At the end of December 2010 two special investigations (according to the WTO terminology - safeguard investigations) were terminated without any measures applied, namely: in respect of imports into Ukraine of ferroalloys and complex mineral fertilizers.
This should serve as a good lesson for domestic producers. First of all, domestic manufacturers should understand that the adoption by Ukraine of any protectionist measures must be carried out strictly in accordance with the WTO requirements. Otherwise, retaliatory sanctions by the states - members of the WTO are unavoidable.
Therefore, the initiation of special investigations by Ukrainian manufacturers in the old-fashioned manner (as it was done before Ukraine joined the WTO), instead of anti-dumping or countervailing investigations despite the fact that under the WTO rules special measures (according to WTO terminology - safeguard measures) should only be applied in exceptional cases, is inappropriate to begin with. The aforementioned "abuse" is directly confirmed by the following statistics: since the beginning of 1999 to January 2011 27 anti-dumping investigations and 33 special investigations were initiated in Ukraine.
The way Ukrainian manufacturers act can be easily explained, since a matter of proof in special investigations is much simpler than in anti-dumping and countervailing ones: there is no need to make complex calculations of dumping margin or the amount of illegitimate subsidies. Instead, it is enough to simply provide customs statistics indicating increase in imports and to compare it with the alleged injury caused to the domestic producers. In addition, special measures allow to "kill all birds with one stone", simultaneously blocking all channels of imports, while anti-dumping and countervailing measures are applicable to imports only from separate countries, and even to specific companies.
Initiating special investigations by domestic manufacturers in the old-fashioned manner is no longer appropriate
Unfortunately abuse by the Ukrainian manufacturers of their right to initiate special investigations is not the only faux pas that deprives them of the long-awaited measures.
In this article we want to go through the mistakes using the recent special investigations as an example and to try to figure out why domestic manufacturers have not been able to make use of special measures.
WTO Rules: Should They be Considered?
First of all, Ukrainian manufacturers keep forgetting that since Ukraine joined the WTO initiation and conducting of special investigations must comply with the rules and jurisprudence of the WTO in the area of safeguard measures. This "bad habit" makes domestic manufacturers' position a losing and a risky one right off the bat, since any inconsistency with WTO requirements could lead to withdrawal of measures (if they are applied) or could bring the investigation to a halt with no application of special measures.
Surge of Imports
Domestic manufacturers completely ignore the WTO requirements while investigating the fact of imports surge, being one of the compulsory grounds for special measures application. Thus, according to the Law "On the application of special measures to imports into Ukraine" (hereinafter - the Safeguard Law) and the WTO rules the application of special measures is only possible if there was a significant (!) increase in imports. At the same time, neither the Safeguard Law nor the WTO rules precisely establishes what constitutes a significant increase in imports. In practice, quite often Ukrainian manufacturers initiate investigations in cases where one can not speak about the existence of significant increase in imports in principle. For example, a special investigation regarding complex mineral fertilizers was initiated based on the imports increase by only 12,5% (!).
The use of special measures is only possible if there was a significant increase in imports, but a clear criteria as to what constitutes a significant increase has not been precisely established by the national legislation and the WTO rules and jurisprudence
Another trick used by Ukrainian manufacturers is choosing the most "convenient" periods to examine the import trends. Particularly, in the last investigations they compared the "crisis" period, when imports dropped significantly, with periods when imports started gradually increasing after the end of the crisis. For example, the investigation in respect of complex mineral fertilizers was initiated based on the period of second half of 2008 - first half of 2009, in case of ferroalloys - third quarter of 2008 - third quarter of 2009. No surprise, such a comparison definitely showed increase in imports. This approach is at odds with the WTO practice, under which the period of investigation should generally equal to 3 - 5 years. Following the requirements of WTO, the Interdepartmental Commission on International Trade established an investigation period of three years (2007 - 2009) in a special investigation regarding imports of ferroalloys.
In addition, domestic manufacturers completely lose sight of the fact that surge of imports can be triggered by their own actions, for example, unreasoned pricing policies. During the crisis, when world markets showed a tendency of substantial decline in prices for many commodities, domestic manufacturers either left prices at "pre-crisis" level, or even increased them forcing Ukrainian consumers to switch to buying imported goods on more favorable terms, which naturally leads to a situational increase in imports. This is exactly what happened in the investigation with respect to ferroalloys.
