Barriers to African Exports: Current Problems and Future Risks

Willkie Farr & Gallagher LLP

September 13, 2006

Geneva, Switzerland

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Overall Introduction

Trade should facilitate development Distortions that limit trade

Measures that skew economic incentives (subsidies) Barriers to imports (trade remedies, other “policy” objectives)

Need to know the rules of the game Measures that affect African countries now Measures that can affect African countries in the future How such measures are disciplined by the WTO

Overview of the rules of the game More general strategic comments later

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Agreement on Subsidies and Countervailing Measures

(“SCM Agreement”) and

Agreement on Agriculture (“Ag Agreement”)

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SCM Agreement and Agriculture Agreement

Overview of the Agreements Key provisions Types of subsidies Peace Clause Landmark WTO challenges What does this all mean for Africa?

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SCM Agreement

Regulates:

1. Countervailing Duty Measures

2. Subsidies, and

Applies to all products – industrial and agricultural

Exempts certain subsidies on agricultural products

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Agriculture Agreement

Contains detailed rules regarding market access and subsidies for agricultural products

Achievements Eliminated quantitative restrictions Reduced tariffs Limited and reduced subsidies

Lists detailed SCM Agreement exemptions for

certain agricultural subsidies (these exemptions

expired as of January 1, 2004)

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SCM Agreement – “Subsidy” (Article 1.1)

Definition 1. Financial contribution

2. By a government or other public body

3. That confers a benefit

Examples Government loans Government grants Tax deferrals Government purchase of goods in certain instances

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SCM Agreement – “Specificity” (Article 2)

Only subsidies that are “specific” are governed by the SCM Agreement

Specific: limited to an enterprise or industry, or a group of enterprises or industries

Four Types of Specificity1. Enterprise: specific to a particular enterprise

2. Industry: specific to a particular industry

3. Regional: specific to a particular geographic region

4. Prohibited: prohibited subsidies automatically deemed specific

Purpose: to distinguish between rational government contributions from those that distort international trade (e.g., police and fire services v. export subsidy)

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SCM Agreement – Two Categories of General Subsidies

Prohibited Subsidies (SCM Agreement Part II

(Articles 3 - 4))

Actionable Subsidies (SCM Agreement Part III

(Articles 5 -7))

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SCM Agreement – Prohibited Subsidies

Contingent upon:1. Export performance, or

2. The use of domestic goods over imported goods (SCM Agreement Article 3.1)

These subsidies:

1. Are inherently specific, and

2. Distort international trade

Examples in Annex 1 of the SCM Agreement Tax deductions that encourage exportation Grants to reduce freight costs Certain export credit guarantee or insurance programs

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SCM Agreement – Actionable Subsidies

Allowed unless they cause “adverse effects” to other WTO Members

Forms of adverse effects (SCM Agreement Article 5)1. “Injury” to the domestic industry (i.e., financial decline of domestic

producers of importing country),

2. “Nullification or impairment” of GATT-WTO benefits (i.e., GATT-WTO concession undercut)

3. “Serious prejudice” to the interests of a WTO Member (i.e., displaces exports in the market of the subsidizing country or third market)

Examples Debt forgiveness payments Certain payments to cover operating losses

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SCM Agreement: Remedies Against Subsidies

National Agency Challenges Conduct domestic investigations to determine the level of:

1. Subsidy, and

2. Injury to the domestic industry Subject to SCM Agreement Articles 10 – 23 Remedy: Countervailing Duty Aimed at imports entering individual countries

WTO Challenges Submit Request for Consultations Subject to the SCM Agreement and Dispute Settlement Understanding

(and perhaps other WTO Agreements) Remedy: WTO ruling and compliance/retaliation

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Agriculture Agreement – Two Categories of Agricultural Subsidies

1. Domestic (Agriculture Agreement Article 6)

2. Export (Agriculture Agreement Article 9.1)

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Agriculture Agreement – Three Categories of Domestic Subsidies

“Green Box”

Subsidies

“Blue Box”

Subsidies

“Amber Box”

Subsidies Little to no distortive

effects on trade (e.g., research, disease control, food security, training)

Not subject to reductions; may even increase

Production limiting programs

May have a distortive effect on trade (e.g., minimum price guarantees)

