Turkey: A Broken Link In The Protectionist Chain Of Trade Wars: Turkey Closes Its Steel Safeguard Investigation Without Any Measures!

Last Updated: 26 June 2019
Article by Sahin Ardiyok, Edward Borovikov, Xiaoyi Tang and Armanç Canbeyli

The so-called trade wars have been one of the propulsive forces characterizing the international trade landscape for the last couple of years. Driven by a wave of increased protectionism, the major economies of the global trade network have been racing to shield their national interests from the somewhat "harmful" effects of imports. In this network of inter-correlated nerve-endings, a series of reciprocal measures have ricocheted through the system, predominantly triggered by the policies of the United States of America ("US"). While the larger economies of the world keep retaliating each other with trade remedies, Turkey broke this cycle when it decided not to impose any definitive measures in the safeguard investigation concerning steel products.

In an effort to protect the domestic producers from a potential trade diversion and export overflow caused by the additional duties on steel products imposed by the US and the European Union ("EU"), Turkey had initiated a safeguard investigation and adopted provisional safeguard measures to cover the course of investigation. While this intra-governmental game of chess to restrict trade liberalization, the Turkish authorities have unveiled an intriguing development. After a rigorous investigation process including written and oral phases, Turkey decided to repeal the provisional measures and close the proceedings without imposing any definitive measures.

Considering that both the US and the EU still keep their measures on steel products in place, Turkey's non-retaliation was accurately fair and constructive. Against this backdrop, this article evaluates the merits of the Turkish safeguard investigation on steel imports within the jurisprudence of the World Trade Organization ("WTO"). In an interplay between law and economics, this article also provides an in-depth assessment of the circumstances surrounding the course of steel imports over the course of the investigated period.

Background and scope

On 27 April 2018, the Turkish Ministry of Trade ("Ministry") has initiated a safeguard investigation concerning imports of certain steel products (e.g. flat products, bars, rods, sections, stainless steel, railway materials, tubes, pipes and hollow sections) into Turkey on an ex officio basis. In a subsequent communiqué dated 20 September 2018, the Ministry has also decided to take an interim action and impose a provisional safeguard measure for 200 days. The provisional measures took effect as of 17 October 2018 to impose 25% safeguard duty on the imports of the relevant products.

Additionally, the Ministry published an interim report to summarize its findings and rationale in initiating an ex officio safeguard investigation ("Report"). In essence, the Ministry argued that protectionist tendencies are on the rise globally for iron and steel products, with the additional duties imposed by the US on steel imports, and the safeguard measures introduced by the EU. Accordingly, the Ministry explains that the parallel application of the US and the EU measures poses a risk of excess supply shifting to Turkey and therefore decide to initiate an ex officio safeguard investigation.

With respect to the scope of the safeguard investigation, the Ministry decided to scrutinize predominantly five product groups composed of flat products, long products, pipe and hollow sections, stainless steels as well as railroad and trolley line equipment. The data assessed within the Report covers the period between 2013-2017 as well as the first seven months of 2018. The Ministry also materialized the industries to be effected by providing that the investigated products are used by a broad range of sectors including automotive, water conduit, sewerage systems, white appliances, machinery, ships, railway equipment, metal packaging, pressure vessels, refrigerant products infrastructure projects and constructions.

Basic concepts of safeguard

The primary piece of intra-governmental legislation that governs safeguard measures is the WTO's Safeguard Agreement. As a member state of the WTO, Turkey has also adopted this legislation into its system via Decree No. 2004/7305 on Safeguard Measures for Imports and the Regulation on Safeguard Measures for Imports No 254861. Pursuant to Article 2.1 of the Safeguards Agreement in order to propose a safeguard measure, an investigating authority shall verify whether the product concerned "is being imported into its territory in such increased quantities, absolute or relative to domestic production, and under such conditions as to cause or threaten to cause serious injury". Hence, in order to justify the initiation of a safeguard investigation, the increase in imports must be sudden, recent, significant and sharp.

