Court's Decision Creates Uncertainty Regarding China To Importers

In a surprising move, the United States Court of International Trade on December 30th, 2004 granted a request by the U.S. Association of Importers of Textiles and Apparel ("USA-ITA") for a preliminary injunction enjoining the U.S. government from accepting, considering or acting upon "threat-based" requests for the imposition of safeguards limiting the amount of textile and textile products imported from China.

As a result of China"s becoming a member of the World Trade Organization ("WTO") and the planned elimination of quotas on the importation of textile and apparel products manufactured in WTO countries on January 1st, 2005, the U.S. and China agreed to specific temporary textile "safeguards" or quotas against imports from China. These temporary quotas were for the specific purpose of preventing a "surge" in imports from that nation following the elimination of quotas. Safeguards were to be administered by the Committee for the Implementation of Textile Agreements ("CITA"). CITA could impose safeguard measures against imports of Chinese textile and textile products provided it was proved that increased Chinese imports were creating market disruption.

As early as July 2003, U.S. textile producers began filing safeguard requests with CITA which agreed to consider the requests. CITA later imposed safeguard quotas on Chinese imports of certain products for a period of one year. These safeguard quotas applied to products where regular quotas had already been eliminated and where there was clear evidence of a large increase or surge in Chinese imports. However, since October of 2004 CITA has agreed to accept an additional twelve requests for safeguard actions based not upon actual market disruption but the mere threat of market disruption. In these twelve cases, Chinese quotas were still in effect limiting the amount of goods which could be imported. There was no surge of imports - only the threat of a surge once the quotas were eliminated. CITA had not yet imposed safeguards in these twelve cases, but the fact that CITA agreed to consider petitions based solely upon an alleged threat of market disruption prompted the USA-ITA to seek an injunction from the Court to prevent the imposition of safeguard quotas based merely on the threat of market disruption.

Under US law, a preliminary injunction can be granted if, the party requesting it proves it will i) be immediately and irreparably injured; ii) that the balance of hardship favors the party seeking the injunction; iii) that there is a likelihood of success on the merits for a permanent injunction; and iv) the public interest will be better served if the injunction is granted.

The first requirement for a preliminary injunction is often the most difficult to meet but in this case the Court agreed with USA-ITA that irreparable harm would occur. The Court found that importers of Chinese textiles and apparel had relied upon CITA"s rules and precedents while formulating their 2005 business plans for sourcing their products. The Court noted that CITA"s rules and precedents had addressed only cases of actual market disruption and not the threat of market disruption. The Court further found if threat based safeguards were imposed importers would be forced to alter their business plans by seeking alternative sources. Numerous importers would be forced to take the same action simultaneously, alternative suppliers of the products would not be available, quality of products would be diminished and shipping costs would increase. Accordingly, the Court found that the USA-ITA members would suffer immediate and irreparable harm if CITA were permitted to impose safeguard quotas as a result of threat-based petitions.

As to the second requirement, the Court found that the balance of hardships favored the importers. Importers would suffer the aforementioned immediate and irreparable injury if threat-based requests were accepted whereas the government"s interests would be protected. Under the China Textile Safeguard Regulations, CITA could still consider safeguard requests based on actual rather than anticipated market disruption caused by a surge in Chinese imports.

As to the third requirement - the likelihood of success on the merits - the Court found that CITA"s published regulations with regard to the acceptance of threat-based requests raised questions with regard to whether the agency had exceeded the scope of its authority in such matters. This was a significant factor in this case.

Finally, the Court found that the issuance of the preliminary injunction was warranted because it was in the public"s interest that the trade laws of the U.S. be properly administered.

The Court"s decision was, in our judgement, soundly written and well reasoned. Nevertheless, it has the effect of changing twenty years of case law which held that the administration of textile quotas was effectively exempt from judicial review. The government is sure to appeal the decision on this aspect alone.

