2.1 WTO accession, crisis and political economy of Ukraine's safeguard investigation

In 2008 and 2009, the Ukrainian car market was hit by two important events. First, in May 2008, Ukraine joined the WTO. As a result of the WTO accession, car import tariffs dropped from 25% to 10% and the prohibition on importing used cars older than eight years was lifted (Ernst and Young, 2016). Second, the financial crisis and credit crunch hit Ukraine in 2009, when only about 5% of cars were purchased with credit compared with about 50% in 2008 (AUTO-Consulting, 2009b; Focus, 2008). Demand for new cars dropped by 74% from 2008 to 2009, due to falling incomes, lack of credit opportunities, and economic uncertainty. The Ukrainian economy was greatly affected by the crisis, and the currency depreciated substantially. Sharp economic contraction was already evident by early in 2009. In response, the Parliament passed a law, overriding a presidential veto that increased the import tariffs for all goods except for ‘critical imports’ by 13% in March 2009. The measure was removed in May 2009 for most goods, and in September for refrigerators and motor cars (WTO, 2016; CMS, 2009).

In its request for a safeguard investigation in 2011, the industry association UkrAutoprom, representing domestic producers ZAZ, KrASZ, and Eurocar (Bogdan joined later), mentioned that the share of imported cars in total sales during the 2008–2010 period had increased by 16%. The capacity utilization of Ukrainian factories was at 20% and the number of employees decreased by 70%. Representatives of the industry association claimed that the safeguard measures would give incentives for FDI that would lead to the opening of new factories. UkrAvtoprom had previously obtained protection against automobile imports from Russia between 2001 and 2006, first through a 31.7% duty and then through quotas. As a result of the measures, VAZ started car manufacturing in Ukraine. Petr Poroshenko, then the Minister of Economy, announced in early June 2012 that the safeguard investigation had come to a conclusion and that Ukraine had good reasons to protect the market. The results of the investigation, however, were not made public. The minister justified the need for protection, comparing Russian import tariffs of 20–25% with Ukrainian tariffs at 10% and mentioning subsidies received by European automobile producers. He also said the protection is needed due to 12,000 jobs lost because of the decline in Ukrainian car production in 2009 (AUTO-Consulting, 2012c; Zerkalo Nedeli, Reference Nedeli2012).

The investigative authority (Interdepartmental Committee for International Trade) found that the share of imported products in the total amount of products sold domestically increased by 37.9% in 2010 relative to 2008, although in absolute terms imported products fell by 71%. The domestic production in Ukraine fell by 76.9% over the same period, the largest drop in the world, and domestic sales fell by 86.3%. The Committee pointed to the increase in the import share of cars originating from Turkey, South Korea, Romania, and Germany in 2010 relative to 2008. According to the Committee, the number of workers in domestic car manufacturing fell by 51.6% and operational profits fell by 89.9%. The Committee concluded that increased imports had led to the displacement of the domestic producers from the home market and threatened serious injury to the industry.

The introduction of the safeguard measure was met with resistance within Ukraine. Although the investigative committee came to its conclusions by the 28 May 2012, the decision was not circulated until 14 March 2013. Lobbying from the industry association on one side, and the importers association, on the other side, could be behind the delay. The association of car importers and dealers was vocal about the potential negative impacts of the measure. Furthermore, Viktor Janukovich Jr, a Ukrainian MP and vice-president of the national automobile club, strongly criticized imposing the measures, suggesting it would not help the industry, would dampen the budget due to lower import supply, and could lead to retaliation through the WTO (AUTO-Consulting, 2012d). The role of these political economy factors was exacerbated by the reports that Poroshenko's business reach involved ownership of the car production company Bogdan and Lutsk (AUTO-Consulting, 2012a; Golovnev, Reference Sergii2014).

Table 1 presents a timeline of the events from the initiation of the investigation in 2011 until the revocation of the safeguard measure in September 2015.

