RESTRICTED
WORLD TRADE S/WPGR/W/24
3September 1997
ORGANIZATION
(97-3573)
Working Party onGATS Rules
EXAMPLES OFSITUATIONS INWHICH EMERGENCY
SAFEGUARD ACTION MAY BETAKEN
Note bytheSecretariat
I. INTRODUCTION
1. Inorder toassist theWorking Party onGATS Rules initsdeliberations onanemergency
safeguard mechanism under Article XoftheGATS, theSecretariat wasasked toprovide hypothetical
or,ifavailable, empirical examples ofsituations pertaining toservices trade inwhich emergency
safeguard action maybetaken.
2. Inresponding totheWorking Party'srequest, theSecretariat wasconfronted withaproblem.
Toestablish whether asituation, hypothetical orreal,qualifies asoneinwhich safeguard action should
ormaybetaken, itisnecessary tohavecertain criteria. However, itisinorder todetermine what
suchcriteria maybethatexamples havebeensought bytheWorking Party. Toovercome thisproblem
ofcircularity, andsoasnottopreempt theresult offurther discussions, theSecretariat tookapragmatic
approach which isnotbased onanyparticular apriori definition ofsafeguard situations. Rather,
thefollowing examples seektocapture awide-range ofsituations, other thanthose covered byexisting
GATS provisions dealing withexceptional circumstances ,1which might bepotential candidates for
emergency safeguard action.
3. There seems tobeacertain degree ofagreement thatsafeguard measures should betaken only
if,asaresult ofunforeseen developments andoftheeffect oftheobligations incurred byaMember
under theGATS, imports ofservices takeplace insuchincreased quantities andunder suchconditions
astocause orthreaten serious injury tonational/domestic suppliers oflikeordirectly competitive
services. Furthermore, there seems tobeagreement thatmeasures should betemporary .
4. TheInformal NotebytheChairman of3June1997 identified fourkeyquestions concerning
apossible emergency safeguard mechanism. Asrequested bytheWorking Party, thisnotefocuses
onlyonthesecond question, concerning thecircumstances inwhich safeguard action could betaken.
Oneoftheotherquestions thattheWorking Party needs todealwithconcerns onwhose behalf safeguard
action could betaken, i.e.domestic suppliers, regardless ofnationality, oronlynational suppliers.2
Thisissue, andtherelated issueofhowlikeordirectly competitive services andservice suppliers would
bedefined, isnotdiscussed inthispaper, andtheterm"domestic industry" isusedtorefer tothe
intended beneficiaries ofsafeguard action. Thepaper alsodoesnotdiscuss theapproach thatcould
beadopted (conceptual andempirical) todemonstrate injury/adverse effects, andtoestablish acausal
1These include Articles IIIbis,XII,XIV, XIVbisandParagraph 2oftheAnnex onFinancial Services.
2Adistinction canbemade between "domestic" suppliers, which would include allsuppliers located ina
Member 'sterritory ,and"national" suppliers whoareeither themselves nationals orowned bynationals ofthe
Member concerned.S/WPGR/W/24
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linkwithincreases inimports attributable toGATS commitments. Thefinalquestion pertaining to
remedies isonlyaddressed totheextent thatseemed directly relevant tothecircumstances inwhich
safeguard action could betaken.
5. ThenextSection provides examples ofcircumstances inwhich domestic industry maysuffer
injury. Itillustrates thedifficulty inestablishing acausal linkwithincreased imports when other
contributing factors arepresent, andalsoraises thequestion ofwhether thenature ofunderlying factors
should berelevant indetermining thepermissibility andtheformofsafeguard action. Section IIItakes
acloser lookatthenotion ofunforeseen developments andaskshowfaritispossible tomake thenotion
legally meaningful. Section IVprovides examples ofthepossible grounds for,andforms of,safeguard
action anddiscusses thepossibility ofincorporating certain economic criteria inthese determinations.
Finally, Section Villustrates thedistinction between government objectives which could beforeseen,
andtherefore seem tobecandidates forexantescheduling, andthose which seem more appropriately
tobethebasis forexpostsafeguard action.
