The Safeguards Agreement

Safeguard measures are one of three types of trade remedial measures available to countries in the global trading regime. The two other measures are antidumping and countervailing duties.

Countries take safeguard action or use safeguard measures in an emergency when a surge in imports has caused, or threatens to cause, serious injury to domestic industry. Safeguard measures restrict the import of such goods.

Safeguard action or measures can take various forms such as suspension of concessions, imposing quantitative import restrictions or increasing applied tariff rates beyond bound tariff rates. Safeguard measures, unlike antidumping duties or countervailing duties, may take different forms and do not necessarily take the form of imposing duties.

Hence, a safeguard measure may stop the surge of imports by either restricting the quantity of imports (quantitative restrictions) or by making imports expensive by imposing duties or increasing applied rates beyond bound rates. Antidumping and countervailing measures restrict the surge of imports only by making the import more expensive by imposing duties, not by limiting the quantity (imposing quantitative restrictions).

Article XIX of the General Agreement on Tariffs and Trade (GATT) states the conditions under which countries can impose safeguard measures.

The imposition of safeguard measures, apart from Article XIX of GATT, is also governed by the Agreement on Safeguards. The operation of GATT from 1947 to 1986 revealed that countries were using certain ‘grey area' measures such as voluntary bilateral export restraints to limit or restrict the surge of imports. These measures were not in accordance with Article XIX of GATT, although they had the same effect of restricting imports. In order to discipline the use of such restrictive import measures, countries agreed, during the Uruguay Round of negotiations, to a safeguard agreement that either disciplined or banned the use of such measures by clearly specifying the conditions under which safeguard measures could be imposed.

Conditions for imposing safeguard measures

According to Article XIX of GATT and the safeguard agreement, safeguard measures can be imposed under three conditions: when there is a surge in imports, when there is ‘serious injury' or ‘threat of serious injury' to domestic industry, and when there is a causal link.

Surge in imports : This surge could be either in absolute terms or relative terms. In other words, even if imports in absolute terms do not increase there can be an import surge if there is an increase in relative terms to domestic production. So, if the import of commodity ‘A' increases from 10 units to 25 units, it may classify as an import surge if the domestic production of commodity ‘A' is, say, only 12 units. Here the increase in importation of ‘A' is in relative terms to domestic production, and not much in absolute terms.

‘Serious injury' or ‘threat of serious injury' to domestic industry: The agreement defines ‘serious injury' as a significant overall impairment in the position of a domestic industry. In determining whether ‘serious injury' is present, the investigating authorities must evaluate all relevant factors that have a bearing on the condition of the industry. Factors that must be analysed are the absolute and relative rate and amount of increase in imports, the market share taken by the increased imports, as well as changes in the level of sales, production, productivity, capacity, utilisation, profits and losses, and employment in the domestic industry.

‘Threat of serious injury' is a threat that is clearly looming as shown by the facts, and not based on mere accusation, guess or remote possibility. If present ‘serious injury' is not found, a safeguard measure nevertheless can be applied if a ‘threat of serious injury' is found.

The other important concept in determining ‘serious injury' or ‘threat of serious injury' is ‘domestic industry'.
The safeguard agreement states that ‘domestic industry' shall be understood to mean:

• The producers as a whole of like or directly competitive products operating within the territory of a member.
• Those whose collective output of like or directly competitive products constitutes a major proportion of the total domestic production of those products.

The concept of ‘domestic industry’ is very important, as it is domestic industry that will face the adverse consequences of a surge in imports and hence it is domestic industry that needs to be protected. Simply put, if there is a surge in the import of ink pens into India from China that causes ‘serious injury’, or there is the ‘threat of serious injury’, then the producers as a whole of India’s ink pen industry or ballpoint pen industry (directly competitive products) become the ‘domestic industry’ for the purposes of the safeguard agreement.

Similarly, those whose collective output of the like (ink pen industry) or directly competitive products (ballpoint pen industry) constitutes a major proportion of the total domestic production would also classify as ‘domestic industry’ for the purposes of the safeguard agreement. Here it is important to note that the safeguard agreement does not define what constitutes ‘major proportion’. Perhaps a clue can be taken from the antidumping agreement. Hence, if domestic producers of the like or directly competitive product collectively constitute 50% or more of domestic production, then it would classify as ‘domestic industry’ for the purposes of the safeguard agreement.

