THE UNITED STATES. Chapter 1 NATIONAL TREATMENT. 1) Harbor Maintenance Tax HMT

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1 Chapter 1 THE UNITED STATES NATIONAL TREATMENT 1) Harbor Maintenance Tax HMT Since 1987, in accordance with the Water Resources Development Act of 1986 (Public Law ), as amended, the United States has operated a system that is designed to impose ad valorem taxes of percent (0.04 percent prior to 1990) on freight (imports and exports and certain domestic freight) belonging to entities that use harbors within the territory of the United States. The system is commonly known as the Harbor Maintenance Tax (HMT). Under this system, imported products are almost invariably subject to the tax because it is collected at the point of importation, where relevant duties are charged. The tax burden on exports and national freight is comparatively low because shipowners or exporters voluntarily pay the tax in these circumstances on a quarterly basis. With regard to national freight, there are three exceptions: (a) payments under US$10,000 per quarter; (b) traffic in Alaska, Hawaii and territorial dependents; and (c) the landing of fish from ships and some freight shipments of Alaskan crude oil. Yet, similar exceptions are not allowed for imported products. In addition, US military personnel are given an annual limit of $500 million of the ad valorem taxes. Reportedly, as of October 1997, a surplus of $1.1 billion had accumulated. The US system may violate GATT 1994 in three respects: 9

2 1. GATT Article II (Schedules of Concessions): The system imposes a tax that exceeds that prescribed in the schedules of concessions; 2. GATT Article III (National Treatment): Compared to domestic products, imported products are accorded less favorable treatment, as explained above; and 3. GATT Article VIII (Fees and Formalities Connected with Importation and Exportation): The system is designed to (and does, in fact) levy charges that exceed fees for harbor maintenance. In February 1998, the European Union requested WTO consultations with the United States regarding this system under GATT Article XXII. Japan has participated in the consultations as a third party. Consultations were held in March and June 1998, but no further developments have occurred. In March 1998, the Supreme Court of the United States held the HMT as unconstitutional with respect to exports. In accordance with this decision, the US government stopped collecting the tax from exporters beginning in April However, the HMT is imposed on importers and the problems described above have not been resolved. HR 2586 (FY2002 Defense Appropriations Bill), which was passed by the House of Representatives in September 2001, included preferential treatment for ships of US nationality. Specifically, it restricted foreign entities maritime transport options for shipments to the United States. Since the Senate passed its own legislation on the issue, it was subsequently considered by a joint conference of Congress, which ultimately eliminated the provision. At the meeting of the Automobile Consultation Group (ACG) in January 2003, Japan referred to the HMT because it is of great concern to the Japanese automobile industry and claimed that the HMT clearly discriminates against imported cars. 2) Merchant Shipping Act of 1920 (Jones Act) The Jones Act specifies that only ships owned by US citizens, built in US shipyards and run by US crews are permitted to engage in domestic passenger and cargo transport within the United States and its territories. This restricts exports of foreignmade ships to the United States. 10

3 The measure is considered a violation of GATT III(National Treatment) and Article XI (General prohibition of quantitative restriction). The United States, however, claims that the measure is permitted under the special rule on the provisional application of GATT of During the Uruguay Round negotiation, Member countries other than the United States recognized that the special rule shall not carry over to GATT 1994, but the United States maintained that the measure should continue, mostly to uphold the Jones Act. In the end, Member countries agreed to put the special provision in GATT This Paragraph, maintained under such unusual proceedings, causes considerable problems. Furthermore, despite the caveat in Paragraph 3 of GATT 1994 requesting the review within five years from the date of the Agreement s entry into force and every two years afterward throughout the duration of the Agreement, on whether the US measure still needs to be maintained, the United States introduced language that the review should terminate when no change was found in the subjected laws and regulations. This language permits reviews to terminate in an easy and simple manner. This may be in violation of the spirit of the Paragraph 3. In addition, the United States maintains that the measure is to maintain the national security by allowing only US shipbuilders to construct and repair ships convertible to military purposes, thereby retains the responsive capabilities of US Navy. However, the United States has not provided detailed explanations on the causal relationship between (this) special restrictive measure and the maintenance of national security. It is necessary to continue monitoring US action in the future. The Jones Act has been discussed in the WTO General Counsel since July Most Members, including Japan, have insisted that the measure likely constitutes a violation of Articles III and XI of the GATT, but the United States has maintained its legality, asserting that, under the provisional application of the GATT 1947, existing laws were grand-fathered and, thus, are exempt from the obligations of the GATT In January 2003, the issue was addressed during the general session without any substance; the United States submitted its annual report on the Jones Act. Later in November, the United States held an informal meeting and, at the general session in December, Japan requested the United States orally and in writing to provide: (1) a detailed explanation on the data included in the aforementioned annual report; (2) the data Japan previously requested the United States to submit on the number of foreignowned shipbuilders in the United States, the number of shipbuilders to build US-ships for use under the purpose of GATT Paragraph 3, the number of employees and annual sales of such shipbuilders, etc.; and (3) information on revising the Jones Act. Although the United States submitted responses to Japan s requests orally and in writing, the contents of their responses could hardly be called sufficient. Since there was no 11

