[Bhaskar is a student at Jindal Global Law School.]
On 31 August 2022, India notified the World Trade Organization (WTO) about its proposal to suspend concessions on British trade with India worth USD 250 million. This was a reaction in response to the UK’s decision to extend a package of tariffs on imported steel products by two years. The tariffs package is from 2018, when the UK, as a part of the European Union (EU), introduced measures to safeguard domestic producers from foreign steel exporters.
In early 2022, the UK government’s newly created Trade Remedies Authority (TRA) suggested that there was no pressing need to extend the tariffs on steel products. This suggestion was ignored, as the then International Trade Secretary, Liz Truss, passed an emergency ordinance to amend the proposal presented to the TRA. It must be noted that the EU also chose to extend the quotas in 2021, extending the period to 2024.
Despite their exit from the EU, the UK has chosen to retain a majority of the quotas. The limitations on steel products stipulate a certain cap on the tonnage (amount) of steel a country can export to the UK. Overshooting the cap would result in a 25% tariff on the product.
India’s chief concern is that such an action on imports is inapposite to the obligations of contracting parties under the WTO agreement, especially the Agreement on Safeguards (SG). As a result, India has requested trade compensation to offset the losses on the export duty of steel products to the tune of USD 248 million. In this piece, the author shall break down the nuances behind the measures, noting the remedies available to both parties and a prospective way ahead.
Legal Standard for Safeguards
The WTO is an international organization that facilitates trade liberalization. It is a forum where governments approach each other and negotiate trade logistics and have access to an amenable dispute resolution mechanism. The WTO’s process is driven by an older set of rules enshrined in the General Agreement on Tariffs and Trade 1994 (GATT). Under this regime, the SG lays down rules for “safeguard measures”. A safeguard measure is any emergency action taken as a result of sudden surge in the import of a class of products to address damage or possible damage to a member state’s domestic industries. Such measures may vary from reconsidering concessions provided to quantitative restrictions on the import of said products.
Article XIX of the GATT speaks of emergency actions on imported products. It stipulates that if the obligations incurred due to trade with another country result in an unforeseen influx of goods from that country, the importing country would be free to suspend or modify concessions on said imported goods. These concessions are undertakings exchanged between WTO member states that reaffirm mutual arrangements concerning a substantial reduction of tariffs and barriers to global trade. Suspensions and modifications to concessions are labelled as safeguards.
Using Article XIX as a guiding principle, the SG establishes rules for applying safeguard measures. Article 2 (SG) states that a safeguard measure may be applied when a member state has objectively assessed import circumstances. The assessment of injury to the domestic industry must be carried out by competent authorities within the contracting member state. It is not based on the product’s country of origin. The threshold to impose such limitations, however, must be beyond mere injury to domestic industries, it must be a serious injury.
Article 4 of the SG defines serious injury as a significant overall impairment to the position of a domestic industry of a contracting party. Similarly, a threat of serious injury must indicate an imminent threat to the position of an industry. The position of a domestic industry is key in understanding the objective of this rule. Domestic industries that produce similar products or are like imported products are likely to face competition along qualitative or quantitative metrics. This rule provides a contracting party’s domestic industry with a fair chance to position itself in the global markets.
Such measures, however, must be temporary. This is required to further the cause of ‘progressively liberalizing’ the measure. Member states are free to impose safeguards reasonably, but the SG stipulates that they must ensure a gradual relaxation of the application of the safeguard. This must be supplemented with providing compensation to the exporting member states whose trade may be affected negatively concerning that particular class of products.
India’s Contentions
India’s communication to the Council for Trade in Goods mentions four grounds of dispute against to the UK’s safeguard measures. They are broadly based on the following:
On the evidence of serious injury
The SG is replete with the requirement that to apply a safeguard measure, the Committee on Safeguards must be supplied with objective evidence of serious injury to a domestic industry. In Article 12.3 (SG), member states proposing to apply safeguards must consult with member states having a substantial interest in the export of a particular product. This is in furtherance of the objective of Article 8, which prescribes adequate means of trade compensation to counter the adverse effects of the extension of a measure. India has claimed that it has a substantial interest in the steel sector and that the imposition of such a measure will cause harm to its export cycles. India has mentioned that the safeguards have led to a decline in exports weighing 2,19,000 tons, amounting to a duty of USD 248 million. To that end, they have claimed that there are legal inconsistencies in the evidence presented to satisfy the serious injury threshold.
