5.40 The data available in March need not have been perfect, as seen in the "Fur Felt Hat" case. Article 6 of the ATC was a safeguard provision invoked in cases of serious damage or threat to an industry, and could not be interpreted to require that the importing Member wait until its industry had succumbed because a complete census of the industry had not yet been conducted. Article 6.7 of the ATC recognized this fact by requiring only that the data submitted with the request for consultations must be "as up­to­date as possible".

5.41 In the present case the burden was on Costa Rica to bring forward evidence and arguments demonstrating a prima facie case that the United States had acted inconsistently with Articles 6.2 and 6.3 of the ATC. When evaluating the CITA's analysis of the data available to it in March 1995, the Panel should take into account that domestic authorities were uniquely well­placed to scrutinize and evaluate the situation in a domestic industry, and that the facts in the March Statement clearly indicated that there were adverse effects on the US underwear industry resulting from increased imports of underwear. The Panel should examine whether Costa Rica had advanced facts which provided convincing evidence that it was unreasonable for the CITA to determine that the adverse effects of increased underwear imports on the US domestic underwear industry amounted to serious damage, or actual threat thereof. A similar examination should be applied with respect to determinations under Article 6.4 of the ATC.

5.42 The United States considered that the "Fur Felt Hat" case was still relevant for purposes of the present dispute, even after the incorporation of the Agreement on Safeguards in the WTO Agreement. The Agreement on Safeguards provided for a package of rights and obligations differing from those under Article XIX of the GATT 1994. This package included new procedural and transparency requirements; additional obligations regarding the duration and review of safeguards measures; an explicit ban on grey area measures; and on the other hand, a ban on compensatory withdrawals under Article XIX:3 if the safeguard measure satisfied certain conditions. The standards for action provided in the Agreement also reflected a shift in focus incorporating the jurisprudence of the "Fur Felt Hat" case. While Article XIX itself referred to the existence of serious injury or threat, in the "Fur Felt Hat" case the working party had focused instead on the evidence found by the authorities in the importing country before their determination and the extent to which it had been shown that the authorities' evaluation of that evidence was unreasonable. The Agreement on Safeguards adopted this approach. Its standards were not phrased in terms of facts that the importing Member must prove (if necessary to a panel). Rather, they were phrased explicitly in terms of the investigation to be undertaken by the competent authorities in the importing country. For instance, Article 2.1 of the Agreement on Safeguards provided that:

"A Member may apply a safeguard measure to a product only if that Member has determined, pursuant to the provisions set out below, that such product is being imported into its territory in such increased quantities, absolute or relative to domestic production, and under such conditions as to cause or threaten to cause serious injury to the domestic industry that produces like or directly competitive products."

Thus, the United States argued, a panel's evaluation of measures taken pursuant to the Agreement on Safeguards should follow the approach taken in the "Fur Felt Hat" case.

5.43 It was noted by the United States that the approach adopted in the "Fur Felt Hat" working party report had also been adopted in the Agreement on Safeguards because it had come to be widely accepted. In 1951 the "Fur Felt Hat" report was viewed as an important precedent, and it was agreed that, because of its value in relation to the interpretation of Article XIX of the General Agreement, the text of the report should be published. This working party report had become the accepted benchmark for panel evaluation of safeguards actions. No assertion was made that the approach adopted by that working party had been legally incorrect. Indeed, the general acquiescence to this standard, in spite of the many invocations of Article XIX:1 recorded in over 45 years of later GATT history, indicated that this approach had become customary law, or at the least,

"subsequent practice in the application of the treaty which establishes the agreement of the parties regarding its interpretation",

in the sense of Article 31.3(b) of the Vienna Convention on the Law of Treaties.

5.44 The United States stated that they had not argued, and would not argue, that the regime now governing textile trade in the WTO was a sui generis regime. It was a safeguards regime just as the regime under Article XIX and the Agreement on Safeguards were safeguard regimes. Both regimes permitted a Member to restrict trade in fairly traded goods on the basis of a determination made by that Member, subject to certain limitations. The textile regime diverged from Article XIX but many of its basic concepts depended on the fundamental concepts behind Article XIX; like English and American law, the two were originally one, have diverged over time, but still shared fundamental concepts and structure. Where the negotiators had indicated their desire that the two regimes differ (for instance, concerning the selectivity of actions taken or the duration of safeguards once imposed), the difference in rights and obligations provided in the negotiated text must be respected. However, the "Fur Felt Hat" case, an accepted precedent which predated the divergence between the two regimes, was relevant and persuasive in interpreting the provisions in both, or either, of these regimes concerning the initial decision to take safeguards action.