Table 1. Timeline of events related to the safeguard measure

2.2 Automobile production in post-Soviet Ukraine

At the end of the 1980s, four companies produced cars and trucks in the Ukraine. The most important car manufacturer was ZAZ (which was one of the domestic firms that requested the safeguard investigation), known for its relatively cheap, small-sized model Zaporozhets that had been very popular in the USSR. During Soviet times, the market was exclusively supplied by cars produced in the USSR, in particular Russian SFSR and Ukrainian SSR. In 1994, ZAZ was privatized, although the state continued to hold 86% of the company. ZAZ launched a new model Tavria in 1995, but sales fell continuously over time. The production of ZAZ declined from 156,000 cars in 1991 to negligible levels by 1997. The low quality of the Tavria model and a relatively high price were key to the falling demand.

ZAZ initiated a joint venture with Daewoo in 1998 to help it stay afloat. As part of the deal, the Ukrainian government increased import tariffs on cars from 30% to 60%. Also, Daewoo was granted special privileges, such as importing parts duty-free. After the first year, the joint venture was already performing below the expectations of both parties. Only minimal assembly was done in Ukraine, as practically all assembled cars were coming from South Korea. For its part, Daewoo was unhappy with the high number of imports of used cars, which undercut its sales. Used cars constituted a large majority of all car sales, and importers of used cars found various loopholes to avoid paying the hefty import duties. The problems of the joint venture with Daewoo are similar to challenges of the Ukrainian automobile industry in 2009. Among the main reasons for the failure of the joint venture were the economic crisis of 1998–1999 that affected internal market demand, the low productivity of the production in Ukraine, and competition with other countries hosting Daewoo production facilities (Romania, Poland, and Uzbekistan).

By contrast, an assembly partnership of Ukrainian car factories with the Russian company AvtoVAZ was long lasting. Before 1999, AvtoVAZ only exported assembled cars, but after 1999 AvtoVAZ started supplying parts and components to Ukrainian factories to assemble cars. When Ukraine imposed a preliminary anti-dumping duty of 31.7% on car imports from Russia in August 2002, the measure had an instantaneous effect. Within four months of the measure coming into force, the market share of AvtoVAZ fell from 54% to 37% (Ukrayinska Pravda, Reference Pravda2003). Shortly afterwards the duty was revoked while an import quota was introduced. These measures led to a further expansion of the AvtoVAZ's Lada car assembly in Ukraine. Success of these trade restrictive measures targeted at encouraging Russian car producers to assemble in Ukraine was a relevant motivator for imposing the safeguard measures in 2013.

2.3 Ukraine's passenger car market

The economic downturn that the post-Soviet countries were experiencing up until the 2000s eventually gave way to more rapid growth. From 2000 to 2008, Ukraine's GDP increased by 71% (World Bank, 2015). In addition, the low car density of 106.76 cars per 1,000 people in 2000 increased to 138.22 per 1,000 people in 2008 (HumanProgress.org, 2014). Soaring incomes, demand, and credit availability had a positive impact on car sales, which grew at about 30% annually. By 2008, Ukraine was an important market for passenger cars as the seventh largest market in Europe by the number of cars sold and by growth potential (AUTO-Consulting, 2009a).

Figure 1 shows the quantity of car sales, domestic production, imports, and exports from 2006 to 2013 relative to the amount in 2008. The passenger car market in Ukraine was rapidly growing and all factors were improving between 2005 and 2008. However, the market crashed in 2009 as the country was hit by the global economic crisis that sharply reduced credit availability and consumer demand for passenger cars. Sales of both locally produced and imported cars plummeted: only about 162,000 cars were sold in 2009 compared to 623,000 in 2008. In the period from 2008 to 2009, imports and domestic production fell at an almost equal rate. However total imports showed a recovery from 2009 to 2010 while the domestic production stagnated, which was probably related to the liberalization of import duties on passenger cars.

Source: UN COMTRADE, International Organization of Motor Vehicle Manufacturers.

