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Opinions expressed in the case studies and any errors or omissions
therein are the responsibility of their authors and not of the
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> Case
Studies main page
> Introduction
ON THIS PAGE:
> I. The
problem
> Setting the scene
> WTO context
> Textiles in the world trading system
> Costa Rica’s perspective on the problem
> II. The local and external players
> Government players
> Private-sector players
> III.
Challenges faced and the outcome
> IV.
Lessons for others (the players’ views)
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I. The problem back to top
Setting the scene
In March 1995 the United States claimed that
its domestic underwear industry was being seriously damaged or
threatened with actual damage by imported cotton and man-made-fibre
underwear(1) from Costa Rica and six other countries.(2) The United States
initiated consultations with the countries alleged to be damaging or
threatening its industry with the intention of invoking the transitional
safeguard provisions of the Agreement on Textiles and Clothing (ATC).(3)
During the course of these consultations, three of the seven countries
agreed to quantitative restrictions on the imported underwear that would
be allowed into the United States. However, after failing to reach
agreements with Costa Rica, Honduras, Thailand and Turkey, the United
States in June 1995(4) introduced restrictions on the importation of cotton
and man-made-fibre underwear backdated to take effect starting in March
1995.
With the unilateral introduction of
restrictions, the case was referred to the Textile Monitoring Body (TMB)
for review and recommendations regarding the matter as required by the
ATC. The TMB found that the United States had not demonstrated that its
industry had suffered serious damage. However, it could not reach
consensus on whether the existence of an actual threat of serious damage
had been demonstrated, and thus recommended further consultations among
the parties.
The United States eventually reached
agreements with Honduras, Thailand and Turkey after further
consultations. However, the United States and Costa Rica were unable to
reach a mutual understanding after consultations in August 1995 and
November 1995. On 22 December 1995 Costa Rica began the dispute
settlement process under Article XXIII of the General Agreement on
Tariffs and Trade (GATT 1994) and the corresponding provisions of the
ATC.
Why did Costa Rica decide to pursue the
dispute settlement process? This key decision had significance beyond
the immediate details of the specific dispute. The case was the first
formal dispute settlement case to address issues arising from the
intended liberalization of trade in textiles as embodied by the ATC and
the first case in which a small developing country initiated a dispute
against the United States.(5)
WTO context back to top
In 1995 the newly created WTO and the recently
concluded Uruguay Round of negotiations that culminated in the 1994 GATT
offered its members improved access to the world trading system. All
members had negotiated and agreed to these mechanisms, which, in the
best judgment of the members, represented fundamental principles of free
or liberalized trade that would serve the best interests of the members
and the world trading system. However, in 1995 many of these mechanisms
(chief among these being the Understanding on Rules and Procedures
Governing the Settlement of Disputes (DSU)(6) and the ATC) remained largely
untested. Given the immense discrepancies in relative political and
economic influence among the members, would the system withstand the
intense, but inevitable, political and economic forces that would be
brought to bear on specific dispute cases?
At the time of this dispute, members could not
predict how the new DSU process would function. Developing countries, in
particular, were concerned about the new system’s fairness.(7) In recent
years, developing countries have initiated more than half of all new
dispute cases.(8) However, at the time when Costa Rica initiated its case,
no small developing country had brought a case against a large developed
country. Many observers viewed confronting the United States as a risky
strategy — not only for Costa Rica, but also for the DSU process in
general. How would the United States respond to a ruling against it?
Unwillingness by the United States to abide by such a ruling could
undermine the credibility of the entire process.
Textiles in the world trading system
back to top
The Short-Term Cotton Arrangement (STA) of 1961 for the first time
formally acknowledged special treatment of the textile sector in the
world trading system. This special arrangement for cotton, which began
as a one-year agreement, led to a sequence of arrangements on textiles
spanning more than forty years. The Long-Term Arrangement (LTA) lasting
from 1962 to 1973 and the Arrangement Regarding International Trade in
Textiles (better known as the Multifibre Arrangement or MFA) lasting
from 1974 to 1994, for all practical purposes exempted the textiles
sector from GATT rules and discipline.(9) The ATC, which succeeded the MFA
in 1994, explicitly acknowledged the need to integrate the textile
sector into GATT and set a definitive end date (31 December 2004) for
the special treatment of the sector. However, at the time of the Costa
Rica-US dispute the liberalizing impact of the ATC remained unclear. And
the history of textile treatment in the world trading system justified a
certain level of scepticism.