Not subject to reductions; may even increase

“All other” subsidies distortive effect on trade (i.e., price supports)

“Blue box” subsidies not included because not directly related to quantity of production

Subject to reduction commitments (AG Individual Member Schedules)

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Agriculture Agreement – Export Subsidies

Definition: “subsidies contingent upon export performance” (Agriculture Agreement Article 1(e))

Examples Direct export subsidies contingent upon export performance Sales to government, which in turn exports at a price lower than the

domestic market price Cost reduction subsidies for marketing

Subject to reduction commitments

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Agriculture Agreement – “Peace Clause”

Agriculture Agreement Article 13 (known as the “Peace Clause”): exempted agricultural subsidies from certain legal challenges under the SCM Agreement

This clause expired as of January 1, 2004 for developed countries.

Exemptions in effect prior to 2004 “Green Box” Subsidies: exempted from 1) domestic countervailing

duties in importing WTO countries, and 2) multilateral trade actions under the WTO dispute settlement system

“Blue Box”, “Amber Box” and Export Subsidies: exempted from only multilateral trade actions (i.e., may be subject to countervailing duties in importing WTO countries)

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Agriculture Agreement – “Peace Clause”

On or after January 1, 2004, legal challenges now allowed:

Agriculture Agreement SCM Agreement

Domestic Subsidies Actionable Subsidies

Export Subsidies Prohibited Subsidies

As a practical matter, the hope for increased commitments as part of the Doha Round negotiations have delayed legal challenges.

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Agricultural Subsidies - Landmark WTO Challenges

European Communities – Export Subsidies on Sugar (2005) Involved export-related payments to EC producers and/or exporters of certain

sugar products WTO Appellate Body ruled in favor of Australia, Brazil and Thailand and

against the European Community Cote d’Ivoire, Kenya, Madagascar, Malawi, Mauritius, Swaziland and

Tanzania participated as third parties Arguments

Australia, Brazil and Thailand: payments at issue constituted export subsidies outside the scope of the Agriculture and SCM Agreements

EC: payments were within allowable limits under the Agriculture Agreement Finding: such subsidies were inconsistent with the Agriculture Agreement

because they constituted export subsidies in excess of bound EC levels No finding under the SCM Agreement on the ground of judicial economy

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Agricultural Subsidies - Landmark WTO Challenges

United States – Subsidies on Upland Cotton (2005) Certain loans and grants for U.S. producers/users/ exporters of certain cotton WTO Appellate Body ruled in favor of Brazil and against the United States Benin and Chad participated as third parties Arguments

Brazil: U.S. loans and grants at issue constituted domestic subsidies prohibited under both the Agriculture and SCM Agreements

United States: U.S. loans and grants at issue constituted “Green Box” subsidies exempt under the Peace Clause and, thus, not challengeable under the Agriculture and SCM Agreements

Findings Such loans and payments were not exempt under the Peace Clause because they did

not qualify as a “Green Box” measure and exceeded the allowable limits of such subsidies

Such loans and payments were inconsistent with the SCM Agreement because they caused serious prejudice, through price suppression, of certain cotton in the world market

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What does all this mean for Africa?

Developed country subsidies undermine trade and economic development in Africa

Example: U.S. cotton subsidies $4 billion of total U.S. cotton subsidy payments during the 2001-2002

season exceed gross national incomes of most African countries While U.S. world market share increased from 23.5% in 1999 to 39.9%

in 2002, West African world market share decreased from 10.2% in 1998 to 8.1% in 2002.

In 2001, sub-Saharan cotton exporters lost $302 million as a direct consequence of U.S. cotton subsidies.

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What does all this mean for Africa?

Other products subsidized by developed nations and harmful to African nations that export agricultural goods Sugar Corn Wheat Milk Rice

Developed country subsidies show no signs of abating, particularly in the United States where TPA is set to expire and a Congressional election is looming in November 2006 followed by a Presidential election in 2008

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What does all this mean for Africa?