The immediate effect of this decision is significant. For the time being, CITA simply cannot act in any way upon threat-based requests for safeguard quotas. In the meantime, regular WTO quotas have expired. At this time, there are no longer any textile or apparel quotas from any country (with the exception of the three safeguard quotas in effect) and for the reasons discussed below, it is unlikely that any quotas will be imposed for the next five to six months.

In practical terms, it is very difficult to determine at this time what the long term effect the granting of the preliminary injunction will have on the safeguard measures. The Court"s decision is limited only to CITA"s ability to accept or initiate safeguard requests based solely on threat-based disruptions caused by an anticipated increase in imports. In fact, the Court specifically states that CITA can still consider safeguard requests based on actual market disruption. The USA-ITA is also challenging the validity of CITA"s delegated authority to issue regulations under China"s Accession Agreement to the WTO. This could potentially invalidate all of CITA"s China Textile Safeguard Regulations. But the court did not make a final decision on this argument and a resolution of that question will likely not occur until after lengthy litigation.

The government can take several different courses of action in response to the decision and it is likely they will act on several fronts. As to the court case, the U.S. government may, within thirty days of the date of the decision, or by January 30th, 2005, request that the Court reconsider its decision. Such a request would likely not be considered because in order to prevail it must be demonstrated that an error or evidentiary flaw occurred during the initial hearing or there was discovery of additional evidence that was not available at the time. This is highly unlikely in this case. Another option would be for the government to appeal the preliminary injunction decision. Such an action is similarly unlikely as appellate courts often decline to rule on preliminary injunctions. Notice of appeal must be filed within 30 days but the appeal process itself takes much longer - usually four to six months. Most likely the parties will file briefs and a hearing will be held by the Court to grant a permanent injunction. This process will likely take a minimum of three months and any decision regarding a permanent injunction will almost certainly be appealed by the losing party.

Domestic producers may also re-file safeguard petitions based on actual market disruption based on imports of Chinese textiles and apparel. Such petitions would require supporting information including import data demonstrating that imports of Chinese origin textile and apparel products are increasing rapidly and in absolute terms. In order to demonstrate market disruption, the petitioners would have to compare the level of imports for a period of time after the elimination of quota in 2005 with a comparable period during which quotas were in effect. In our view, a reasonable period of time in which to identify a surge in imports would take a least 2 to 3 months. In addition, petitioners would need time to prepare their submissions to incorporate such data. Accordingly, it is likely that such petitions would not be filed until sometime between March 1st or April 1st, 2005 at the earliest. Under CITA"s procedures, a decision to accept or reject a safeguard petition must be made within 15 days from the date of filing. If the petition is accepted there is a prescribed 30-day comment period. CITA must then decide within 60 days after the close of the comment period whether or not to impose the safeguard measures. In theory, CITA could impose safeguards as early as April 16th. However, the agency is likely to take the full 60 days and would not impose safeguards earlier than mid June.

Finally, the government may have legislation introduced in Congress which would specifically authorize CITA to implement regulations to carry out the safeguard provisions as they relate to China"s accession to the WTO. Such legislation would destroy the argument that CITA has no authority to consider these safeguard petitions but enacting legislation - even on a rush basis - would take several months. Quite likely such legislation would also authorize CITA to consider threat based petitions. But, by the time CITA had the authority to consider a threat based petition, quotas would have been eliminated a sufficient amount time to file petitions based upon any actual surge in imports.

Considering the different possible courses of action discussed above, it is our judgement that safeguard quotas cannot be put into effect before May or June of 2005 at the earliest. In the meantime, shipments of textiles and apparel from China will not be subject to any quotas. These dates are speculative at this point since we do not know how quickly the domestic producers may move to re-file the safeguard petitions or how long the preliminary injunction issued by the Court of International Trade will remain in effect. We will continue to closely monitor the situation and keep you informed of any further developments. Please do not hesitate to contact us should you have any questions or require further information.

The material on this site is protected under the copyright laws of the United States of America and international conventions, and is the exclusive property of Continuity Centers or any licensee. All rights reserved. © Continuity Centers 2005. Site by Webline Designs.