6:51 AM May 17, 1995

US WIELDS THE STICK, JAPAN INVOKES THE WTO

Geneva 17 May (Chakravarthi Raghavan) -- In a palpable violation of the rules of the World Trade Organization, the United States Tuesday ratcheted up its trade dispute with Japan by announcing a 100% prohibitive import tariff on luxury cars from Japan, to be levied from 20 May, but subject to a final determination on 28 June.

Japan immediately invoked the WTO's dispute settlement procedures, and as the first step Wednesday asked for consultations with the US as a matter of urgency.

Nearly six billion dollars worth of trade, of Japanese exports of luxury cars to the US, are involved and would affect cars already shipped but landing after midnight 20 May.

US dealers and importers would have to pay the heavy duty even provisionally before clearing them from US customs and this is bound to cause severe damage to the Japanese trade.

The US move for unilateral trade sanctions over its dispute with Japan on the dispute over automobile and automotive parts sector was announced in Washington by the US Trade Representative Mickey Kantor who made clear that (unlike in other such earlier trade sanctions moves and publication of a preliminary list), the final determination would cover virtually cover all the targets.

The US was denounced in Tokyo by the Japanese government and the trade. The European Union (some of whose members would gain in their own luxury car exports to the US market and occupying the space that Japan would be forced to vacate) said in Brussels the US measures if implemented would be contrary to US obligations under the WTO.

The EU is expected to decide on Friday (at a meeting in Brussels) whether it should become a party in the dispute.

The WTO's reaction in Geneva was muted and restrained, and perhaps even very weak considering the systemic challenge posed by the US move.

In a press statement (that made no reference to the Kantor announcement of trade sanctions, but termed 'statement related to the US/Japan dispute on automobiles and automobile parts), the WTO Director-General, Ronald Ruggiero, said he hoped both parties would abide by WTO rules and procedures and that what was now at stake was not the functioning of the WTO but the credibility of the engagements freely entered into by the two parties.

Many trade diplomats privately acknowledged that the reaction was weak, considering the fact that the US was acting unilaterally and ahead of its actually invoking the WTO dispute settlement system and, in effect, cocking a snook at the multilateral body.

But the WTO head, some diplomats said and observers said, could not but have such a reaction in the fight between the two giants that irrespective of the outcome would damage the system.

Several trade officials of other countries welcomed the issue coming up in the WTO and the testing of the system, including the US use or threat of use of the S. 301, that would be possible.

As one Third World negotiator put it: "None of us have the financial and legal and human resources and capacity to mount such a challenge. If the Japanese do, it would be to the good. The US counter would also enable the system to look at the Japanese restrictive practices, and they can no longer hide behind the facade of the actions of private enterprises in their country."

The Kantor press conference comments, and those of other officials, suggested that the US is hoping that Japan, and its auto-manufacturers, would give in and reach some agreement on purchase of US auto-parts and supplies both for the manufacturers in Japan as also their "transplants" in the US.

The negotiator, as several others, agreed that if Japan reached some settlement (as has been its practice all these years) in this situation, before the issue is heard and disposed of, it would encourage the Americans to act even more high-handedly to others and the system would be severely damaged.

But the Japanese, he added, were however telling everyone that the US was now dealing with a new Japan and the older views and emphasis on compromising with the US was no longer acceptable.

Japanese sources say they want to avoid an escalation -- in terms of retaliation of their own, hitting where the US could be hurt most (such as Japanese short-term treasury bond investments in the US -and would try to keep the dispute within the trade ambit.

In his statement Ruggiero said as WTO D.G. he had "a responsibility to all WTO Members in ensuring that their rights and obligations are kept in mind by every one of them".

"The United States, he said, "has given notice that it intends having recourse to the WTO dispute settlement rules in the context of its dispute with Japan: that is its right. I understand Japan will exercise its own rights in a similar manner. I expect both parties to abide by the WTO rules and procedures, which they know well and which they so painstakingly negotiated in the Uruguay Round and signed and ratified last year.

