European Union

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These are trying times for the World Trade Organization (WTO).

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Amid the blustery headwinds of trade wars and tariffs, the WTO has come in for some heat, most prominently from U.S. President Donald Trump.

Most recently, the WTO’s Appellate Body, the organization’s vital dispute settlement mechanism, has reached an impasse. With the expiration of judges’ terms last week and the U.S.’s blocking of new appointments, the WTO is not able to fill positions on the panel, leaving it at a standstill with only one member.

European Commissioner for Trade Phil Hogan last week emphasized the nature of the crisis.

“This is a regrettable and very serious blow to the international rules-based trade system, which, for the past 24 years, has relied on the WTO’s Appellate Body – and dispute settlement generally,” Hogan said.

“This is a critical moment for multilateralism and for the global trading system. With the Appellate Body removed from the equation, we have lost an enforceable dispute settlement system that has been an independent guarantor – for large and small economies alike – that the WTO’s rules are applied impartially.”

WTO Director-General Roberto Azevêdo recently said he would begin consultations aimed at resolving the impasse vis-a-vis the Appellate Body.

“A well-functioning, impartial and binding dispute settlement system is a core pillar of the WTO system,” Azevêdo said. “Rules-based dispute resolution prevents trade conflicts from ending up in escalating tit-for-tat retaliation — which becomes difficult to stop once it starts — or becoming intractable political quagmires.

“Obviously the paralysis of the Appellate Body does not mean that rules-based dispute settlement has stopped at the WTO. Members will continue to resolve WTO disputes through consultations, panels, and other means envisaged in the WTO agreements such as arbitration or good offices of the DG … but we cannot abandon what must be our priority, namely finding a permanent solution for the Appellate Body.”

Meanwhile, the European Commission has put forth a proposal aimed at addressing the crisis from Europe’s perspective (the proposal is laid out helpfully in a flow chart).

“A stronger Europe in the world implies efficient EU leadership on global trade and appropriate powers to ensure that international trade rules are respected,” European Commission President Ursula von der Leyen said. “For that reason, I start my mandate by taking swift action to strengthen our trade toolbox. Today’s proposals will let us defend our interests in these particularly uneasy times for international trade. As many European jobs are at stake, the EU needs to be equipped to ensure that our partners respect their commitments and that’s what this proposal aims for.”

According to a European Commission release, the proposal allows “the European Union to protect its trade interests despite the paralysis of the multilateral dispute settlement system in the World Trade Organization.”

As a result of the blockage of new appointments, the proposal seeks to amend the existing Enforcement Regulation rules, which date back to May 2014.

“The Commission’s proposal will enable the EU to react even if the WTO is not delivering a final ruling at the appellate level because the other WTO member blocks the dispute procedure by appealing into the void,” the Commission said.

“This new mechanism will also apply to the dispute settlement provisions included in regional or bilateral trade agreements to which the EU is party. The EU must be able to respond resolutely in case trade partners hinder effective dispute settlement resolution, for instance, by blocking the composition of panels.”

In addition, a new position of Chief Trade Enforcement Officer will be filled in early 2020.

As it stands, if a country appeals a WTO ruling in favor of the E.U., the case goes to the effectively paralyzed Appellate Body, thereby allowing the country to appeal “into the void,” as the European Commission colorfully puts it.

As such, the Commission proposes the E.U. be able to “trigger countermeasures in situations where a partner prevents the dispute from reaching the point where such authorisation could be granted.”

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The proposal will be subject to the “normal legislative procedure,” and the Commission hopes the process can be concluded by mid-2020.

Some call them safeguards, some call them protectionist barriers, and some love them and some hate them.

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Few measures divide like import tariffs.

We have seen it in the U.S. While Europe would claim its own measures are a reaction to the impact of imports following the U.S. Section 232 action, the reality is domestic European producers — led by their trade group, the European Steel Association (EUROFER) — are very much in favor of the European Union’s decision to put in place permanent safeguard measures on steel imports (in place of the provisional ones which have been applied since July 2018).

The new measures differ from the provisional arrangements in part because they were arrived at after careful monitoring of imports in the intervening period. As such, they are so are more targeted, at some 26 product categories, Pan European Networks reports in its publication Government Europa. The tariff of 25% applies to imports that exceed a certain threshold and are designed to ensure sufficient supply is available to consumers without allowing the market to be swamped by excess material, severely depressing prices.

A report in Steel Times quotes Eurofer saying imports have surged by 12% last year, making the need for an effective defense mechanism essential.

Axel Eggert, director-general of EUROFER, is quoted as saying “For every three tonnes of steel blocked by the US’ section 232 tariffs, two tonnes have been shipped to the open EU market.”