II. CIRCUMSTANCES INWHICH DOMESTIC INDUSTRY MAY SUFFER INJURY
6. Atonelevel, itiseasytoconstruct examples. Onecould pickanyindustry, saythedomestic
basic telecommunications sector, andconsider alarge increase inimports offoreign services (say,
call-back services) which cause injury, reflected insignificantly reduced profits, output andemployment.
Similar examples could beconstructed forother industries butthiswould probably nothelpgreatly
toadvance thecurrent discussion. Inorder tocreate more illuminating examples, itmaybenecessary
tolookdeeper atthereasons fortheincrease inimports.
7. Forexpositional purposes itmaybeuseful todistinguish between:
- developments which areprimarily domestic inorigin; and
- developments which areprimarily foreign inorigin.
Developments which areprimarily domestic inorigin
8. Consider thefollowing examples ofsituations ineachofwhich thereislikely tobeanincrease
inimports andinjury todomestic industry, buttheunderlying factors differ. Theexamples arepresented
roughly inorder of"increasing exogeneity", i.e.inorder ofdiminishing responsibility ofdomestic
industry anddomestic government forthedifficulties:
(i) Management errors in,say,business services leadtosignificant increases inthecosts
ofproduction andhence prices ofservices, aswellasdeterioration intheirquality;
orinthetelecommunications orbanking sector, firms failtoinvest innewtechnologies,
which hurts theircompetitiveness.
(ii) Huge domestic wage increases outpace increases inlabour productivity inaparticular
sector andpushupproduction costs, andfirms arenotallowed tohireforeign workers.3
Orstrikes disrupt production inaparticular sector.
3Certain shocks mayaffect domestic firms more thanforeign firms because inputs arenon-tradable, either
naturally orbecause ofpolicy. Skis-slopes areanexample ofanaturally non-tradable input, while restrictions
oninternational labour mobility areanexample ofpolicy-induced non-tradability.S/WPGR/W/24
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(iii) Government policies directly affect thecompetitiveness offirms: e.g.banks areforced
tomake badorsubsidised loanstofailing industries ordepressed regions; radiostations
areinduced tobroadcast several hours ofsocially desirable butunpopular programmes,
which donotinterest advertisers.
(iv) Government policies indirectly affect thecompetitiveness offirms: e.g.asudden
tightening ofmonetary policy leads toanincrease ininterest ratesandappreciation
ofexchange rates.4
(v) Domestic preferences shifttowards foreign services ortoservices inwhich foreign
service suppliers haveacomparative advantage.5There could, forinstance, bean
evaporation oftrustinnational educational institutions ornational hospitals following
certain isolated scandalous developments. Orthere could beasudden shift in
preferences forforeign entertainers oraudiovisual services.
(vi) Adverse political ornatural shocks affect firms: e.g.civildisorder orearthquakes
leadtothedamage ofdomestic industry; or,lessdramatically, badweather hurts the
tourist industry.
9. Most negative domestic shocks arethemselves responsible forinjury tofirms. Butitcould
beargued insome cases thatitisthesurge inimports, consequent upontheworsened competitiveness
ofdomestic firms, thatisultimately responsible forinjury totheindustry. Forinstance, increased
wages maybethesource oftheproblem forthedomestic industry, butitistheability ofnational
consumers tosubstitute cheaper foreign services formore expensive domestic oneswhich ultimately
leads toinjury.
10. Notably, theAgreement onSafeguards, states inArticle 4.2(b) that"When factors other than
increased imports arecausing injury tothedomestic industry atthesame time, suchinjury shallnot
beattributed toincreased imports."6Theexamples inthisSection highlight theproblems thatmay
ariseinestablishing acausal linkbetween injury toindustry andincreased imports evenwhen thefact
ofsuchincrease isnotindispute.
4Seefootnote 3above. Inthiscase, itisthesegmentation ofcapital markets which makes domestic firms
excessively vulnerable todomestic interest rateincreases.
5Itcould alsobethatforeign preferences shiftdramatically away from national suppliers.