5.45 The United States confirmed its argument that the standard of review appropriate for this case was the one enunciated in the "Fur Felt Hat" case. That is, the Panel should look to see whether the authority's determinations were reasonable in light of the requirements of the relevant agreement, in this case the ATC, and considering the data available at the time. The United States did not advocate de novo review. In response to the Panel's question, the United States said that if "adequately motivated" meant that the Panel was to explore the possible motives underlying the CITA's decision making process, the United States disagreed with such a standard of review. If "adequately motivated" meant that the Panel was to examine whether the domestic authorities had based their determination on an examination of factors required in the ATC, and whether the basis for the determination had been adequately explained, the United States would agree with this formulation as it was compatible with the standard of review in the "Fur Felt Hat" case, and the United States did not advocate a position on how the TMB's finding by consensus on serious damage should be treated by the Panel. It was only stated that the United States did not agree with the TMB's finding and the ATC, Article 8, did not require them to inform the TMB concerning their view on their finding. Instead, the ATC required that Members endeavour to comply with recommendations and inform the TMB if recommendations could not be accepted. In this case the TMB recommendation did not include a recommendation that they expressed a particular view on the TMB's consensus finding or the lack of consensus on threat.

Views of Costa Rica on Standard of Review

5.46 As regards the standard of review, Costa Rica recalled that the United States had proposed that the Panel should restrict itself, solely and exclusively, to verifying whether the United States had followed the procedures laid down in Article 6 of the ATC and to ruling that its determination was reasonable considering the information available at the time the determination was made. Costa Rica argued and requested the Panel to rule accordingly, that on this point the United States was wrong, since the standard of review which the Panel should apply was a very different one

5.47 In the view of Costa Rica, the standard of review applicable to this case,which must be based on the general principles of GATT law and the provisions of the DSU, required the Panel to undertake an analysis and monitor the following five aspects: compliance with the procedural rules; proper establishment of the facts; objective and impartial evaluation of the facts in the light of the rules of the ATC; proper exercise of discretion in interpretation of the rules; and compliance with the rules.

5.48 Although novel in the textile field, the standard of review to be applied by a panel, was not new in the context of the GATT dispute settlement mechanism nor in the context of many legal systems. Nor was it a question foreign to the WTO itself, since it had arisen in various WTO Agreements. Neither was it unknown to the jurisprudence which, although not very abundant, nevertheless threw useful light on the matter.

5.49 Firstly, Costa Rica noted that this subject had been dealt with on numerous occasions in the reports of various panels set up to review the consistency of a particular measure with the GATT rules, especially in the anti-dumping field. For example, in the case of the New Zealand transformers³, the Panel did not share the view expressed by New Zealand to the effect that the determination of "material injury" could not be challenged or scrutinized by other contracting parties nor indeed by the CONTRACTING PARTIES themselves. In support of its ruling, the Panel pointed out that:

"To conclude otherwise would give governments complete freedom and unrestricted discretion in deciding anti-dumping cases without any possibility to review the action taken in the GATT. This would lead to an unacceptable situation under the aspect of law and order in international trade relations as governed by the GATT."

5.50 Thus, the first thing that Costa Rica noted was that the GATT jurisprudence on this particular point had not been uniform over the course of time and in relation to different subjects. It followed that the above-mentioned "Fur Felt Hat" case could not be regarded as a leading case in this field which ought necessarily to be followed by subsequent panels. The second argument was based on a general principle of GATT law according to which, in the absence of an express rule to the contrary, it was not possible to assume any limitation on the standard of review. This principle was clearly expressed in Article 11 of the DSU, according to which:

"The function of panels is to assist the DSB in discharging its responsibilities under this Understanding and the covered agreements. Accordingly, a panel should make an objective assessment of the matter before it, including an objective assessment of the facts of the case and the applicability of and conformity with the relevant covered agreements, and make such other findings as will assist the DSB in making the recommendations or in giving the rulings provided for in the covered agreements...".

5.51 At the same time, according to Article 3.2 of the DSU, the essential functions of the WTO's dispute settlement system - and, consequently, of the DSB - were:

"... to preserve the rights and obligations of Members under the covered agreements, and ... to clarify the existing provisions of those agreements in accordance with customary rules of interpretation of public international law ...".

5.52 On the basis of these provisions, in Costa Rica's view, in order properly to perform its task of preserving the rights and obligations of Members and clarifying the existing provisions of the WTO Agreements, the DSB must require that the work of panels not be subjected to a priori limitations, based on a putative restriction on its powers of review in a particular case.

