WTO Appellate Body Report: Indonesia – Iron or Steel Products

by White & Case LLP
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SUMMARY:

This is one of a series of reports on WTO Panel or Appellate Body decisions.

(a)Decision:

The WTO Appellate Body has affirmed that claims against Indonesia under the WTO Agreement on Safeguards should be dismissed on the grounds that the challenged duty was not actually a "safeguard measure".  All disputing parties had agreed that Indonesia's duty on iron or steel was a safeguard measure, but the Appellate Body rejected this consensus position.

The Appellate Body upheld a separate challenge against the duty as a violation of the Most-Favoured-Nation (MFN) obligation of Article I of the General Agreement on Tariffs and Trade (GATT) 1994.

(b)Significance of Decision:

This decision reinforces the principle that WTO Panels must make their own, independent assessment of whether a WTO Agreement applies, and they are not bound by the positions of the disputing parties on this issue.

The current dispute was unusual in that the Appellate Body rejected the concurring views of the complaining parties (Chinese Taipei and Viet Nam) and the defending party (Indonesia) on the critical threshold issue of whether the measure was a safeguard. Indonesia had conducted an investigation under its safeguards legislation, and had notified the resulting duty to the WTO Committee on Safeguards. All disputing parties agreed that the Agreement on Safeguards applied, although they differed on whether Indonesia's duty was consistent with that Agreement.

The Appellate Body ruled that the Agreement on Safeguards did not apply. Indonesia had no binding tariff obligations under GATT Article II with respect to the products subject to the duty. The Panel had noted that the Agreement on Safeguards and GATT 1994 define "safeguard measures" in part as those which "suspend a GATT obligation" or "withdraw or modify a GATT concession". The Panel found that as Indonesia was "free to impose any amount of duty it deems appropriate" on these unbound products, the specific duty challenged in this case "did not suspend, withdraw, or modify Indonesia's obligations under Article II of the GATT 1994". Therefore, the Safeguards Agreement did not apply, and the Panel dismissed all claims under that Agreement. The Appellate Body upheld the Panel's ruling, stressing that "the imposition of the specific duty does not suspend any of Indonesia's GATT obligations, nor does it withdraw or modify any of Indonesia's GATT concessions" and was therefore not a safeguard measure.

This ruling is directly relevant to the current challenge by a number of WTO Members to the US Section 232 duties on aluminum and steel. These complaining parties argue, among other things, that the Section 232 duties violate US obligations under the Agreement on Safeguards. The United States has strongly rejected the notion that the Safeguards Agreement applies. In a June 2018 statement, the United States Trade Representative argued that "the United States has not taken a safeguard measure. The President's actions here were taken under a US national security statute – not under the separate US statute for safeguard measures". He added that "[t]he United States is not invoking Article XIX of the GATT, permitting emergency safeguard actions, to justify its duties. So any assertion that others' retaliatory duties are a justified response to a US "safeguard action" is, on its face, ridiculous".

Yet the August 15 ruling of the Appellate Body in the Indonesia case reinforces the pre-existing case law that WTO Panels will have the final say on whether or not a measure is subject to a covered WTO Agreement, including the Agreement on Safeguards. The Indonesian duties were imposed under Indonesia's safeguard law, and yet were found by both the Panel and the Appellate Body not to be a safeguard measure. Similarly, while the Section 232 duties were indeed not enacted under the US safeguards law, it would still be up to a Panel to determine whether the Agreement on Safeguards applies to these US measures. Ultimately, the substantive content of the measure, not the legislation used to adopt it, will be determinative.

REPORT:

(a)Background: Safeguards investigation leads to a specific duty

In 2014, Indonesia imposed a specific duty on galvalume, a type of flat-rolled iron or steel. The duty was imposed following an investigation under Indonesia's safeguards legislation. This three-year duty was also notified by Indonesia to the WTO Committee on Safeguards. Indonesia applied the duty on imports of galvalume from all sources, although developing countries were exempt.

