Lim Koon Huan and Jason Teoh report on the first petition under the Safeguards Act.
PROLOGUE - THE GENESIS
A safeguard action is used to restrain international trade in order to protect a particular home industry from foreign competition. A country may take a safeguard action (e.g. restrict importation of a product temporarily) to protect a specific domestic industry from an increase in imports of any product which is causing, or which is threatening to cause, serious injury to the domestic industry that produces like or directly competitive products.
Unlike anti-dumping or countervailing measures which are remedies against unfair trade, a safeguard measure may be imposed on fairly traded imports. It is thus important to understand that safeguards are an “extraordinary” remedy to be considered in “unforeseen” circumstances by way of temporary “emergency actions”.
When a country imposes restrictions on imports to safeguard its domestic producers, in principle it must give something in return. The exporting country or countries can seek compensation through consultations. If no agreement is reached, the exporting country may retaliate by taking equivalent action. For instance, it can raise tariffs on exports from the country that is enforcing the safeguard measure. The safeguard measure is thus a very delicate measure which needs to be exercised with utmost care.
In Malaysia, the Safeguards Act 2006 (“the Act”) and the Safeguards Regulations 2007 were put in place to govern this important aspect of international trade. The Act expressly provides that its application must be in conformity with the obligations of Malaysia under the Agreement Establishing the WTO, including the General Agreement on Tariffs and Trade 1994 (“GATT”) and the WTO Agreement on Safeguards.
MALAYSIA’S “MEGA STEEL” EXPERIENCE
On 1 April 2011, Megasteel Sdn Bhd (“Megasteel”) submitted a petition requesting the Government of Malaysia (“Government”) to initiate a safeguard investigation on the imports of hot rolled coils ("HRC") on the basis that the surge in imports of HRC in Malaysia from 2007 to September 2010 had seriously injured the domestic industry.
Megasteel sought an additional 35% import duty on HRC which would bring the total duty payable on HRC up to 60% for 5 years (notwithstanding that the Act limits the duration of a safeguard measure to a maximum of 4 years unless an extension is granted).
Megasteel is the sole producer of HRC in Malaysia and thus represents 100% of the total production of HRC in Malaysia.
By a Notice of Initiation of Safeguard Measure with Regard to Imports of Hot Rolled Coils imported into Malaysia published in the Government Gazette (P.U.(B) 250/2011) on 25 April 2011, the Government through the Ministry of International Trade and Industry ("MITI"), the appointed investigating authority under the Act, initiated an investigation based on Megasteel’s petition after finding that there is sufficient evidence to support Megasteel’s claim of serious injury or threat caused by the increased imports.
Given the delicate nature of a safeguard measure, the Government’s decision to initiate an investigation based on Megasteel’s petition attracted much attention both domestically and internationally. Domestic downstream steel players, the Japanese Chamber of Trade & Industry, Malaysia representing the interest of 545 Japanese companies in Malaysia, foreign exporters of HRC and embassies of various countries such as Japan, China, Indonesia, South Korea, Taiwan and Thailand (“Interested Parties”) objected to Megasteel's petition. The petition and the ensuing developments also received much coverage in the local trade press.
THE SAFEGUARD PROCESS
In its investigation, the Investigation Authority must make a preliminary determination on the following: (i) whether HRC is being imported into Malaysia in increased quantities; (ii) whether such increased quantities of imported HRC causes or threatens to cause serious injury to the domestic industry that produces like or directly competitive products; and (iii) the causation between the two. In addition, the imposition of the safeguard measure must only be as a result of unforeseen developments.
If the Investigation Authority makes a negative preliminary determination, the Government may either continue or terminate the investigation. If it makes an affirmative preliminary determination, the Government is required to continue the investigation and has the option to apply provisional safeguard measures.
On 28 June 2011, MITI held a public hearing for Megasteel and all Interested Parties to put forward their respective arguments before a Hearing Panel.
Prior to the public hearing, all affected HRC importers were given questionnaires to be completed to assist MITI to assess the situation. All Interested Parties were also requested to file their pre-Hearing Written Views to MITI.
MEGASTEEL’S JUSTIFICATIONS
In arguing for intervention by the Government for the safeguard measure set out in its petition, Megasteel alleged that the surge in imports of HRC in Malaysia from 2007 to September 2010 had seriously injured the domestic HRC industry.
Megasteel reasoned that its inability to revert to its 2008 performance is testament that it has not been able to share in the overall economic recovery of Malaysia. Megasteel appealed for a safeguard duty at a level which would enable it to earn sufficient profits during the safeguard period to implement an adjustment plan i.e. to complete a blast furnace that will allow it to be competitive at an international level.
THE COUNTER-ARGUMENTS
The Interested Parties submitted that the whole basis of Megasteel’s petition was misconceived and ought to be rejected. Amongst the rebuttals put forward were –
(a) that Megasteel had used inaccurate figures in its petition. In this regard, the Japanese steel mills pointed out the discrepancies between the figures used in the petition and Megasteel’s parent company’s annual reports for the relevant years;
(b) that Megasteel did not produce HRC products like or directly competitive to the majority of the imported HRC products;
(c) as a result of the above, the domestic HRC industry did not suffer serious injury or threats of serious injury;
(d) that any injury suffered by the domestic HRC industry was not caused by increased imports of HRC but by Megasteel’s own rising production costs and operational inefficiencies;
(e) that there were no unforeseen developments;
(f) that there was no actual adjustment plan by Megasteel. The adjustment plan was in fact that of Megasteel’s parent company; and
(g) that the imposition of any safeguard measures in this matter would be contrary to Malaysia's public interest as many multinational manufacturing companies dependent on imported HRC may relocate their businesses to other countries as it would no longer be economically viable for them to remain in Malaysia.
Further, developing ASEAN countries like Indonesia argued that any safeguard measures imposed by the Government should not affect them under the
de minimis rule.
After the public hearing, all parties filed their post-hearing written submissions to assist the MITI to make a preliminary determination.
THE NEGATIVE PRELIMINARY DETERMINATION
After considering the oral and written submissions, MITI made a negative preliminary determination on 19 August 2011 and recommended that the Government terminate the safeguard investigation.
The negative preliminary determination and the recommendation to terminate the investigation were based on the following findings -
(a) that although there was an increase of imports of HRC during the relevant period, Megasteel did not suffer any injury due to such increase;
(b) that there was insufficient evidence of threat of serious injury as claimed by Megasteel;
(c) that the adjustment plan was not an investment made by Megasteel; and
(d) that the elements necessary for the imposition of safeguard measures will not to be found to exist even if the investigation is continued.
By a Notice of Negative Preliminary Determination with Regard to the Investigation on Hot Rolled Coils imported into Malaysia published in the Government Gazette (P.U.(B) 465/2011) on 22 August 2011, the Government terminated the investigation.
EPILOGUE - COMPETITION ACT VERSUS SAFEGUARDS ACT
After the negative preliminary determination and the termination of the investigation by the Government, there is speculation that the Government may consider new protective incentives for Megasteel. It remains to be seen what these new incentives will be but it is understandable that the Government would want Megasteel, the sole domestic HRC producer, to be or remain a viable option for local businesses that require HRC in their production processes.
With the Competition Act 2010 coming into force next year, it would be interesting to see how the Government would react to petitions by monopolistic companies seeking safeguard protections under the Act in an anti-monopoly environment.
The Megasteel petition is noteworthy as it is the first safeguard action instituted under the Act.