5.53 With reference to Costa Rica's argument that the reference to objective assessment in Article 11 of the DSU required that panels' scope of review not be limited, the United States pointed out that they had not argued that panels could not review Article 6 determinations by domestic authorities; they had simply argued that these determinations should be accorded the proper weight. It should also be noted that this reference to "objective assessment" and to making findings in DSU Article 11 did not represent a policy-making initiative in the Uruguay Round, but it was the wholesale incorporation of paragraph 16 of the 1979 GATT Understanding Regarding Notification, Consultation, Dispute Settlement and Surveillance. As the drafters of the DSU had sought to make the review a comprehensive text incorporating all prior codification efforts on dispute settlement, the GATT Contracting Parties had intended the 1979 Understanding and its annex to reflect customary practice and improvements in that practice, which included the standard of review in the "Fur Felt Hat" case.

5.54 Costa Rica pointed out that in the case of the Agreement on Safeguards and the ATC there was no explicit (or implicit) provision establishing limitations on a panel's freedom of review, which was why the above-mentioned general principle should be applied. Where anti-dumping was concerned, the situation was different. Given the actual existence of Article 17.6 of the Agreement on Implementation of Article VI of the GATT 1994 (hereinafter the "Anti-Dumping Agreement"), according to which, in examining the matter submitted to it, the Panel:

"(i) in its assessment of the facts of the matter, shall determine whether the authorities' establishment of the facts was proper and whether their evaluation of those facts was unbiased and objective. If the establishment of the facts was proper and the evaluation was unbiased and objective, even though the Panel might have reached a different conclusion, the evaluation shall not be overturned;


(ii) shall interpret the relevant provisions of the Agreement in accordance with customary rules of interpretation of public international law. Where the Panel finds that a relevant provision of the Agreement admits of more than one permissible interpretation, the Panel shall find the authorities' measure to be in conformity with the Agreement if its rests upon one of those permissible interpretations."

Views of Authors Relating to Standard of Review

5.55 Costa Rica referred to this provision and the history of its negotiation, and noted that the authors Croley and Jackson had pointed out that the aim of those behind the drafting of this Article had been to establish limits on the standard of review which could be applied by a WTO panel, for which purpose they had based themselves on the jurisprudence of United States administrative law.⁴ The idea was to establish an express rule mainly for the purpose of introducing limitations, in the specific case of anti-dumping matters, on the general principle mentioned above.

5.56 The United States considered the above­cited article by Croley and Jackson to be largely irrelevant to the work of this Panel as it focused almost entirely on specific provisions of a different agreement outside the Panel's terms of reference, the Anti­Dumping Agreement. They nevertheless noted in examining this article that it too recognized the importance of the "Fur Felt Hat" case in GATT law⁵, and referred to other GATT cases recognizing a restrained standard of review.⁶ They had also noted that the authors, in their conclusions, overall had recommended caution on the part of WTO panels, arguing that:

"... panels should

also recognize that national governments often have legitimate reasons for the decisions they take. At times for example such governments can justifiably argue that an appropriate allocation of power should tilt in favour of the national governments that are closest to the constituencies most affected by a given decision."⁷

Relationship to Other GATT Provisions

5.57 In the view of Costa Rica, these authors had clearly explained how it followed unequivocally from the Decision on Review of Article 17.6 of the Anti­Dumping Agreement and the Declaration on Dispute Settlement Pursuant to the Agreement on Implementation of Article VI of the GATT 1994 or Part V of the Agreement on Subsidies and Countervailing Measures that this limited standard of review was applicable solely to the review of anti-dumping measures. It was important to make this clear as it provided a useful guide to defining what should be the standard of review in a case in which what was being scrutinized was the consistency of a clothing trade restriction with the requirements of Article VI. As already pointed out, the limitation on the standard of review in anti-dumping matters operated solely and exclusively in that field and, in that respect, must be regarded as an exception to the general rule outlined above.

5.58 Costa Rica argued that, in view of the above, it was not possible to accept a standard of review which would be just as restricted or even more restricted than that established in Article 17.6 of the Anti-Dumping Agreement when a panel scrutinized matters other than those covered by that Agreement, as the United States insisted. In fact, in the present case the United States wanted the standard of review to consist in verifying that the procedures established in Article 6 of the ATC were followed and ruling that the determination by the United States was reasonable, which was even more limited than the obligation imposed upon any panel under the above-mentioned Article 17.6 of the Anti-Dumping Agreement. This interpretation was not acceptable. The standard of review of this Panel was and must be much broader than that proposed by the United States and that which Article 17.6 of the Anti-Dumping Agreement established for the review of anti-dumping measures.