Moreover, by virtue of Articles 2.1 and 4.2(a) of the Safeguard Agreement, the increase of imports (as defined above) shall also be realized "under such conditions as to cause or threaten to cause serious injury". These fundamental requirements for initiating a safeguard investigation are also echoed in the landmark decision of the WTO Appellate Body, Argentina – Footwear Safeguard. 2 Needless to say, the investigation authorities must also establish and demonstrate the causality between the increase in imports and the serious injury or threat of it.

In brief, the conditions of safeguard requires (i) a sudden, recent, significant and sharp increase in imports, (ii) a serious injury or the threat of a serious injury and (iii) a causal link between the first two prongs. In the absence of the foregoing fundamental elements, the investigation authorities would not have a solid ground to conduct a WTO-compliant safeguard investigation. Therefore, it is important to put the course of steel imports into Turkey under the magnifying glass and ascertain whether the circumstances qualified for a safeguard measure or not.

Economic analysis of the increase in imports

The findings of the Ministry, which are comprehensively consolidated within the Report, indicate that there has been no indication of a sudden, recent, significant and sharp increase in the overall group of investigated products. Furthermore, the individual data in the Report pertaining to each one of the five product groups demonstrate similar outcome in absolute terms or relative to domestic production or consumption. In a numbers speak louder than words kind of assessment, the Report indicates that global import volume from 2013 to 2017 increased by only 0,4 million tons while the domestic consumption increased by 5 million tons during the same period. Against this backdrop, the Ministry's report showcases a decrease in the market share of the imports.

To take this analysis one-step further, it is important to break down the data in the Report and conduct an in-depth economic analysis. Accordingly, in terms of import amounts, the overall data in the Report indicate that there has not been any significant increase over the course of the investigation. Additionally, the increase in imports is significantly lower than the growth rate of Turkey for the same period, which is recorded around 6% by the official statistics.

When a similar assessment is applied on model product groups, it is concluded that the imports of pipes and hollow sections have increased by 17% between 2013 and 2017. While this may seem like an important increase, the growth rate of Turkey for the same period has been calculated as 24% in light of the official statistics. Hence, the increase in imports fall behind the growth rate of the country, which indicates that the domestic products were the primary source of supply. Consequently, the Report of the Ministry stipulates that the market share of the imports stabilized at 35% after 2014. Along the lines of these high-profile legal and economic arguments raised by the representatives of global industries, the Ministry was directed to reconsider the necessity of definitive measures within the realm of safeguard. It is also worth mentioning that Brussels office of the global law firm Dentons, together with a team of lawyers and economics from Balcıoğlu Selçuk Akman Keki Attorney Partnership has taken charge of representing a significant portion of the Russian and Chinese steel industries throughout the whole procedure. Although the foregoing analysis on the course of imports between 2013 and 2017 nicely demonstrates that there have been no sudden, recent, significant and sharp increase in imports, there is another important notion in reviewing the course of imports from a safeguard perspective. Accordingly, as analyzed in detail below, the jurisprudential rationale of the WTO provides that the most recent data within the investigation period have the most powerful indication capacity in determination of the safeguard's necessity.

Importance of developments in the most recent period

In accordance with our explanations in the foregoing section, the WTO adjudicators provide that the end of the investigation period is more important than the beginning in terms of import data. Accordingly, in US – Lamb 3, the WTO Appellate Body makes a reference to one of its earlier rulings, Argentina – Footwear Safeguard 4, which provides that; the relevant investigation period should not only end in the very recent past, the investigation period should be the recent past." Moreover, in a parallel ruling, US – Steel Safeguards5, which is based on the foregoing decisional practice, the WTO Appellate Body found a lack of "reasoned and adequate" explanation supporting the determination with respect to "increased imports" by the US investigating authorities, when the evidence pointed to a downward trend in imports at the end of the investigation period. Hence, although the investigation at hand take into consideration a broad period between 2013 - 2018, the most important data within this period is singled out to be the first seven months of 2018, which is the recent end of the investigation period.