Costa Rica’s perspective on the problem
back to top
Costa Rica had just approved the Uruguay Round. The administration
gained domestic political support for the agreement by promising that if
the country was willing to undertake trade liberalizing reforms, Costa
Rica would benefit from increased rights and opportunities within the
world trading system. Now, almost before the ink on the new agreement
had dried, the promise of new rights and opportunities seemed in
jeopardy. From Costa Rica’s perspective, the United States’ efforts
to impose restrictions were inconsistent both with the spirit of the ATC’s
goal of integrating textiles into the GATT and with the ATC provisions
for transitional safeguard measures. Costa Rica believed that the United
States, as part of a systematic strategy, was attempting to maintain
control of a vertically integrated industry by requiring countries to
use US fabric in garments intended for the US market. The restrictions
effectively only applied to underwear garments made with fabric not of
US origin. In essence, the United States was attempting to protect its
fabric industries rather than the domestic underwear industry. This
strategy would allow the United States to control the entire production
chain while utilizing cheaper labour from Costa Rica (and other
developing countries) for assembly. Costa Rica argued that the
transitional safeguard measures available under the ATC did not provide
for restrictions to be applied to the products of one industry
(underwear garments) in order to protect the interests of another
industry (fabric).
Of course, focusing only on the legal issues and the facts of the
case ignores the political complexities of Costa Rica’s decision to
pursue a dispute settlement case through the WTO. Many diverse political
and economic stakeholders with potentially conflicting priorities and
interests influence a decision to pursue a formal dispute settlement
process. Several other countries were in a similar situation to that of
Costa Rica, yet only Costa Rica chose to proceed with a dispute
settlement case. What were the internal dynamics in Costa Rica that led
to the decision to pursue the case?
II. The local and
external players back to top
Government players
Within Costa Rica, three governmental entities
actively influenced the course of events. The Ministry of Trade handled
technical trade-related matters and relations — particularly in the
context of WTO issues. The Ministry of Foreign Affairs was responsible
for matters of international relations. Costa Rica’s embassy in
Washington, typically headed by a politician with significant clout in
the Costa Rican government, handled matters of specific interest to the
United States-Costa Rica relationship. These groups did not always see
eye to eye on policy matters. The Ministry of Trade had only gained the
status of a formal agency in the late 1980s and was, therefore, a
relatively new governmental entity. The gradual evolution of a group
handling trade issues into a formal agency meant that the Trade Ministry’s
jurisdiction was not clearly established in law, which sometimes led to
conflicts with the Ministry of Foreign Affairs. The Ministry of Foreign
Affairs tended to believe that trade issues were a subset of foreign
relations and should be managed within the context of its broad
perspective on Costa Rica’s international relations. The prospect of
bringing a dispute settlement case against the United States strained
the relationships between these agencies, since the Ministry of Foreign
Affairs and the Washington embassy did not initially support the action.
When Costa Rica became aware of the US plan to
impose quantitative restrictions on the underwear industry, the Minister
of Trade, José Rossi, gave responsibility for the case to a team of
young lawyers.(10)
Irene Arguedas, Francisco Chacón, Roberto Echandi and Anabel González
had all received law degrees from top US universities and had developed
a reputation as serious and competent technocrats. They provided Costa
Rica with the necessary technical and legal capacity to handle a dispute
settlement case.
Private-sector players back to top
In the period leading up to the dispute,
clothing manufacturing had been one of the fastest growing export
sectors in the Costa Rican economy, largely because the country had
begun to process imported textiles into garments for export. This
activity had benefited greatly from the US value added tariff
provisions(11)
and preferential access to the US market under the Caribbean Basin
Initiative. Industry growth also coincided with a Costa Rican economic
reform programme designed to raise domestic value added to products of
export interest. The textiles and clothing industry achieved significant
gains in the value added/output ratio.(12)
Consequently, the textile and clothing
industry was an important industry at the time of the dispute, and
although the restrictions only affected a segment of the overall
industry, the potential economic consequences to the textile and
clothing sector as a whole were significant. Costa Rica was a relatively
high-cost, although globally competitive, producer of textiles and
clothing. However, committing to the use of relatively high-cost US
fabric would almost certainly undermine Costa Rica’s long-term
competitiveness in the global textile and clothing market. In order to
remain competitive Costa Rica would need the flexibility to source its
fabric from the lowest-cost suppliers.