According to the Safeguard Law and the WTO Agreements, the existence of serious injury or threat of such injury is one of the mandatory grounds for the application of special measures, along with surge of imports.
Although the Safeguard Law does not specify what kind of injury can be considered as serious and, therefore, sufficient for the application of special measures, the answer to this question may be found in the WTO jurisprudence (cases: United States - Lamb (US - Lamb), Argentina - Footwear (Argentina - Footwear), United States - Wheat Gluten (US - Wheat Gluten), Korea - Dairy Products (Korea - Diary)), which was completely ignored by Ukrainian manufacturers.
Moreover, domestic producers do not take into account that the standard of "serious injury" in the WTO Agreement on Safeguards is much higher and contrasts from the standard of "material injury" provided for by the Agreement on Implementation of Article VI of the GATT 1994, the Agreement on Subsidies and Countervailing Measures and the GATT 1994. Such approach is nothing but logical, since the anti-dumping and countervailing measures designed to protect domestic manufacturers from unfair actions committed by companies importing goods, while special measures are applied to fair trade practices.
The standard of "serious injury" in the WTO Agreement on Safeguards is much higher and contrasts from the standard of "material injury" provided for by the Agreement on Implementation of Article VI of the GATT 1994, the Agreement on Subsidies and Countervailing Measures and the GATT 1994
What is more important, serious injury should be determined only on the basis of evaluation of the overall position of the domestic industry taking into account all the relevant factors affecting the situation of such industry. The WTO Agreement on Safeguards establishes a list of such factors, every one of which has to be evaluated by the domestic producer initiating an investigation and subsequently has to be examined and investigated by competent authorities.
On a separate note, it should be emphasized that in recent special investigations domestic producers used a relatively short periods of time to examine the alleged injury (for example, in an investigation in respect of complex mineral fertilizers they selected the second half of 2008 - first half of 2009, in case of ferroalloys - third quarter of 2008 - third quarter 2009 years). The inadequacy of using such terms is conditioned by the fact of the crisis emerging at that very time which, of course, caused injury to Ukrainian manufacturers and therefore, it is very difficult to objectively distinquish and separately examine the impact of imports surge and the injury by the crisis.
In accordance with the Safeguard Law, GATT 1994 and WTO Agreement on Safeguards a complulsory prerequisite for application of special measures is the existence of a causal link between increase in imports and the serious injury caused to the domestic producers. In this case, the following principle is used: when factors other than increased imports are causing injury to the domestic industry at the same time, such injury shall not be attributed to increased imports. In reality Ukrainian manufacturers disregard the said rule and, in principle, do not distinguish or separate these other factors causing injury to their business. And this despite the fact that, as a rule, in each investigation, such factors are present, for example: global financial crisis, which resulted in significant drop in consumption of almost all the goods, export-oriented policy of Ukrainian producers and substantial decrease in exports due to the crisis, no export VAT reimbursement by the state, etc.
Domestic producers should also keep in mind that while deciding to apply special measures as a result of the investigation, under the Safeguard Law the competent authorities must also take into account other national interests, particularly: protection of competition on the market, consumers' interests, employment, the impact of imports on investment, international economic interests of Ukraine, etc. For example, the application of special measures following an investigation against imports of ferroalloys could have led to the monopolization of the market, which undoubtedly would have had an adversary effect on the interests of consumers.
The experience of recent special investigations show that the time when the state played ball with domestic producers and applied special measures every time they were requested has well passed. After joining the WTO Ukraine is bound by a number of commitments under the WTO Agreements, thus, voluntarily waiving the arbitrary use of protectionist measures. Therefore it is no longer good enough for domestic manufacturers to simply submit an application stating the facts of the existing increase in imports, injury caused an the causal link between the two. Now you need to properly substantiate the existence of the mentioned facts in the light of the WTO Agreements and jurisprudence, as well as to provide all the necessary evidence. Otherwise, one should not even count on the application of special measures...
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