Causal link: For the imposition of safeguard measures there has to be a causal link between surge in imports and ‘serious injury’ to domestic industry. It is important to remember that unless there is a causal link (direct relationship) between surge in imports and ‘serious injury’ to domestic industry, no safeguard measure can be imposed.

The safeguard agreement explicitly states that the determination of ‘serious injury’ should be based on objective evidence of the existence of a causal link between increased imports of the product concerned and ‘serious injury’. Further, if the ‘serious injury’ is due to other factors such as domestic factors, then even if there is a surge in imports the ‘serious injury’ cannot be attributed to the surge in imports, hence no safeguard measures can be imposed.

It is interesting to note that during the Uruguay Round of negotiations there were demands that for the imposition of safeguard measures, imports should be the ‘principal cause’ of injury. The criterion of a causal link, as found in the present safeguard agreement, falls short of the demand of ‘principal cause’ of injury.

There is one situation where safeguard measures cannot be imposed even if all the three conditions stated above are fulfilled. This is known as de minimis import exemption.

A safeguard measure shall not be applied to low-volume imports from developing countries. Imports will be of low volume where imports from a single developing country do not account for more than 3% of total imports of the product concerned or the product under investigation. Hence, if the total imports of a commodity ‘A’ in a country ‘X’ is 100 units, and if another country ‘Y’s exports of the same commodity ‘A’ is 2.5 units (less than three units and hence less than 3%, in this case) then country ‘Y’s exports would be de minimis. And, provided developing country members below this threshold on an individual basis do not collectively account for more than 9% of those imports, such imports shall be excluded from the measure.

Differences in concept of ‘injury’ in safeguards agreement and antidumping agreement

In the antidumping agreement, for the imposition of antidumping duties the causal link should be between dumped products and ‘material injury’ to the industry. In the safeguard agreement, the causal link should be between surge in imports and ‘serious injury’ to the domestic industry.

The difference is thus in the degree of injury to domestic industry. Although neither the safeguard agreement nor the antidumping agreement provide any guidance towards the difference between an injury being ‘serious’ and it being ‘material’, the appellate body (the highest judicial body in the WTO) had held in a case that ‘material injury’ is of a lesser degree than ‘serious injury’. In other words, every ‘serious injury’ is a ‘material injury’, but not vice-versa.

This also implies that proving ‘material injury’ is easier than proving ‘serious injury’. To show that a ‘serious injury’ has taken place, a country would have to take into account more factors than what are used to prove ‘material injury’, such as actual and potential decline in sales, profits, output, market share, productivity, return on investments, or utilisation of capacity; factors affecting domestic prices; magnitude of margin of dumping; actual and potential negative effects on cash flow, inventories, employment, wages, growth, ability to raise capital or investments.

Another important difference between imposing safeguard measures and levying antidumping duties is that while the former is initiated by a surge in imports, the latter is initiated if dumping is taking place. Surge in imports may or may not be related to dumping. For instance, a particular commodity may be dumped but still there may not be a surge in imports because of ineffective demand for that commodity or because of cheap substitutes being domestically available. On the other hand, a surge in imports may be directly linked to dumping.

Assume a case where a commodity ‘A’ is dumped in a country. If this dumping is taking place at a very cheap rate then there may also be a surge in imports of this commodity. Surge in importation may lead to ‘serious injury’ to domestic industry. In such a scenario the importing country has the option of either imposing antidumping duties (because every ‘serious injury’ is also a ‘material injury’) or safeguard measures, whatever it deems fit. However, in this case, if the injury is ‘material’ then the country can impose only antidumping duties (provided dumping is taking place), even if there is a surge in imports.