Generally, the Costa Rican textile sector was
very supportive of pursuing the dispute. However, US multinational
corporations had substantial investments in the textile sector and
lobbied actively and publicly against pursuing the dispute case.
III. Challenges
faced and the outcome back to top
Costa Rica needed to gain the domestic support
of key Costa Rican stakeholders to pursue the case at all. The Ministry
of Foreign Affairs and the Costa Rican embassy in Washington held
similar views concerning the decision to pursue the DSU process — given
the narrow economic stakes in this particular case, the potential
pay-offs of the underwear dispute did not justify risking the broader
relationship with the United States. However, it was not just
inter-bureaucratic quarrelling, but fundamentally different points of
view that led to the divergent attitudes among the agencies towards this
trade dispute. From the perspective of the Ministry of Trade these
differing points of view represented a generation gap. They perceived
the prevailing view among their colleagues in the Ministry of Foreign
Affairs, who tended to be much older, as derived from an earlier era
when the economy had been geared toward the Central American market and
focused on import substitution. The Trade team believed that the
Ministry of Foreign Affairs underestimated the importance of the WTO
rules-based trading system to Costa Rica’s economic development
strategy, and hence viewed the potential dispute as primarily a textile
issue. The Trade team viewed trade, and Costa Rica’s full
participation in a rule-oriented international trading system, as
essential to the country’s economic future.
While the team from the Ministry of Trade did
not believe that the case should be pursued at all costs, they were
motivated by strategic considerations in addition to the economic
stakes. Roberto Echandi, a member of the legal team, stated the
strategic point as follows:
[In] the Uruguay Round, a balance had been
reached regarding the incorporation of textiles to the normal rules of
trade (away from the unilateralism and discrimination of the Multifibre
Arrangement). After such a balance was reached, here came the United
States and unilaterally attempted to ignore the deal. That was extremely
dangerous to an economy as dependent on trade and on the US market as
was Costa Rica’s.
The Ministry of Foreign Affairs and the
Washington embassy characterized the Ministry of Trade’s position as
unduly influenced by the ‘romantic’ and ‘theoretical’ ideas of a
group of naïve technocrats. In their opinions, realpolitik should
prevail.
The domestic textile industry did not
automatically support pursuing the case either. As Irene Arguedas, a
member of the team from the Ministry of Trade, recalls, two different
types of companies worked behind the scenes to influence the decision to
pursue the dispute settlement process. The first were those who were
vertically integrated with the US industry and sourced their cut fabric
from US suppliers. These companies could export their product back to
the United States under the Guaranteed Access Level (GAL) programme(13)
and were in favour of an amicable or negotiated solution. The other
group of companies consisted of those who sourced their fabric from
places other than the United States. They were not eligible to export
their product to the United States under the GAL programme. The access
of these companies to the US market would be directly affected by the
specific limit (SL) quota restrictions and they were correspondingly
more interested in pursuing the dispute.(14)
In the face of the strong reservations of key
political players within Costa Rica and the aggressive lobbying by the
US trade officials and US multinationals with investments in the textile
industry,(15)
the Ministry of Trade had to make strong and persuasive arguments to go
ahead with the case. However, even within the Ministry of Trade, team
members were reluctant to pursue the case, especially alone.
Members of the Ministry of Trade team recall
that ‘in order to avoid bearing the burden of testing the system alone’
they attempted to forge alliances with other countries. First, they
sought the support of other Central American countries facing similar
issues to Costa Rica. However, those countries feared the potential
double consequences of losing a dispute settlement case and/or losing
access to the US market. Next, Costa Rica attempted to gain support from
Turkey, Pakistan and India. Costa Rican trade officials travelled to
Geneva to meet with the ambassadors to the WTO. Although these countries
acknowledged that they faced similar issues, they did not believe that
they could forge the domestic coalitions necessary to bring a dispute
case to the WTO. India said that it would support Costa Rica at the WTO
with a third-party submission, but would not join as a complainant in
the case.(16)
Costa Rica would have to make the decision to pursue the case alone to
test ‘whether the concepts and principles of GATT would in fact apply
to the textiles sector’.
Ultimately, José María Figueres, the
president of Costa Rica, decided to initiate the dispute settlement
process. He was a former Minister of Trade himself, and had recently
studied strategy and competition while pursuing a degree at Harvard
University. Consequently he appreciated the strategic argument that the
case transcended the economic considerations of the underwear industry.