Figure 1. Passenger car market in Ukraine (index, 2008 = 1)

Figure 2 shows Ukraine's import values of passenger cars for the five largest exporters and the rest of the world. The main passenger car exporters to Ukraine in the 2008–2010 period, analyzed in the safeguard investigation, were Japan, Russia, China, Germany, and South Korea. Japan was the largest exporter during the period and more than doubled exports to Ukraine from 2007 to 2008. The sharp and sudden increase was possibly driven by optimistic predictions about market development.

Source: Prepared by authors using data from UN COMTRADE, Harmonized System codes 870322 and 870323.

Figure 2. Import value of passenger cars of Ukraine by exporters, US dollars

Japan's role as the largest exporter with quickly rising importance in the Ukrainian market could explain why Japan initiated the litigation, although the safeguard measure affected all exporters. Indeed, as Bown and McCulloch (Reference Bown and McCulloch2003) discuss, safeguard measures have a disproportionate negative effect on the largest and fastest growing exporters. The Japanese delegation at the WTO mentioned, in its arguments against the safeguard measure, that Ukraine's passenger car imports in 2010 were actually 71.5% lower than the 2009 levels. Japan was claiming that its car exports to Ukraine dropped even more: from 51,600 cars in 2008 to 9,000 cars in 2010, that is, by 82.5%. Overall, trends in Figure 2 support the Japanese position that the imports were sharply falling during the analyzed period.

3.1 Unforeseen developments

Turning to the legal claims, in two early decisions – see Argentina–Footwear Footnote ⁵ and Korea–Dairy Footnote ⁶  – the Appellate Body found that the language in GATT Article XIX:1(a) on ‘unforeseen developments’ and ‘the effect of GATT obligations’ continued to apply after the Safeguards Agreement was in effect. Applying these provisions in this case, the Panel found that Ukraine failed to make a proper determination of unforeseen developments, because ‘the competent authorities in their published report identified the relative increase in imports as the unforeseen development rather than identifying and explaining any unforeseen developments that resulted in that relative increase in imports’. It also found that Ukraine failed to make a proper determination of the effect of GATT 1994 obligations, because it did not identify in its published report the effect of GATT 1994 obligations.Footnote ⁷

The Panel then addressed the three core elements of a safeguards determination: increased imports, serious injury (here, the threat of serious injury), and causation.

3.2 Increased imports

With regard to the issue of increased imports, the Panel found a violation of Article 2.1 of the Safeguards Agreement on three bases. First, the Panel concluded that Ukraine acted inconsistently with Article 2.1 by failing to provide an explanation in its published report regarding how intervening trends in imports relative to domestic production supported the competent authorities' determination that there was a relative increase for the period of investigation (2008–2010). In addition, the Panel concluded that Ukraine acted inconsistently with Article 2.1 by failing to demonstrate in its published report, through reasoned explanations, that there was an increase in imports during the period of investigation that was sudden enough, sharp enough, and significant enough. Finally, Ukraine acted inconsistently with Article 2.1 – specifically the requirement that a product ‘is being imported’ in increased quantities – by applying a safeguard measure that was not based on a ‘recent’ increase in imports.Footnote ⁸

