Role of ‘adjustment plan’ in Safeguard investigations

By virtue of India’s accession to the World Trade Organization (“WTO”), India has agreed to the requirements of all the multilateral agreements under the framework of the WTO. One of the fundamental commitments undertaken by India in case of a measure taken against a sudden surge in imports of a product from Member countries is enshrined under Article 5 of the Agreement on Safeguards (“AoS”).

Article 5.1 of AoS states as follows:

“A Member shall apply safeguard measures only to the extent necessary to prevent or remedy serious injury and to facilitate adjustment. […]” (Emphasis added)

In pursuance of such commitment, Rule 5(2)(b) of the Customs Tariff (Identification and Assessment of Safeguard Duty) Rules, 1997 (“Safeguard Rules”) require the domestic industry of the like product to attach a ‘statement on the efforts being taken, or planned to be taken, or both, to make a positive adjustment to import competition.’ However, the language of sub-rule (3) creates a hierarchy, under which the Designated Authority (“Authority”) shall only commence investigation once
the applicant has provided evidence of increased imports, serious injury or threat of serious injury and a causal link between increased imports and injury.[Endnote 1] Therefore, while the absence of an adjustment plan may result in an incomplete application, it does not bar the authority from initiating a safeguards investigation.

The Authority adjudicates upon the viability of the adjustment plan in depth once the investigation is initiated. Factors such as cost reduction, increase of capacity, modernization plans, improvement in efficiency, reconfiguration of units, and backward integration have been accepted by the Authority to constitute viable adjustment plans.[Endnote 2]Adjustment plans which are submitted by the domestic industries are often detailed and confidential, and the non-confidential version summaries are provided to the interested parties to the investigation. In an investigation concerning imports of Hot Rolled Flat Sheets and Plates (Excluding Hot Rolled Flat Products in Coil Form) of Alloy or Non-Alloy Steel into India, the domestic industry had kept their adjustment plans confidential. The Authority summarized such adjustment plans in its final findings for the sake of transparency and clarity.[Endnote 3]

In an investigation concerning imports of Flexible Slabstock Polyol (FSP) into India, the Authority observed that the adjustment plan submitted by the domestic industry was not viable since (a) it did not have a specified time frame; and (b) the letter of intent for expansion of capacity was for polyol and not the Product Under Consideration (“PUC”).[Endnote 4] A similar approach was also taken in an investigation concerning imports of Bare Elastomeric Filament Yarn where the investigation was terminated due to lack of a reliable adjustment plan.[Endnote 5] However, in both these cases, the Authority observed other factors which resulted in negative findings. Similarly, in the investigation concerning imports of Cold Rolled Flat Products of Stainless Steel of 400 series, the adjustment plan was regarded as unviable, but also the other factors required to be satisfied, leading to negative findings.[Endnote 6] It must also be noted that the Authority may choose not to analyze the adjustment plan if the safeguard measure is being sought for less than one year.[Endnote 7]

There exists no Indian jurisprudence which further discusses the precise role of an adjustment plan in a safeguard investigation, and whether an investigation can result in a negative finding on the sole basis of unviability of the adjustment plan submitted by the domestic industry.

The WTO jurisprudence on this aspect is also limited. The Panel in the case of Korea — Definitive Safeguard Measure on Imports of Certain Dairy Products states that the obligation is on the Authority to justify that the measure being recommended is compatible with Article 5.1 of the AoS, but it does not have to be by way of an adjustment plan:

"We wish to make it clear that we do not interpret Article 5.1 as requiring the consideration of an adjustment plan by the authorities … The Panel finds no specific requirement that an adjustment plan as such must be requested and considered in the text of the Agreement on Safeguards. Although there are references to industry adjustment in two of its provisions, nothing in the text of the Agreement on Safeguards suggests that consideration of a specific adjustment plan is required before a measure can be adopted. Rather, we believe that the question of adjustment, along with the question of preventing or remedying serious injury, must be a part of the authorities' reasoned explanation of the measure it has chosen to apply. Nonetheless, we note that examination of an adjustment plan, within the context of the application of a safeguard measure, would be strong evidence that the authorities considered whether the measure was commensurate with the objective of preventing or remedying serious injury and facilitating adjustment."[Endnote 8]

The role of an adjustment plan towards facilitating positive adjustment of the domestic industry such that it can cope with import competition, especially in a global economy which does not have equal constituents, is understated. Unlike anti-dumping and countervailing measures, safeguard measures are not imposed on ‘unfair’ imports. Safeguard is a protectionist measure for protecting domestic industries which are not developed enough to compete with imports. Further, it must also be noted, the AoS is a part of the implementation of Article XIX of the General Agreement on Tariffs and Trade (“GATT”) which allows Member Countries an ‘escape’ from other GATT obligations in case of a situation of ‘emergency’.  In such a situation, the onus lies on the domestic industry to be pro-active and to provide an objective layout of how they intend to make use of the period granted to them to make the required adjustments. An ‘Adjustment Plan’ allows the investigating authority to determine (a) the efforts being made by the domestic industries to compete with the imports; (b) the time period for which the safeguard measure should be implemented; and (c) in the event of the safeguard measure being implemented for over a year, the manner in which it should be progressively liberalized, to best benefit the industry in question.

Several practical problems may also arise out of not giving enough importance to ‘facilitating adjustment’. The lack of initiative by the domestic industry coupled with the safeguard duties imposed on imports has the potential of leading to a dire lack of supply, the consequences of which are borne by the user industry and consumers. Such a situation could spiral into several connected industries facing huge financial losses.

While the consistent Indian practice is to assess the facilitation of adjustment through adjustment plans, its weightage in determining the imposition of safeguard duties is unclear. It is only a factor of time and circumstances which shall truly reveal the consequences of non-submission of a viable adjustment plan.

[The author is an Associate in International Trade Practice, Lakshmikumaran & Sridharan, New Delhi]