ELSA MOOT COURT COMPETITION (EMC) on WTO Law THE CASE - 2011-2012 Zeltonia Safeguard Measures on Cement (Complainant:

: Arachland)
by Meredith Kolsky Lewis Senior Lecturer, Victoria University of Wellington Law School, Wellington, New Zealand 1. Zeltonia is a developed country and a WTO Member. Zeltonia has formed a trade agreement called the Zeltonia Felagi Free Trade Agreement (ZEFFTA) with WTO Member Felagi. ZEFFTA came into effect on January 1, 2005; however, neither Zeltonia nor Felagi has notified the agreement to the WTO. Under ZEFFTA, Zeltonia has agreed to eliminate tariffs applicable to Felagi on 75 percent of its tariff lines by January 1, 2015. On January 1, 2007, Zeltonia lowered its tariffs applicable to Felagi to zero on the majority of goods covered by ZEFFTA, including cement and all textile products within the scope of Agreement. The excluded 25 percent of Zeltonias tariff lines comprise all agricultural products and 50 percent of the tariff lines applicable to textiles. Over the past ten years, a constant 20 percent of Felagis exports to Zeltonia by value have been agricultural products. An additional 20 percent of Felagis exports to Zeltonia by value have consisted of textile products. Half of Felagis textile exports to Zeltonia by value are products excluded from coverage under ZEFFTA. The other half of Felagis textile exports to Zeltonia are currently eligible to receive zero tariffs pursuant to ZEFFTA. Pursuant to ZEFFTA, Felagi has agreed to eliminate tariffs applicable to Zeltonia on 85 percent of its tariff lines by January 1, 2015. The excluded 15 percent of Felagis tariff lines comprise all agricultural products. Felagi has already lowered to zero its tariffs applicable to Zeltonia for the majority of goods covered by ZEFFTA. Over the past ten years, a constant 30 percent of Zeltonias exports to Felagi by value have been agricultural products. Zeltonia has also formed a trade agreement with non-WTO Member Bakastan called the Bakastan Zeltonia Free Trade Agreement, usually referred to as BAZ. BAZ came into effect on January 1, 2006. Zeltonia has not notified the agreement to the

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WTO. In June 2005, Bakastan expressed its interest in acceding to the WTO and began the accession process. In the course of Bakastans accession discussions, Bakastan indicated that it considered itself to be a developing country. In January 2007 Bakastan held elections and elected a new president. The new government suspended Bakastans participation in the WTO accession proceedings, and those proceedings remain on indefinite hold. 5. Under BAZ, Zeltonia and Bakastan have each agreed to eliminate tariffs applicable to the other countrys goods on 95 percent of tariff lines. The excluded five percent of goods comprise approximately two percent of agricultural tariff line items and three percent of manufactured goods tariff line items. Zeltonia has a struggling cement industry. Historically, Zeltonias cement industry had a seventy percent market share domestically, with the other thirty percent coming from imports. However, for the past several years, Zeltonia has been importing an increasing amount of cement. Since the beginning of 2007, cement imports have increased such that imports now comprise fifty percent of the Zeltonian market; correspondingly, the Zeltonian cement industrys domestic market share has fallen to fifty percent. Zeltonia produces cement in the traditional, heavily carbon-intensive fashion. Both Felagis and Bakastans cement industries utilize a carbon-intensive production process similar to that of Zeltonia. Felagi exports cement to Zeltonia and its exports to Zeltonia have risen since 2006. Two other WTO Members, Vidron and Seliff, similarly export cement to Zeltonia that is produced in a heavily carbon-intensive fashion. Vidrons and Seliffs cement exports have maintained a relatively stable small share of the Zeltonia cement market for the past several years. Five years ago, Vidron and Seliffs cement exports to Zeltonia each comprised approximately four percent of the Zeltonian market; today that figure is three percent for each country. Bakastan has been exporting cement to Zeltonia since BAZ took effect. Bakastan cement exports currently have a six percent market share in Zeltonia. Arachland also exports cement to Zeltonia. Arachland has provided government assistance for a number of years to its domestic cement industry to encourage more ecofriendly production methods. This assistance has included research and development grants, low-interest loans and preferential tax treatment. Arachland cement producers have been implementing increasingly comprehensive eco-friendly production processes for many years. As of January 2005, 50 percent of Arachland cement exports to Zeltonia were produced in the traditional way, and 50 percent of exports were carbon neutral. For the past three years, 100 percent of Arachland cement exports to Zeltonia have been produced in an entirely carbon neutral fashion (as documented applying appropriate ISO methodologies). Zeltonia uses the Harmonized Tariff System (HTS) classifications for its tariffs to the six-digit level. For all types of cement, Zeltonias bound MFN tariff rate is 20 percent. Between 1995 and 2006, Zeltonia used an applied MFN tariff rate of 10 percent for all types of cement. Beginning in 2007, Zeltonia raised its MFN tariff rate for the other category of cement 2523.29 to the bound rate of 20 percent. It additionally added a new tariff classification to the eight-digit level for eco-cement. The eco-cement classification is 2523.29.10 and has been set at the bound rate of 20 percent since 2007.