The measures do appear to partially reflect consumers concerns, EUROFER says that the final measures include an immediate “relaxation,” increasing the size of the quota by 5% (calculated on the base years of 2015-2017), with a further 5% relaxation in July and another 5% in July 2020, subject to review. Steel demand in 2019 is expected to increase by just 1%.

But, not surprisingly, not everyone is in favor of the measures.

European auto manufacturers association ACEA has called the measures protectionist. It has said that steel exports to the United States have only dropped slightly, and so little extra steel has been diverted to Europe. EUROFER puts the figure at an increase from 20% import penetration historically to 25% import penetration during the monitored period last year – hardly the “significant volumes” touted by UK Steel Director General Gareth Stace.

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If the U.S. reaches a sufficiently attractive trade deal that it decides to remove the Section 232 measures – unlikely, but a possibility – to what extent will Europe remove its new measures?

We will see. In an increasingly protectionist world, barriers are quick to be adopted and slow to be removed.

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They call it the law of unintended consequences and, broadly speaking, it was intended by the American sociologist Robert K. Merton to mean unintended consequences are outcomes that are not the ones foreseen and intended by a purposeful action — particularly actions of a government.

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Well, I don’t for one minute expect President Donald Trump gave much thought to the consequences for the rest of the world of his decision last year to slap 25% import tariffs on steel products from the rest of the world.

His focus was largely on a domestic audience and if he gave thought at all for the international consequences, it was probably the impact on China. Although steel imports into the U.S. from China were not as large as from suppliers like Russia, Ukraine, Brazil and Canada, the cumulative impact of deterring those suppliers from the U.S. market has been an increase in metal looking for a home in Europe.

The E.U. imposed a number of policies in response to the perceived threat of increased steel imports. One was to demand that most steel (and aluminum) imports into the E.U. apply for a form of licence, called Prior Surveillance. The measure is not designed to control imports as much as to monitor the precise origin, down to the level of manufacturer, probably with the intention of applying quotas or anti-dumping action at the manufacturer level at some stage in the near future.

But in the meantime, the E.U. feels it needs more of a blanket approach. As such, the European Commission has announced it will prolong until July 16, 2021, a 25% tariff on more than 20 types of steel ranging from stainless hot-rolled and cold-rolled sheets to rebars and railway material when the shipments exceed the average over the past three years.

According to the Gulf Times, 26 types of steel will be covered by the E.U.’s definitive measures, compared with 23 product categories under the provisional system and 28 within the scope of the original probe representing some 40% of the E.U.’s annual iron and steel imports.

The E.U.’s decision has not been met with universal approval. The decision was immensely popular among steel producers who pushed for the measures; however, consumers like the automotive sector called the move unhelpful and a cause of “regret,” according to S&P Global.

The European Automobile Manufacturers’ Association (ACEA) was quoted as saying “ACEA questions the need for such trade protectionist measures. In the automotive sector, access to EU steel production is extremely tight and imports remain necessary to fill supply-chain gaps.”

ACEA points out any increase in imports is down to increased consumption, not increased market penetration by overseas mills, saying “Motor vehicle manufacturing has increased by 5 million units per year since 2014, and some increase in steel imports has been necessary to meet this higher demand.”

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It would seem U.S. carmakers and the wider steel-consuming industry are not alone in facing higher prices going into 2019.

As GDP growth slows — recent data shows it is certainly slowing in Europe and China — manufacturers’ factory gate prices will come under pressure as this translates into lower sales. Heightened raw material inputs will therefore squeeze margins in the year ahead.

Readers in North America can be excused for puzzling why Europeans worry overly about the so-called “Eurozone crisis.”

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They seem to come around periodically. There is a great deal of noise and some volatility in the stock markets, but eventually — whether it is Greece, Spain, Portugal, Ireland, or a combination of several economies — the E.U. seems to have muddled through such crises over the last decade.

Even Brexit is confining its impact to the U.K. economy and has largely left the rest of the E.U. unaffected. But Italy’s latest budget proposals hold the potential for serious disruption, not least because it is the Eurozone’s third-largest economy and a founding member of the trade agreement started in the years after World War II — so its impact is proportionately significant.

So, what is the problem this time, you may ask?

Well, Europe has been slow to recover from the financial crisis of 2008. Debt ballooned in many countries and under the constraints of a fixed currency managed to the advantage of rich northern states like Germany, balance of payments deteriorated as the north imposed austerity on the south (or so many southern states saw it).

