| Module 6 Safeguard MeasuresR. Sharma Commodities and Trade Division |
The purpose of this module is to describe various safeguard measures in the WTO agreements and to discuss problems and issues facing the developing countries in the area of safeguards for agricultural products.
6.1 Introduction
6.2 Basic features of four selected safeguard provisions
6.3 Some issues for the developing countries
The role of safeguards
A contingency measure or a safeguard refers to additional duties or import regulations that may be imposed when a country is faced with a sudden surge in imports and/or an unusual decline in import prices that hurt or threaten to hurt a domestic import-competing sector. More formally, within the WTO legal framework, the safeguard rules permit an importing country to temporarily suspend its WTO obligations in the event of such situations mentioned above.
Prior to the Uruguay Round, safeguard provisions were relatively unimportant for trade in agricultural products as this escaped many of the GATT disciplines. For example, most agricultural tariffs were unbound and various exemptions made it easier to apply quantitative restrictions. Although the Agreement on Agriculture (AoA) of the Uruguay Round (UR) devised a special safeguard measure for agricultural trade (but limited to selected products and countries, see below), this provision is valid only for the duration of the yet-to-be-defined "reform process". Afterwards, general safeguards would also apply to agricultural trade1. It is for this reason that it is important to be acquainted with these measures.
There are several GATT safeguard provisions that allow for the temporary suspension of obligations (some also allow for permanent suspension). These are presented in Box 1 along with the specific safeguard provision of the AoA. Space does not allow a discussion of all these provisions - for this, the best reference is the Uruguay Round Legal Texts itself. This module covers the following aspects:
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Anti-dumping: measures to deal with dumping - pricing of exports by a private firm below what is charged in the home market - that materially injures a domestic industry (GATT Article VI and Agreement on Implementation of Article VI of GATT 1994). Countervailing duties: measures to offset the effect of subsidization by the government of the exporting country that causes or threatens material injury to a domestic industry (GATT Articles VI and XVI and Agreement on Subsidies and Countervailing Measures). Emergency protection: temporary protection in cases where imports of a product cause or threaten serious injury to domestic producers of directly competitive products (Article XIX). Special Safeguards Provisions: provided for by the Agreement on Agriculture (Article 5) and limited to only those agricultural products which underwent tariffication in the Uruguay Round and for which the right to use this safeguard is reserved in country Schedules by designating the symbol SSG. The provision remains in force for the duration of the "reform process" to be determined under Article 20 of this Agreement. Balance of payments: restrictions on imports to safeguard a country's external financial position (Article XII). Infant industries: government assistance for economic development, allowing import restrictions to protect infant industries (Articles XVIII:a and XVIII:c). General waivers: allowing Members to ask for permission not to be bound by an obligation (Article XXV and WTO Agreement). In contrast to other mechanisms, this requires formal approval by the WTO Council. Provisions allowing for permanent exceptions from the obligations. General exceptions: measures to safeguard public morals, health, laws and natural resources, subject to the requirement that such measures are non-discriminatory and are not a disguised restriction on trade (Article XX). Modification of Schedules and tariff renegotiations: allowing for the withdrawal of certain concessions (i.e. raising the bound tariffs) subject to compensation to affected Members (Article XXVIII and Article XXVIII bis). |
Source: As compiled by Hoekman and Kostecki (1996), Chapter 7 - Safeguards.
Special safeguards can be invoked if...
Article 5 of the AoA - the longest of all articles in this Agreement - established conditions to invoke temporary duty increases, above the bound levels, on specified agricultural products. In order to invoke this safeguard, three conditions have to be met: i) the product in question must have been subjected to the tariffication process2; ii) the product must be designated in the country Schedule as a product for which the SSG may be invoked; and iii) the criteria for either a price-based trigger or a quantity-based trigger must be met. The SSG was the creation of the AoA to address concerns that removing non-tariff measures might result in either a flood of imports that would hurt domestic production or depress domestic prices because duties bound through the tariffication process alone might not be sufficient. The right to make use of the SSG provision has been reserved by 36 WTO Members, and for a limited number of products in each case. As a majority of the developing countries did not tariffy, offering "ceiling bindings" instead, very few of them have access to this provision.
...either import prices fall significantly ...
Price-based SSG. The basic idea is that additional duties (over the bound rate) are allowed when import prices fall below an established trigger level. The reference price for calculating the price trigger was defined in general terms as the average unit value of the c.i.f. price during the 1986-88 base period, expressed in domestic currency, but it could also be an "appropriate" price in terms of quality of the product and its stage of processing. Countries using the SSG provision have notified these trigger prices to the WTO. The formula for calculating the permitted level of the additional duty is somewhat complex - the additional duty depends upon the degree to which the import price falls below the trigger level. In a way, this works like a variable levy - the greater the decline in the import price below the trigger level, the higher is the duty - but it does not completely offset the fall in the import price. This means that domestic prices are not entirely insulated from the effects of changing world market prices.