6Itmayberelevant thattheAgreement onImplementation ofArticle VIofGATT 1994, inArticle 3.5states
that"The authorities shall alsoexamine anyknown factors other thanthedumped imports which atthesame
timeareinjuring thedomestic industry, andtheinjury caused bythese other factors maynotbeattributed to
thedumped imports. Factors which mayberelevant inthisrespect include, inter alia,thevolume andprices
ofimports notsoldatdumping prices, contraction indemand orchanges inthepatterns ofconsumption, trade-
restrictive practices ofandcompetition between theforeign anddomestic producers, developments intechnology
andtheexport performance andproductivity ofthedomestic industry."S/WPGR/W/24
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11. Several further questions arise:
Shouldthereasonswhichcontributetotheincreaseinimportsberelevantindetermining
thepermissibility ortheformofsafeguard action, orshould attention berestricted to
theincrease inimports perseregardless oftheunderlying reasons?7
Iftheunderlying reasons forincrease inimports aredeemed toberelevant, thenfurther questions arise:
Towhat extent should safeguard action beusedtoremedy failings intrinsic tothe
domestic industry itself, suchaspoormanagement?
Towhatextent should governments beallowed tooffset through safeguard action the
adverse effects ondomestic firms ofdirect andindirect policy interventions? Should
theyberequired tomodify theproblem-causing policies themselves asacondition for
safeguard action? Inthiscontext, should adistinction bemade between policies which
haveeconomy-wide effects, andthose which haveindustry-specific effects?
Towhatextent should governments beabletousesafeguard action toinsure domestic
industry against thenormal rough andtumble offreemarkets, caused byfactors such
asashiftinpreferences orchanges intheweather?
Developments which areprimarily foreign inorigin
12. Intheabove examples, increased imports wereaconsequence ofcertain domestic developments,
anditwasdifficult toestablish whether injury wasattributable toincreased imports alone. Itisthe
foreignsupplierperformance-enhancingdevelopmentswhichmayprovidemorestraightforwardexamples.
Buttheremaybereason todistinguish between developments which aredeemed "fair" andothers which
arenot.
"Fair" trading developments
(i) Foreign technological innovations make newer, better orcheaper foreign services
available. Forinstance aforeign supplier provides newpatented telecommunication
services which affects theprofitability ofdomestic suppliers. Iftheinnovation will
eventually become nationally available, thenthedifficulties aretemporary. Ifhowever,
theinnovation willnotbeaccessible fortheeconomically meaningful future, then
domestic industry maycease tobeviable.
(ii) Foreign service suppliers haveexclusive access toinputs which become cheaper .Or
foreign service suppliers inasector benefit from improvements incomplementary
infrastructure, suchasbetter roadaccess totourist resorts, orenhanced airport orport
capacity facilitating multi-modal transport.
(iii) Effective advertising byforeign service suppliers induces largeshiftsindemand towards
theirservices. Thiscould happen inanysector. e.g.audiovisual, tourism orfinancial
services.
7Inthegoods context, thequestion ofestablishing acausal linkbetween injury andincrease inimports in
thepresence ofother contributing factors hasbeenaddressed, butnofurther distinction hasbeenmade between
theunderlying causes fortheincrease inimports.S/WPGR/W/24
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Some questions mirror theonesraised intheprevious section:
Towhatextent should governments beabletousesafeguard action toinsure
domestic industry from theuncertainty inherent infreemarkets, caused by
factors suchasachanges intechnology, inputprices andconsumer preferences?
Towhatextent should governments beabletousesafeguard action toprotect
domestic industry fromtheadverse consequences ofrestrictions which deprive
itofaccess tocheaper foreign inputs?
"Unfair" trading developments
(iv) Foreign governments provide assistance toforeign suppliers whoselltothedomestic
market. Thiscould mostexplicitly taketheformofnewsubsidies ortaxexemptions
byanother Member.
Should issues which relate totheappropriateness ofcountervailing measures
betaken upunder Article XVorcantheyalsoprovide acaseforsafeguard
action -atleastwhile Article XVdisciplines arebeing developed?
(v) Foreign service suppliers indulge inanti-competitive practices .Forinstance, theyuse
profits fromprotected domestic markets tofinance anexpansion inlow-priced exports.
Certain practices ofmonopoly andexclusive service suppliers canalready be
addressed under Article VIIIoftheGATS. Should other issues which relate
toanti-competitive practices bedealt with, forinstance, bystrengthening
Article IXofGATS which deals withbusiness practices, orcantheyalso
provide acaseforsafeguard action?