4 progress during 2004, it is necessary to continue monitoring future US action. (For additional information on maritime services, see Trade in Services.) QUANTITATIVE RESTRICTIONS 1) Export Management System The International Emergency Economic Powers Act of the United States gives the government the ability to invoke unilateral export restrictions on agricultural goods for reasons of foreign policy or domestic shortages. The law was used in 1973 to ban exports of soybeans and soybean products and, again in 1974 and 1975, to restrict exports of wheat to the Soviet Union and Poland. Such restrictions significantly impact the targeted countries. We find the measure problematic not only because of its potential to distort trade, but also because of its negative impact on food security; it impairs the stability of imports of foodstuffs by importing countries. For the import of agricultural products, the UR Agreement requests the replacement of non-tariff border measures with tariffs, in principle, and to reduce tariff rates. The regulation on export ban and export regulation under Article 12 of the Agriculture Agreement is moderate and lacks transparency, predictability, and stability. Although the US system does not directly infringe on international rules, it does have trade distorting effects and obstructs stable food imports at importer countries. Therefore, it may present problems in terms of food security. At the WTO negotiations on agriculture, Japan submitted a proposal which would strengthen disciplines on export prohibitions or export restrictions, in terms of redressed imbalance of rights and obligations between exporting and importing countries, while ensuring food security. In 2004, Japan reiterated its position several times at the Special Session of the Committee on Agriculture and in other bilateral meetings between many countries. It was finally agreed under Annex A of the WTO Framework Agreement (Framework forestablishing modalities in Agriculture) in July 2004 that Disciplines on export prohibitions and restrictions in Article 12.1 of the Agreement on Agriculture will be strengthered. 12

5 Tariff Quantitative restriction Figure US-1 Comparison of disciplines importing and exporting countries in the area of Agriculture Importer side Import tariff on every agriculture product is binding Have obligation to reduce tariff under UR Agreement Enable to raise tariff under the safeguard in accordance with the set rules Quantitative restrictions on imports should be converted to tariffs. Must set minimum access. Exporter side Export tariffs are not binding No obligations to reduce export taxes Free to set new tariff or raise tariff as no rules to govern them. Possible to set new restriction or continue restriction on exports provided: Consideration on the effects of such restriction upon the food security of importer countries Prior notification, and if required consult with importer countries 2) Export Restrictions on Logs The United States enacted logging restrictions in order to protect the spotted owl and other animals. These restrictions reduced the domestic supply of logs, which led to the "Forest Resource Conservation and Shortage Relief Act of 1990," a law which restricts log exports. The United States currently bans the exportation of logs taken from federal and state-owned forests west of the 100 west longitude line. The United States argues that this measure is for the conservation of exhaustive natural resources (GATT Article XX(g)) and therefore is allowed as an exception to Article XI, which prohibits quantitative restrictions. However, this is a restriction on the export of logs only; there are no restrictions on trade in logs within United States. The measure therefore cannot be justified as a necessary and appropriate means of protecting forest resources. For this reason, it may be in violation of the GATT Article XI. 13

6 The export control measures over logs, including this issue, may be a measure to protect the domestic industry under the pretext of forestry resource protection. During 2004, Japan addressed this issue not only in the context of the negotiation group for market access of non-agricultural products in the Doha Round, but also in bilateral consultations. TARIFFS 1) High Tariff Products The simple average bound tariff rate for non-agricultural products as a result of the Uruguay Round is 3.2 %. Items with high tariffs include woolen goods (maximum 25 %), glassware (maximum 38 %), porcelain and ceramics (maximum 28 %) and trucks (25 %). The tariff rate on trucks is significantly higher than the 2.5 % tariff on passenger cars, placing imported trucks under a severe competitive disadvantage; Japan has strong interests in seeing this tariff rate reduced. Higher tariff rates themselves do not, per se, conflict with WTO Agreements unless they exceed the bound rates. However, from the viewpoint of promoting free trade, it is desirable to reduce tariffs to their lowest possible rate, while eliminating the tariff peaks described above. Negotiations over market access for non-agricultural products in the Doha Development Agenda (DDA) are ongoing and include negotiations on reducing tariff rates. 2) Method of Calculating Tariffs on Clocks and Wristwatches The United States calculates tariffs on finished clocks and watches as the aggregate of the tariffs on their components. These calculations are complex and the administrative procedures onerous. For example, under the current rules, the tariff on a 14

7 wristwatch is the total of the tariffs on its: (a) movement; (b) case; (c) strap, band or bracelet; and (d) battery. In other words, when a company exports a finished wristwatch to the United States, it must classify it under an eight-digit HTS number according to the nature of the product, and then calculate and total the tariffs for each component: the movement, case, band and battery. This calculation method is not a violation of WTO rules because it was enacted in accordance with concession table amendment procedures. Nonetheless, it places excessive burdens on traders. What is more, this component price breakdown system is unusual by international standards, and is based on the assumption that mechanical clocks and watches are the primary form of clocks and watches made. Actually, they account for less than 2 % of worldwide production today. During the Japan-US Deregulation Dialogues in 1998 and 1999, Japan requested that the US simplify clock and watch import procedures for complete units by classifying them under a 6-digit HS code, rather than accumulate the tariff amounts for individual components. In spite of Japan's request, the report on tariff simplification published by the US International Trade Commission (ITC) in March 1999 failed to offer adequate improvements. Clock and watch tariffs are still categorized under 8-digit tariff codes and various size and price differentiations remain. The issue was further discussed during the Japan-US Deregulation Initiative talks in 2002 and The Japan-US Deregulation Initiative Report issued in June 2004 reflected Japanese concerns over clock and watch tariff rate calculation methodologies and rules of origin certificates. The report stated that negotiations would continue with deference to both the Japanese government s position and the ongoing WTO discussions. In this case, the problem is that trade procedures are very cumbersome due to the existence of a complicated tariff system. The issue can be easily resolved if the United States eliminates import tariffs on clocks and watches as Japan has done. TRADE PROCEDURES Public Health Security and Bioterrorism Preparedness and Response Act of 2002 (the Bioterrorism Act) In June 2002, the US Food and Drug Administration (FDA) enacted the Public Health Security and Bioterrorism Preparedness and Response Act of 2002 (the 15