5.59 The United States noted the various GATT cases concerning anti-dumping determinations, which Costa Rica had cited. In the US view, however, this was not an anti-dumping case. An interpretation of the GATT or the Agreement on the Implementation of Article VI was clearly outside of the scope of the terms of reference of the Panel. In any event, the US had never argued that an importing Member was not required to carry out an investigation and carefully examine the facts before making its Article 6.2 of the ATC determinations under Articles 6.2 and 6.4 of the ATC. The US had also never argued that the determinations were exempt from Panel review. The US authorities had carried out a careful investigation, the results of which appeared in the March Market Statement annexed to their first submission. In that submission, they had established the facts of the case by going through the March Statement and pointing out systematically how the CITA had met the requirements of Article 6 of the ATC. They had simply argued that the expertise of US authorities and the findings in the investigation should be accorded an appropriate weight or margin of appreciation. This would also be consistent with the transitional nature of the ATC and the role of the TMB in monitoring measures taken while textile and apparel trade was integrated into the GATT 1994 and other Annex 1A Agreements.

5.60 Furthermore, according to the United States, Costa Rica's reference to anti­dumping cases was also irrelevant because in an anti­dumping case before a WTO panel, Article 17.6 of the Anti­Dumping Agreement superseded panel reports under GATT Article VI. Even in the "Transformers" case cited by Costa Rica, the Panel had recognized the appropriateness in the context of deferring to factual expertise of domestic investigating authorities:

"The Panel ... considered the evidence put forward by both sides as to the appropriateness of the cost elements used by the New Zealand authorities in arriving at their decision that dumping had occurred. The Panel noted that this evidence was of a highly technical nature, especially because it related to complicated custom­built products. It also noted that Article VI did not contain any specific guidelines for the calculation of cost­of­production and considered that the method used in this particular case appeared to be a reasonable one. In view of this and having noted the arguments of both sides ... the Panel considered that there was no basis on which to disagree with the New Zealand authorities' finding of dumping ...".⁸

5.61 Costa Rica argued that in order to define this standard of review for the specific case in question, it was important to bear in mind various considerations. Firstly, effective compliance with the substantive requirements of the ATC for the adoption of a transitional safeguard could not be achieved without the certainty that the full extent of the determinations of the importing Member was open to review. Without such a guarantee there was very little incentive for an importing Member to comply with the basic rules of the Agreement which, in practice, meant a return to the situation that existed in the textiles and clothing trade before the Uruguay Round. It was important to note the increasing legalization of the dispute settlement system, firstly of the GATT and now of the WTO, with the aim of raising legal standards. It was not for nothing that Article 8 and Article 14 of the Agreement on Safeguards subjected the measures adopted to their review procedures, in accordance with the rules of the above-mentioned dispute settlement mechanism.

Deference to National Authorities

5.62 Costa Rica recognized that although the national authorities could usually count on having access to most of the factual information needed to carry out an effective investigation, for example for the purpose of determining whether a domestic industry had suffered serious damage, it was also clear that those same national authorities could become a hostage to the local forces of protectionism so that they were prevented from carrying out the investigation properly or interpreting and applying the rules of the agreement in question to the best effect. In this connection, for example, Meier wrote that for deference to be paid to the decisions of a national body:

"... there should be agreement that the national body be independent of government, that all interests be given due consideration, and that the national procedure of enquiry be similar to that followed by the United States International Trade Commission".⁹

Pursuing this question further, Meier expresses the opinion that Article XIX of the GATT should be revised in order to incorporate two key principles:

"(i) that the determination of conditions on which the executive is called to take action be entrusted to a statutory body whose term of office should not be coextensive with that of the executive, and (ii) that, after a preliminary investigation by its own specialized personnel, this body should hold public hearings in which all interested parties, including the foreign firms, could be represented and not only present their views but also cross-examine each other within an adversary procedure".¹⁰

5.63 Costa Rica considered that the national body entrusted with applying the transitional safeguard in the United States, CITA in no way resembled that described by Meier and neither did the procedure it used to arrive at its determination bear any resemblance to that recommended for enabling the decisions of the national body to be held in greater respect. Accordingly, at least in connection with the review of a determination to apply a transitional safeguard, this argument should not carry much weight with the Panel. Finally, the reasons for adopting a restrictive standard of review in the domestic administrative law of some countries, for example the United States, not only could not be transposed to the context of the WTO but, in many cases, if so transposed, would produce the opposite effect.