To illustrate this issue more clearly, in terms of the flaws in the investigating authorities' analysis identified by the Panel, it is worth going into more depth on one of these findings. The Panel had found it ‘clear that, for an affirmative determination of increased imports to be consistent with Article 2.1, it is not sufficient for the competent authorities to establish an increase in imports through a simple mathematical comparison of data for the two end points marking the beginning and end of the period of investigation’. It continued, ‘[i]t is necessary, though still not sufficient by itself, that the competent authorities also set out in their published report a reasoned and adequate explanation concerning the development of imports between the end points, i.e. concerning the intervening trends in imports that occurred during the period of investigation’. Here, the Panel observed that ‘the published report of the competent authorities contains only an end-point-to-end-point comparison and analysis, finding that the import volume relative to domestic production was 37.9% higher in 2010 than in 2008’. The published report ‘provides neither data nor an explanation concerning intervening trends in relative imports, and specifically, makes no reference to import volume relative to domestic production in 2009’. While Ukraine provided relevant data and analysis of intervening trends in imports in relative terms in its first written submission to the Panel, the Panel stated that ‘such an ex post explanation cannot remedy the deficiency in the competent authorities' determination as set out in the Notice’. Nevertheless, finding it ‘instructive to consider briefly’ the data provided by Ukraine, the Panel considered that ‘[a] brief look at intervening trends … reveals that the competent authorities' end-point-to-end-point analysis is not sufficient on its own to explain adequately why and how the facts of this case supported the conclusion of the competent authorities’. In response to Ukraine's argument that a more detailed analysis regarding increased imports was performed, but that analysis is confidential, the Panel stated that ‘Ukraine did not explain how or why an analysis of intervening trends (as opposed to the actual import volumes) could be confidential’.Footnote ⁹

3.3 Serious injury to the domestic industry

The second major issue in a safeguards determination is to assess whether serious injury to the domestic industry exists. Here, the allegation was of a ‘threat’ of serious injury under Article 4.2(a). In this regard, the Panel found as follows. First, it concluded that the competent authorities failed to properly evaluate, and give a reasoned explanation of, the likely development of the import market share and its likely effect on the situation of the domestic industry in the very near future; second, the competent authorities ‘failed to properly evaluate and give a reasoned explanation of, the likely development of imports, either in absolute terms or relative to domestic production, and their likely effect on the situation of the domestic industry in the very near future’; third, the competent authorities ‘failed to properly evaluate, and give a reasoned explanation of, the increase in the very near future in exports to Ukraine's market, anticipated to arise from current or imminent capacity of exporting countries to export’; and, finally, the competent authorities ‘failed to properly evaluate, and give a reasoned explanation of, the likely developments in the injury factors relating directly to the situation of the domestic industry and the likely effect of these developments on the situation of the domestic industry in the very near future’.Footnote ¹⁰ On this basis, the Panel concluded that Ukraine acted inconsistently with Safeguards Agreement Article 4.2(a).

3.4 Causal impact of increased imports on injury

Finally, the Panel turned to the issue of causation, that is, whether the increased imports were causing the serious injury. On this issue, the Panel recalled Appellate Body precedent that under Article 4.2(b), competent authorities are required ‘to establish … a genuine and substantial relationship of cause and effect’, and also that ‘the relationship between the movements in imports and the movements in injury factors is central to a causation analysis and determination’. Furthermore, the Panel agreed with the Panel in US–Steel Safeguards that ‘upward movements in imports should normally occur at the same time as downward movements in injury factors in order for coincidence to be indicative of a causal link’. The Panel then examined the facts here, and noted evidence showing that between 2008 and 2009 imports decreased in absolute and relative terms and injury factors showed a deterioration, while between 2009 and 2010 imports increased in relative terms as compared to 2008, but some injury factors actually improved, as compared to 2008. While the Panel did not conclude from these trends that no coincidence in movements exists in this case, nonetheless, because the injury factors worsened when there was a relative decrease in imports and began to improve when there was a relative increase, Ukraine's investigating authorities ‘should have addressed these movements, which seem counter to findings of coincidence and causation, and given reasoned and adequate explanations as to why a causal link nevertheless existed’. The Panel concluded that ‘the competent authorities did not undertake a proper analysis of the relationship between movements in imports and movement in injury factors’. On this basis, the Panel found that the competent authorities did not demonstrate, through reasoned and adequate explanations, how the developments identified support their determination that a relative increase in imports contributed to bringing about a threat of serious injury. It thus concluded that Ukraine acted inconsistently with Article 4.2(b).Footnote ¹¹

The Panel also found a separate violation of the causation requirement on the basis that ‘the competent authorities should have identified and explained in the published report, in clear and unambiguous terms, the nature and extent of the injurious effects of those other factors as distinguished from injurious effects of increased imports, as well as the particular method used to separate and distinguish other causal factors’.Footnote ¹²