... or import volumes surge
Volume-based SSG. The basic idea, as above, is that additional duties (over the bound rate) are allowed when there is a surge in imports relative to an established trigger level of imports. The trigger level is derived using a formula based on: i) the actual level of imports averaged over the preceding three years; ii) the share of imports in domestic consumption; and iii) the absolute volume change in consumption over the most recent year for which the data are available. In this formula, the trigger level is higher (and the probability of using the trigger less): i) the greater the three-year average level of imports; ii) the lower the share of imports in domestic consumption; and iii) the faster the growth in domestic consumption.
Some additional conditions in its use are: i) the maximum additional duty permitted can not exceed 30 percent of the normal level of duty in effect during the year in which the SSG is invoked; ii) the additional duty may not be levied beyond the end of the year in which it has been imposed; iii) the additional duty cannot be applied to imports taking place within tariff quotas.
As regards the experience with this safeguard, only a limited number of countries made use of this provision during 1995-97 (but some of them used it more frequently). Two apparent reasons for this seem to be that the bound tariffs on many of the commodities for which the SSGs could be invoked remain high and that world market prices of many agricultural commodities were firm during most of this period. The extent to which this provision is used in 1998 and 1999, when world prices declined, is yet to be evaluated.
Anti-dumping duties protect against below-cost selling by private firms...
Dumping is defined in general terms as the sale by a private firm of an exported product in a foreign market at a price below that at which the same product is usually sold in its home market. The basic GATT provision dealing with anti-dumping, or AD, is Article VI of GATT 1994 - anti-dumping and countervailing duties. The Agreement on Implementation of Article VI of GATT 1994, commonly known as the AD Agreement, provides further elaboration of the basic principles set forth in Article VI and details on the investigation, determination and application of the AD duties.
To apply an AD duty, three conditions have to be met: i) a determination that dumping has occurred (including an estimate of the dumping margin, i.e. the difference in prices); ii) that a domestic industry is suffering from, or threatened with, material injury, and iii) that the dumping is the cause of the injury. Thus, an "injury test" is crucial, i.e. the dumped imports caused or threatened material injury to an established industry in the importing country.
Other important rules are that the AD duty must not exceed the margin of dumping, and that the duty would have to be imposed on a non-discriminatory basis on imports from all sources found to be dumped and causing injury. Members with AD legislation are required to maintain independent "judicial, arbitral or administrative tribunals" to permit prompt review of administrative actions concerning final AD determination and to maintain the AD duties.
There are no provisions in the AD Agreement that specify different rules for the treatment of imports from developing countries, or for the application of AD duties by them. However, the Agreement includes a provision that recognizes that developed countries should give "special regard" to the situation of developing countries, and calls on them to explore "possibilities of constructive remedies" where the application of AD duties would affect their essential interests.
Unlike in the case of countervailing duty actions (see below), the "peace clause" (Article 13) of the AoA does not exempt agricultural products from AD actions during its implementation period.
... while counter-vailing duties protect against government subsidies
The thinking about countervailing duties is similar to that of AD - while AD is aimed at an unfair competitive activity by an exporting private firm, countervailing action is aimed at unfair practices resulting from government subsidies (both domestic and export subsidies). Otherwise, most of the procedural requirements are fairly similar.
Two articles of the GATT deal with this subject - Article XVI - Subsidies (the source of the problem) and Article VI - anti-dumping and countervailing duties (the remedy). The Uruguay Round Agreement on Subsidies and Countervailing Measures (the "SCM Agreement") - a total of 50 pages in length - expands on these articles substantially, providing a host of definitions (e.g. what constitutes a subsidy), the types of subsidies from the standpoint of CV actions (non-actionable, prohibited and actionable subsidies) and detailed investigative procedures and rules.
Countervailing measures are a unilateral remedy taken by a member, but it may only be applied after an investigation by that Member and a determination that the criteria set forth in the SCM Agreement are satisfied. The substantive criteria require that a Member shall not impose a countervailing measure unless it determines that there are subsidized imports, injury to a domestic industry, and a causal link between the subsidized imports and the injury, as in the AD case. In-depth procedural requirements regulate the conduct of countervailing investigations and the imposition and maintenance of countervailing measures. A failure to respect either the substantive or procedural requirements can be taken to dispute settlement and may be the basis for invalidating the measure.
For reasons mentioned at the beginning of this module, i.e. that agriculture escaped many of the general GATT disciplines, contingency measures have not been applied much to agricultural trade. Between January 1993 and June 1995, only 78 of the 1 148 AD actions recorded involved agriculture and food products3. In the case of CV actions, the corresponding figures were 47 initiations out of 237 in total.