Failing to take a stand on what Costa Rica perceived as a threat to its
rights under the GATT could eventually lead to a larger, and
economically substantive, risk — the erosion of Costa Rica’s ability
to participate in and benefit from the world trading system.
Once the decision was made to pursue the case,
the administration still had to decide how to handle its prosecution.
Although the Ministry of Trade legal team was well educated and had a
reputation for good work, they were also perceived in some quarters as
too young to lead Costa Rica’s challenge in such an important case.
Therefore, several attempts were made to secure outside counsel to
assist with the case. However, given the amount of research the in-house
team had already conducted on the specific issues, they found that they
already knew more than the ‘experts’ they interviewed. In addition,
the costs of retaining outside legal counsel were very high. Eventually,
concerns about the limited value to be added by an external counsel
relative to the costs and the fact that the case seemed legally
straightforward, led the key stakeholders to allow the existing trade
team to handle the case.
Despite the concerns about pursuing the case
and managing its prosecution, Costa Rica prevailed in both the dispute
settlement process and the subsequent legal appeal. Not only did Costa
Rica receive favourable rulings, but the United States also accepted and
conformed to the decisions.
From Costa Rica’s perspective there were
several positive outcomes in addition to the legal outcome of the case.
First, the case helped to build the perception domestically (and
internationally) that small countries could benefit from membership of
the WTO. Second, without substantively damaging the relationship, Costa
Rica gained an increased level of respect from the United States and
more generally among WTO members. Finally, the country gained
significant experience and expanded its capacity with regard to
international trade and legal issues, while the legal team within the
Ministry of Trade further enhanced its reputation for credibility within
the Costa Rican government.
IV. Lessons for
others (the players’ views) back to top
Costa Rica, despite its concerns about ‘testing
the system’ alone, used the mechanisms available to it as a WTO member
to ensure that important principles of the multilateral trading system
(as agreed upon by the members’ economies) were appropriately applied.
The ‘system’ worked as intended in this case. Almost ten years after
the dispute, both developed and developing countries regularly use the
DSU process. This case, as an early test of the system, clearly pointed
to some lessons.
Anabel Gonzales of the Costa Rican legal team
identified one general lesson related to managing trade disagreements:
‘Never underestimate a trade conflict. Pay attention to it from the
beginning and throughout the process.’ The United States probably
underestimated both Costa Rica’s resolve and its capacity to prosecute
the case. While the other countries identified by the United States as
posing a threat to its underwear industry quickly agreed to settle with
the United States, Costa Rica did not. When the case went before the
dispute settlement panel, many discrepancies in the information provided
by the United States substantively undermined the credibility of the
claim that its industry was being damaged.(17)
The Costa Rican trade team handling the case believed that if the United
States had seriously thought that a dispute settlement panel would
eventually scrutinize the case, they would have assembled the data
supporting their case more carefully.
While there were not many things that the team
from the Ministry of Trade would perhaps have done differently if given
the chance, Costa Rica’s experience in navigating the DSU process
suggests several additional lessons. Despite Costa Rica’s success in
this case, Irene Arguedas emphasizes that countries should use the DSU
as a genuinely last resort: ‘First, it is key to exhaust every
possibility there may be to try to avoid the dispute and settle with
your partner.’ Pursuing a dispute case is intellectually demanding,
time-consuming, resource-intensive and politically stressful. Only when
the alternatives have been exhausted and the potential risks of not
pursing the case are substantial should countries initiate a case.
It is important for complainants to be well
prepared. They must have a detailed understanding of the case issues and
believe that there are substantive legal grounds for bringing the case.
As Anabel Gonzales puts it, ‘Before taking your case to the [dispute
settlement process], make sure you know it and [are confident] it is a
winner.’ Having the capacity to handle the case is part of being well
prepared. Technical and legal expertise is essential to being prepared
for what is often described as an intense process. Irene Arguedas makes
the point this way.
Once the process is launched, it moves
according to the time periods provided by the [DSU], which are short
(though adequate). It means that there is no time to learn! Therefore,
in order to be able to face adequately this kind of challenge, it is key
to have good in-house technical and legal expertise. Capacity building
is normally a challenge and resources are usually lacking, but, in the
absence of that, chances of success are minimal.
The members of the Costa Rican legal team
believe that it has become even more difficult to handle a dispute
settlement case as the process has evolved and parties have become more
sophisticated than they were in the early days of the system. While
capacity building is often difficult, it can nevertheless not be
overlooked.