3.5 Other findings of violation

Beyond these core Safeguards Agreement obligations, the Panel also concluded that, ‘to the extent that Ukraine failed to provide adequate opportunity for prior consultations to review a proposed timetable for progressive liberalization, Ukraine cannot be said to have ‘endeavored to maintain’ a substantially equivalent level of concessions and other obligations, because without a proposed timetable for progressive liberalization, exporting Members such as Japan were unable to form an accurate understanding as to what might constitute a substantially equivalent level of concessions or other obligations’. Thus, the Panel concluded that Ukraine acted inconsistently with Safeguards Agreement Article 8.1 because it ‘failed to Endeavour to maintain a substantially equivalent level of concessions and other obligations’Footnote ¹³ .

Finally, the Panel also found violations related to Ukraine's failure to provide proper notice during the proceedings, to publish the report promptly, and to notify the WTO's Safeguards Committee.

4.1 Increased imports and injury to the domestic industry

4.1.1 Evidence of increased imports

The Panel found that Ukraine acted inconsistently with the Article 2.1 of the Safeguards Agreement by failing to demonstrate clearly that there was a sharp, significant, and sudden increase in relative imports during the analyzed period (2008–2010). The WTO Panel criticized the investigation by the Ukrainian authorities for providing only information about the change in relative importance of imports between 2010 and 2008 but not showing trends and outcomes in 2009.

As we saw in Figures 1 and 2, both the total imports and imports from the largest exporters fell in absolute terms from 2008 to 2009 and increased from 2009 to 2010. Thus, the relevant question is whether there was a consistent increase in relative imports throughout the analyzed period. We will now present the trend of relative imports in Ukraine's passenger car market to understand whether Ukraine could have potentially met the requirements. Available data present two different pictures for 2009 depending on the definition of relative importance of imports. In this study, we applied two different methods for calculating the import penetration given the available data. Figure 3 provides the import penetration between 2005 and 2014 calculated with the two methods.

Source: Prepared by authors using data from UN COMTRADE, International Organization of Motor Vehicle Manufacturers.

Figure 3. Import penetration in passenger car market in Ukraine (HS 8703)

First, we can define the import penetration for a given period (year) as the share of foreign cars imported in that period in total car sales. The resulting trend from this definition is marked by a light gray line in Figure 3. However, this definition has a problem that is apparent in the case of the Ukrainian passenger car market. Import penetration, according to the first measure, sharply drops from 2008 to 2009 and then increases again from 2009 to 2010. The sharp increases and drops are connected with the difference in the time point when products are imported and the point when the products are actually sold on the market. Thus, the drop from 2008 to 2009 can simply be a result of over-importing in 2008 due to optimistic predictions before the crisis hit that led to cars that were imported in 2008 being sold in 2009. Hence, few additional imports were required in 2009.

Indeed, the jumps in 2008–2009 and 2009–2010 disappear if we look at the share of imported cars in total sales in a given year, whether the cars were imported in the same year or not. That is, we measure import penetration as 1 minus the market share of domestically produced cars. Imports are expected to be ordered longer in advance than the domestic production due to the transportation and clearance time, which can be quite long. Thus, the domestic production might respond quicker to the changes in market demand due the large shocks. Here we see that the share of foreign cars sold on the market increased from 2008 to 2009 and from 2009 to 2010. The relative importance of imports increased from about 40% to 72% in 2009 and to 75% from 2009 to 2010.

4.1.2 Evidence of threat of serious injury to the domestic industry

With regard to injury, the WTO Panel ruled that the Ukrainian competent authorities did not demonstrate clearly that the domestic industry was under a threat of a serious injury over the analyzed period. Specifically, Ukraine did not explain what the likely development of imports would be in the near future. Below we first address the evidence of injury factors to the domestic industry and then briefly discuss how Ukraine could have explained the likely development of export capacity of exporting countries.