5.64 In the view of the United States, the points Costa Rica had cited from the article by Meier were wrong or peculiar. The Uruguay Round negotiators appeared in practice to have overruled Meier as they negotiated an original Agreement on Safeguards which facilitates access to Article XIX while barring grey-area measures. Moreover Costa Rica had urged that the Panel adopt proposals by Meier in 1977 for revision of Article XIX, which amounted to requiring that all governments install an imitation of the US international trade commission. The Uruguay Round negotiators had rejected this point as well. The WTO Agreements do not regulate the separation of powers or delegation of authority by governments to domestic institutions of any WTO Member. US law happens to separate the authority for the implementation of safeguards taken on textiles and clothing purposes and that for safeguards under Article XIX. It would be inappropriate, and legally unsupported to impose a model on any government as a matter of its WTO obligations or to accord that model a legally privileged position as argued by Costa Rica. The notifications made to the WTO concerning national safeguard systems clearly showed great diversity in trade policy making and implementation, a diversity which the WTO has not only tolerated but welcomed. In any event, the determination of serious damage or actual threat thereof made by the US authorities in this case must be evaluated not against one academic proposal, but against the law and practice of the ATC.

5.65 On the basis of the above, even if a high degree of deference was paid to the decision taken by the national authorities, Costa Rica was of the opinion that the standard of review applicable in this case required the Panel to scrutinize and verify the following aspects:

(i) Compliance with the procedural rules: this meant formally confirming not only that all the steps in the process of applying the transitional safeguard followed each other chronologically - as the United States would have it - but also that each of these procedural rules was actually complied with. In this connection, the utmost importance attached to the obligation upon the importing Member to bring evidence, as already indicated, and, above all, the effective fulfilment of that obligation through the submission of specific and relevant information, as required by the ATC, and the proper scrutiny of that information in relation to the parameters of the Agreement, as Costa Rica had previously pointed out. This same aspect also included the obligation upon the importing Member to establish, at the time of making the determination, whether the test of serious damage or actual threat of serious damage had been applied, as well as the obligation to hold consultations with the exporting Member on the basis of the premises on which the case was founded.


(ii) The proper establishment of the facts: from this aspect, the Panel should confirm that, on the basis of the specific and relevant information submitted, a detailed examination had been carried out, thereby enabling the facts to be properly established. From this it followed that there must be a reliable and logical correlation between the information in question and its examination, on the one hand, and between the latter and the establishment of the facts, on the other. This meant, inter alia, properly justifying each of the facts established and, conversely, that it was not possible to establish facts which had not been duly justified. With this in mind, for example, it was not possible in the view of Costa Rica to accept that the United States had demonstrated the existence of problems affecting employment, sales and profits, investment or capacity in its industry, inasmuch as these facts had not been properly substantiated, having been established on the basis of the evidence of only one or two enterprises. Nor was it possible to accept that the data on imports, domestic production and market size resulted in the establishment of the facts adduced by the United States, considering the problem created in this particular case by the fact that "807 trade" was counted twice, not to mention the total absence of analysis of this question within the underwear trade.


(iii) The objective and impartial evaluation of the facts in the light of the rules of the ATC: the Panel must determine whether the facts had been objectively and impartially evaluated by the national body within the framework of the rules of the ATC. Accordingly, the Panel must verify that the process of subsumption of the facts in the legal arguments provided for by the rules had proceeded logically and naturally, without distorting the evaluation of the facts or involving errors of judgement or abuse of power which might have led to a result different from that which could have been anticipated under conditions of objectivity and impartiality. Thus, for example, it was impossible to conclude that the establishment of an SL quota below the call level could constitute the more favourable treatment for re-imports envisaged in Article 6.6(d) of the ATC.


(iv) The proper exercise of discretion in the interpretation of the rules: when it became necessary to interpret a rule of the ATC, the national body may not assume unlimited powers of discretion, inasmuch as the ATC itself imposed limits which must be respected. Thus, as Costa Rica had already pointed, the principles underlying the adoption of a transitional safeguard were clearly established in Article 6.1 of the ATC, according to which the safeguard should be applied,


"as sparingly as possible, consistently with the provisions of this Article and the effective implementation of the integration process under this Agreement".


Given these limits, the rules could not be understood, for example, to mean that the ATC authorized the retroactive imposition of a safeguard measure.


(v) Compliance with the rules: finally, the Panel must make sure that, despite having complied with the requirements mentioned above, the importing Member had not infringed the ATC in some other way.

5.66 Only a case which survived the scrutiny of a Panel on the basis of the above standard of review could be considered consistent with the ATC. In the case in question, it had already been amply shown that the restriction adopted by the United States on this occasion could not survive scrutiny of this kind, which was why Costa Rica had requested the Panel to rule that it be withdrawn.