In the particular case of CV actions in agriculture, Article 13 of the AoA contains a "peace clause", which states that permissible domestic subsidies (in the "green box") cannot be subject to countervailing duties during the implementation period, and that other ("amber") domestic support and export subsidies are subject to CV action only if a determination of injury or threat thereof is established as per the SCM agreement.
The basic GATT provision dealing with emergency safeguards is Article XIX - emergency action on imports of particular products - and is straightforward and short, a mere three paragraphs. In practice, Article XIX was little used and much abused, e.g. it gave rise to such "grey area" measures as voluntary export restraints, orderly marketing agreements and similar other measures. The Uruguay Round Agreement on Safeguards ("SG Agreement") was negotiated "to re-establish multilateral control over safeguards and eliminate measures that escape such control".
Basically, the SCM Agreement sets forth detailed rules for the application of safeguard measures pursuant to Article XIX. The conditions leading to the application of the safeguard measures are defined similarly as in AD and CV agreements, e.g. increased imports and injury, but there are also important differences. The guiding principles of the SG Agreement are that: i) such measures must be temporary; ii) that they may be imposed only when imports are found to cause or threaten serious injury to a competing domestic industry; iii) that they (generally) be applied on a non-selective (i.e. most-favoured-nation) basis; iv) that they be progressively liberalized while in effect; and v) that the Member imposing them must pay compensation to the Members whose trade is affected.
Emergency safeguards are flexible and quick ...
Emergency safeguards differ from the AD and CV measures in some important ways. One is that these are not conditioned upon an "unfair" practice, i.e. there need not be dumping or subsidies. Rather, these are predicated on the argument that the suffering industry needs protection to adjust itself to the external shocks, e.g. import surges. A second feature of the provisions is that safeguard actions can be taken very rapidly, if critical circumstances are deemed to exist (provisional AD and CV duties can only be imposed after a preliminary investigation that provides an opportunity for all interested parties to comment, and present evidence). A third distinguishing feature is that quantitative import controls can be used, whereas only additional duties are permitted in the case of AD and CV measures.
... but require compensation
One other important feature of emergency safeguards is that, unlike with the AD and CV actions, compensation is required. The SG Agreement has laid down specific rules on "compensation" or "offsetting action". In line with the GATT tradition, these call for the member imposing the measure to consult with those members that have a "principal supplying interest" in the product, and try to maintain "a substantially equivalent level of concessions". Members may agree on any adequate means of trade compensation, but failing an agreement the exporting member affected can suspend equivalent concessions or other obligations on 30 days' notice (i.e. it can retaliate), provided the Council for Trade in Goods does not disapprove.
For a majority of the developing countries, this requirement for compensation may severely limit the scope for using the safeguards. Given the often small volume of their trade and its higher degree of concentration, they would not have much to offer in terms of trade concessions elsewhere.
There are two groups of Special and Differential Treatment (SDT) provisions for the developing countries in the SCM Agreement. One of these allows for longer duration for the safeguard measures introduced by developing countries. The other limits the use of safeguards against their exports, as follows. A safeguard measure may not be applied to exports originating in any individual developing country whose share of the relevant imports of the country imposing the measure is less than 3 percent. But this exemption does not apply if the collective import share of the developing countries with individual import shares below 3 percent is more than 9 percent. The value of these SDT provisions, in practice, is yet to be assessed.
The challenge facing the developing countries. There is no experience to draw upon on the use of GATT contingency protection measures by developing countries in agricultural trade, as until recently most agricultural tariffs were unbound and other options were available to regulate trade. This situation has changed. The challenge facing these countries in the coming years may be stated in three steps as follows.
Safeguards are necessary in agricultural trade ...
First, agricultural sectors do require some safeguards as agricultural commodity markets are by nature volatile. As an example, the world market price of raw sugar fell from 12.3 US cents per pound in December 1997 to 7.2 US cents per pound in September 1998. This would have required a tariff rate of 70 percent if a country wished to stabilize the domestic market price at the level of December 1997 if the initial tariff was zero (or a tariff of 105 percent if the initial tariff was already 20 percent)4. The issue here is not so much that of a secular decline in world prices and adapting domestic prices to this trend over a medium-term, which makes an economic sense, but one of stabilizing domestic prices in the face of short-term swings.
Second, although price instability on world markets is felt identically by all countries, the consequences can be much greater for developing countries, for two reasons: i) the agricultural sector is generally more vulnerable to external shocks of this nature; and ii) the sector plays an overriding role in the economy, including in terms of the livelihood of a large segment of the population. Moreover, very few developing countries have in place insurance mechanisms (e.g. crop insurance schemes, access to risk management instruments) to respond to the shocks, nor can many afford one. In this situation, the damage could be considerable - both in terms of increased transitory food insecurity and some dislocation of the sector with effects felt for some years.