First, let us look at the situation of domestic industry by 2011 and possible developments. The Ukrainian car industry has not produced local brands since 2011 when the only remaining Ukrainian car, Tavria, was taken off production. But already before that the Ukrainian car manufacturing companies focused on assembling or providing complete manufacturing under the licenses of foreign car companies. The worries of the domestic manufacturers were motivated by the withdrawal of companies that were assembling in Ukraine between 2008 and 2010. In the boom years until 2008, ZAZ factories were manufacturing Opel Astra and Mercedes, while Eurocar was producing Sat, Audi, and Volkswagen cars. However, in the period from 2008 to 2010, automobile brands were withdrawing production from Ukraine. First Volkswagen terminated car manufacturing in Ukraine in the fall of 2008. Assembly by Opel and Audi stopped in 2009. As discussed in the Section 2, the Ukrainian manufacturers were requesting trade protection as a means to create an environment attractive for FDI.

Table 2 shows the only brands that continued production in Ukraine for 2011. Almost all cars produced locally (under foreign license) were under the two HS codes covered by the safeguard. Thus, Ukraine could have argued that the withdrawal of a number of brands producing in Ukraine meant that it was unlikely that the industry would recover in the near future. The safeguard measure then could provide a necessary environment for profitable production of the remaining brands after the shock of the global crisis and sharp import tariff liberalization.

Table 2. Car production in Ukraine by car HS code, 2011–2012

Source: Inputs collected from http://ukrmach.dp.ua/2012/05/29/ukraina-komu-vygodny-specposhliny-na-inomarki.html.

Next, to assess how significant was the threat of serious injury to the domestic industry, we compare Ukraine's passenger car production with that of other countries.

One relevant comparison group is other Eastern European countries likely to have a similar economic environment. Figure 4 compares the passenger car production from 2006 to 2012 relative to the production quantity in 2008 for five Eastern European EU member states (Romania, Hungary, Slovakia, Slovenia, and Poland) and three non-members (Ukraine, Russia, and Serbia) for which we have production data for the analyzed period.

Source: Prepared by authors using data from International Organization of Motor Vehicle Manufacturers.

Figure 4. Production quantity of passenger cars of certain countries (index, 2008 = 1)

The development of Ukrainian car production before 2008 follows a very similar trend to each of the other countries. However, Ukraine had the largest production drop from 2008 to 2009 and smallest recovery from 2009 to 2010. Given that all the countries in the group are in a competition with Ukraine for attracting car manufacturers, Ukraine could have argued that the developments from 2008 to 2010 made its industry recovery unlikely while some closely located countries were increasing their production over the same period.

The second relevant group for assessing the injury includes countries that saw the largest decreases in the passenger car production during the analyzed period. Figure 5 presents the production trends for five countries with the worst fall in production (Ukraine is among them) and the total for all countries in the world. In fact, South Korea and Japan are also among the largest exporters to Ukraine. All countries saw a similarly drastic fall in production between 2008 and 2010. The production in Ukraine and Thailand fell very suddenly from 2008 to 2009 while the production of Finland, South Korea, and Japan a bit more modestly from 2008 to 2009 with a continued fall from 2009 to 2010. At the same time, South Korea and Japan showed similarly sharp recovery by 2011. In conclusion, Ukraine had one of the worst declines in production worldwide and its slow recovery was matched only by Finland. Furthermore, two large exporters to Ukraine were also in the group of those exporters most hit after 2008 and yet they managed a much stronger recovery after 2010. Because world car production was recovering after 2010, it could also be argued that these countries also experienced an increase in their export capacity.

Source: Prepared by authors using data from International Organization of Motor Vehicle Manufacturers.

Figure 5. Production quantity of passenger cars of certain countries (index, 2008 = 1)

4.2 Causal impact of various factors

The WTO Panel ruled that the Ukrainian competent authorities failed to demonstrate that imports caused injury to the domestic industry. In this section, we attempt to shed light on the relative importance of various factors in causing injury to the domestic industry.