Burden of Proof

5.67 Recalling that the measures at issue were taken as an invocation of the multilaterally­agreed safeguard provisions set forth in Article 6 of the ATC, the United States argued that, consistent with accepted GATT dispute settlement practice that had been carried over in the WTO, the burden was on Costa Rica in the first instance to demonstrate that United States actions were inconsistent with the ATC. The burden was not on the United States to re­demonstrate that its actions were justified. It was considered that the United States had presented ample material in the TMB justifying the safeguard measure, and they were prepared to refute the claims that Costa Rica had made; however, the Panel should first determine whether Costa Rica had indeed brought forward factual information and legal arguments substantiating its case, which, in their view, Costa Rica had not done.

5.68 Costa Rica argued that this particular conclusion by the United States was wrong, since the burden of proof in a dispute settlement proceeding under the DSU for the purpose of determining the consistency of a clothing trade restriction with Article 6 of the ATC fell upon the importing Member which had adopted the restriction. This followed from the ATC, since Article 6.2 of the ATC expressly stated that the importing Member must demonstrate the fulfilment of the basic requirements which must be satisfied before a transitional safeguard can be adopted. Accordingly, the importing Member must show or prove that the actual situation against which it would protect itself fully satisfied the basic requirements. The importing Member had two obligations to fulfil: firstly, they must submit specific and relevant factual information in support of their claim and, secondly, review the factors listed in Article 6 and show how their case fitted within the substantive criteria established by the ATC as prerequisites for the adoption of a special transitional safeguard.

5.69 In the view of Costa Rica, the importing Member had an obligation to demonstrate the satisfaction of these requirements not only to the exporting Member during the consultations but also to the TMB and, where appropriate, to the Panel. In accordance with Articles 6.7, 6.9 and 6.10 of the ATC, it was clear that the importing Member must demonstrate its compliance with the basic requirements of the ATC to the TMB. In the case in question the TMB had ruled that "the existence of serious damage had not been demonstrated" and "did not reach consensus on the existence of actual threat of serious damage". From this it clearly followed that the burden of proof vis-à-vis the TMB fell upon the importing Member, who must demonstrate the existence of the conditions laid down by the ATC. The importing Member was also obliged to demonstrate the existence of damage in a dispute settlement proceeding under the DSU, since logic forbid that, in this stage, suddenly and for no reason, the burden of proof should be reversed, requiring the exporting Member to demonstrate that the basic requirements of the ATC had not been fulfilled by the importing Member. To proceed in this way would be to establish a presumption in favour of the latter, in the sense that any restriction on the textile and clothing trade adopted by a Member would have to be assumed to be consistent with Article 6 of the ATC unless the exporting Member could prove otherwise. It was clear that such a rule would make completely pointless the existence of the substantive requirements established by the ATC to ensure that the special transitional safeguard remained an emergency measure and did not become the general rule. There was no reason to "reward" a Member which was unable to demonstrate its case to the TMB by relieving this burden of proof. Moreover, establishing a presumption in favour of the importing Member even against the ruling of the TMB did not make sense, since that would imply depriving the TMB of any role in the supervision of the operation of the ATC.

5.70 Costa Rica pointed out that the United States was justifying its position on the basis of a single case, whose findings should not be taken into consideration by the Panel since, in their view, they were wrong. They stressed that no other panel, from 1951 up to today, had based its findings on that case. It was also important to note that panels set up in other cases, in particular where anti-dumping measures were concerned, had treated the question of the burden of proof very differently. For example, when Finland requested a review of its dispute with New Zealand over an anti­dumping proceeding initiated against shipments of electrical transformers from a Finnish company to a local power company in New Zealand (see also paragraph 5.49), the panel had shared the view expressed by the panel on complaints set up to examine a complaint against anti-dumping duties applied by Sweden (BISD, 3S/81) to the effect that:

"it was clear from the wording of Article VI (of the GATT) that no anti-dumping duties should be levied until certain facts had been established. As this represented an obligation on the part of the contracting party imposing such duties, it would be reasonable to expect that that contracting party should establish the existence of these facts when its action is challenged."

The report of that Panel did no more than recognize what was a general principle of GATT law, according to which the burden of proof fell upon the Member which invoked Article VI or Article XIX of the General Agreement. In this respect, the principle was clearly laid down in Articles 3 and 11 of the Agreement on Safeguards, according to which it was the importing Member which, in accordance with a series of pre-established procedures, must demonstrate compliance with the basic requirements in order to be able to proceed with the adoption of a safeguard measure. As the principle was of general application, it should also govern the adoption of a special transitional safeguard under the ATC, especially as Article 6.2 of the ATC itself was clearly based on the same principle.