8 Bioterrorism Act). The Bioterrorism Act requires individuals and businesses shipping foods to the United States to register their food facilities and to provide advance notice of foods shipping. The FDA announced the Interim Final Regulations to implement the Bioterrorism Act in December 2003, which include Registration of Food Facilities and Prior Notice of Imported Food Shipment provisions. To avoid confusion in enforcing the Interim Final Regulations, the Compliance Policy Guide (CPG) was issued prior to the Final Regulation, which has currently been prepared by the FDA. As the final implementation of the Bioterrorism Act would significantly impact Japanese exporters and individuals who export foods to the United States, the Japanese Government has submitted public comments to the US FDA regarding the implementation. Accordingly, some of Japan s concerns have been reflected in the Interim Final Regulations and the CPG. However, the Interim Final Regulations still pose problems under GATT Article VIII, which calls for minimizing the incidence and complexity of import and export formalities and for decreasing and simplifying the documentation required for import and export. Especially, under the Interim Final Regulations, prior notice is required even for individuals who ship foods to the United States. Moreover, though the CPG is applied flexibly, a customs inspector may still reject imported foods at his discretion. In addition, points of contact where parties can inquire in Japanese about matters regarding the Bioterrorism Act have not been published and the FDA s website does not provide information in Japanese how to access necessary information timely. The U.S. is preparing the Final Regulations taking into account the opinions and comments from Japan and other countries. Japan will continue to monitor implementation of the Bioterrorism Act and encourage effective and fair Final Regulations. ANTI-DUMPING MEASURES While the United States is one of the most open markets in the world, it still maintains elements of unilateralism and protectionism in its trading system. Antidumping (AD) legislation is perhaps the largest source of hidden protectionism in the United States, and many countries have complained about the shortcomings of the US regime. Some of the problems were remedied by the Uruguay Round implementation legislation, in which the United States brought certain parts of its AD system in line with the Anti-Dumping Agreement. 16

9 Notwithstanding these improvements, there are two general concerns. First, the US implementing legislation could be interpreted or applied in ways that are inconsistent with the Anti-Dumping Agreement. Second, even where the implementing legislation seems to be clear, actual practice under the provisions might violate the intent of the Anti-Dumping Agreement. Therefore, it will be very important to monitor closely the US administration of its AD law and, if any problems exist, to point them out. In the past, Japan has raised various generalized problems with US AD measures, including: (i) asymmetrical comparisons of prices ( CEP offset ) in calculating dumping margins; (ii) the definition of affiliated party ; (iii) problems in applying facts available ; (iv) the handling of captive production related to the injury determination (treatment of merchant market ); and (v) issues involved in considering later developed products and like products within the scope of the investigation. The section below details cases where these issues remain a concern. 1) US Anti-dumping Act of 1916 (WT/DS162) Section 801 of the United States Revenue Act of 1916 (the 1916 Act or "Antidumping Act of 1916") allows, under certain conditions, civil actions and criminal proceedings to be brought against importers who have sold foreign produced goods in the United States at prices which are "substantially less" than the prices at which the same products are sold in a relevant foreign market. In case a plaintiff is able to establish that an importer has engaged in price discrimination with specific intent, including the intent of destroying or injuring an industry in the United States, the law permits a plaintiff to receive treble damages from the defendant; the defendant may also face imprisonment. In November 1998, US steel producer Wheeling-Pittsburgh filed a suit under the Antidumping Act of 1916 in the Federal District Court of Ohio seeking civil compensation for injury and a halt to imports from nine foreign companies, including three Japanese firms. Wheeling-Pittsburgh alleged that these companies engaged in dumping with the intent to harm the US steel industry and Wheeling-Pittsburgh. (Afterwards, in 1999, Wheeling-Pittsburgh discontinued the case, consequently, in 2000, the Federal District Court of Ohio dismissed the suit.) into In February 1999, pursuant to the dispute settlement procedures of the WTO, Japan requested bilateral consultations with the United States. Japan claimed that: (a) the law in question provided criminal penalties and fines as relief, rather than the AD duties allowed by GATT; and (b) the procedures used to initiate the investigation did not conform with the Anti-Dumping Agreement. Therefore, the US was in violation of its obligations under the WTO Agreements. In July 1999, a panel was established; its 17