Even if a country thinks that the DSU process
is its last resort, and that it has a well-prepared case, it should make
sure it has the solid support of key players in government, industry and
other stakeholders before proceeding with the case. Irene Arguedas says,
‘It is absolutely crucial to have solid support from the government
and from at least an important part of the industry. In our case, the
support of the President…. was key.’ In addition to government and
industry stakeholders, Anabel Gonzales suggests developing strong
relationships with the domestic and international press. The Costa Rican
team held regular informational meetings for the press to educate them
on the issues and keep them informed about developments. While building
relations with the press will not win a case, having the public media
supporting a case is generally an advantage in maintaining domestic
support. Ultimately, forging a solid and reliable domestic coalition is
at least as important as preparing a quality case.
Finally, even when a country has exhausted
other options, fostered capacity, prepared a solid case, and forged
domestic support, building relationships with allies can enhance the
case. In this case, India’s third-party submission supporting Costa
Rica’s case was symbolically important. In addition, discussions with
India during the case and India’s contributions to the oral hearings
were very helpful to the Costa Rican team.
In reflecting on the case nearly ten years
later, members of the Costa Rican team all expressed enthusiasm for the
opportunity to have played an active role in the dispute settlement
process. Although the underwear case is nearly a decade old,
liberalization of textiles within the world trading system continues to
present challenges for member economies. As the ATC’s 31 December 2004
deadline for the full integration of textiles into the GATT approached,
the battle over textile quotas continued. Textile trade groups from
countries that benefited from quotas continued to lobby aggressively for
delays in their scheduled elimination.
NOTES:
1.- US textile category 352/652. back to text
2.- The other countries were Colombia, Dominican
Republic, El Salvador, Honduras, Thailand and Turkey. back to text
3.- ATC, Art. 6. back to text
4.- Thirty days after the 60-day consultation
period as required by Art. 6.10 of the ATC. back to text
5.- Costa Rica’s case was only the fourth
dispute brought against the United States. The countries bringing
dispute cases prior to Costa Rica were Venezuela, Brazil and Japan. back to text
6.- GATT 1994, Art. XXIII. back to text
7.- Although this may have been the concern of
developing countries and some observers at the time, there are those who
now believe that the system favours developing countries. That is, it
has become politically difficult for a large country like the United
States to bring a dispute case against a small developing country
because no one likes a bully, but it is easy for a small developing
country to bring a case against a large developed country because
everyone loves an underdog. However, developing countries point out that
they need the protection of a formal dispute process. They say that the
large developed countries do not need a formal process to put pressure
on their trading partners. back to text
8.- ‘WTO Dispute Settlement 1995-2003: A
Statistical Analysis’, Journal of International Economic Law,
2004. back to text
9.- M. Raffaelli and T. Jenkins, The Drafting
History of the Agreement on Textiles and Clothing, Geneva:
International Textiles and Clothing Bureau, 1995. back to text
10.- Everyone on the team was under 35 years of
age and two of the team were under 30. Even the minister was still in
his thirties. back to text
11.- This is sometimes referred to as ‘807
Trade’ in reference to the chapter in the former US tariff schedules
by which it was covered. At the time of the dispute this trade was
covered by item 9802.00.80 of the Harmonized Tariff Schedule of the
United States (HTSUS). back to text
12.- Trade Policy Review of Costa Rica, 1995
(document WT/TPR/S/1). back to text
13.- Guaranteed access levels, or GALs, are the
specific negotiated quota levels for particular products being given
more favourable treatment because the products are made from fabric
formed and cut in the United States. Generally the GALs being proposed
by the United States as part of its overall restraints considerably
exceeded the levels of current trade and would, therefore, have no real
impact on trade in such products. back to text
14.- It should be noted that a similarly
challenging political dynamic was mirrored in the structure of the US
industry. Companies using a totally domestic process to manufacture
underwear would likely be threatened by increased imports of underwear.
However, companies using 807 programmes to assemble their product abroad
could benefit from increased imports. Therefore consensus among industry
on the trade dispute in the United States was likewise unlikely. back to text
15.- Members of Costa Rica’s trade team say
that lobbying efforts on the part of the United States in this case were
among the most aggressive they have witnessed. back to text
16.- India clearly had an interest in the case,
as it subsequently brought two textile-related cases against the United
States (DS 32 and DS 33) just months after the Costa Rican case. back to text
17.- See
WT/DS24/R. back to text
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* Independent consultant based in Geneva, Switzerland.
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