Temporary Relief from Exports

Challenge, July, 2000 by Greg Mastel, Andrew Harig

The authors argue that there is a law that can provide breathing room for industries suddenly disrupted by a flood of imports. They discuss why and under what circumstances it should be used.

THE recent problems of the steel industry in dealing with dramatic surges of imports from a number of countries have put import relief back on the U.S. policy agenda. Whatever one's views on the merits of trade, it is beyond dispute that imports will occasionally bring about dramatic dislocations in the form of factory closings and layoffs. As U.S. industries ranging from textiles to steel to semiconductors will attest, no country, including the United States, is immune from this reality of globalization.

Unfortunately, U.S. policy for responding to economic disruptions caused by imports is sadly out-of-date. Temporary import relief is provided under a law known as Section 201, which is based upon the simple premise that temporary relief from imports may be provided in order to give import-competing U.S. industries the breathing space needed to undertake reforms to become more competitive.

From the 1970s through the mid-1980s, Section 201 was used frequently. A number of U.S. companies arid industries, including the Harley-Davidson Motorcycle Company, were able to use the respite from imports provided under Section 201 to return to competitive health. In recent years, however, owing to weaknesses in the law and reluctance on the part of policy-makers to use it, Section 201 has fallen into disuse.

This is an outcome that both "protectionists" and "free traders" should seek to reverse. Section 201 provides an opportunity to provide temporary import relief in a manner consistent with U.S. obligations under the World Trade Organization (WTO) while promoting competitive adjustment. It is also infinitely superior to the inevitable alternative--ad hoc legislative efforts to limit imports, which will likely violate the WTO, spark clashes with trading partners, and fail to effectively encourage adjustment. As the recent demonstrations in Seattle made clear, the political reality is that the American public is not willing to tolerate unfettered free trade. Section 201 strikes a balance that allows trade liberalization to proceed while addressing the legitimate concerns of industries facing import competition. Those in the government and private sector seriously interested in continuing on the path to trade liberalization would do well to place revitalizing Section 201 high on their agenda.

Relief Under Section 201

Under the WTO, any member is allowed to impose a temporary escape clause or safeguard relief from imports for up to eight years, provided those imports are causing serious injury to the competing domestic industry. In the United States, this escape clause is made operational through Section 201. The statute is administered through a two-step process. After action is initiated under Section 201--normally in response to a petition from a domestic industry--the U.S. International Trade Commission (ITC) decides if the WTO and statutory requirements for serious injury are met and, if so, makes recommendations for relief.

The proceeding then moves to the White House, where the president makes the final decision on whether and in what form relief will be extended. The president has wide latitude to weigh a range of factors in making his decision. Although action can be expedited, the entire process normally takes up to nine months. On paper, this makes Section 201 a relatively fast route to import relief. [1]

The modem Section 201 was created in the Trade Act of 1974. Several important provisions, such as an eight-year time limit on relief and an emphasis upon adjustment plans, date to the Trade Act of 1988.

Structural Impediments to Safeguard Action

Despite these changes to the law, there are a number of problems with Section 201 that have caused it to fall out of use in recent years (see Figure 1). Perhaps the most significant of these involve differences between U.S. law and the WTO that make Section 201 more difficult to employ than is necessary.

One key difference has to do with the interpretation of what constitutes serious injury to an industry. The "serious injury test" is the threshold test that must be satisfied under the WTO. Specifically, it requires the demonstration of serious injury or threat thereof before import limitations can be imposed. The WTO does offer some vague guidance regarding the components of a serious-injury determination. These include that it must be accompanied by an absolute or relative increase in imports, and that it must constitute "a significant overall impairment in the position of a domestic industry" [2] Beyond this, however, little specific guidance is given in defining serious injury.

U.S. law imposes a stricter and more clearly defined standard for serious injury, requiring that imports be a "substantial cause" of injury. Congress added that "the term 'substantial cause' means a cause which is important and not less than any other cause." [3] This phrase is a significant limitation. Oftentimes when a domestic industry is experiencing serious economic problems, there are arguably many causes for the distress, ranging from poor economic growth to demographic change to unexpected technology shifts. Although legislators have taken some steps to address obvious problems, if current law is interpreted strictly, it would be difficult to establish that imports were causing serious injury while the industry was also suffering other economic problems.