10 report was circulated to all Members in May (The European Commission also requested bilateral consultations with the United States in June 1998 because of perceived WTO Agreement violations and a panel was established in February 1999; its report was circulated to all Members in March 2000.) The reports of both panels upheld virtually all of the arguments made by Japan and the European Union. The Panel recommended that the United States bring the Antidumping Act of 1916 into conformity with the WTO Agreement. The United States appealed both of the reports to the Appellate Body in May The Appellate Body upheld the Panel s findings in both cases, and in August 2000 circulated a report to all Members recommending that the United States repeal the Antidumping Act of 1916; the report was adopted in September This marked the first time that the WTO recommended that a Member repeal its law in order to bring it conformity with the WTO. The WTO panel and the Appellate Body found the following: (1) Antidumping Act of 1916 is in violation of GATT Article VI:1 and Article VI:2 (2) Antidumping Act of 1916 is in violation of the AD Agreement Articles 1, 4.1, 5.1, 5.2, 5.4, 18.1, and 18.4 (3) Antidumping Act of 1916 is in violation of Marrakesh Agreement Establishing the WTO Article XVI.4 (4) As a result, benefits to Japan are nullified and impaired. Note-1 GATT Article VI:1 and VI:2: Stipulates that the only measure permitted to counteract dumping is the AD duty calculated as the difference between normal value and the export price. AD Agreement Article 1: Stipulates that AD measures can be taken only when they are based on the investigation under the AD Agreement and the conditions of GATT Article VI. AD Agreement 4.1, 5.1, 5.2 and 5.4: Stipulates that support from 25 percent or more of the domestic industry is needed to initiate an AD investigation. AD Agreement Article 18.1: Stipulates that AD measures cannot be taken except in the cases under GATT provisions. AD Agreement Article 18.4: Stipulates the obligations for WTO member countries to ensure the conformity of their domestic laws and regulations to the AD Agreement.. Marrakesh Agreement Establishing the WTO Article XVI.4: Stipulates that WTO member countries must conform their domestic laws and regulations with the WTO Agreements. 18

11 The reasonable period of time to implement the recommendations and rulings of the Dispute Settlement Body (DSB) was originally set for July 26, The deadline was extended until the end of December 2001, as a result of consultations between Japan, the European Commission and the United States because of the US argument that the US Congress could not repeal the Anti-Dumping Act of 1916 within the set time frame. However, because the recommendation was not implemented within the deadline, at the January 2002 meeting of the DSB, Japan and the European Commission requested authorization to retaliate in the form of mirror legislation (Japan s retaliation is to implement a measure that is similar to the Antidumping Act of 1916, but applies only to imports from the United States). The United States responded by requesting arbitration concerning the level of retaliation. Although in March 2002 Japan and the United States (and the European Commission and the United States) agreed to suspend arbitration procedures, each party reserved the right to independently request reactivation of the suspended arbitration. In the US Congress, legislation to repeal the Act with no retroactive effects (i.e., repeal is not valid for the cases already in dispute) was submitted to the US House of Representatives in March While the US Congress repeatedly delayed consideration of legislation to repeal the Act, the EU requested WTO arbitration proceedings at the meeting of the DSB in September Also, to compensate EU companies affected by the 1916 Act, the EU introduced a Council Regulation in December 2003 that enables European companies to recover damages incurred under 1916 Act law suits. The 1916 Act is also of concern to Japan. In May 2004, the Iowa Federal District court ordered a Japanese company to pay damages in the amount of approximately 4 billion yen pursuant to a case filed against the company in March The Japanese company appealed the Iowa court s ruling to the Federal Court of Appeals. However, the possibility remains that the company may still be required to pay damages. In the fall of 2004, Japan submitted a bill to the Extraordinary Diet to enable Japanese companies to recover damages caused by lawsuits filed against them under the 1916 Act. The bill was passed and enacted on December 8, In October and November 2004, the US House and Senate, respectively, passed the Miscellaneous Trade and Technical Corrections Act of The bill repeals the 1916 Act, but not retroactively. The President signed the bill into law on December 3, Though the efforts by the United States to repeal the 1916 Act are commendable, a new problem arose on November 23, 2004, prior to its repeal. Specifically, a trustee of a bankrupt US company sued a Japanese company for violating the 1916 Act. Japan needs to closely monitor the progress of this lawsuit to ensure that the respondent Japanese company does not suffer damages under a US law that has been repealed. 19

