ITC Mid-Point Review Release

MEMORANDUM

October 14, 2003

This memorandum responds to a paper by lawyers for the domestic integrated steel producers, Messrs. Wolff and Lighthizer dated October 2, 2003. That paper in turn addresses an ECAT paper that analyzed the authority of the EU and other countries to suspend trade concessions to the United States (in plain terms, retaliation). We strongly disagree.

Wolff/Lighthizer argue that the President lacks the legal authority to terminate the steel safeguard measures now, because there are only two permissible grounds for termination and, in their opinion, neither exists. The grounds for termination are: (1) the failure of the domestic industry to make adequate adjustment to import competition; or (2) "changed economic circumstances" that impair the effectiveness of the relief as restrictively defined by Wolff/Lighthizer. Further, the Wolff/Lighthizer paper argues that US trading partners/WTO Members lack the authority to retaliate against U.S. exports in response to a WTO decision (widely expected) that the U.S. steel measures are inconsistent with the WTO Safeguards Agreement.

In summary, we conclude after reviewing the Wolff/Lighthizer paper that it does not accurately state the law regarding the President's authority or the authority of our trading partners to suspend trade concessions under the WTO Safeguards Agreement.

Contrary to the Wolff/Lighthizer arguments, we conclude that the President has ample authority to terminate the tariffs under the statutory language in Section 204 of the Trade Act -- based on changes to the U.S. economy since March 2002. The deterioration of the steel industry's customer base, leading to increasing imports of steel-containing products and the flow of OEM orders off shore, impairs the effectiveness of the safeguard measures and the President is within his authority to terminate the measures.

Beyond the narrow limits of Section 204, the President also possesses inherent power under the Constitution to conduct foreign affairs, which Congress has not, and could not restrict. Moreover, WTO members have the authority under the WTO Safeguards Agreement to suspend tariff concessions; the Office of the U.S. Trade Representative has at least informally acknowledged this authority.

1. Background

The President is permitted to terminate or modify the steel safeguard measures after receipt of a report from the International Trade Commission on the mid-point review of measures, inter alia, if he determines that "changed economic circumstances" have impaired the effectiveness of the relief.

Steel consumers have pointed out that they, the customers of domestic steel producers, have lost a significant portion of their business since the tariff decision was made in March 2002. 1/  There are a number of reasons for this loss of economic activity in the U.S.; however, the reasons are less important than the fact that the loss has occurred. With so much business lost, steel producers have a diminished market into which they can sell their products, which undermines their ability to be competitive once tariffs are removed. The sooner the tariffs are removed, therefore, the better for the health of steel consumers and steel producers.

The European Union has published a retaliation list scheduled to go into effect five days after the WTO Dispute Settlement Body adopts an adverse WTO decision on the steel tariffs. Japan and other WTO Members are developing separate retaliation lists involving U.S. exports as well. Retaliation could occur as early as November 2003. Wolff/Lighthizer argue that the European Union and other WTO members have waived their right to retaliate to "suspend" concessions because of their decision to resort to the dispute settlement process in the WTO. In my view, this is not correct.

2. "Changed Economic Circumstances"

The language of Section 204(a) (quoted in pertinent part below) grants the President authority to determine whether changed economic circumstances have occurred. While Wolff/Lighthizer argue that the 1988 amendment to the Act limits the meaning of "changed economic circumstances" to currency fluctuations and attempts to circumvent the relief, this is not a fair or reasonable reading of the statute or the legislative history.

The Conference Report to the 1988 Trade Act 2/ mentioned currency fluctuations and attempts at "circumvention" as examples of changed circumstances, not an exhaustive list. In a different context, the House Report on the bill contains other examples of grounds for termination or modification of relief, specifically including "changed circumstances in the domestic [U.S.] economy." 3/

In the absence of clear evidence to the contrary, Congress would not have intended to restrict the President from taking action to modify measures that are rendered ineffective by changes in the domestic economy. Based on a rational reading of the statute, the President has the authority to consider domestic as well as foreign economic changes in deciding whether "changed economic circumstances" exist that warrant termination or modification of the steel measures.

In arguing the contrary position, Wolff/Lighthizer would tie the President's hands and require continuation of tariffs regardless of their harm to the domestic economy. Such a reading is a dramatic departure from the breadth of Presidential discretion in international trade decisions. It must be remembered that the President has more than the authority granted in Section 204 to make international policy. He has inherent authority under Article II of the Constitution in international trade matters. A narrow reading, such as that put forward by Wolff/Lighthizer, could raise serious constitutional issues.

Such a narrow reading of the statute is neither required nor correct. The use of the term "changed economic circumstances" is used in the context of a determination the President must make to modify or terminate safeguard measures:

Action taken under [Section 203] may be reduced, modified or terminated by the President . . . if the President . . . determines, on the basis that . . . the effectiveness of the action . . . has been impaired by changed economic circumstances . . ..
[Section 204(b)(1)].

Wolff/Lighthizer assert that the meaning of the language in section 204 is plain and unambiguous. But in a stunningly illogical interpretation, they assert that the plain meaning of the statute prohibits the President from considering domestic economic conditions in deciding whether to continue, modify or terminate safeguard measures.

Wolff/Lighthizer ignore the statutory language, which gives the President the authority to determine that changed economic circumstances have impaired the effectiveness of the relief. That means that the President is to decide if changed economic circumstances exist. Congress cannot override this determination with a disapproval resolution, and the courts are very unlikely to disturb it.

