1. Lenzburg, Chamonia and Filand are Members of the World Trade Organization (WTO). They are industrialized economies of the capacity in producing a variety of manufacturing products, including steel, aluminum, copper, electronic, automobile and chemical products. In the past decades, the three countries have built a close economic relationship in which Lenzburg is the most important export market for both Chamonia and Filand. Lenzburg and Filand concluded a Free Trade Agreement (LEFFTA) in 2006. An FTA negotiation between Lenzburg and Chamonia was initiated in 2011 but did not produce any outcome.

2. In recent years, owing to a combing impact by financial crises and an increasing broadened structural gap between imports and exports, the Lenzburg’s trade deficit widened substantially from $39.2 billion in 1992 to $501 billion in 2016. In early 2017, the government of Lenzburg decided to change its trade policy from free trade towards fair trade. On 1 February 2017, the President of Lenzburg stated that “I believe strongly in free trade but it also has to be fair trade. Lenzburg needs to rebalance its economic relationship with its trading partners and to eliminate unfair trade practices by other countries.” After the statement, Lenzburg initiated more than ten anti-dumping and countervailing investigations against the imports from Chamonia. At the same time, it filed one WTO dispute against Chamonia to address alleged discrimination against the imported automobile products.

3. Meanwhile, the Lenzburg’s copper producers complained that they had suffered serious injury because of the imported products. Lenzburg’s copper producers have a long standing concern on Lenzburg’s trade relationship with Chamonia and Filand. The copper producers claimed that the local producers were the victims of the free trade and the domestic workers had lost thousands of jobs because of the increasing imported products. They also complained that if all domestic copper producers were swept out of Lenzburg market, Lenzburg would have no capacity to meet the demand of national defense.

4. On 9 February 2017, the Government of Lenzburg initiated a national security investigation on copper industry (including the standard-grade and the high-grade copper producers) in accordance with the domestic law entitled the “Patriot Act”.

5. The Patriot Act requires the government to examine the effect of imports on national security requirements, which are explicitely stipulated in the Act, namely: domestic production needed for projected national defense requirements; the capacity of domestic industries to meet such requirements; existing and anticipated availabilities of the human resources, products, raw materials, and other supplies and services essential to the national defense; the requirements of growth of such industries and such supplies and services including the investment, exploration, and development necessary to assure such growth; and the importation of goods in terms of their quantities, availabilities, character, and use as those affect such industries; and the capacity of the Lenzburg to meet national security requirements.

6. In the prior investigations, the Government of Lenzburg determined that “national security” for purposes of Patriot Act includes the “general security and welfare of certain industries, beyond those necessary to satisfy national defense requirements, which are critical to the minimum operations of the economy and government.”

7. After a one-year investigation, on 9 February 2018, the Government of Lenzburg released its final report and found that:

(1) Copper is a soft, malleable, and ductile metal with very high thermal and electrical conductivity. Copper is used as a conductor of heat and electricity, as a building material, and as a constituent of various metal alloys, such as cupronickel used to make marine hardware and coins, and constantan used in strain gauges and thermocouples for temperature measurement.

(2) Copper is essential to Lenzburg’s national security. Copper is needed to satisfy requirements for (a) maintaining effective military capabilities including advanced electronic system, bullets, grenades, weapons systems, space and missile structural components, and propellants; and (b) critical infrastructure sectors that are central to the essential operations of Lenzburg economy and government, including power transmissions, transportation systems, manufacturing industries and construction.

(3) Lenzburg’s Government does not maintain any strategic stockpile of copper products or any semi-finished copper products.

(4) The present quantity of imports adversely impacts the economic welfare of the Lenzburg copper industry (see Table 1 and Table 2).

(5) Since 2013, six smelters with a combined 3,500 workers have been permanently shut down, totaling 1.13 million metric tons in lost production capacity per year. The loss of jobs in the copper sector has been precipitous between 2013 and 2016, falling 58 percent from about 13,000 to 5,000 employees.

(6) Lenzburg currently has five smelters remaining, only two smelters that are operating at full capacity. Only one of these five smelters produces high-grade copper required for critical infrastructure and defense applications, including types of advanced electronic system and weapon-grade copper products used in making of bullets, grenades and ballistic missiles. Should this one Lenzburg smelter close, Lenzburg would be left without an adequate domestic supplier for key national security needs. The only other high-volume producers of high-grade copper are located in Filand (internal use only).

(7) Global excess copper capacity is a circumstance that contributes to the weakening of Lenzburg copper industry and the economy. A major cause of the recent decline in Lenzburg copper industry is the rapid increase in production in Filand. Filand’s overproduction suppressed global copper prices and flooded into the world market (see Table 3).

8. Based on these findings, the Government of Lenzburg concludes that the present quantities and circumstance of copper imports are “weakening our internal economy” and threaten to impair the national security as defined in the Patriot Act. Lenzburg is at risk of becoming entirely reliant on foreign producers of high-grade copper, which is essential for key military and commercial systems. The domestic copper industry is at risk of becoming unable to satisfy existing national security needs or respond to a national security emergency that requires a large increase in domestic production. These risks and long-run industry trends threaten to impair the national security.

9. The Government of Lenzburg determined that to remove the threat of impairment, it is necessary to reduce imports to a level that will provide the opportunity for Lenzburg copper producers to restart idled capacity. This will increase and stabilize Lenzburg’s production of copper at the minimal level needed to meet the current and future national security needs. Therefore, the Government of Lenzburg recommended imposing a tariff rate of 20 percent on imports of copper products from all countries. This tariff rate would be in addition to the current applied tariff rate and any antidumping or countervailing duty collections applicable to any product.