There may be another situation where a product may not be dumped but still may result in a surge in imports. Assume a case where the price of product ‘A’ in country ‘X’ is 10 units and the country exports this product to country ‘Y’ at 12 units. This clearly means that country ‘X’ is not dumping ‘A’ in country ‘Y’. However, there is a surge in imports of ‘A’ from country ‘X’ to country ‘Y’ -- may be because the like products that are domestically produced cost 20 units or more. In this case, if the surge in imports of ‘A’, which is not being dumped, causes ‘serious injury’ to the domestic industry of country ‘Y’, then country ‘Y’ can impose safeguard measures.

Another important characteristic regarding the imposition of safeguard measures is that they should be levied on a Most Favoured Nation (MFN) basis. Hence, if there is a surge in steel imports in country ‘X’ that leads to ‘serious injury’ to the domestic steel industry of country ‘X’, then all steel imports coming into country ‘X’, irrespective of their country of origin, will be targeted for the imposition of safeguard measures. This is also different from the imposition of antidumping duties where only the dumped products are targeted. Hence, if steel from country ‘X’ is dumped in country ‘Y’, leading to ‘material injury’ to the steel industry of country ‘Y’, then country ‘Y’ will impose antidumping duties only on steel imports coming from country ‘X’ and not on all steel imports. Hence, antidumping duties are not imposed on an MFN basis.  

Procedure for imposing safeguard measures

According to the safeguard agreement, any country imposing safeguard measures must do so following an investigation according to the established rules and procedures that have been made public. So, if country ‘X’ has established and made public a particular procedure for investigation and imposing safeguard measures, then ‘X’ has to follow this procedure each time it wants to undertake an investigation for the imposition of safeguard measures. The country cannot follow a procedure different from this publicly-established procedure, as it will then be arbitrary and non-transparent.

The safeguard agreement also requires that the investigation by competent authorities shall include reasonable public notice to all interested parties and public hearings or other appropriate means in which importers, exporters and other interested parties can present evidence and their views. These public hearings, or public notices, should also provide the opportunity to all interested parties to respond to the presentations of other parties and to submit their views. At these public hearings, views may be expressed on whether the imposition of safeguard measures is in the public interest or not. Further, the competent authorities are under an obligation to publish a report putting forward their findings and logical conclusions reached on all pertinent issues of fact and law. In other words, the competent authorities will have to state their findings and give reasons for either imposing or not imposing safeguard measures, as the case may be.

In the process of investigating the imposition of safeguard measures, any information given by an interested party is by nature confidential or if the interested party is able to show that the information is confidential, then the competent authority will treat such information as confidential and will not disclose it to anybody. If the competent authority wants to disclose this confidential information it will do so only after obtaining the permission of the party that gave the information. However, interested parties providing confidential information may be required or asked to provide non-confidential summaries of this confidential information. In case the interested party providing the confidential information cannot provide non-confidential summaries they will have to provide reasons for the same.

The purpose here is to have as much transparency as possible. The agreement clearly appreciates the fact that there may be certain information that is confidential. In other words, there may be some information that an interested party would not like to provide for reasons such as that it could affect their business or other legitimate interests. However, in order to boost transparency, the safeguard agreement requires that in such cases the interested party may provide non-confidential summaries of the confidential information.

The safeguard agreement further provides that if a request for confidentiality is not warranted by the competent authorities, and if the party concerned is either unwilling to make the information public or to authorise its disclosure in generalised or summary form, then the authorities may disregard or not consider such information. The competent authorities may consider such information if it can be demonstrated to their satisfaction from appropriate sources that the information is correct.

Imposition of safeguard measures

If it is established that there is a surge in imports of a commodity, and this surge is directly responsible for causing ‘serious injury’ or ‘threatens to cause serious injury’, then the investigating (importing) country can impose safeguard measures. The safeguard agreement also provides that in critical cases where investigations are going on and where a delay would cause damage that would be difficult to repair, provisional safeguard measures can be imposed provided a preliminary or provisional determination has been made regarding clear evidence of increased imports having caused or threaten to cause serious injury.

These provisional measures can be imposed for 200 days and mainly take the form of tariff increases. In cases where, subsequently, it is found that increased imports have not caused ‘serious injury’, nor do they ‘threaten to cause serious injury’, then the increased tariffs should be promptly returned to the countries/parties on which the high tariffs were imposed.