Wolff/Lighthizer then resort to legislative history, although pointing out that it is only relevant if there is an ambiguity. They argue that the 1988 changes to the Act removed the power of the President to consider the national interest in deciding whether to continue or terminate safeguard measures. This is a surprisingly unfair reading of the legislative history. The "national interest," which was the vague standard given in the pre-1988 law was changed. Two grounds were listed: (1) failure to make adequate adjustments; and (2) "changed economic circumstances".

The statute does not expressly forbid the President to make any modification of safeguard relief in the absence of these conditions. However, even assuming that the President is so restricted, that does not argue for the narrow interpretation of "changed economic circumstances" asserted by Wolff/Lighthizer. Indeed, it would be most unexpected for the President to be denied authority to modify or terminate safeguard measures on grounds that would clearly allow him to decline to provide relief in the first instance. 4/

Precedent also refutes the Wolff/Lighthizer argument. In the safeguards case on Lamb Meat, the President terminated safeguard measures after the mid-point review report, due to changed circumstances. In that case, the U.S. lost a WTO case brought by Australia and New Zealand. In light of this change, as well as other changed economic circumstances detailed by the International Trade Commission, the President determined to terminate the safeguard measures. This termination is clearly inconsistent with the arguments of Wolff/Lighthizer, who did not mention this precedent. See Proclamation 7502 (November 14, 2001), published in 66 Fed. Reg. 57837 (November 19, 2001).

3. Suspension of Concessions (Retaliation) under WTO Safeguards Agreement

Wolff/Lighthizer are unconvincing in their analysis of the interplay between the Safeguards Agreement and the Dispute Settlement Understanding. The crux of the matter is Article 8 of the Safeguards Agreement. They misapprehend the meaning and the purpose of Article 8, which is clearly intended to give WTO members the right to demand offsetting trade concessions when safeguard measures inhibit the trade they had a right to expect under the negotiated trade agreements. While Wolff/Lighthizer blithely assert that the rights under Article 8 do "not even arguably apply" to the current case, the fact is that Article 8 does apply.

Wolff/Lighthizer argue in essence that the Article 8 rights must be invoked within 90 days or be lost forever, without exception. However, the United States government acknowledges that such a requirement does not exist. Several countries (such as Brazil and Korea) specifically withheld retaliatory measures last year at the request of the U.S. in exchange for a commitment that the U.S. would not argue that Brazil had waived its rights by waiting until after the conclusion of dispute settlement proceedings. Moreover, reading the 90-day limit in Article 8.2 together with Article 8.3, the Wolff/Lighthizer argument would render much of Article 8.3 meaningless. 5/ The better argument is that the countries entitled to offsetting concessions do not lose their rights to suspend concessions while waiting for a dispute settlement decision.

The Wolff/Lighthizer position is also impractical. If a WTO member has been wronged by the imposition of WTO-inconsistent safeguards, it is far more in keeping with a rules-based system to permit the adjudication of a dispute before forcing a decision to retaliate on a member that may believe that it has that right. The language of Article 8.2 and 8.3 taken together provides that orderly resolution.

The decision of the Appellate Body in the steel case is nearly at hand. The European Union, for one, has already issued a retaliation list which, in my view, is consistent with Article 8.2 and 8.3 of the Safeguards Agreement. Other WTO Members are likely to do so in the near future. The United States would not likely be successful in challenging such a decision; moreover, U.S. exporters of products on the EU retaliation list, and any other list that may be issued by one or more of seven other countries, would be harmed immediately (in fact, they may already be harmed by the uncertainty of their future exports). It would be cold comfort to them to read the Wolff/Lighthizer argument that the U.S. might have a theoretical cause of action (which, as Wolff/Lighthizer have pointed out on occasions when it suits them, are only prospective in effect).

4. Conclusion

A fair reading of the relevant U.S. statute indicates that the President has the discretion to consider all changed economic circumstances (domestic and foreign) in deciding whether to terminate or modify safeguard measures under Section 201-204 of the Trade Act of 1974, as amended. The loss of direct and indirect manufacturing business and the forced flight of steel consumers out of the United States is a changed economic circumstance sufficient to authorize the President to modify or terminate the steel safeguard measures.

In addition, the EU and seven other countries challenging the steel safeguards in the WTO could suspend their concessions in retaliation for U.S. measures that are inconsistent with WTO obligations. Such retaliation is authorized by Article 8.2 and 8.3 of the WTO Safeguards Agreement, and nothing in the Dispute Settlement Understanding or the Safeguards Agreement removes the risk of such retaliation.

1/ While Wolff/Lighthizer state that the damage to steel consuming industries from the tariffs has been "negligible," this is refuted by the facts contained in the ITC report, which show that downstream industries lost well over $1 billion as a result of the tariffs.

Even this degree of damage, however, is far from the full story of why termination of the tariffs is justified. The changed circumstances need not be caused by the imposition of the tariffs. The fact of damage to the steel industry's customer base and the migration of employment and manufacturing activity abroad impairs the effectiveness of the steel safeguards by removing the very customers that the steel industry needs to remain viable. The President has clear evidence of this development, which is a "changed economic circumstance" sufficient to justify the termination of the steel measures.

2/ H. Rep. 100-576, 100th Cong., 2nd Sess. (April 20, 1988) at 687-88.

3/ H. Rep. 100-40, 100th Cong., 1st Sess. (April 6, 1987) at 109.

4/ See Section 203(a)(2) for the factors the President is to take into account in determining what measures to take in response to an injury determination by the ITC.

5/ Article 8.3 restricts suspension of concessions for the first three years of a measure, if the measure is based on an absolute increase in imports and if it is consistent with the obligations under the Safeguards Agreement. However, the provision clearly permits suspension of concessions after three years. Interpreting the 90-day rule as Wolff/Lighthizer assert would render much of Article 8.3 meaningless.