The participation of Benin and Chad in United States – Upland Cotton was a significant step

Given the uncertainty of the agricultural negotiations under the Doha Round, African nations should continue – and increase – such involvement

The WTO was created in pursuit of economic development for LDCs and developing nations. WTO rights were accorded to those nations towards that end

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Sanitary and Phytosanitary Measures Agreement

(“SPS Agreement”)

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SPS Agreement

What are Sanitary and Phytosanitary Measures What is the SPS Agreement What are the Requirements of the SPS Agreement Recent Proliferation of SPS Measures in Developed Countries Why the SPS Agreement is Important to Developing Countries SPS Agreement and WTO Dispute Settlement System Some Case Examples

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Sanitary and Phytosanitary Measures

Sanitary and phytosanitary measures are defined as any measures applied:  To protect human or animal life from risks arising from additives,

contaminants, toxins or disease-causing organisms in their food; To protect human life from plant- or animal-carried diseases; To protect animal or plant life from pests, diseases, or disease-causing

organisms; To prevent or limit other damage to a country from the entry,

establishment or spread of pests.

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What is the SPS Agreement?

The SPS Agreement entered into force with the establishment of the WTO on January 1, 1995  

The SPS Agreement allows governments to impose requirements on food and agricultural trade in order to protect human, animal or plant life or health provided they do not discriminate or use these measures as disguised protectionism.

While SPS measures may have valid intentions, they can be significant barriers to the importation of food and agricultural products.

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Requirements of the SPS Agreement

General Rules: SPS measures should not arbitrarily or unjustifiably

discriminate between countries (Article 2.3). SPS measures must be applied only to the extent necessary

to protect human, animal, or plant life or health (Article 2.2).

– Japan-Apples case establishes the standard that SPS measures must be proportionate to the risk it is meant to address.

SPS measures must be based on science (Article 2.2).

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Requirements of the SPS Agreement (contd.) Standards For Complying with SPS Concerns:

Member countries are encouraged to use international standards and guidelines in developing and implementing SPS measures (Article 3.1)

– …although the Appellate Body ruled in EC-Hormones that SPS measures do not necessary have to conform strictly to international standards.

If a member country sets standards above international standards, it must provide a scientific justification (Article 3.3).

– Japan-Apples held that this scientific justification can be challenged

SPS measures must allow countries to use different standards and methods of inspecting products. As long as the exports achieve the same level of health protection as in the importing country, the exports should be acceptable. (Article 4.1)

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Requirements of the SPS Agreement (contd.) Risk Assessment Requirement:

Measures must be based on science and a scientific risk assessment (Articles 5, 2.2.).

– In Australia-Salmon case, the Appellate Body found that the imposing Member does not necessarily have to conduct the risk assessment itself.

Requirements under SPS measures must be proportionate to the risk it is meant to address. SPS measures must be based as far as possible on the analysis and assessment of objective and accurate scientific data

(Article 5). – For example, the Appellate Body in EC-Hormones found that the EC’s

measures were not based upon a “rational relationship” between the measures imposed and the risk growth hormones pose to the health of the population.

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Requirements of the SPS Agreement (contd.) Transparency Requirement:

Governments must provide advance notice of new or changed sanitary and phytosanitary regulations, and establish a national enquiry point to provide information (Article 7)

Governments must be open to scrutiny how they apply their food safety and animal and plant health regulations (Article 7).

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Recent Proliferation of SPS Measures in Developed Countries

Agricultural trade is shifting towards high-value, perishable products like fresh fruit and vegetables, meats, and fish

Growing demand for processed food products Consumers in developed countries have raised expectations

with regard to food standards Domestic pressure to regulate imports has increased since

heightened competition from agricultural trade liberalization Advances in science and technology make testing for risk-

causing elements (e.g., bacteria, chemicals) easier

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Why the SPS Agreement is Important to Developing Countries

SPS measures in developed countries may be used as a market barrier for products coming from developing countries.

Developing countries may have a more difficult time complying with strict SPS requirements: Lack of technical and financial resources to comply with new laws Different methods of ensuring protection of food, animals

With the proliferation of SPS regulations in developed countries, developing countries may find more markets closed to their goods.

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SPS Agreement and Dispute Settlement System

30 formal complaints have been made under the SPS Agreement (26 separate issues)

8 disputes proceeded to the WTO Panel (others are still pending consultations or settlements agreed upon)

Developing countries have been involved in 13 disputes (some as complainant, some as defendant).

No African country has ever initiated a complaint under the SPS Agreement.