The rights or wrongs of the Eurozone’s structure aside, countries like Italy have been constrained for the last decade by fiscal rules set in Brussels. The Italian economy has lagged behind the rest of Europe — unemployment is high and growth is low. As the graphs below courtesy of Stratfor illustrate, the populace has had enough.

Earlier this year, they even surprised themselves by voting in a populist coalition on a platform of radical reform and reflation. That is a policy that puts them at loggerheads with Brussels, which has demanded an Italian deficit reduction that should see the deficit grow by just 0.6%, down from an expected 1.6%, to be achieved by increased austerity measures.

Italy’s new government, a coalition of the Five Star Movement and the League, have presented Brussels with a budget that would see the deficit rise to 2.4% next year, three times higher than an E.U.-mandated target and which Barclay’s Bank is quoted as predicting in The Telegraph will likely exceed 3%, even without a global economic downturn next year.

Italian 10-year debt yields have surged as a result, up near 300 points, not quite at the 400 level seen in the crisis of 2011 but a record four-year high. So far they are only talking about the budget, but nothing has been implemented. After years of QE, banks are holding some €387 billion (U.S. $444 billion) of state debt.

As The Telegraph report observes, banks face mark-to-market losses as yields rise. This erodes their capital buffers, forcing them to curtail lending and further crimping growth. Or, they might have to sell some of their bonds, creating pressure for yields to rise higher.

Either action can quickly turn into a self-feeding “doom-loop,” the paper suggests, as the banks and the sovereign state take each other down.

There is not going to be an Italian sovereign default. Although there are reports of capital flight to Switzerland, it is very unlikely there will be a run on Italian banks as there was in Greece.

However, Italy’s sheer size and core membership of the Euro means Brussels and Rome cannot allow the current standoff to escalate out of control.

Like a runaway super tanker, the situation cannot be easily contained like it was in Greece if the markets genuinely take fright.

You have to have some sympathy for Italy. State spending has always played a massive part in keeping a country together, where geography, history and culture constantly try to tear it apart, a report by Stratfor observed.

Reports of riots in Rome over the appalling state of public services underlines the popular will for public investment, regardless of austerity measures demanded by Brussels. So far, the government has a clear popular mandate to ignore Brussels and go for debt-fueled growth.

Brussels, likewise, is equally set against allowing Italy to buck the rules. The two are on a collision course and set against a backdrop of slowing global growth — outside of the U.S., at least — the economics are not in either party’s favor. Global growth or risk appetite are not going to mitigate the impact of an increasingly indebted Italian economy.

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The stage is set for a potential crisis.

We are not there yet, but in an increasingly nervous investment climate, it could prove a factor in a wider global stock market fall and global retrenchment.

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The European Union (E.U.) posted a 3% increase in apparent steel consumption during Q1 2018 compared with Q1 2017, according to a recent European Steel Association (EUROFER) report.

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According to EUROFER, the E.U. steel market began 2018 on “relatively strong footing,” but that rising trade tensions could knock the sector off course.

“The latest data confirms the severe impact the US Section 232 tariffs are having by deflecting imports into the EU – with surges across almost all product lines,” said Axel Eggert, EUROFER director general, in a release. “This surge is occurring at the same time as growth predictions are being revised onto flatter trajectories. We cannot risk the ongoing recovery being put at stake– and welcome the recent EU safeguard in its efforts to stabilise the sector.”

According to the report, real steel consumption and seasonal restocking are factors explaining the 3% rise in apparent consumption during Q1.

Domestic deliveries to the E.U. market rose 2.1% during the aforementioned period. Meanwhile third-country imports rose by 9.8% to 10 million tons, hitting the highest quarterly total since Q3 2007, according to EUROFER.

“This confirms that the volume effects of anti-dumping measures imposed by the European Commission over the course of 2017 faded out rapidly due to other third country suppliers filling the gap left by the countries which had duties applied to them,” the report states.

As for steel demand, the EUROFER report projects growth to continue in 2018 and 2019, but notes the uncertainty of “international steel fundamentals.”

“The sharp rise in imports of specific steel product from some third countries confirms that steel trade distortions remain a threat, which could be exacerbated by trade deflection resulting from the Section 232 tariffs applied by the Trump administration,” the report argues.

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Other highlights from the EUROFER report:

  • In Q1 2018, all steel-using sectors in the E.U. posted production growth (except for steel-tube manufacturing).
  • Production activity is forecast to grow 2.8% in 2018 and 1.9% in 2019.
  • Economic growth in the E.U. fell to 0.4% quarter-on-quarter in Q1 2018, down from 0.7% in Q4 2017.

President Donald Trump will not be the first commander-in-chief to find that waging wars on multiple fronts is a strategy with significant drawbacks.