For instance, say that during the course of an investigation a preliminary case is made out for imposing provisional measures and the investigating (importing) country imposes an extra tariff rate of 30%. If at the end of the investigation, which lasts for, say, four months from the date the extra tariff was imposed, it is determined that the increase in imports was neither causing nor threatening to cause serious injury, then the investigating country will have to refund the extra tariff of 30% that it has imposed for four months to all the countries/parties on which this extra tariff was imposed.

If, subsequent to the investigation, it is proved that a surge in imports has either caused ‘serious injury’ or ‘threatens to cause serious injury’, then the investigating (importing) country can impose safeguard measure

However, the imposition of safeguard measures is subject to the following conditions:

Lesser duration rule: The safeguard agreement states that safeguard measures should be imposed only for the time period that is necessary to prevent or remedy the ‘serious injury’ and to facilitate the growth of domestic industry. An interesting feature of the safeguard agreement is that imposition of safeguard measures should also match the domestic industry becoming competitive during the period when the safeguard measure is in place.

Hence, the safeguard agreement makes it clear that the imposition of safeguard measures has to be matched by certain actions by the investigating (importing) country, and the measure shall remain in place only till it is necessary to correct distortions in the domestic industry. By stating this, the safeguard agreement establishes the trade remedial nature of safeguard provisions in the WTO.

The safeguard agreement further states that if a quantitative restriction is used as a safeguard measure, such a measure shall not reduce the quantity of imports below the level of imports in the recent period. This recent level shall be the average of imports for the last three representative years for which statistics are available. In other words, if the investigating (importing) country imposes safeguard measures in the form of quantitative restrictions (QRs), then this restriction on quantity should use the recent level of imports as the benchmark.

If the recent level of imports of a particular commodity stands at 300 units in the last three years, with 100 units in each of these three years, then the QRs imposed to restrict the quantity of import of this particular commodity in the fourth year should not be more than 100 units, that is, the level of imports for the last three years. However, a higher level of QRs can be imposed (in the above example, in the fourth year instead of limiting it to 100 units it can be brought down to, say, 70 units) provided there is a clear justification that proves that this different (stricter) level is necessary to prevent or remedy ‘serious injury'.

The initial period for imposing safeguard measures should not exceed four years. This period can be extended if the competent authorities are able to prove that relaxing the safeguard measure would again lead to either ‘serious injury' or ‘threat of serious injury' to domestic industry. However, no safeguard measure can be imposed for more than eight years. These eight years include any provisional measure, initial years of application, and any extension.

Equivalent level of concessions: The safeguard agreement states that any member country of the WTO proposing to apply a safeguard measure, or seeking extension of a safeguard measure, shall endeavour to maintain a substantially equivalent level of concessions and other obligations to that existing under GATT 1994 between it and the exporting members that would be affected by such a measure. In other words, when a country proposes to impose safeguard measures against another country or countries, it has to offer trade compensation to all the countries against whom it is going to impose safeguard measures. This can be achieved by the concerned countries agreeing to an adequate means of trade compensation for the adverse effects of the measure on their trade.

If the concerned countries are unable to reach an agreement within 30 days, then the affected exporting members (countries against whom the safeguard measure has been taken) shall be free to suspend, after 90 days of the measure being applied, the application of substantially equivalent concessions or other obligations under GATT 1994 to the trade of the member applying the safeguard measure. This suspension of concessions by the exporting country should take place after 30 days from a written notice that is received by the Council for Trade in Goods of the WTO. The only situation where the exporting country (against whom the safeguard measure has been imposed) cannot take retaliatory steps is when the Council of Trade in Goods disapproves such action.

Trends in imposition of safeguard measures

The history of the last 10 years of the WTO demonstrates that safeguard measures have not been very popular. Countries that have been major initiators of safeguard investigations, during the period 1995-2001, include the United States , that initiated 42 investigations and Chile and India that have initiated 16 and 11 safeguard investigations respectively.

Source: Rules Division Countervailing Duty Database, www.wto.org

The comparatively infrequent use of safeguard measures by countries as a trade remedial measure is because countries prefer imposing antidumping duties. Over the years, antidumping has clearly emerged as the favourite trade remedial measure of almost all countries.