12 Column: How to Restore Damages Caused by the US 1916 Act Japan s Special Measures Law for Protecting Companies from the Obligation of Returning Profits under the 1916 Act ( Damage Recovery Act ) was passed the 161 st Diet session on December 8, The act helps Japanese persons and companies recover damages incurred through the 1916 Act. The importance of this act to the foreign trade of Japan is significant. I US Anti-dumping Act As shown in Part I, Chapter 1 US Antidumping Act of 1916, the 1916 Act stipulates that an importer who has engaged in price discrimination with specific intent, including the intent of destroying or inuring an industry in the United States, may be subject to criminal punishment, including fines and imprisonment. In addition, the Act grants plaintiffs treble damages plus reasonable attorney fees. II. The 1916 Act in Violation of the WTO Agreement Japan and the EU challenged the 1916 Act at the WTO in 1999, claiming that it violates the WTO Agreement. The Panel and the Appellate Body agreed with Japan and the EU. The WTO specifically found that the 1916 Act violated the WTO AD Agreement because it imposes measures other than AD duties to remedy dumping. The Appellate Body further determined that the only means of complying with its ruling would be for the United States to repeal the 1916 Act. The Panel and Appellate Body reports were adopted by the Dispute Settlement Body of the WTO on September 26, The Dispute Settlement Body recommended that the United States bring the 1916 Act into conformity with its WTO obligations by the end of December III. Japanese Companies and the 1916 Act While the United States continuously failed to repeal the 1916 Act, a US court ordered a Japanese company to pay damages under the 1916 Act. Specifically, a rotary press manufacturer in the United States (Company A) had filed suit under the 1916 Act in the Federal District Court in Iowa against a Japanese rotary press manufacturer and its US subsidiary (Company B) claiming that Company B had committed dumping. The jury found against Company B in December 2003 and ordered it to pay three times the damages claimed by Company A plus attorney fees. Company B appealed the Court s decision to the US Court of Appeals; the case is ongoing. IV. EU Council Regulations and the 1916 Act The EU introduced a Council Regulation (No 2238/2003) on December 15, 2003 designed to compensate companies damaged by rulings under the 1916 Act. The Regulation took effect in January The regulation protects EU companies from the 1916 Act by allowing EU companies and individuals to bring suit in the EU against the US company responsible for bringing the suit under the 1916 Act. The regulation also grants the EU the right to reject rulings and orders issued in US courts pursuant to the 1916 Act. 20

13 V. Japan s Need for Development of Related-Laws After the EU introduced its Council Regulation, Japan considered amending its laws to provide similar protection to Japanese companies. Japan believed it was justified in doing so because: (i) the US had failed to amend or repeal the 1916 Act by the designated date; (ii) a US court had issued an order against a Japanese company to pay damages; and (iii) with the EU regulation in place, US companies could more easily target Japanese companies under the 1916 Act. Consequently, the Ministry of Economy, Trade and Industry studied the feasibility of establishing a new act and invited opinions and comments from a broad range of experts. The comments were discussed at the WTO committee of the 14 th Industrial Structure Council and submitted to the 161 Extraordinary Diet. Ultimately, the Special Measures Law for Protecting Companies from the Obligation of Returning Profits under the 1916 Act ( Damage Recovery Act ) was introduced and implemented after approval by the Diet. Outline of the Act The act provides: (i) Recognizing the Right to Claim Damage Recovery The Act stipulates that persons in Japan (including enterprises and organizations established under the act of Japan and other Japanese nationals (Article 2)) who have suffered from damages arising from a court judgment made pursuant to the 1916 Act may seek recovery of the damages from US enterprises and others in Japanese court (Article 3). Claims under this act are subject to a three-year statute of limitations (Article 4). Courts with jurisdiction to accept claims are designated under Article 5. (ii) Negation from Acceptance and Execution of Judgment made Pursuant to the 1916 Act Judgments made under the 1916 Act by any court outside Japan shall not be effective. The act clearly prohibits Japan from accepting and executing any judgment made under the 1916 Act (Article 6). VI. Consistency with the WTO Agreement Article 23.1 of Annex 2 of the WTO Understanding on Rules and Procedures Governing the Settlement of Disputes governs redress with respect to violations of WTO Agreements. The panel examining EU import measures (WT/DS165/R) defined redress as an action to restore the balance of rights and obligations that form the basis of the WTO Agreement. (See Paragraph 6.23 of the panel report.) Japan s Damage Recovery Act was not intended to cause the US to repeal or amend the 1916 Act, but to allow Japanese enterprises and persons suffering from damages by the 1916 Act to recover their damages. In other words, the Act aimed to protect the profits of private persons and not of the national interest. The Act does not aim to restore the balance of rights and obligations that form the basis of the WTO Agreement. As is clear from the above discussions, the Act does seek redress by repealing or amending the 1916 Act. Therefore, it does not violate Article 23.1 of the Understanding 21

14 on Rules and Procedures Governing the Settlement of Disputes. EU agrees with this position with respect to its Council Regulation. The Damage Recovery Act passed the 161 st Diet on November 30, 2004 and took effect on December 8, As indicated above, the United States repealed the 1916 Act on December 3, However, the repeal of the 1916 Act is not retroactive with respect to ongoing cases. Thus, the 1916 Act still applies to Japanese companies named as defendants in active cases. To that extent, the Damage Recovery Act applies. 2) US Anti-Dumping Measures on Certain Hot-Rolled Steel Products from Japan (WT/DS184) In October 1998, the United States initiated an investigation against certain hotrolled steel products from Japan and, in June 1999, imposed AD duties. In January 2000, Japan requested WTO consultations with the United States regarding the US AD measures on certain hot-rolled steel products ( hot-rolled steel ) from Japan. Japan challenged several aspects of the US measures, including the: (a) dumping margin calculation methodology; (b) determination of critical circumstances (calling for retroactive imposition of duties); (c) determinations of injury and causal link; and (d) unfair investigation procedures. Japan considered each of these to be violations of the US obligations under GATT and the Anti-Dumping Agreement. The consultations failed to settle the dispute. This led to the establishment of a Panel in March Brazil, Canada, Chile, the European Commission and the Republic of Korea participated in the Panel proceeding as third parties. In February 2001, the Panel report was circulated to all WTO Members. The Panel agreed with some Japanese claims, but rejected others. Both the United States and Japan, therefore, appealed to the Appellate Body in April and May 2001, respectively; Korea, the European Commission, Canada, Brazil and Chile participated as third parties. The Appellate Body report, circulated in July 2001 to all WTO Members, uphelded most of Japan s claims. It was adopted by the Dispute Settlement Body (DSB) in August Japan s arguments supported by the Panel and Appellate Body were as follows: (1) The application of facts available to three investigated respondents by the United States Department of Commerce ( DOC ) in this case was inconsistent with Article 6.8 and Annex II of the Anti-Dumping Agreement. 22