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Zeltonia classifies cement from Arachland as eco-cement. The Zeltonia HTS (ZHTS) applicable to cement and cement products appears as Annex 1. 10. As a result of ZEFFTA, cement from Felagi is eligible to enter into Zeltonia duty-free. As a result of BAZ, cement from Bakastan is also eligible to enter into Zeltonia dutyfree. Cement from Arachland is currently all subject to the HTS 2523.29.10 classification. Arachlands cement has the same uses as traditionally manufactured cement, and is physically and chemically all but indistinguishable from cement produced in a carbonintensive manner. Arachland is unique in producing eco-friendly cement with an almost identical composition to traditionally manufactured cement. Eco-friendly cements manufactured in other countries all incorporate significant quantities of magnesium compounds, waste materials, or other contents in order to produce a less carbonintensive product. Arachland has pioneered cement production processes that use a variety of proprietary technologies to manufacture carbon-neutral cement. Arachland and Felagi are the largest exporters of cement to Zeltonia. Both Arachlands and Felagis cement producers have increased their share of the Zeltonian market over the past five years. Felagis market share has increased over the past five years from 12 percent to 18 percent. Arachland cement exporters share of the Zeltonia market has risen from 10 percent five years ago to 20 percent today. Arachland cement manufacturers all market their cement in Zeltonia as being carbon neutral. The Arachland manufacturers advertise regularly on Zeltonian television and in Zeltonian newspapers and magazines, touting the environmental benefits of using carbon-neutral cement. 60 percent of the cement used in Zeltonia is used in home and commercial building construction. A number of builders in Zeltonia have obtained permits from local municipalities to develop new housing subdivisions on the condition that they use eco-friendly materials where such materials are available at a similar cost to their carbon-intensive counterparts. These builders have, over the past three years, largely shifted their cement purchases from Zeltonian cement to cement imported from Arachland. 95 percent of the cement Arachland sells in Zeltonia is to such builders. In January 2008, Zeltonias cement industry petitioned its government to take action with respect to Arachlands cement subsidies. In particular, the industry alleged that the imports of subsidized cement from Arachland were causing material injury to the domestic industry. It requested that countervailing duties be imposed to counteract the injurious effect of these subsidies. In the countervailing duty investigation, the Zeltonia Ministry of Commerce (ZMOC) determined that cement from Arachland was being subsidized; that cement from Arachland is a like product to cement from Zeltonia; that the Zeltonian industry was suffering material injury; and that there was a causal link between the subsidized imports from Arachland and the material injury to the domestic industry. At the conclusion of the investigation, ZMOC duly imposed a ten percent ad valorem countervailing duty against imports of cement from Arachland. This was intended to fully offset the subsidies received by Arachland producers. More recently, in June 2010, Zeltonias cement industry petitioned its government to impose a safeguards measure on cement imports. ZMOC, which is also responsible for conducting safeguards investigations, duly initiated an investigation pursuant to the

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Zeltonian Safeguards Statute (ZSS). The text of ZSS contains criteria for the imposition of a safeguard identical to those set forth in GATT Article XIX and the WTO Agreement on Safeguards. In the investigation, to determine whether increased imports had caused or threatened to cause serious injury to Zeltonias domestic cement industry, ZMOC considered imports of cement from all countries exporting cement to Zeltonia, with the exception of cement imports from Felagi and Bakastan. 16. In the course of the safeguards investigation, Arachlands cement exporters argued before ZMOC that their cement should be excluded from the investigation. In support of this position, the Arachland cement exporters submitted evidence that: Zeltonian purchasers of cement have a strong preference for sustainably produced cement when such cement is priced similarly to conventional cement; builders that purchased Arachland cement made close to 100 percent of their cement purchases from Arachland suppliers; and purchasers of Arachland cement almost never purchased conventionally manufactured cement anymore due to the various eco-requirements imposed by Zeltonian municipalities. In its preliminary and final determinations, ZMOC rejected the Arachland cement exporters argument, stating Arachland cement is the same as Zeltonian cement; Arachlands production methods are not relevant to this investigation. ZMOC ultimately reached affirmative determinations on the issues of serious injury and causation and determined that the domestic cement industry satisfied the conditions set forth in ZSS for a safeguard to be imposed. As a remedy, ZMOC raised the tariff on all cement imports into Zeltonia, with the exception of cement imported from Felagi and Bakastan, to 30 percent 10 percent higher than the bound rate. Cement imported from Felagi and Bakastan continues to be eligible for a zero tariff. Shortly after the imposition of the safeguard measure, Arachland initiated consultations under DSU Article 4 with Zeltonia regarding its measures discussed above. These consultations failed to resolve Arachlands concerns. Accordingly, on 1 July 2011, Arachland requested the establishment of a panel at a meeting of the WTO Dispute Settlement Body (DSB). No Member objected at the DSB meeting to the establishment of a panel, and the DSB therefore duly established the panel in accordance with Article 6 of the Dispute Settlement Understanding (DSU). With the agreement of the parties, the panel has adopted the standard terms of reference. Before the panel, Arachland has claimed that Zeltonia has acted inconsistently with its WTO obligations because: a. Zeltonias tariff treatment of exports from Arachland is inconsistent with GATT Article I:1; The application of Zeltonias safeguard measure is inconsistent with GATT Article XIX and Articles 2.1, 2.2, 4.1(c), 4.2(a) and 4.2(b) of the Agreement on Safeguards; and The simultaneous application of Zeltonias countervailing duties and safeguards measure is inconsistent with Article 5.1 of the Agreement on Safeguards and with the first sentence of Article 19.3 of the Agreement on Subsidies and Countervailing Measures.