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SPS Agreement and Dispute Settlement System

Examples of Complaints Brought By Or Against Developing Countries Turkey – Certain Import Procedures for Fresh Fruit (by Ecuador)

Mexico – Certain Measures Preventing the Importation of Black Beans from Nicaragua (by Nicaragua)

Egypt – Import Prohibition on Canned Tuna with Soybean Oil (by Thailand)

India – Quantitative Restrictions on Imports of Agricultural, Textile and Industrial Products (by Australia, Canada, EC, New Zealand, Switzerland and the United States)

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Case Examples: Turkey – Certain Import Procedures for Fresh Fruit Filed by Ecuador in 2002 Resolved as a result of a mutually agreed solution Turkey required that an importer obtain a Control Certificate to

import bananas. Ecuador complained that the way the Control Certificate was

issued and administrated, Turkey effectively put quantitative limitations on imports of bananas.

Turkey also failed to apply to domestic bananas an equivalent testing and certification procedure as required for imported bananas.

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Case Examples: Mexico – Certain Measures Preventing the Importation of Black Beans from Nicaragua

Filed by Nicaragua in 2003 Status – Nicaragua withdrew the request for consultations because its

complaints had been adequately addressed in negotiations Nicaragua complains that the following are inconsistent with Mexico’s

obligations under GATT: Mexican authorities refused to furnish importers with the document containing

the phytosanitary requirements necessary for the importation of black beans from Nicaragua;

In the administration of the above procedures, Mexican authorities provided more favorable treatment to like products originating in other countries.

Failure to publish the specific phytosanitary requirements for the importation of black beans from Nicaragua.

Failure to publish the rules, requirements, and procedures concerning the tender for the quota allocation of black beans from Nicaragua

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Trade Remedies

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Trade Remedies

Introduction to trade remedies (use, distinctions, similarities)

Safeguard Measures

Anti-dumping Duties

Countervailing Duties

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What are trade remedies?

Permissible import restraints that otherwise would be contrary to WTO principles Essentially, exceptions to the bedrock rules of binding tariffs and MFN

(most favored nation) treatment

Designed to allow relief from imports deemed “unfair”, or adjustment from a surge in imports Often called the “safety valve” to allow further trade liberalization

WTO identifies three primary types: Safeguards (temporary relief from import surges) Antidumping (counteracting unfairly low prices) Countervailing duties (counteracting subsidies)

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Frequency of Use

As tariffs are reduced or eliminated, more countries are invoking WTO trade remedies to assist domestic industries

From 1995 through 2005: 182 safeguard proceedings were initiated (huge increase in 2002 due to

steel measures) 2,840 antidumping proceedings were initiated 148 CVD proceedings were initiated

In 2006, there was a large drop-off in the number of cases initiated

Part of a counter-cyclical cycle with status of economies

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Africa’s Prior Involvement

Egypt – Definitive Anti-Dumping Measures on Steel Rebar from Turkey (Appellate Body and Panel Reports adopted)

South Africa – Definitive Anti-Dumping Measures on Blanketing from Turkey (consultations requested – no panel established nor settlement)

South Africa – Anti-Dumping Duties on Certain Pharmaceutical Products from India (consultations requested – no panel established nor settlement notified)

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WTO Complaints Involving the AD, SCM and Safeguards Agreement

Through June 2006 - 33 complaints involving challenges under the WTO Safeguards

Agreement 69 complaints involving challenges under the WTO Antidumping

Agreement 70 complaints involving challenges under the WTO Subsidies and

Countervailing Measures Agreement

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Complaints Under the Safeguards Agreement

0 02 2

53

7

11

1 02

0

0

5

10

15

20

25

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

Jun-0

6

Safeguards Complaints

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Complaints Under the SCM Agreement

0

710 11

3

7

4

7 6 6

1

8

0

5

10

15

20

25

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

Jun-0

6

SCM Complaints

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Complaints Under the AD Agreement

13 3

68

11

67 6

8

46

0

5

10

15

20

25

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

Jun-0

6

AD Complaints

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Distinctions

Nature of underlying activity In safeguard cases, there is no issue of unfairness