... but current procedures make heavy demands on developing countries
Third, the use of the three general GATT safeguard measures, even on a provisional basis, is subject to extensive procedural requirements and conditions - perhaps by design in order to ensure that they are not misused. It is difficult to imagine that many developing countries, in their current state of socio-economic development, would have the necessary level of institutional and legal capability, as well as finance, to utilize these provisions5. Although emergency safeguards appear relatively less demanding in terms of procedural requirements, they require compensation to be paid, which is unlikely to be feasible for most of them.
Options to be explored under Special and Differential Treatment...
Given this situation, what are the options for them? Obviously, one of these is to improve their capability to use the general safeguards, but this will take time, effort and resources. In the meantime, what may be done?
Provide to the developing countries a safeguard similar to the agricultural SSG. As said earlier, the agricultural SSG is the simplest of all WTO safeguards. The right to use this is currently reserved by 36 countries only and for a limited number of commodities. Moreover, this provision is set to lapse at the end of the "reform process". In view of the above-noted difficulties facing the developing countries to use the general safeguards, there may be a good justification for pursuing a SSG-type safeguard within the framework of Special and Differential Treatment. Obviously, some improvements may be necessary on trigger mechanisms etc. in order to ensure that the provision is not misused. Also, it may be desirable that the mechanism does not fully insulate domestic markets from changes in import prices.
Limit the SSG for food security-related products only. This option is similar to the above except that the SSGs are limited to a selected list of products that are critical for food security. These could be basic foods and/or some other commodities that are "sensitive" from the standpoint of food security (some criteria can be set to select and limit the number of commodities). Perhaps, this could be one way to "take into account" the food security concern in the reform process, as called upon in Article 20 of the AoA.
Carefully approach the reduction of the bound tariffs. High bound tariffs can obviate the need for a safeguard as, providing the intention is not to use the full bound rate all the time, tariffs can be raised to the level required to offset a falling world price. With the tariffs now bound and facing further reductions in the next round, those countries that find it difficult to use one or more of the general GATT safeguards may need to approach tariff reductions carefully. Viewed in this way, there is a some kind of trade-off between the level of the bound tariff and accessibility to safeguards. Individual developing countries need to review their situation on this matter.
...but ultimately countries should acquire the capacity to implement the general GATT safeguards
Strengthen institutional capability to use general GATT safeguards. It is in the spirit of the WTO system that all derogations and exemptions are ultimately eliminated, thus bringing all trade within the general GATT rules. The SSG, or its another variant, may thus be viewed as, at best, a temporary provision. Ultimately, the developing countries need to strengthen their capability to use the general safeguards. This process could be moved faster through some concrete measures for technical and financial assistance, in line with similar other provisions in the current WTO agreements. At the same time, some form of independent legal assistance at the international level may be considered necessary to assist these countries in procedural matters in the use the general safeguards as and when required.
Carson, C. 1998. The Uruguay Round Agreement on Agriculture. Paris, OECD.
FAO. 1998. The Implications of the Uruguay Round Agreement on Agriculture for developing countries: A Training Manual, by S. Healy, R. Pearce & M. Stockbridge. Rome.
GATT. 1994. The Results of the Uruguay Round of Multilateral Trade Negotiations: The Legal Texts. Geneva, GATT Secretariat.
Hoekman, B. & Kostecki, M. 1996. The Political Economy of the World Trading System: From GATT to WTO. Oxford, Oxford University Press.
Low, Patrick. 1997. Safeguards, antidumping, countervailing duties, and observations on administrative and technical barriers to trade. In Implementing the Uruguay Round Agreement in Latin America: The Case of Agriculture. FAO/World Bank Workshop, Santiago, Chile.
WTO. 1999. Guide to the Uruguay Round Agreements. WTO Secretariat and Kluwer Law International. The Hague.
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1 General GATT safeguards are available for all countries and all products, including agricultural products.
2 In other words, this provision cannot be invoked for products for which protection already took the form of tariff only, nor for products for which "ceiling bindings" were offered.
4 Assuming the simple expression, Pd = Pw * (1+t), where Pd and Pw are domestic and world prices and t is the tariff rate. If Pd is to be maintained at 12.3 cents when Pw is 7.2 cents, t would have to be 71 percent. But if tariff was initially at 20 percent, the initial Pd would be 14.8 cents - to stabilize Pd at this level when Pw drops to 7.2 cents would require a tariff of 105 percent.
5 Another constraint in the use of general safeguards by the developing countries is lack of national legislation on safeguards, as WTO rules in this area are implemented through Members' national legislation.