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In addition to rejecting all of Arachlands claims, Zeltonia makes an alternative claim whereby the measures complained of in (a) and (b) above are justified under Article XXIV of the GATT 1994.

Indicative References: Agreement on Safeguards (Safeguards Agreement) Agreement on Subsidies and Countervailing Measures (SCM Agreement) General Agreement on Tariffs and Trade (GATT 1994), Articles I, VI, XIX, XXIV Understanding on the Interpretation of Article XXIV of the GATT 1994 Marrakesh Agreement Establishing the World Trade Organization (WTO Agreement), Articles IX-X 1969 Vienna Convention on the Law of Treaties, UN Doc A/Conf 39/28, UNTS 58 (1980), 8 ILM 679, Articles 30-32

World Trade Organization Cases: Turkey Textiles (WT/DS34) Argentina Footwear (WT/DS121) EC Measures Affecting Asbestos and Products Containing Asbestos (WT/DS135) US Wheat Gluten (WT/DS166) US Lamb Safeguards (WT/DS177) US Cotton Yarn (WT/DS192) US Line Pipe (WT/DS202) US Steel Safeguards (WT/DS252) US Customs Bond Directive (WT/DS345) China Audiovisual Services (WT/DS363) US Definitive AD/CVD on Certain Products from China (WT/DS379) China Raw Materials (WT/DS394)

GATT Panel Reports: Japan SPF Dimension Lumber (L/6470, adopted 19 July 1989, BISD 36S/167) Spain Unroasted Coffee (L/5135, adopted 11 June 1981, BISD 28S/102)

Other Documents: Negotiating Group on Safeguards, Synopsis of Proposals (31 October 1988) MTN.GNG/NG9/W/21 Committee on Regional Trade Agreements (15 February 1998) WT/REG/W/17/Rev.1 Decision of the General Council of 7 February 1996, WT/L/127 GATT Analytical Index SPEC(85)60 (18 December 1985) WTO/UNEP Report Trade and Climate Change

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Selected Literature: Choi, Won-Mog Legal Problems of Making Regional Trade Agreements with Non WTO Member States, 8 Journal of International Economic Law 825 (2005) Condon, Bradly Climate Change and Unresolved Issues in WTO Law, 12 Journal of International Economic Law 895 (2009) Devuyst, Youri and Asja Serdarevic, The World Trade Organization and Regional Trade Agreements: Bridging the Constitutional Credibility Gap, 18 Duke Journal of Comparative and International Law 1 (2008). Mavroidis, Petros, Trade in Goods (Oxford University Press, 2007) Sykes, Alan O., The WTO Agreement on Safeguards (Oxford University Press, 2006) Lee, Yong-Shik, Safeguards Measures in World Trade (2d ed. Kluwer 2007) Van den Bossche, Peter., The Law and Policy of the World Trade Organization, Text, Cases and Materials, 2nd Edition, Cambridge University Press: 2008

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Annex 1 Harmonized Tariff Schedule of Zeltonia (2011)

Heading/ Sub-heading 2523 Article Description Portland cement, aluminous cement, slag cement, supersulfate cement and similar hydraulic cements, whether or not coloured or in the form of clinkers: Cement clinkers Portland cement White cement, whether or not artificially coloured Other: Eco-cement Aluminous cement Other hydraulic cements Unit of Qty Tons Rates of Duty General Rates of Duty Special

2523.10.00 2523.21.00 2523.21.00 2523.29.00 2523.29.10 2523.30.00 2523.90.00 * **

Tons Tons Tons Tons Tons Tons

10% 10% 20% 20% 10% 10%

Free (B, F) Free (B, F) Free (B, F) Free (B, F) Free (B, F) Free (B, F)

General Rates of Duty are those applied to countries not entitled to any preferential treatment Programs under which special tariff treatment may be provided, and the corresponding symbols for such programs as they are indicated in the "Special" sub-column, are as follows: B = Bakastan Zeltonia Free Trade Agreement F = Zeltonia Felagi Free Trade Agreement

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