"In reality, what is now at stake is not the functioning of the World Trade Organisation but the credibility of the engagements freely entered into by these parties."

In invoking the WTO Dispute Settlement Understanding (DSU) provisions and procedures, Japan sought consultations with the United States under Art. XXII (the first step to seeking a panel) and invoked provisions about 'urgency' for a quick resolution to the dispute.

Normally, from the start to the finish, the resolution of the dispute could take about ten months. But if treated as a matter of 'urgency' a few months could be shaved off. But even then, by the time the final word of the appellate body comes through, it would be the middle of the US Presidential campaign and both parties could use it against each other.

Under the provisions (Art 4:8 of the DSU) which apply "in cases of urgency, including those which concern perishable goods", the US has to enter into consultations within ten days and failing that, or failing a resolution of the problem within 20 days, Japan could move for establishment of a panel. In cases of urgency, the Article also calls upon parties to the dispute, panels and the Appellate body to accelerate their own proceedings to the greatest extent possible.

Japan is contending that by announcing the moves for sanctions, and levying a provisional 100% duty on imports from Japan of these luxury cars, the US was violating Art. 1 (most-favoured-nation) article, as well as Article II (bound duties), as well as the provisions of the DSU itself which require parties to adhere to its procedures for settlement of all disputes, including getting authorization before taking trade retaliation or seeking compensation.

The US has not fully set out how it feels its benefits have been impaired and nullified by Japan, though its statements and comments of its officials suggest that it would be contending both damage by a socalled "non-violation" action of Japan, as well as actions or inactions by Japan (Art XXIII:1 (c): nullification or impairment of attainment of the objectives of the WTO/GATT by 'existence of any other situation).

This last has never been tested.

The EU in 1983 sought to invoke this against Japan (and sought a working party) arguing that benefits of successive GATT negotiations with Japan had not been realized (by the EU) because of "a series of factors peculiar to the Japanese economy which have resulted in a lower level of imports, especially of manufactured products, as compared with other industrial countries..." and that this had impaired benefits otherwise accruing to the EC and is "an impediment to the attainment of the GATT's objectives, in particular the general GATT objective of 'reciprocal and mutually advantageous arrangements".

The case itself was not pursued. In the discussions in the GATT Council at that time (according to the GATT's Analytical Index) "one delegation commented that the EC had not based its case on particular provisions of the General Agreement but instead referred to one of its objectives and that this was unprecedented ... (and) problems and precedents could arise if such loosely terms for a working party were accepted". At an early stage, in 1958, the GATT Contracting Parties set up an expert group to study and make recommendations on Restrictive Business Practices. The expert group said that the GATT CPs was the appropriate and competent body to initiate action and recommended that the CPs in such cases should encourage direct consultations to eliminate such practices. But the group was divided (and as a result the CPs did not decide) on the invoking of the Art XXII and XXIII GATT provisions for consultations and dispute settlement nor for an expert body to be set up to look into such complaints and make recommendations.

The UNCTAD-negotiated UN Code on RBPs, at US insistence is no more than a voluntary code without any teeth, and effectively excludes any transactions and arrangements between a TNC and its subsidiary or affiliate -- excepting where abuse of market power could be proved.

The US complaints about Japanese practices in purchasing autoparts and spares by the Japanese manufacturers -- and the US is specific that it relates both to cars made in Japan as well as in Japanese transplants, which would mean not only Japanese subsidiaries in the US but in third countries too -- really amounts to a US demand for "local content requirement".

Both sides have been engaging in considerable propaganda to influence immediately third party opinions, and many trade officials appear confused, to put it at the mildest.

In this dispute, as in others, the WTO secretariat, both the substantive divisions and the legal division, would be heavily involved in providing guidance to the panels (and negotiating history etc). Not only the dispute system, but the secretariat (with its Atlantic biases) too would be under scrutiny.