More fundamentally, should Article Xdeal,asdoesGATT Article XIX, with
fairtrading practices towhich theremustbeanMFN-based response (already
builtintoArticle X),orshould itsscope beexpanded todealwithunfair trading
practices towhich there maybeanon-MFN response?
III. UNFORESEEN DEVELOPMENTS
13. Itmaynotbeeasytodetermine whatcould constitute unforeseen developments. Inthearea
ofgoods, thistermhasbeeninterpreted (though without consensus) tomean "developments afterthe
negotiation ofatariff concession which itwould notbereasonable toexpect thatthenegotiators of
thecountry making theconcession could andshould haveforeseen atthetimewhen theconcession
wasnegotiated."8Unfortunately, theonlyrecorded application ofthisinterpretation didnotleadto
aclear result.9Theinterpretation hasalsobeencharacterised asunduly widening thescope ofthe
8Seepage4oftheReportoftheIntersessionalWorkingPartyontheComplaintofCzech oslovakiaConcerning
theWithdrawal bytheUnited States ofaConcession under theTerms ofArticle XIX (GATT/CP/106, 27March
1951).
9Thesame Working Party, except therepresentative oftheUnited States, first"agreed withtheCzechoslovak
representative thatthefactthathatstyles hadchanged didnotconstitute an'unforeseen development 'within
themeaning ofArticle XIX" (page 5).ButthentheWorking Party, withtheexception oftheCzechoslovak
(continued...)S/WPGR/W/24
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escape clause andrendering tariff concessions lessstable.10Theneedforfollow upreview ofArticle
XIXlanguage withaviewtoobtaining greater stability oftradeconcessions wasnoted ina1963GATT
report.11Itisnotable thattheAgreement onSafeguards, while defining inArticle 1safeguard measures
asthose provided forinArticle XIXofGATT 1994, doesnotcontain anymention oftheterm
"unforeseen developments."
14. Oneargument could bethatitisunduly difficult andnotparticularly fruitful totryandverify
thatadevelopment wasindeed foreseen. Thequestion is:
Isitfeasible todevelop criteria todetermine whether circumstances were insome
objective sense foreseeable? Isthenotion tobeapermissive oneinwhich allbenefit
ofdoubt goestotheparty invoking itorisitpossible tomake judgements onwhat
could reasonably havebeenforeseen?
Forinstance, anyoftheexamples cited above could beunforeseen either because ofpoorforesight
orbecause theyweregenuinely impossible toforesee. However, itmaybethecasethatcertain changes
inpolicy, suchasatightening ofmonetary policy, should havebeenforeseen, perhaps because itwas
known thatthegovernment would respond toinflationary problems. Or,itmaybewellknown that
certain markets, suchasfashion designing, arecharacterised byhighvariations indemand conditions.
Would itbepossible anduseful todistinguish between sectors where significant
variationsindemandandsupplyarepartofnormalbusinessconditionsandotherswhere
theyarenot?
IV. EXAMPLES OFPOSSIBLE GROUNDS FOR, AND FORMS OF,SAFEGUARD ACTION
15. Theclearest caseforsafeguard action isbased ontheneedtofacilitate economic adjustment.
Increased imports, evenwhen theycontribute toanincrease intheaggregate welfare ofthesociety,
mayadversely affect theinterests ofcertain groups, suchasthose whose skills arespecific totheimport
competing industry. Thesocial costs ofadjustment maybelower iftheimport-competing domestic
firms aregiven timetoadjust, either byimproving theircompetitiveness orbymoving resources into
other areas ofproduction. Theroleofsafeguard action isthustoprovide temporary relief inorder
tomake possible gradual rather thanabrupt adjustment.
9(...continued)
representative, agreed that"thedegree towhich thechange infashion affected thecompetitive situation, could
notreasonably beexpected tohavebeenforeseen bytheUnited States authorities in1947, andthattheconditions
ofArticle XIXthattheincrease inimports must beduetounforeseen developments andtotheeffect ofthetariff
concession cantherefore beconsidered tohave been fulfilled" (page 6).
