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THE SAFEGUARD SEQUEL

 

Lim Koon Huan and Nicholas Lai provide an insight into Malaysia’s second safeguard investigation


INTRODUCTION

The Ministry of International Trade and Industry (“MITI”) recently released its final determination on Malaysia’s second safeguard investigation.

On 29 June 2015, MITI published its finding that the importation of certain grades of hot rolled steel plates (known in the industry as “HRP”) from 42 countries into Malaysia was causing serious injury to the Malaysian steel market and industry (“domestic market”). HRP has a wide range of uses - from simple furniture and electrical appliances to heavy industries, such as the construction of highway bridges and shipbuilding.

Pursuant to MITI’s findings, safeguard duties starting at 17.40% were imposed on imports from the 42 countries commencing 2 July 2015 to help the domestic market regain competitiveness and market share. These duties would apply for a period of three years, and would gradually reduce to 10.40% in the final year.

This decision is significant as it sees MITI imposing safeguard measures for the very first time since the enforcement of the Safeguards Act 2006 (“Act”) and the Safeguards Regulations 2007 (“Regulations”) on 22 November 2007. Malaysia’s first safeguard investigation in 2011, which was on importation of hot rolled coils (HRC), was terminated at the preliminary determination stage.

This article discusses the salient events in MITI’s second safeguard investigation.

 

THE ESSENCE OF A SAFEGUARD INVESTIGATION         

In simple terms, safeguard duties are a trade protection measure which aims to counteract the sudden and sharp increase of imports of a particular product which cause injury to the domestic market. While increasing imports may be indicative of a thriving economy propelled by an increase of demand, the suddenness and/or sharpness of such increase in imports may leave domestic producers struggling to maintain competitiveness and market share against the imported goods.

If MITI finds that the domestic market is suffering material injury because of such imports, MITI may (i) impose safeguard duties; (ii) restrict imports by imposing a quota; or (iii) simultaneously impose safeguard duties as well as a quota on imports (section 28 of the Act).

Safeguard measures are unique in that they are a purely protectionist tool underpinned by the primary concern for the welfare of the domestic market. In contrast, anti-dumping and countervailing measures are strictly to tackle “unfair trade”, though the end goal of remedying the injured market remains the same. As such, it must be recognised that safeguards are a delicate measure as their drastic effects of “restricting trade” may well apply to fairly traded goods in the market.

THE PROCESS

 A safeguard investigation may be initiated either upon the initiative of the Government of Malaysia or a written petition by the domestic industry. In the case of a written petition, the domestic industry must consist of either all the domestic producers of the product in question or domestic producers whose collective output make up a major proportion of Malaysia’s total domestic production. Upon receipt of a written petition, MITI must decide whether there is sufficient evidence to initiate an investigation.

On 24 June 2014, Ji Kang Dimensi Sdn Bhd (“Petitioner”) submitted a written petition (“Petition”) requesting MITI to initiate a safeguard investigation on HRP. According to the Petition, there are two domestic producers of HRP in Malaysia and the Petitioner’s output represents 88% of the total domestic production of HRP.

On 18 August 2014, MITI published a gazette notification to initiate a safeguard investigation against HRP imported to Malaysia between 1 January 2011 and 31 December 2013 (“Period of Investigation”). The notice of initiation preliminarily indicated that the import of HRP increased by 13.45% from 2011 to 2012, and by 25.64% from 2012 to 2013. It further claimed that the Petitioner’s documents showed that the increased imports of HRP had caused serious injury to the domestic industry in terms of market share and trade performances.

As safeguard measures affect both exporting and importing communities of HRP, it is incumbent that MITI obtain and consider all views before coming to a decision. The relevant notices and documents were sent to all interested parties, which included local importers, foreign exporters, foreign governments and trade associations across the globe. MITI set a 30 day deadline for interested parties to provide their responses and views to the safeguard investigation.

The feedback from Malaysian importers of HRP is worth noting. The common concern raised was the limited grades of HRP which the Petitioner was able to produce. It was argued that the Petitioner could not be materially injured by imports of grades of HRP that were not in competition with the Petitioner’s products. As such, a blanket safeguard measure would unduly burden the domestic sectors which require and use stringent grades of HRP, such as the oil and gas, automotive, electrical and electronics, shipbuilding and construction sectors.

On 23 October 2014, MITI conducted a public hearing for the Petitioner and all interested parties to present their arguments before a panel chaired by the Senior Director of Multilateral Trade Policy and Negotiations Division, MITI.