Acting from this point, we have analyzed the increase in the overall imports of the investigated products between January-July for 2017 and 2018. Based on this calculation, the amount of imports has increased by (negative) -0.1%. When we break down the data provided in the Report into product groups, we see that that the imports of railway products have significantly decreased by 74% within the same period. Considering that there have been negative increase in the most important period of the investigation authority's data intake, it is safe to conclude that the condition requiring sudden, recent, significant and sharp increase in imports has not been met by the Turkish safeguard investigation.

Assessment of serious injury or threat of serious injury

The decisional practice of the WTO sets high standards in determination of a serious injury or a threat of serious injury within the context of safeguard measures. In other words, considering that the safeguard measures affect not only unfair trade, but also fair trade; landmark jurisprudences such as US Lamb and Argentina – Footwear Safeguard confirm the necessity of a diligent analysis in injury determinations.

Accordingly, in Argentine Preserved Peaches6, the WTO Appellate Body provides, by virtue of Article 4.1(b) of the Safeguard Agreement, that "the threat of serious injury shall be understood to mean serious injury that is clearly imminent". Moreover, in US – Lamb 7, the WTO adjudicators rule that the threat of serious injury "must be based on facts and not merely on allegations, conjecture or remote possibility". When we apply the foregoing principles on the core justifications to the investigation at hand, we can see that the possibility of a trade diversion due to the US and EU measures on steel products do not amount to a "clearly imminent threat" and only constitutes a "mere possibility". Hence, the conjectural threat of a trade diversion shorts fall in qualifying for the high standards of injury determination followed by the WTO's judicial enforcement.

Another important parameter for the injury determination is the current state of the domestic industry. When we assess the Ministry's findings on the strong foundations of the domestic producers, the Report clearly demonstrates that the Turkish industry has improved its domestic production, sales, market share capacity, capacity utilisation, profitability and employment productivity. The Turkish producers also did not essentially lose capacity utilisation from 2014 untill now. Moreover, the Report also indicates that while the domestic consumption kept increasing, the market share of imports have been decreasing, which is a strong indicator that the domestic producers supplied most of the Turkish industries' need for steel products.

Additionally, Turkey currently imposes certain customs import tariffs on steel products from the majority of global exporting sources. Turkey also applies additional tariffs on long products and anti-dumping measures on imports of various flat and tubular steel products from China. Hence, it is safe to conclude that domestic producers were already protected from a potential trade diversion by the protective cloak of the foregoing measures.

Absence of causality

So far, we have assessed the increase in imports and the actual/potential injuries to domestic industry. What about the causal link between the imports and the injury?.

Our overall explanations up this point demonstrate that there has neither been a significant increase in imports nor a serious (threat) of injury over the course of the investigated period. Hence, in the absence of any increase of imports or any injury determination, the investigation at hand proves to be structurally disqualified from demonstrating a de facto causality with the improved economic indicators of the prosperous Turkish steel industry. As an analogue of this inability, the Report also fails to "provide a reasoned explanation" that the intended safeguard measure "is no more restrictive than is necessary to prevent or remedy the serious injury" as laid out by the WTO adjudicators in Korea Dairy Products. 8 Similarly, the Appellate Body ruled in US Line Pipes 9 that the authorities must provide a "reasoned and adequate explanation of how the facts support their determinations".

Conclusions

In light of our explanations above, the intra-governmental legislation of the WTO along with its well-settled jurisprudential rationale clearly provide that the conditions of safeguard requires (i) a sudden, recent, significant and sharp increase in imports, (ii) a serious injury or the threat of a serious injury and (iii) a causal link between the first two prongs.

When we apply these principles to Turkey's recently closed safeguard investigation on certain steel products, we can demonstrate -by using the investigation authority's own findings and figures- that neither the overall assessment of the imports, nor most of the product categories feature a sudden, recent, significant and sharp increase.