10OneGATT expert writes, "Asonereviews thisremarkable GATT report onArticle XIX, itappears quite
clearthattheresultofthefindingsmadewastogreatlyextendthescopeoftheescapeclauseandrenderitavailable
forinvocation inawide variety ofsituations. Italmost appears thatamere rapid increase intheproportion of
imports tothedomestic production would make invocation ofArticle XIXjustifiable, especially when allbenefit
ofdoubt goestotheparty invoking it.Thenetresult istorender tariff concessions andother GATT obligations
lessstable." (Seepage 563ofJ.H.Jackson, World Trade andtheLawofGATT, Bobbs-Merrill Company,
Inc., Indianapolis, Kansas City, New York, 1969.)
11Seepage 3oftheReport oftheWorking Party onProcedures forTariff Reductions (L/2002, 30April
1963).S/WPGR/W/24
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16. What arethecircumstances which make safeguard action necessary anddesirable? Even if
theshock todomestic industry istemporary, private enterprises maystillnotbeequipped toweather
thestorm. Forinstance, theycould besubject toconstraints which force themtobehave myopically -
forinstance, capital market imperfections, which limittheability offirms toborrow. Iftheshock
ispermanent, anddomestic industry isnolonger viable, there maystillbeareason toensure the
continued operation ofprivate enterprises foracertain period. Thatis,there mayexist positive
externalities, i.e.benefits forsociety which private firms donottakeintoaccount. Anexample could
bethesocial benefits frompreventing instantaneous layoffs ofrelatively immobile factors ofproduction.
Isthefactofinjury caused byincreased imports asufficient condition forsafeguard
action, orshould there beadditional conditions? Forinstance, should Members be
required todemonstrate theexistence ofmarket imperfections and/or positive
externalities which make safeguard action necessary anddesirable?12
17. Itisevident thatservices liketransport, telecommunications andfinancial services playan
important infrastructural roleintheeconomy. Forinstance, thesudden availability ofcheap imported
transport services mayprovide ahugebenefit todomestic consumers andgoods exporters evenasthey
injure thedomestic transport industry. Eventhough theeconomy asawhole maybenefit fromcheaper
imports, itiswell-known thatgovernments aresubject tostrong pressures forsafeguard action from
theinjured industry, andthatcountervailing pressures from userindustries orconsumers tendtobe
relatively weak.13Thequestion arises whether there might bereason tocreate multilateral disciplines
toensure amore balanced appraisal ofthecaseforsafeguard action.
Should safeguard action bejustified onlybytheneedtoprotect aparticular industry
frominjury, orshould thejustification bebased onawider viewofnational welfare?
Should theinclusion ofa"public-interest" clause belefttothediscretion ofindividual
Members?
18. Eventhoughsafeguardactionsmaybejustified,restrictionsonimportsmaynotprovideasolution
inresponse tocertain shocks, andmaynotbethemostdesirable instruments evenwhen theydoprovide
asolution. Forinstance, saythedomestic health industry isindifficulty, direct support maybeamore
suitable instrument thanimport restrictions, provided thatthenecessary resources canberaised through
non-distortionarymeans.Whilebothmeasuresmayhelptheindustry,importrestrictionshurtconsumers
byleading toanincrease inprices, which canbeavoided through direct assistance. However, import
restrictions mayviolate market access commitments while direct assistance maywellbeinconsistent
withaMember 'snational treatment commitments.
12Nosuchconditions areimposed inthegoods context, butMembers maynotwish tolimit themselves to
thegoods precedent.
13Inrecognition ofthisproblem, theAgreement onSafeguards, inArticle 3:1stipulates thatthe"investigation
shall include reasonable public notice toallinterested parties andpublic hearings orother appropriate means
inwhich importers, exporters andother interested parties could present evidence andtheirviews, including the
opportunity torespond tothepresentations ofother parties andtosubmit their views, inter alia,astowhether
ornottheapplication ofasafeguard measure would beinthepublic interest." However, insubstantive terms,
itisstillinjury toindustry, rather thannational welfare more generally, which would seem tobethebasis for
action.S/WPGR/W/24
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Should there beapresumption infavour ofeconomically superior instruments of
safeguard action?14
V. EXAMPLES OFOBJECTIVES WHICH CAN BEREFLECTED INSCHEDULES
19. Itcould beargued thatevenifthecauses ofinjury cannot beanticipated, thenegative effects
thatwould prompt government intervention aresometimes known inadvance. Thatisagovernment
maybeabletoseewhatdeclines inoutput, orincreases inunemployment would induce ittoact.Now
intheGATS there issignificant scope forexantescheduling oflimitations, inawaythatthere isnot
inthegoods context. Inthegoods context, Members make commitments onasingle dimension, i.e.