– By law, all imports examined in a safeguards case are considered fairly traded

– Since fairly traded, all sources should be included (though exceptions apply for developing country exclusions, country-specific safeguards (China and Vietnam), and possibly FTA partners)

AD and CVD counteract “unfair” trade practices– Unfairly priced (AD) and government subsidized (CVD) imports– The added tariff is intended to offset the improper dumping or subsidy– Allegation of unfairness means must target individual country

Nature of injury varies AD and CVD require only material injury Safeguards require serious injury

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Distinctions

Nature of remedy AD and CVD limited to the amount of dumping or subsidization Safeguard remedies more flexible

Duration of remedy AD and CVD can last forever, although there are reevaluations

every five years Safeguard measures usually shorter in duration – often three

years to avoid need to compensate

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Similarities

Cases usually brought by domestic industries struggling to compete with imports

Usually triggered by an increase in imports Some degree of injury to domestic industry must be

demonstrated Regardless of dumping or subsidy margin (or size of import

surge), no import relief unless finding of injury and causation

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Safeguards Agreement

Under WTO Agreement three conditions must be satisfied before imposing safeguard measures

(1) Must find a recent increase in import volume that was unforeseen and the result of trade concessions

(2) Must find that the increased imports have caused (or threatened to cause) the domestic industry to suffer serious injury

(3) Must craft appropriate remedy that is no more restrictive than necessary to eliminate the serious injury caused by the imports

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Safeguards – Developing Countries

Safeguard cases involve all countries at the beginning

Developing countries are accorded some favorable treatment under Agreement Safeguard measures may not be applied against WTO Member

developing countries that account for less than 3% of total imports of the like product and the total share of all developing countries is less than 9%

Example of U.S. steel case– Due to satisfaction of the criteria above, most WTO Member developing

countries were excluded from the steel safeguard that was subject to a WTO panel

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Antidumping – Overview

Definition What it is:

– “Dumping” refers to situation when an exporter sells goods in an export market at prices lower than those same goods are sold in its home market

What it is not:– Dumping has nothing to do with actions of a foreign

government;– Dumping does not involve predatory pricing

Antidumping remedy consists of additional tariff equal to the amount of injurious dumping

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Subsidy - Overview

Financial contribution by government Government versus private sector

Benefit conferred Use of market benchmarks

Specific to some industry Certain companies or industries All export subsidies De jure versus de facto

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WTO Categories

Prohibited subsidies (“red light”) Export subsidies, import substitution

Actionable subsidies (“yellow light”) Government financing; beneficial tax rates But must demonstrate “serious prejudice”

Non-actionable subsidies (“green light”) R&D assistance; facility adaptation for environmental regulations

have since expired

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CVD

Can attack red light or yellow light subsidies Common theme: use of market benchmark to

evaluate subsidy Must be “specific,” which is often a major issue to

be debated Procedural framework largely mirrors

Antidumping Agreement

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Subsidies – Developing Countries

Developing and least-developed countries given time to comply with new anti-subsidy rules Least developed countries (less than $1,000 per capita) are exempted

from disciplines on prohibited subsidies

More favorable de minimis and negligibility rules

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Attacking trade remedies

As more countries use trade remedies, more countries are turning to the WTO.

Binding dispute settlement makes WTO alternative more attractive.

The trend is expected to accelerate as more countries adopt and implement trade remedy laws.

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WTO Panel Decisions

The WTO has adopted 84 panel reports. Of those 84 reports, 54 (or 64%) covered AD/CVD or Safeguard Measures:

Safeguards - 8 (or 10%) AD - 21 (or 25%)

(includes 2 regarding Mexico's High Fructose Corn Syrup, 2 regarding EC Bed Linen, 2 regarding Korean DRAMs, and 2 regarding Guatemala cement)

Subsidies/CVD - 25 (or 30%)(includes 2 regarding Australian leather, 5 regarding Brazilian/Canadian aircraft, 3 regarding Canadian milk/dairy, and 2 regarding US-FSC)

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Conclusions

African countries face current barriers. As they become more active in international trade, the range of

barriers are likely to increase. The rules of the game are quite complex, and often do not

reflect a “common sense” understanding. WTO challenges can succeed, but progress in clarifying the

legal disciplines has been slow. As in any complex game, awareness of and knowledge about

the rules is an enormous advantage.