5.71 The United States failed to see the relevance of the Costa Rican arguments that legal duties under the ATC flowed from a general principle of GATT law; that the burden of proof fell on the member which invoked GATT Articles VI or XIX; or that since a Member invoking safeguard action under Article XIX must establish certain facts under Articles 3 and 11 of the Agreement on Safeguards, that principle should govern transitional safeguards under the ATC. Interpretation of the GATT or the Safeguard Agreement was beyond the Panel's terms of reference. Moreover since the US had not yet integrated the apparel categories in question, neither the GATT nor the Safeguards Agreement applied in this case. Even if Articles 3 and 11 of the Safeguards Agreement applied here, their provisions only required that the importing country conduct an investigation, provide due process to interested parties and publish a report. In particular there was nothing in either of these articles that shifted the burden of proof in WTO Dispute Settlement to the importing Member.

5.72 Costa Rica noted that various authors had very sharply criticised the report on the "Fur Felt Hat" case. Thus, for example, Meier wrote:

"In the United States withdrawal case (Hatters' Fur case), for example, the working party held that the invoking party (United States) was 'entitled to the benefit of any reasonable doubt' and that the complainant (Czechoslovakia) 'has failed to establish that no serious injury has been sustained or threatened'. This has made it difficult to maintain the substantive requirements with respect to causation of 'injury', and it has made access to Article XIX freer than it should be. This procedural rule should be revised to require the invoking party to go forward with the burden of proof of 'serious injury'."¹¹

5.73 Commenting on the same case, Dam pointed out that:

"Whatever distinctions may be made between the burden of coming forward with evidence and the burden of convincing the working party, it is clear that the effect of this procedural rule is to permit much freer access to Article XIX relief than might appear possible from the language of that article ...".¹²

5.74 Costa Rica suggested that the Panel should take this opportunity to correct the approach taken in the case cited by the United States and proceed on the basis of the considerations previously advanced to establish clearly that the burden of proof in this case rests upon the United States, which must demonstrate to the satisfaction of the Panel that it has complied with the requirements laid down by the ATC for the adoption of a transitional safeguard.

5.75 The United States noted that Article 3.1 of the DSU affirmed Members' adherence to the principle in Article XVI:1 of the Agreement Establishing the WTO that Members must be guided by the decisions, procedures and customary practices of the GATT 1947 and that such practice included findings and recommendations of the "Fur Felt Hat" working party. Therefore, the United States suggested that the Panel refrain from intervening, as requested by Costa Rica, to alter the established practice.

D. ARTICLE 6 OF THE ATC: GENERAL VIEWS ON ITS APPLICATION

5.76 Costa Rica argued that the United States had failed to comply with the principles applicable to the adoption of a safeguard measure under Article 6 of the ATC. Article 6.1 of the ATC established two principles that must guide the application of any safeguard to be adopted under the said provision. Firstly, "The transitional safeguard should be applied as sparingly as possible ...". This principle of sparing application of the measure carried an obligation of tempering or adjusting safeguard action prudently or sensitively, avoiding excess. It imposed an obligation to be as scrupulous as possible when seeking to establish new restrictions. Failure to comply with this principle would hinder or might even altogether prevent attainment of the objective of further liberalization of trade in textiles and clothing. Secondly, Article 6.1 of the ATC went on to say that the transitional safeguard should be applied. "... consistently with the provisions of this Article and the effective implementation of the integration process under this Agreement".

5.77 Costa Rica further argued that in accordance with this second principle, it was clear, firstly, that any Member wishing to use this mechanism had an obligation to comply with the provisions established by the Article for this purpose, and secondly, that the application of the measure must be guided by the final objective of the ATC which was the full integration of textiles and clothing into the GATT rules. When considering these two principles together, it was clear that Article 6 of the ATC sought to prevent the arbitrary and/or unjustified use of the transitional safeguard, by imposing on all Members a reference framework to which the application of any safeguard measure was subject and against which the adoption of every safeguard must be measured. The imposition of the unilateral restriction by the United States on trade from Costa Rica in the category under consideration had infringed Article 6.1 of the ATC because it was an arbitrary and unjustified action that did not comply with the provisions of this Article.

5.78 The United States commented that Costa Rica's argument consistently depended on the assumption that the ATC integration process must be read into Article 6 so as to accelerate the pace of integration. This was not the case. It was clear in the ATC that integration was an independently determined process, and that Article 6 applied only to products not yet integrated.