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Taking on America’s NAFTA partners, Canada and Mexico, at the same time as the European Union is encouraging multiple retaliatory measures at a time when most people believe the real target was always intended to be China.

Many hold-up Caterpillar as the bellwether of U.S. industry, but if Caterpillar is the bellwether then Harley-Davidson must surely be the most iconic of American manufacturers. Its unique style of motorcycle is recognized and admired the world over and has come to epitomize the confident, free-spirited American dream.

So, when a firm like Harley-Davidson, which was repeatedly lauded by the president during his election campaign as an American icon and job creator, announces that it is going to have to shift production of its bikes overseas to avoid retaliatory tariffs imposed by the European Union, you have to ask if something is going a little wrong with the trade policy.

In a New York Times article, Harley-Davidson is quoted as saying the move “is not the company’s preference, but represents the only sustainable option to make its motorcycles accessible to customers in the E.U. and maintain a viable business in Europe.” Europe is the firm’s second-largest market after the U.S. However, as popular as its bikes are, the E.U.’s recently announced 31% import tariff — levied in retaliation for U.S. steel and aluminum import tariffs imposed by the president, the E.U. claimed — will, in the firm’s opinion, decimate sales.

Currently, Harley-Davidson incurs a 6% import tariff into the E.U., a cost the company appears comfortably able to absorb and still compete with domestic E.U. and Japanese motorcycle makers. But an increase to 31% would see on average a price increase of $2,200 per motorcycle, according to the article (although with the cheapest Sportster retailing for over $12,000 and top of the range models going for well over $20,000, that figure seems conservative).

Harley-Davidson agrees passing on the price increase to consumers is not viable. While no plans have been announced, the word is India may be the recipient of Milwaukee’s finest.

Not that India would be a significant market for Harley-Davidsons, as they have a heavy tax burden on larger bikes and you almost never see anything larger than the Royal Enfield 350 Bullit on the streets – the exception being the smart set in downtown Mumbai on their Ducatis and higher-end Japanese bikes (but that is still a small niche market).

Harley-Davidson sold 40,000 bikes in the E.U. last year and has vowed to absorb the tariff hike to preserve market share, at least for the remainder of this year, a move that could wipe out one-third of the company’s net profit. But Harley-Davidson does have options — it already manufactures in Brazil, Australia, India and Thailand, with India and Thailand becoming increasingly important assembly points.

These tariffs look set to hasten that trend, at least for sales outside of the U.S., as U.S. component costs rise due to import tariffs and retaliatory tariffs make U.S. manufactured goods less viable.

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Harley-Davidson is not alone in feeling the heat of such tariffs. Bourbon makers, orange juice producers and even playing card manufacturers are said to be in the same position.

But none are as quintessentially American as Harley-Davidson.

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As even casual watchers of world affairs and international commerce might have caught on to by now, protectionism — or, at minimum, complaints of protectionism — has been on the rise.

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The current of protectionism has blown in many directions, from the U.S. Section 232 tariffs to the proposed tariffs on Chinese imports, not to mention the flurry of counter-tariffs (both proposed and actuated).

The European Union struck back against the U.S. steel and aluminum tariffs this past week, imposing import tariffs on a variety of American goods, from steel and aluminum products to Harley-Davidson motorcycles. (The tariffs went into effect on Friday, June 22.)

Nonetheless, the European Commission touted a new report this week that claims it “has eliminated the highest number ever of trade barriers faced by EU companies doing business abroad.”

“As the world’s largest and most accessible market, the EU is determined to ensure that foreign markets remain equally open to our firms and products, E.U. Trade Commissioner Cecilia Malmström said. “Given the recent rise in protectionism in many parts of the world, our daily work to remove trade barriers has become even more important. Ensuring that our companies have access to foreign markets is at the heart of our trade policy. Today’s report also underlines that effective solutions can be found within the international rulebook. As protectionism grows, EU enforcement of the rules must follow suit.”

According to the release, “45 obstacles were lifted fully or in part in 2017 – more than twice as many as in 2016.”

“The barriers removed spanned across 13 key EU export and investment sectors, including aircraft, automotive, ceramics, ICT & electronics, machinery, pharma, medical devices, textiles, leather, agri-food, steel, paper, and services,” the statement reads. “Overall, this brings the number of barriers eliminated under the Juncker Commission to 88.”

E.U. companies exported an additional €4.8 billion in 2017 as a result of the removal of barriers from 2014-2016. Among those barriers removed were, according to the report:

  • Recognition of safety standards used by the EU machinery industry in Brazil’s new safety legislation;
  • Elimination of administrative barriers for services in Argentina;
  • Removal of restrictions on copper and aluminium scrap, and paper in Turkey;
  • Removal of animal and plant health and hygiene barriers related to bovine exports from some EU Member States to China, Saudi Arabia and Taiwan;
  • Elimination of certain restrictions on poultry exports from some EU Member States to Saudi Arabia and the United Arab Emirates.