15 (2) DOC s inclusion of margins based on partial facts available in the calculation of the all others rate, which is the dumping margin of exporters and producers not individually investigated, was inconsistent with Articles 9.4 and 18.4 of the Anti-Dumping Agreement. (3) DOC s exclusion in this case of certain home market sales to affiliates in the calculation of the normal value as not in the ordinary course of trade was arbitrary and inconsistent with Article 2.1 of the Anti-Dumping Agreement. (4) The injury determination was focused primarily on injury in the merchant market and factors affecting financial performance in that market and, thus, was inconsistent with Articles 3.1 and 3.4 of the Anti-Dumping Agreement. The Anti-Dumping Agreement requires the administering authority to focus on the industry as a whole. The DSB made the following recommendations: (1) amend the statutory provision regarding the all others rate; (2) abolish the practice of excluding home market sales to affiliates from the normal value calculation; (3) re-calculate dumping margins in a manner consistent with the Anti- Dumping Agreement; and (4) re-determine its injury in conformance with the WTO Agreement. Through DSB arbitration in February 2002, the reasonable period of time (RPT) for compliance was set at 15 months from the date of adoption of the Panel and Appellate Body Report (in other words, by November 23, 2002). Although the United States amended regulations and undertook recalculations in regard to (b) and (c), above, within the RPT, it completely failed to fulfill its obligations in regard to (a) and (d). The United States requested Japan to accept an extension of the RPT to implement the remaining recommendations, to which Japan agreed. The RPT was extended until the end of the first session of the 108 th US Congress or the end of 2003, whichever came first. The US Administration sought to amend the relevant portions of the Act. US Trade Representative Zoellick and Secretary of Commerce Evans jointly sent a letter to the US Congress in April 2003 urging them to pass the Amendment. However, in November 2003 and again in July 2004, the administration requested at the WTO to extend the deadline for implementing the rulings (i.e., for Congress to pass the Amendment) because there was no prospect for the Amendment to pass the US Congress before the approaching end of the session. Although the US Administration continues to urge Congress to pass the Amendment, Japan finds it appropriate to continue requesting the United States to amend the Act; the deadline has been extended until July 31,

16 During the Japan-US Regulatory Reform Initiative in December 2004, Japan again requested that the US government speedily implement the recommendation. The US responded that it would urge congress to start action. It remains necessary to continue monitoring US action in the future and to strongly request that the US implement the recommendation. 3) The Byrd Amendment (Amendment to the Tariff Act of 1930) (DS217/DS234) In October 2000, the US Congress passed the Agricultural Appropriations Act of 2001, which included an amendment to the Tariff Act of 1930 requiring the distribution of revenues collected from AD and countervailing duties to US domestic companies that filed or supported the petition. The Continued Dumping and Subsidy Offset Act of 2000 is called the Byrd Amendment because it was introduced by Senator Byrd. In December 2000, Japan, the European Union, Australia, Republic of Korea, Brazil, India, Thailand, Indonesia and Chile jointly requested consultations with the United States under the DSU. The nine Members alleged that the Byrd Amendment was inconsistent with the WTO Agreement. Canada and Mexico requested consultations with United States for the same reasons in June The issue was not resolved in either of the consultations, and panels were established in August and September 2001 respectively. The case was adjudicated by a single panel; the Panel report was circulated in September The Panel found the Byrd Amendment in violation of the WTO Agreement for multiple reasons and recommended the repeal of the Byrd Amendment as the most appropriate and effective method of implementation. The United States appealed the Panel s decision in October In January 2003, the Appellate Body upheld the Panel s finding that "specific actions against dumping/subsidy" under the ADA, the ASCM and GATT are limited to three measures: (1) definitive AD/countervailing duties; (2) provisional measures; and (3) price undertakings. The measures in the Byrd Amendment are "specific actions against dumping/subsidy," but are not one of the three permitted measures. Thus, the Byrd Amendment is inconsistent with WTO Agreement. The Appellate Body report was adopted by the Dispute Settlement Body on 27 January. The report recommends that the United States bring the Byrd Amendment into conformity with its obligations under the Anti-Dumping Agreement, the Agreement on Subsidies and Countervailing Measures and GATT. 24