A total of 56 parties attended the public hearing. Notable participants were large steel corporations from Japan and Korea, the Malaysian Iron & Steel Industry Federation (MISIF), the Japanese Iron and Steel Federation (JISF), representatives of the governments of Japan, Korea, India, Indonesia, Taipei and Ukraine as well as a number of domestic end users of HRP products.

Having obtained the views and responses of the Petitioner and all interested parties, MITI had to weigh the evidence and make a preliminary determination. While Regulation 9(1) of the Regulations requires MITI to make a preliminary determination within 90 days from the date of initiation of the Petition, MITI exercised its powers under Regulation 9(2) to extend the time period by an additional 30 days.

The Preliminary Determination

On 11 December 2014, MITI gazetted its affirmative preliminary determination, finding, inter alia, that the increase of imports during the Period of Investigation had indeed caused serious injury to the domestic industry in terms of the Petitioner’s “decline in market share, decline in domestic sales, low production and capacity utilisation, decline in cash flow, decline in profitability and inventory, and negative return on investment.” Pursuant to MITI’s affirmative finding, a provisional safeguard duty of 23.93% was imposed on HRP imports from 42 countries with immediate effect.

However, MITI took into account the views of exporters and importers alike by exempting certain grades of HRP from the provisional duty (Schedule 1 of Federal Gazette P.U.(B) 543/14). The exemption applied to grades used for the automotive, boiler and pressure vessels, offshore and structural uses and pipelines for the oil and gas sectors.

Pursuant to the affirmative preliminary determination, MITI conducted on-site verification at importers’ premises to verify the views and positions set out by the domestic importers. MITI visited a total of 29 domestic importers for this exercise. Interested parties were also free to follow up and meet with MITI to make further representations and comments on the findings of the preliminary determination. Regulation 12 of the Regulations required MITI to make a final determination of the safeguard investigation within 200 days from the preliminary determination.

The Final Determination

On 29 June 2015, MITI gazetted its final determination affirming the findings in its preliminary determination and released a final determination report on 1 July 2015. While the bases for the affirmative determination were maintained, there are material differences that are noteworthy:

(a)      First, it found that the increase of imports during the Period of Investigation appeared to be greater than indicated in the Petition (for the 2011-2012 period, the initial reported increase of 13.45% became 42.17% in the final determination report; while the 2012-2013 period also saw an increase from the initially reported 25.64% to 28.65%). While MITI did not explain how the higher percentages were arrived at, one possible explanation could lie in the removal of exempted grades of HRP from the initial import volume analysis.

 

(b)      Secondly, the provisional safeguard duty of 23.93% was replaced with lower final duties. Safeguard duties were to be imposed over three years with progressive reductions: 17.40% for 2015/6; 13.90% for 2016/7; 10.40% for 2017/8.

 

(c)       Thirdly, MITI took a positive list approach in the final determination as opposed to the negative list approach in the preliminary determination. This means that instead of applying a blanket final safeguard duty on all imported HRP and providing a list of exempted HRP grades, MITI specified the range of HRP products on which final safeguard duties were imposed. By doing so, importers of grades of HRP that fall outside the specified range of HRP products would not be subject to the final safeguard duties.

 

(d)      Lastly, de minimis imports were also exempted from the final safeguard duties. Imports from developing countries that did not make up at least 3% individually or 9% collectively of Malaysia’s total HRP imports were exempt from the final safeguard duties pursuant to section 33(1) of the Act.


CONCLUSION

While Malaysia is still taking baby steps into the safeguard scene, other Asian and ASEAN countries have long used this trade measure to remedy sudden and unforeseen influx of goods. India is considered the world’s most proactive jurisdiction in trade protectionism, having initiated 24 safeguard investigations since 2007 and a total of 39 investigations since its first in 1997. Indonesia is not far behind, having initiated no less than 23 safeguard investigations since 2007, and a total of 26 investigations since its first in 2004.

Malaysia’s first two safeguard investigations clearly demonstrate the willingness of MITI to fairly listen to and weigh the arguments presented by all parties concerned. As local industries become more aware of the potential that safeguard measures can offer, we may well see an increase in the number of safeguard investigations being initiated in the years to come. It is incumbent that MITI continues to carry out its duty in balancing the interests of all stakeholders in the domestic market and not unnecessarily impede natural market forces of free and fair trade.


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