thetariff, andthere isnopossibility ofincluding, forinstance, limitations relating tonational share
ofoutput. Butthere isgreater scope intheGATS foraMember towrite intoitsschedule certain
circumstances thatwould trigger government intervention. Thisisforinstance whatMexico hasdone
inthefinancial services chapter ofNAFTA.15Thus, thedesire tomaintain acertain national share
ofoutput, employment orassets incertain sensitive sectors would seem tobetypical candidates for
exantescheduling rather thanexpostsafeguard action. Tonotinclude suchelements inschedules,
buttoinvoke themasabasisforsafeguard action, mayhavetheeffect ofinflicting avoidable uncertainty
onthemarket participants -theverything thattheGATS isdesigned toprevent.
20. Itmay,however, bethecasethateventhough aMember isreconciled toreductions innational
output andemployment inaparticular industry, thespeed atwhich thisishappening (duetoarapid
increase inimports) imposes ahighsocial cost. Thiscould form thebasis fortemporary safeguard
action tofacilitate more gradual adjustment ,asdiscussed intheprevious section. Alternatively, a
Member maychange itsmind, anddecide aftermaking acommitment thatitwould liketomaintain
anational share ofoutput oremployment. Even though thispermanent change inpolicy would ideally
taketheformofamodification ofcommitments under Article XXI, emergency safeguard action may
stillbeneeded asaninterim measure while theArticle XXI-process iscompleted, forinstance ifthere
isasudden flood ofimports which threatens todrive domestic industry outofbusiness.
21. Ifitisaccepted thattheonlyobjective ofsafeguard action should bemaking more gradual
adjustment possible, thenensuring thatsafeguard action istemporary maybethekeydiscipline. This
would ensure thatintervention serves onlytohelpindustry dealwitheither temporary shocks, such
asabrief surge inimports, orfacilitates adjustment inresponse topermanent shocks, suchasa
fundamental shiftincomparative advantage.
Ifitcanbeensured thatintervention istemporary andnot(frequently) repeated, how
much needisthere toestablish criteria which would bedifficult toenforce, suchas
those which seektoestablish whether ornotevents were foreseen?
14Article 5oftheAgreement onSafeguards stipulates thatMembers should choose measures most suitable
fortheachievement ofobjectives suchasprevention orremedying serious injury andfacilitation ofadjustment.
15Thus,Annex1413.6SectionBofNAFTAprovidesthatifthesumofauthorizedcapitalofforeigncommer cial
bankaffiliatesreaches25percentoftheaggregatecapitalofallcommer cialbanksinMexico,Mexicomayrequest
consultationswiththeotherNAFTApartiesonthepotentialadverseeffectsarisingfromthepresenceofcommer cial
banks ofother parties andthepossible needforremedial action, including further temporary limitations onmarket
participation.S/WPGR/W/24
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22. Finally, thekeyquestion maybeposed thus:
When should objectives bebuiltexanteintotheschedules andnotbethebasis for
safeguard action, andwhen should more liberal commitments bescheduled withthe
scope forexpostsafeguard action?
Theformer option hasthevirtue ofcreating amore certain environment forbothdomestic andforeign
suppliers, butthedisadvantage ofperhaps leading toexcessively cautious, andtherefore lessliberal
scheduling. Theattractiveness ofthelatter option willdepend strongly ontheability todevise adequate
procedural disciplines which prevent abuse ofthesafeguard mechanism andensure thatthesecurity
created byGATS commitments isnotundermined. Onbalance, Members mayfeelthatmotives for
intervention incertain sectors (orcertain modes) aremoreappropriately thesubject ofexantescheduling
andthatincertain sectors (orwithrespect tocertain modes) there isgreater scope fordeveloping
enforceable procedural disciplines onsafeguard action -forinstance, because ofgreater availability
ofstatistics.