17 The United States proposed to repeal the Byrd Amendment in its Budget Statement of 2006, as well as in its Budget Statement of 2004 and However, the US Congress has been slow to act and many oppose repealing the amendment. The US also proposed in WTO rule negotiations that a system similar to the Byrd Amendment be adopted by the WTO. These efforts must be closely monitored and rejected. Implementating WTO s rulings is the most elementary duty of WTO members and it is necessary to continue to insist on implementation. Further, in spite of the proposal to repeal the Byrd Amendment, the Congress has not discussed the amendment proposed by Senator Snow in June 2003, Congressman Ramstad in March Again in March 2005, Congressman Ramstad proposed the amendment, however, there has been no prospect for discussion in the Congress yet. In addition, a letter signed by 70 Congress members opposing the repeal was sent to the president in February 2003 and similar letters by 16 senators and by 6 senators were sent in July 2003 and in September In June 2003, an arbitration panel determined that the deadline for implementing the recommendation was December 27, The United States let the implementation deadline pass without any amendment to or repeal of the Byrd Amendment. Because of this, Japan, the European Union, Canada, Republic of Korea, Mexico, Brazil, India, and Chile requested the WTO to approve countermeasures on January 15, (The countermeasures include imposing additional tariffs on products imported from the United States, in an amount equivalent to the revenue distributed under the provisions of the Byrd Amendment.) The United States, in turn, claimed that the level of the countermeasures was not appropriate. At the DSB Meeting on January 26, 2004, the matter was referred to arbitration to determine the level of countermeasures. On August 31, the arbitrator ruled that the authorized level of retaliation in each case would be equal to 0.72 multiplied by the [a]mount of disbursements under CDSOA for the most recent year for which data are available relating to AD or countervailing duties paid on imports from [the subject country] at that time, as published by the United States authorities. The 0.72 multiplier is the trade effect coefficient that estimates the nullification or impairment (i.e., trade effects) suffered by affected parties as a result of Byrd Amendment disbursements. On November 10, the 7 joint applicants (Japan, European Union, Canada, India, Republic of Korea, Brazil and Mexico) requested approval to impose countermeasures. The countermeasures, which enable each applicant to raise tariffs on imports from the US within the scope of the arbitration ruling, were approved by the DSB on November 26. On December 6, Chile also filed an application to impose countermeasures, which was approved by the DSB on December 17. These movements ensured the right to exercise the countermeasure. If it is actually to be exercised, proper additional tariff rates will be set, within the approved countermeasure scope, on products selected from the list attached to the application, and such rates will be notified to the WTO. It is necessary for Japan to cooperate with other applicants and to press the United States to repeal the Byrd Amendment. 25

18 4) Sunset Provision (US Sunset Review of Anti-Dumping Duties on Corrosion-Resistant Carbon Steel Products from Japan (WT/DS244)) Because past US AD laws lacked a sunset review mechanism or a time limit on orders imposing AD duties, AD duties tend to remain in force much longer in the United States than in other Members. Article 11.3 of the Anti-Dumping Agreement provides for sunset reviews. Pursuant to Article 11.3, AD duties automatically expire at the end of five years unless the measures are reviewed and it is determined that dumping and injury are likely to continue if the measures were terminated. Subsequently, the US adapted its AD law to incorporate the sunset provisions of Article Under the law, all AD measures must be reviewed ( sunset reviews ) beginning July Since that time, the US conducted 54 sunset reviews of measures against Japan and terminated 34 of them. (See Figure US-2) As stated above, the AD Agreement stipulates that AD measures shall be terminated in 5 years, unless the authorities determine that the expiry of the duty would be likely to lead to continuation or recurrence of dumping and injury. The US sunset regime, however, is designed so that continuation of the measures is the rule rather than the exception. Therefore, Japan considered that the US sunset review procedure was inconsistent with the AD Agreement. Indeed, the implementation of the US sunset review procedures after the establishment of the WTO (in 1995) showed that, among 54 AD cases against Japan that went through the sunset review procedures, 22 cases remain in effect (as of January 2005). As a result, nearly half of US AD measures have continued over 10 years. (Some AD measures have continued over 20 years.) In view of then upcoming sunset review procedures in 2003 on AD measures against Japanese steel products that had been in effect since 1998, Japan requested bilateral WTO consultations with the United States in January 2002 over its sunset review regime. The bilateral consultations were intended to confirm the basic principle of the AD Agreement that required AD measures to terminate after 5 years, in general. Japan and the United States did not share opinions at the bilateral consultations held in March 2002; a panel was established in May 2002 (Brazil, Canada, Chile, the EU, India, Korea and Norway). On August 14, 2003, the Panel rejected Japan s claim and determined that the US decisions under the sunset review were not inconsistent with the WTO Agreements. Japan appealed to the Appellate Body on September 15, On December 15, 2003, the Appellate Body accepted part of Japan s claim, but concluded that, due to 26