On the duration of the safeguard measures
Article 7 (SG) states that a safeguard measure may be applied only for such a period as necessary to correct a serious injury and facilitate adjustment to competition. Such period shall not be more than four years unless the competent authorities have determined further extension. Such extensions, however, must be cognizant of the compensatory measures (Article 8) which must be undertaken to make good any losses faced by exporting member states.
The overall objective of the SG and associated agreements under the WTO is to work towards a better state of progressive liberalization. To progressively liberalize is to gradually loosen any and, if appropriate, all restrictions to global trade and exchange. David Ricardo posited that states cannot exist in isolation, instead, they have to demonstrate a comparative advantage to other states. A comparative advantage is any domestic specialization or manufacturing/resource expertise which gives a country an advantage in that sector. For example, India has a comparative advantage in high speed steel products. An exchange of comparative advantages is the base logic behind trade liberalization and globalization. Member states enter into agreements with each other with the undertaking that they will respect the notion of liberalization.
To facilitate adjustment when a safeguard exceeds three years in duration, the member applying such a measure must review the situation halfway through the term of the measure and either withdraw it or increase the pace of liberalization (Article 7.4). Extensions cannot be more restrictive than the initial plans.
The UK government’s initial plan for 2021 covered ten steel products, but the recent extension in June 2022 includes all 15 steel products as mentioned in the schedule of the notification. India claims that this is against the objectives of progressive liberalization as captured in the SG.
What Lies Ahead
India has expressed no reluctance to avail its right of suspending concessions and obligations on trade with the UK. Article 8.2 (SG) allows an exporting member state to suspend all concessions on a member state within 90 days of the application of such a measure if no agreement is achieved between the member state proposing the safeguard measure and exporting member states. Such reciprocal or retaliatory suspensions can be imposed only after 30 days from consultations. The agreement in this context explicitly refers to the question of trade compensation to offset the adverse effects of the safeguard measures imposed by the UK. India has proposed to impose retaliatory tariffs. Products ranging from blended whisky to animal feed and precious stones would be subject to an equivalent tariffs package if the UK does not comply with India’s requests. India expects to be able to offset the decline in exports by imposing customs duties on about USD 250 million worth of goods originating in the UK.
India, however, may not have to proceed with such drastic measures. The recent flash currency shocks and bond-market scare in the UK have created enough disarray among the ranks to stifle the leadership into reconsidering its economic scheme. Despite containing the crisis to a significant level, inflation in the UK is still on the rise. Tariffs on imported products essentially drive their price up. In an economy already trying to boost consumer spending while battling with reeling inflation targets (2.5% now), imposing duties on products may appease domestic producers/manufacturers but may result in limiting options for consumers. Steel, a global commodity, is priced relative to the USD (for benchmarks). A weaker pound (relative to the USD) does not help the UK’s case, as the input costs for domestic manufacturing that used imported steel will shoot up due to the additional tariffs. India should wait till the government’s policy decisions on interest rate renewals are finalized and any announcement on tariff quotas are made.
India had indicated its intention to impose retaliatory customs of a similar nature previously as well. In 2021, India proposed duties on the EU’s tariffs package on steel products. In 2018, India and the EU proposed customs duties on US exports due to the US tariffs on Indian aluminum products. This shows that India reserves the right to impose retaliatory customs duties against a good number of safeguard measures. However, such policy decisions must be well thought out and weigh the strategic relations between member states. Recent negotiations with the United Kingdom for a Free Trade Agreement demonstrate a friendlier intent on the UK’s part. In light of the same, it cannot be presumed that India will necessarily retaliate.
As officials negotiate the terms of compensation, we may drift away from the realm of the SG. Regarding compensation, the UK has agreed to be open to reconsidering equivalent measures under Article 8.1. This must be assessed against the backdrop of the prospective India – UK Free Trade Agreement, which has been delayed for quite some time. To conclude, it depends on whether the FTA between India and the UK sees the light of day. If it does, harsh considerations like so may be diluted by the parties' mutually acceptable and proportionate measures, improving a promising trade relationship.