10. When received the recommendations, the President of Lenzburg stated that “the final report of 9 February 2018 reflects an emergent situation of the copper industry. It requires us to take extraordinary action on the imports.” The President immediately approved the recommendation and the additional tariff rate of 20 percent will thereby be effective on 1 January 2019.

11. According to Lenzburg’s WTO Schedule of Concessions, its binding tariff rate for copper products is 5 percent. Lenzburg currently applies 5 percent tariff rate to the copper products from Chamonia and zero tariffs to the copper products from Filand in accordance with the concessions made under LEFFTA.

12. Chamonia expressed strong concerns on Lenzburg’s proposed tariff on imported copper products. On 5 March 2018, Chamonia raised this issue before the Safeguard Committee and stated that it understood that the Lenzburg’s tariff measure was in essence a safeguard measure and damaged the stability of the multilateral trading system. The measure violated the Safeguard Agreement and Article XIX of the GATT 1994. The investigation was initiated by the Lenzburg authorities without the petitions by domestic industry. As for the application, the measure would be implemented for an unlimited period, in contrast to a 4-year limit envisaged in Article 7.1 of the Safeguard Agreement. While progressive liberalization of measure was required under Article 7.4 of the Agreement, such liberalization was indiscernible.

13. Lenzburg did not agree with Chamonia’s characterization of the additional tariff on copper products as a safeguard measure. It responded that the proposed measure was on the grounds that the additional import duty of 20 percent was necessary to adjust imports of copper that threatened to impair its national security. In any event, it could be covered by the Security Exception clause of the GATT 1994. Given that the relevant actions were not a safeguard measure, Lenzburg was not required to meet the obligations under the Agreement on Safeguards. In addition, as the proposed tariff has not entered into force yet, there was no basis for Chamonia to allege the nullification of interest.

14. On 15 March 2018, the Government of Chamonia requested consultation with the Government of the Lenzburg pursuant to Article 4 of the Understanding on Rules and Procedures Governing the Settlement of Disputes, Article XXIII:1 of the General Agreement on Tariffs and Trade 1994 (GATT 1994), and Article 14 of the Agreement on Safeguards. After two months, the consultations ended without a mutually satisfactory solution. On 16 May 2018, Chamonia requested the establishment of a Panel. The Panel was established at the DSB meeting on 27 July 2018.

15. In its request for the establishment of a Panel, Chamonia argues that Lenzburg’s additional import duty measure breaches several provisions of the WTO agreements, in particular:

A. Article II:1(a) of the GATT 1994 because it accords less favorable treatment to products originating in the Chamonia than that provided in Lenzburg's schedule of concessions.

B. Article XIX:1(a) of the GATT 1994, Article 2.1, 3.1, 4.1, 4.2 and 7 of the Agreement on Safeguards, because the proposed suspension of tariff concessions is a safeguard measure and the investigating authority of Lenzburg fails to meet the relevant obligation contained in the WTO Agreements.

16. In response to Chamonia’s claims, Lenzburg contests that its proposed additional import duty of 20 percent is not a safeguard measure. At the same time, Lenzburg invokes Article XXI of the GATT 1994 to justify its interest.

NOTE: Since Lenzburg does not deny that its import duty measure fails to meet the substantive obligations of safeguard measures under the WTO Agreements, the Participants are NOT required to provide a detailed analysis on the breach of Article XIX:1(a) of the GATT 1994, Article 2.1, 3.1, 4.1, 4.2 and 7 of the Agreement on Safeguards. However, the Participants are free to raise any arguments on the applicability of the provisions referred to by the Complainant.

INDICATIVE LIST OF RELEVANT CASE LAW:

- Appellate Body Report, United States – Continued Existence and Application of Zeroing Methodology, WT/DS350/AB/R, adopted 19 February 2009

- Appellate Body Report, United States – Measures Affecting Trade in Large Civil Aircraft (Second Complaint), WT/DS353/AB/R, adopted 23 March 2012

- Panel Report, Dominican Republic – Safeguard Measures on Imports of Polypropylene Bags and Tubular Fabric, WT/DS415/R, WT/DS416/R, WT/DS417/R, WT/DS418/R, and Add.1, adopted 22 February 2012

- Appellate Body Reports, Argentina – Measures Affecting the Importation of Goods, WT/DS438/AB/R, WT/DS444/AB/R,  WT/DS445/AB/R, adopted 26 January 2015

- Panel Report, Russia – Tariff Treatment of Certain Agricultural and Manufacturing Product, WT/DS485/R, adopted 26 September 2016

- Panel Report, Indonesia – Safeguard on Certain Iron or Steel Products, WT/DS490/R, WT/DS496/R, and Add.1, circulated on 18 August 2017

- Appellate Body Report, Indonesia – Safeguard on Certain Iron or Steel Products, WT/DS490/AB/R, WT/DS496/AB/R, circulated on 15 August 2018

- Appellate Body Report, United States – Definitive Safeguard Measures on Imports of Circular Welded Carbon Quality Line Pipe from Korea, WT/DS202/AB/R, adopted 8 March 2002

- Appellate Body Report, United States – Definitive Safeguard Measures on Imports of Certain Steel Products, WT/DS248/AB/R, WT/DS249/AB/R, WT/DS251/AB/R, WT/DS252/AB/R, WT/DS253/AB/R, WT/DS254/AB/R, WT/DS258/AB/R, WT/DS259/AB/R, adopted 10 December 2003

- Panel Report, United States - Trade Measures affecting Nicaragua, L/6053, dated 13 October 1986 (unadopted)