19 insufficiency of the factual basis to complete the analysis of Japan s claims the United States did not act inconsistently with the WTO Agreements. Japan s claim and the arguments in the Appellate Body report are summarized below: (1) Consistency with WTO for the Sunset Policy Bulletin (SPB) As Such Japan claimed that the Panel erred in concluding that SPB was not an actionable administrative procedure within the meaning of Article 18.4, and therefore could not give rise to a WTO violation. The Appellate Body reversed the Panel s findings; the SPB is a measure that is challengeable, as such, under the AD or WTO Agreement, whether it was a mandatory legal instrument or not. However, the Appellate Body did not determine the consistency with the WTO, since there was not a sufficient finding of facts by the Panel (2) Applicability of the AD Agreement Article 2.4 to sunset review, and the prohibition of zeroing Japan claimed that the concept of determination of dumping as set forth in Article 2 should be applied to the determination of dumping under a sunset review, and that it was inconsistent with the AD Agreement that the Department of Commerce (USDOC) determined the likelihood of continuation and recurrence of dumping based on the dumping margin calculated using a methodology of zeroing, which itself was inconsistent with Article 2 of the AD Agreement, for evidence to determine the existence of dumping. The Appellate Body reversed the Panel s findings and determined that to use a dumping margin calculated under the zeroing methodology to sunset review was inconsistent with Articles 2.4 and 11.3 of the AD Agreement. However, the Appellate Body did not determine that USDOC acted inconsistent with the AD Agreement, since the Panel did not assess the facts, including whether the methodology that USDOC used in calculating the dumping margins was equivalent in effect to the methodology inconsistent with the WTO Agreement. (3) The making of likelihood determinations on a order-wide basis Japan claimed that the Panel erred in finding that USDOC acted consistently with the AD Agreement when making dumping a determination in the sunset review on an order-wide basis and not on a company specific basis. The Appellate Body reversed the Panel s finding, which was determined solely on the basis that the reason that SPB was not a measure that is challengeable as such under the AD Agreement. However, the Appellate Body found that AD Agreement Article 11.3 (sunset review) did not mandate the company-specific determination on the likelihood of continuation or recurrence of dumping. Therefore, SPB, as such, was consistent with the WTO Agreement in stating that USDOC will make its likelihood determination in a sunset review on an order-wide basis. The Appellate Body rejected Japan s claim. 27

20 (4) The factors considered by USDOC in making a likelihood determination Japan claimed that the Panel erred in finding that USDOC acted consistently in the sunset review in making its likelihood of continuation of dumping determination based on the positive evidence. The Appellate Body rejected Japan s claim, and determined that there was no reason to conclude that USDOC did not have before it relevant facts constituting a sufficient factual basis to allow it to reasonably draw the conclusions concerning the likelihood of continuation or recurrence. The Appellate Body s conclusion that the United States did not act inconsistently with the WTO Agreement in the sunset review is regrettable. However, the Appellate Body s determination on part of Japan s legal claim ((1) the SPB is a measure that is challengeable, as such, under the WTO Agreement and (2) zeroing methodology is prohibited generally) is significant in terms of strengthening the rules of AD procedures in the future. Mexico has challenged US sunset review procedures at the WTO. Japan has participated in the dispute as a third party and maintained that the US procedures violate the WTO agreements. In addition, in March 2003, Japan submitted to the WTO a proposal on sunset reviews together with 13 Members. Under the proposal: All AD measures shall remain in force only as long as and to the extent necessary to counteract dumping which is causing injury and shall without exception be terminated at the latest 5 years from the imposition of the order. A Member shall not initiate a new AD investigation for the same country/product, until a date no sooner than one year following the termination of the AD measure, unless there are exceptional circumstances that justify the initiation in a shorter period, which shall not be less than six months. Japan will continue to use and advocate the findings of the Appellate Body that support Japan s claims in this case in future WTO Dispute Settlement procedures and in future sunset reviews, while exerting more efforts to strengthen rules at the AD negotiation. US Expire Figure US-2 Revocation or Continuance of AD Duties (Products imported from Japan) Sunset Review Sunset Review Sunset Review Expire Expire Revoke Cont. Revoke Cont. Revoke Cont EU Note: Includes second sunset review. (Figures valid as of the end of 2004.) 28

21 5) Calculation of dumping margins via the zeroing procedure (WT/DS322) The Unites States applies a procedure known as zeroing that in effect artificially inflates dumping margins. Under this procedure, in adding up margins calculated through an investigation for each model or export transaction, negative margins (export prices are higher than normal value in a home market) are converted to zero. (See Figure US-3) In March 2001, the WTO Appellate Body ruled that the zeroing procedure which the EU used in calculation of dumping margin on the basis of a weighted average normal value with a weighted average export price for imports of cotton-type bed linen from India violated AD Agreement. However, the United States has taken the position that the WTO ruling against zeroing only applied to two specific cases (i.e., the EU s AD measure against Cotton-type Bed Linen from India and US s AD Final Determination on Softwood Lumber from Canada) and would not constitute a finding that its zeroing procedure, as such, violates the WTO. The United States continues to apply the zeroing procedure. Japan s industries, including the bearing industry, have been harmed for a long time under the zeroing procedures since; excessive and unjustifiable AD duties have been imposed. Given these circumstances, on November 24, 2004, Japan requested WTO consultations with the US over its zeroing procedure, Japan s major arguments are as follows: In the original AD investigations, the application of zeroing inflates damping margins. This is in violation of AD Agreement Articles 2.4 and because there is no consideration of all export transaction prices in the original investigation phase and because there is no fair comparison of export price and normal value in home market. In the AD periodic reviews, the application of zeroing inflates damping margins. This is in violation of AD Agreement Articles 2.4 and 9.3 because there is no fair comparison of export price and normal value. In the sunset reviews, the determination of likelihood of continuation or recurrence of dumping which is based on the dumping margins inflated by the application of zeroing and the continuation of collection of AD duties thereafter are in violation of the AD Agreement Article 11. In March 2001, in the case involving Cotton-Type Bed Linen from India (DS241), the WTO Appellate Body recognized that the application of zeroing in the original investigation violated AD Agreement Article because it hindered the comparison of a normal value with prices of all comparable export transaction. After this ruling, the EU repealed its zeroing procedure in original investigations. 29