Article by Ken Purchase, © 2005 Blake, Cassels & Graydon LLP
This article was originally published in Blakes Bulletin on International Trade - April 2005
This special (safeguard) status afforded NAFTA parties seems at odds with the WTO obligation to apply safeguards to a product irrespective of its source.
On February 10, 2005, the Canadian International Trade Tribunal (CITT) announced the commencement of a global safeguard inquiry into imports of bicycles and bicycle frames into Canada. It will be the CITT’s second safeguard investigation since the creation of the World Trade Organization (WTO) in 1995 and its first since the Canadian steel industry’s disastrous attempt to obtain protection, mirroring that granted to its U.S. counterpart in 2003.
What Is A Safeguard?
Safeguards are extraordinary measures intended to provide a limited escape clause from international trade obligations when unanticipated import surges overwhelm and seriously injure the domestic market. When the domestic industry succeeds in acquiring safeguard protection, duties are generally imposed on all imports of the product in question, regardless of the country of origin. To limit the appeal of safeguards as a refuge for protectionist policies, the WTO imposes strict disciplines on their use. Unlike dumping duties, the justification for safeguards is premised solely on the effect of the imports on the domestic industry rather than the ‘fairness’ of the exporter’s pricing. Safeguards may only be applied when there is a sudden, unanticipated surge in imports which has caused, or threatens to cause, serious injury. As the measures are not intended to counter unfair trade practices, the WTO requires that the importing country apply the same safeguard to all countries.
Questions Raised By NAFTA’s Preferred Treatment of NAFTA Parties
The NAFTA complicates Canadian safeguard actions by granting special protection to U.S. and Mexican imports. Specifically, the NAFTA prohibits a NAFTA Party applying safeguards against another NAFTA Party unless its imports account for a substantial share of total imports and contribute importantly to the serious injury.
Additionally, where a safeguard is applied against a NAFTA Party, that Party is guaranteed access at least as great as its imports over a recent representative period plus a reasonable allowance for growth.
This special status afforded NAFTA Parties seems at odds with the WTO obligation to apply safeguards to a product irrespective of its source. There is no express exception to this obligation for members of regional free trade agreements. Indeed, the whole point of a safeguard action is arguably to reduce imports below the level of a recent representative period because imports have surged during that period. While the WTO expressly permits regional free trade agreements like the NAFTA, reserving to one or two countries their historical level of imports plus an allowance for growth potentially upsets the balance of the countries supplying that market and raises a number of WTO issues. Such preferential treatment is unlikely to sit well with countries whose market access is curtailed despite the absence of any suggestion that their products are unfairly priced.
The WTO has never directly ruled on the legitimacy of the special treatment that the NAFTA Parties purport to afford each other in WTO safeguard actions. The United States has relied on the NAFTA a number of times to exclude Canada from safeguard remedies but the WTO has consistently ruled against these measures on the basis of internal inconsistencies and analytical shortcomings. The WTO has not decided whether, in appropriate circumstances, a carve-out for NAFTA members is permissible.
In the Canadian steel safeguard investigation, the CITT avoided much of the controversy by, in large part, refusing to exclude U.S. imports and employing tariff rate quotas (TRQs). The Canadian Government in turn sidestepped potential embarrassment at the WTO by refusing to adopt any of the recommended safeguard measures whatsoever.
Canadian Industry Avoids Chinese Market Disruption Remedy
One of the striking features of the Canadian bicycle industry’s complaint is that it seeks a global safeguard rather than singling out China, the major source of cheap bicycle imports. As a term of China’s accession to the WTO, all other members were granted a time-limited safeguard-like remedy specific to China. Under this market disruption remedy, a surge in imports from China causing serious injury to the domestic industry entitles that country to levy duties on Chinese imports without regard to whether the imports are dumped or subsidized.
For the Canadian bicycle industry, pursuing a Chinese market disruption complaint would have avoided the unpleasant complications of NAFTA’s interaction with the WTO and would have spared the CITT a lot of complex legal argument. The manner in which China is singled out has made market disruption inquiries especially politically sensitive, however, at a juncture in which Canada seeks to strengthen its trade relationship with this emerging superpower. As a result, while the thresholds of a market disruption inquiry are relatively easy to satisfy, Canada has yet to begin such an investigation. A market disruption investigation would also fail to address bicycle imports from Taiwan, a major bicycle exporter.
What To Watch For
The Canadian bicycle industry is likely not particularly concerned with whether U.S.-made bikes are included in any safeguard measures as they tend to be very high end products and are less likely to be contributing importantly to injury.
As such, the U.S. may fall squarely within the exemption contemplated by the NAFTA.
While this is good news for American bicycle manufacturers, it would also provide an ideal opportunity for the WTO to finally rule on the WTO consistency of the NAFTA’s safeguard provisions and the preferential treatment they afford its three members should China ultimately challenge Canada’s safeguard remedy.
If that happens, the implications of this case will extend well beyond the cycling world.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.