Here we follow Irwin (Reference Irwin2003) by decomposing the change in the domestic car production into that arising due to a shift in market demand, foreign supply, and domestic supply so as to assess whether imports caused injury to the domestic industry. Irwin (Reference Irwin2003) describes the differences in the attribution analysis between the US ITC and the WTO Safeguards Agreement and advocates a simple method from Kelly (Reference Kelly1988) that provides a decomposition of the injury into various factors. If the decomposition of domestic supply change reveals that the import supply shift is the largest component, then the attribution requirement of the Safeguards Agreement is deemed to be satisfied. In line with this reasoning, we follow the method developed in Kelly (Reference Kelly1988) to assess the role of imports in causing injury to the Ukrainian automobile industry.

Kelly (Reference Kelly1988) develops a model with linear demand and supply functions. In its framework, soaring imports make a clear prediction on price and market demand. A shift in import supply should increase the total consumption demand and thus lead to a price drop. In such situations, the safeguard measure can protect the domestic market against import supply shocks. If instead the demand shock is the main cause of the injury, then the price should move in the same direction as the consumption demand. Falling price and consumption demand would indicate the role of a demand shock in causing the injury. Finally, a negative shift in the domestic supply curve would lead to an increase in price and imports.

We apply the version of the model where domestic and imported goods are perfect substitutes for two reasons. First, most of the domestically produced cars were in fact foreign brands that would be sold at almost the same price as the imported cars. Second, the perfect substitutes model overstates the impact of imports on domestic injury if the domestic and foreign goods are imperfect substitutes. As we will see below, increased imports are not the main injury factor even in the perfect substitutes' model so they would not be the main factor in the imperfect substitutes' model either.

The change in domestic supply is decomposed as follows:

$$\eqalign{\Delta S &= \displaystyle{1 \over \nu} \left[ \underbrace{w_D e_D D\left( {\eta \displaystyle{{\Delta P} \over P} - \displaystyle{{\Delta D} \over D}} \right)}_{Change\; in\; demand} - \underbrace{\left( {w_M e_M - \eta} \right)S\left( {e_D \displaystyle{{\Delta P} \over P} - \displaystyle{{\Delta S} \over S}} \right)}_{Change\; in\; supply} \right. \cr &\quad \left. - \underbrace{w_D e_D M\left( {e_M \displaystyle{{\Delta P} \over P} - \displaystyle{{\Delta M} \over M}} \right)}_{Change\; in\; imports} \right] } $$

where $\nu = \eta - w_D e_D - w_M e_M, \; w_D = \displaystyle{S \over D},\; \; w_M = \displaystyle{M \over D},\; e_D \; $ is the elasticity of domestic supply, e _M is the elasticity of export supply, η is the elasticity of domestic demand, Δdenotes the observed change of a variable.

First, note that the third term, change in imports, has to be the largest in absolute value negative component so that the import shift would be the main cause of injury. However, in our case that term is positive independent of the assumptions about elasticity because the price increased over the analyzed period when imports fell. Indeed,

$$\displaystyle{1 \over \nu} \left( - w_De_DM \left(e_M \displaystyle{\Delta P \over P} - \displaystyle{\Delta M \over M} \right) \right) \gt 0\; \; \; {\rm as} \,\nu \lt 0,\; - w_De_D \lt 0,\; \; e_M \gt 0,\; \displaystyle{\Delta P \over P} \gt 0,\; \; - \displaystyle{\Delta M \over M} \gt 0.$$

Table 3 below presents the required information on consumption demand, domestic production, imports, and prices for the Ukrainian passenger car sector. Over the period 2008–2010, the price moderately increased, the consumption demand plummeted, and imports dropped. Due to data availability, the analysis is conducted for a four-digit code 8703 that covers also passenger cars that were not under safeguard investigation. However, the investigated products are about 80% of the passenger car market (Zerkalo Nedeli, Reference Nedeli2012) and almost 100% of the domestically produced cars.