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The full Trade and Investment Barriers Report can be read here.

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This morning in metals news, it might not be long before the European Union imposes new measures to curb steel import levels, the zinc price continues its slide and Chinese President Xi Jinping warns that China is not afraid of fighting back on trade.

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E.U. Preparing Measures to Stem Flow of Steel Imports

At a news conference Tuesday, E.U. Trade Commissioner Cecilia Malmstrom said the E.U. could begin measures to slow the flow of steel imports into the 28-member bloc by mid-July, Reuters reported.

According to the report, Malmstrom said the investigation would likely take the rest of the year, and that the measures targeted for application next month would be provisional.

Zinc Price Slides

The zinc price has been on a tough run, dropping for the ninth consecutive day and falling to its lowest price in 10 months, Bloomberg reported.

Increasing LME inventories and dropping Chinese demand have contributed to the price drop, according to the report.

Xi: ‘We Punch Back’

As trade tensions between the U.S. and China continue to intensify, Chinese President Xi Jinping reiterated that China will strike back in defense of its interests.

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“In the West you have the notion that if somebody hits you on the left cheek, you turn the other cheek,” Xi said, as quoted by The Wall Street Journal. “In our culture, we punch back.”

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This morning in metals news, Sanjeev Gupta reopened his GFG Industrial Group’s steelworks in South Carolina in an effort to beat the U.S. steel tariff, the steel tariff could lead to the loss of jobs at a Missouri nail production plant and Harley-Davidson feels the sting of the E.U.’s counter-tariffs.

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Shuttered Steelworks in South Carolina Reopens

A shuttered steelworks in South Carolina was reopened by Sanjeev Gupta’s GFG Industrials, The Telegraph reported, in an effort to beat the U.S. steel tariff.

The plant produces wire rod for use in the automotive and construction sectors, according to the report.

U.S. Nail Producer Feels Effect of Tariff

According to Newsweek, Mid Continent Nail Corporation lost 50% of its business in the two weeks after President Trump’s 25% steel tariff went into effect.

Furthermore, that could mean the loss of jobs for the Missouri plant. According to the report, the company may have to lay off 200 more workers by the end of July.

Harley-Davidson Looks Abroad

As Harley-Davidson now faces counter-tariffs from the E.U. — instituted in response to the U.S.’s steel and aluminum tariffs — the company is now looking to shift its production overseas, according to a CNBC report.

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According to the report, Harley-Davidson said shifting targeted production overseas could take anywhere between nine and 18 months.

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The European Union announced Wednesday that it will impose duties on a list of U.S. products, worth approximately €2.8 billion, in response to the U.S.’s steel and aluminum tariffs. The 25% duty will go into effect Friday, June 22.

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The U.S.’s 25% duty on steel imports and 10% duty on aluminum imports went into effect after the U.S. announced at the end of May that it would not continue the temporary exemptions from the tariffs for the E.U., Canada and Mexico.

The list of U.S. products that will be subjected to the tariffs includes steel and aluminum products, in addition to agricultural goods and a “combination of other various products.” Other products subject to the duty include bourbon, motorcycles and orange juice. (A full list of the products is available here.)

“By putting these duties in place the EU is exercising its rights under the World Trade Organisation (WTO) rules,” a release on the European Commission’s website states.

Echoing previous comments, E.U. Trade Commissioner Cecilia Malmstrom alluded to the rules of international trade in justification of the move.

“We did not want to be in this position,” Malmstrom said in a prepared statement. “However, the unilateral and unjustified decision of the US to impose steel and aluminium tariffs on the EU means that we are left with no other choice. The rules of international trade, which we have developed over the years hand in hand with our American partners, cannot be violated without a reaction from our side. Our response is measured, proportionate and fully in line with WTO rules. Needless to say, if the US removes its tariffs, our measures will also be removed.”

The E.U. duties on U.S. goods will be “effective for as long as the US measures are in place, in line with the WTO Safeguards Agreement and EU legislation,” according to the release.

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“The EU will rebalance bilateral trade with the US taking as a basis the value of its steel and aluminium exports affected by the US measures,” the statement continues. “Those are worth €6.4 billion. Of this amount, the EU will rebalance on €2.8 billion worth of exports immediately. The remaining rebalancing on trade valued at €3.6 billion will take place at a later stage – in three years’ time or after a positive finding in WTO dispute settlement if that should come sooner.”

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