did not violate Art. 6.2, 7.1 and 11 of the DSU by conducting its own assessment of the measure.

Did the Panel err in interpretation of the safeguard measure?

The Panel determined that one of the defining features of safeguard measures is the suspension, withdrawal, or modification of a GATT obligation or concession that precludes a Member from imposing a measure to the extent necessary to prevent or remedy serious injury in a situation where all of the conditions for the imposition of a safeguard measure are satisfied.[16]

Indonesia unsuccessfully brought the argument that the specific duty in question qualifies as a safeguard since it had been imposed as a result of a safeguard investigation conducted in accordance with Indonesian domestic trade remedy regulations. The Panel did not consider this argument.

Instead, the Panel analysed which WTO obligations Indonesia could have suspended in order to impose the safeguard measure. The Panel began its analysis from obligations under Art. II of the GATT 1994 with regard to Schedule of concessions. Since Indonesia had not included the product in its Schedule of concessions, it has no WTO obligation with regard to this product that can be suspended, withdrawn or modified.

Indonesia argued that it had suspended obligations under Art. XXIV of the GATT[17], given that the challenged measure suspended Indonesian concessions with respect to regional trade agreements, such as ASEAN Free Trade Agreement, ASEAN-China Free Trade Agreement, ASEAN-Korea Free Trade Agreement and Indonesia-Japan Economic Partnership Agreement. The Panel asserted that regional trade agreements do not constitute part of WTO obligations.

Appellate Body found that the measure in order to be classified as safeguard shall comply with the following criteria: (1) the measure must suspend, in whole or in part, a GATT obligation or withdraw or modify a GATT concession; (2) the suspension, withdrawal, or modification in question must be designed to prevent or remedy serious injury to the Member’s domestic industry caused or threatened by increased imports of the subject product. [18] In turn, the Panel is obliged to carry out detailed legal analysis of the challenged measure.

Therefore, the Appellate Body upheld the decision of the Panel that the challenged measure is not a safeguard within the meaning of Art. XIX of the GATT 1994 and Art. 1 of the Agreement on Safeguards.

Additionally, the Appellate Body upheld the Panel’s decision that the challenged measure violated Art. I:1 of the GATT 1994.

For more information, please contact Anzhela Makhinova or Tetiana Tanchyn.

[1] The product is classified under HS code 7210.61.11.00 and defined as “flat-rolled product of iron or non-alloy steel, of a width of 600 mm or more, clad, plated or coated with aluminium-zinc alloys, containing by weight less than 0.6% of carbon, with a thickness not exceeding 1.2mm”

[2] https://www.wto.org/english/tratop_e/dispu_e/cases_e/ds544_e.htm

[3] https://www.wto.org/english/tratop_e/dispu_e/cases_e/ds547_e.htm

[4] https://www.wto.org/english/tratop_e/dispu_e/cases_e/ds548_e.htm

[5] https://www.wto.org/english/tratop_e/dispu_e/cases_e/ds550_e.htm

[6] https://www.wto.org/english/tratop_e/dispu_e/cases_e/ds551_e.htm

[7] https://www.wto.org/english/tratop_e/dispu_e/cases_e/ds552_e.htm

[8] https://www.wto.org/english/tratop_e/dispu_e/cases_e/ds554_e.htm

[9] https://www.wto.org/english/tratop_e/dispu_e/cases_e/ds556_e.htm

[10] https://www.wto.org/english/tratop_e/dispu_e/cases_e/ds564_e.htm

[11] From 01.01.1995 until 31.12.2017, only 331 safeguard investigations were initiated and 166 of them ended with the application of measures. For comparison, for the same time period, 5529 anti-dumping investigations were initiated leading to 3604 anti-dumping measures, and 486 anti-subsidy investigations were initiated leading to 257 countervailing measures.

[12] Schedule of Concessions in the tariff chart of the country, negotiated within the process of its accession to WTO.

[13]The amount of the applied specific duty was Rp 4,998,784 per ton for the period of 2014-2015, Rp 4,314,161 per ton – for the period of 2015-2016 and Rp 3,629,538 per ton – for the period of 2016-2017.

[14] Art. 9.1 of the Agreement on Safeguards envisages the exception only to developing countries.

[15]Appellate Body Report, Indonesia – Iron or Steel Products DS490, DS496, para. 5.20

[16]Panel Report, Indonesia – Iron or Steel Products DS490, DS496, para. 7.15

[17]Art. XXIV of the GATT establishes the rules for regional trade agreements – free trade agreements and customs unions

[18] Appellate Body Report, Indonesia – Iron or Steel Products DS490, DS496, para.5.47

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