By the same token, a series of interrelated economic indicators such as production, capacity utilization, profitability, employment and sustainably indexes show strongly that Turkey has a national-champion like steel industry which is not only capable of supplying the greater portion of the domestic consumptions but also has a sufficient stamina and manoeuvrability to endure any conjectural trade diversions. Hence, the flourishing state of the Turkish steel industry virtually leaves no room for an injury determination within the context of a WTO-compliant safeguard.

Lastly, in the absence of any significant increase in imports and any serious injury determinations, the establishment of a causal link between the given parameters becomes legally redundant.

Based on the foregoing determinations, which are comprehensively covered by the Report and the parties' arguments, which are made known via the public hearings, the Ministry decided to repel the provisional safeguard measures and close the proceedings without imposing any definitive measures on the steel products.

When the safeguard investigation was initiated, the Ministry admitted that the problem of global overcapacity is one of the recent unforeseen developments that necessitates the initiation of this investigation. However, it must be noted that initiating safeguard investigations and eventually imposing safeguard measures on steel imports are not a plausible reaction to deal with structural overcapacity on a global level. Instead, the result is that other countries will follow and impose similar measures due to the fear of a trade diversion. This can be evidenced by a series safeguard investigations on imports of steel products initiated after Turkey's, such as the ones in Canada, the Eurasian Economic Union and Morocco. Due to such a global domino-effect of protectionism, a country imposing its own safeguard measures may soon become a victim of a measure imposed by another country. Thus, it is highly questionable that such a short protection would solve the root causes of overcapacity at a global level.

Accordingly, Turkey's decision not to impose any measures gives a much-needed break to the trade wars by an objective and fair reasoning. Considering that other major trading jurisdictions renowned for pro-trade liberalization keep introducing protectionist measures with serious breaches of WTO rules on the other, Turkey leads -by example - on fairness which will hopefully be well noted and followed by jurisdictions.

In a world of escalating protectionism and trade wars, we assess that the Ministry has acted responsibly by having a no measure decision. In other words, if the Ministry imposed a definitive safeguard measure as an extension of a protectionist national policy; this would not only violate Turkey's international responsibilities within the rules-based system of the WTO but also harm the ever-important steel consuming domestic industries, which would be deprived of alternative products as a result of restricted imports. The impact of Turkey's constructive approach on the ongoing trade wars and the steel industry, however, remains to be seen.

Footnotes

1. Available at the WTO website, G/SG/N/1/TUR/3; notification to WTO on 16 July 2004.

2. Appellate Body Report, WT/DS 121/AB/R Argentine– Safeguard Measures on Imports of footwear, adopted on 12 January 2000, par. 129.

3. Appellate Body Report, WT/DS 177, WT/DS178, United States – Safeguard Measures on Imports of Fresh, Chilled or Frozen Lamb Meat from New Zealand and Australia, adopted on 16 May 2001, footnote 88 to par. 138.

4. Appellate Body Report, WT/DS 121/AB/R Argentine– Safeguard Measures on Imports of Footwear, adopted on 12 January 2000, footnote 130.

5. Appellate Body Report, WT/DS248 et al, United States — Definitive Safeguard Measures on Imports of Certain Steel Products, par. 376.

6. Appellate Body Report, WT/DS238/R et al, United States — Definitive Safeguard Measures on Imports of Preserved Peaches, adopted on 15 April 2003, par. 7.118.

7. Appellate Body Report, WT/DS 177, WT/DS178, United States – Safeguard Measures on Imports of Fresh, Chilled or Frozen Lamb Meat from New Zealand and Australia, adopted on 16 May 2001, footnote 88 to par. 138.

8. Appellate Body Report, WT/DS98/AB/R, WT/DS178, Korea– Safeguard Measures on Imports of Dairy Products, adopted on 12 January 2000, par. 77.

9. Appellate Body Report, WT/DS238/R, United States — Definitive Safeguard Measures on Imports of Line Pipes, par. 216-217.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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