The complaining parties in this dispute, Chinese Taipei and Viet Nam, argued that the specific duty was a safeguard measure within the meaning of the WTO Agreement on Safeguards, and violated that Agreement. In the alternative, they argued that if the duty were not a safeguards measure, it was in any event inconsistent with Indonesia's MFN obligation under GATT Article I.

Indonesia agreed that its measure was a safeguard within the meaning of the Safeguards Agreement, but argued that the duty was consistent with that Agreement.

The Panel noted that Indonesia had no binding tariff obligations under GATT Article II with respect to the products subject to the duty. Therefore, the Safeguards Agreement did not apply, and the Panel dismissed all claims under that Agreement.

(b)Panel's obligation to determine applicability of the covered Agreements

On appeal, Indonesia argued that the Panel exceeded its terms of reference by determining, on its own motion, "whether the measure at issue constitutes a safeguard measure despite the parties' "concurring positions" on that issue".

The Appellate Body rejected this argument, reasoning that "a 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". The Appellate Body also reaffirmed its earlier ruling that "the description of a measure proffered by a party" and the label given to it under domestic law are "not dispositive" of the "proper legal characterization of that measure under the covered agreements".

(c)Indonesian duty "does not constitute a safeguard measure"

The Appellate Body then turned to the substantive issue of whether the Panel erred in determining that the Indonesian duty was not a safeguard measure under the Agreement. It recalled that "all parties have consistently argued that the duty at issue is a safeguard measure" [original emphasis].

The Appellate Body examined Article 1 of the Agreement on Safeguards, which specifies that "safeguard measures" are "measures provided for in Article XIX of GATT 1994". It then stated that "the action contemplated under Article XIX:1(a) consists of the suspension, in whole or in part, of a GATT obligation or the withdrawal from or modification of a GATT concession. Absent such a suspension, withdrawal, or modification, we fail to see how a measure could be characterized as a safeguard measure". It added that "the suspension of a GATT obligation or the withdrawal or modification of a GATT concession must be designed to pursue a specific objective, namely preventing or remedying serious injury to the Member's domestic industry" [original emphasis].

The Appellate Body considered that the reasoning deployed by the Panel to be "problematic" in that it "conflated the constituent features of a safeguard measure with the conditions for the conformity of a safeguard measure with the Agreement on Safeguards". The Appellate Body nevertheless upheld the Panel's ruling, as "the imposition of the specific duty does not suspend any of Indonesia's GATT obligations, nor does it withdraw or modify any of Indonesia's GATT concessions". It affirmed the Panel's finding that Indonesia "has no binding tariff obligation with respect to galvalume in its WTO Schedule of Concessions" and was therefore "free to impose any amount of duty it deems appropriate" on that product.

Indonesia also pointed to the fact that it had exempted a large number of developing countries from the measure, as required by Article 9.1 of the Agreement on Safeguards. In the view of the Appellate Body, this did not support the argument that the Indonesian duty was a safeguard measure. It found that "that exemption appears to constitute an ancillary aspect of the measure", aimed at according "special and differential treatment" to developing countries. It added that "[t]he disciplines of Article 9.1 set out conditions for the WTO-consistent application of safeguard measures, and do not speak to the question of whether a measure constitutes a safeguard measure for purposes of the applicability of the WTO safeguard disciplines" [emphasis added].

Thus, the Appellate Body affirmed that "the measure at issue does not constitute a safeguard measure within the meaning of Article 1 of the Agreement on Safeguards".

(d)"Stand alone" MFN challenge – Indonesia violated GATT Article I

The Panel had concluded that "the application of the specific duty on imports of galvalume originating in all but the…[exempt developing] countries… is inconsistent with Indonesia's obligation to afford MFN treatment under Article I:1 of the GATT 1994". On appeal, Indonesia argued that the MFN claim was not within the Panel's terms of reference, a position rejected by the Appellate Body. Indonesia did "not otherwise challenge the Panel's substantive analysis or findings under Article I:1 of the GATT 1994", and so the Appellate Body upheld this finding of violation.

The Report of the WTO Appellate Body in Indonesia – Safeguard on Certain Iron or Steel Products, (DS490, DS496) was circulated on 15 August 2018.

[View source.]

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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