Table 3. Passenger car market in Ukraine, 2008–2011

Source. Autoconsulting, available at http://gazeta.zn.ua/ECONOMICS/programma_nadezhd_dlya_avtoproma.html.

As discussed above, if the increased imports are the major cause of injury to the domestic industry, then the overall consumption should increase and price drop. The opposite happened in Ukraine: the imports dropped while price increased.

In order to make an assessment of the contribution of each injury factor, we need elasticity estimates. First, elasticity of export supply for Ukraine is estimated between 6 and 7 for HS codes 870322 and 870323 (Nicita et al., Reference Nicita, Olarreaga and Silva2013). Table 4 present the outcome for a case where both domestic and foreign export supply elasticity equals 6 while domestic demand elasticity equals –1 as an example. Calculations reveal a negative shift in the domestic supply curve as the main cause of the injury to the domestic industry. Import supply does not appear to have caused any injury to the domestic industry. Although the weight of each factor varies with the elasticity estimates, the importance and signs of the effects are very robust for a variety of elasticity estimates applied. In particular, domestic supply shift is robustly the strongest injury factor and demand shift is the second injury factor. Finally, import shift is not a cause for injury, but rather a positive factor for domestic supply. Hence, the WTO Panel's decision is line with the economic assessment of the injury attribution.

Table 4. Attribution of injury

4.3 Alternative assessment of causality: case of downstream industry

The passenger cars industry in Ukraine was focused on manufacturing and assembling cars for foreign brands under license agreements. The domestic industry needed contracts and orders from foreign brands in order to manufacture. This situation is rather different from a traditional domestic industry that can decide about its supply. Thus, the industry saw imports as a barrier to receiving foreign investments and stated that the safeguard measure should help to attract foreign companies to manufacture in Ukraine. A number of these brands manufacturing in Ukraine closed local production in or after 2009, opting for exporting the final product into Ukraine. Negative shock of the crisis combined with the more liberal import tariff could have triggered such decisions.

As more and more developing countries rely on offshoring, the policymakers will face a challenge of shielding the domestic industries when foreign firms re-shore or move to another location. Ukraine–Passenger Cars is an interesting case as it demonstrates the challenges faced by an FDI-reliant industry when several brands simultaneously stop operations, leaving factories empty.

Supply decomposition above revealed the domestic supply shift as the main cause of falling domestic production. But what are the factors shifting the Ukrainian car supply? The local companies were operating only thanks to the foreign investment for car assembly. This type of FDI is a direct substitute for car imports. The domestic firms compete with imports not only for car sales but also for ability to operate and assemble cars. So if the falling import tariffs due to WTO accession make exporting final goods more attractive relative to manufacturing in Ukraine, then it could be argued that the trade concessions have caused injury to the domestic market, and left the capacity underutilized and workers unemployed in a sudden manner.

Ukrainian domestic producers did not sustain injury due to the increased imports. But they could have sustained injury due to the trade concessions that made the FDI into domestic manufacturing unattractive. This distinction is very important as discussed by Sykes (Reference Sykes2003). Sykes presents a comprehensive analysis of the GATT/WTO law regarding safeguard measures from an economic perspective. It discusses the inconsistencies of the formulation of the relevant rules in defining exogenous and endogenous factors. The paper argues that originally concession was the exogenous factor that could through increased imports cause injury to the industry (endogenous factors). However, later the understanding shifted to imports seen as exogenous factor that could cause injury, and the relationship to the concessions went away.

The original reference to trade concessions was made with regards to the GATT tariff cuts. However, the spirit of the original GATT concessions is comparable to the liberalization that the newly acceding WTO members undergo. From that perspective, the safeguard measures could be justified by demonstrating that trade concessions had a causal effect on market equilibrium that injured the domestic producers. And in this reasoning, the imports are not the problem per se but as an alternative to FDI. And as our brief analysis revealed, the domestic supply was the leading cause of injury. Therefore, one could argue that trade concessions related to the WTO accession had an unforeseen effect and caused injury to the domestic industry through the domestic supply rather than imports.