5.79 The United States noted that both parties to the dispute had agreed that the ATC was the only relevant agreement in this case. In its view, it was clear from the structure of the ATC, Article 6 in particular, and the express direction of Article 3.2 of the DSU, that the Panel's report,

"cannot add to or diminish the rights and obligations provided in the covered agreements".

Accordingly, where the negotiators of the ATC had failed to agree on certain provisions or otherwise had chosen not to address them in the ATC, the Panel must refrain from appearing to create such obligations. Article 6 of the ATC emphasized that it was the importing Member that made the determination based on the "relevant factual information, as up-to-date as possible" and "information ... related, as closely as possible, to identifiable segments of production and to the reference period set out in paragraph 8" of Article 6 of the ATC.

5.80 Accordingly, when examining conformity with the relevant procedures of Article 6 of the ATC, the United States argued that the Panel should seek only to determine whether the investigating authority had followed the procedures in Article 6 of the ATC and whether based on data available, the investigating authority had acted reasonably (see Standard of Review in Section C). The substantive standard for making safeguard determinations for textiles and clothing not yet integrated into GATT 1994 was provided for in the ATC and was substantially, as Costa Rica admitted in its submission, the same as that existing under Article 3 of the Multifibre Arrangement (MFA).

5.81 The United States further argued that Article 6 of the ATC was not the same as other trade remedy provisions with respect to substantive standards. The above­mentioned articles were the relevant provisions to be considered by the Panel in its review. These provisions contained the universe of factors and procedures to be followed by Members taking safeguard action. Article 6 of the ATC did not include more detailed procedures for investigation, nor did it provide more specific definitions to interpret the standard of law to be applied. This omission was a deliberate choice by the Uruguay Round negotiators who in other contexts, such as the Agreement on Safeguards or the Agreement on Subsidies and Countervailing Measures, were capable of providing detailed standards and procedures.

5.82 In the United States' view, the appropriate standard to apply to the importing country's determination was a standard of reasonableness. Article 6 of the ATC referred to "a determination by a Member," based on weighing of evidence on certain factors. The standard for panel evaluation of such determinations should follow established GATT practice, which was based on the 1951 "Fur Felt Hat" case (see Section C).

5.83 The United States argued that although the quantum of injury required to be demonstrated under Article XIX was greater than that under the ATC Article 6, the fundamental process for weighing information was the same. The Panel must determine whether based on the information available, the US determination was made in good faith application of and, was therefore, consistent with Article 6 of the ATC.

E. REQUIREMENTS FOR THE APPLICATION OF A SAFEGUARD MEASURE

5.84 Costa Rica argued that the United States had not fulfilled the specific requirements for the adoption of a transitional safeguard measure. Such action required a demonstration of the existence of a number of substantive elements laid down by Article 6 of the ATC itself. Thus, in accordance with paragraphs 2 and 4 of that Article, two stages may be distinguished, with their corresponding substantive requirements, that must be strictly fulfilled in order to be able to impose such a measure. In a first stage, it was necessary to demonstrate the existence of the substantive prerequisites for the importing Member to be entitled to have recourse to a transitional safeguard. Thus, Article 6.2 of the ATC provided:

"Safeguard action may be taken under this Article when, on the basis of a determination by a Member, it is demonstrated that a particular product is being imported into its territory in such increased quantities as to cause serious damage, or actual threat thereof, to the domestic industry producing like and/or directly competitive products ...".

5.85 The United States argued that the CITA had followed all of the procedures required under Article 6 of the ATC in making its serious damage, or actual threat thereof, determination.

Determination of Serious Damage or Actual Threat Thereof

5.86 In the view of Costa Rica, Article 6.2 of the ATC established three requirements that must be fulfilled and were the prerequisites for being able to impose a specific safeguard, namely: (a) an increase in total imports of a particular product, regardless of their origin; (b) serious damage or actual threat thereof to the domestic industry producing like and/or directly competitive products; and (c) a causal relationship between the increase in total imports and the existence of the serious damage or actual threat of serious damage.

5.87 The establishment of these three requirements, which were developed in detail in paragraphs 2 and 3 of Article 6 of the ATC, was not new in foreign trade law, as in one way or another they were the conditions laid down by Article XIX of GATT 1994 and by the WTO Agreement on Safeguards for the imposition of a safeguard measure. Broadly speaking, the idea was that these measures were by definition an exception to the rule of free trade. Furthermore, since what they were intended to restrict was fair trade and not unfair trade, such measures must comply with a number of strict requirements so as to be able to "justify" departing from the principles of free trade. The fact that the ATC had established a specific safeguard mechanism for use during the transition period did not deprive it of the intrinsic nature or philosophy of any safeguard mechanism, and in particular its character of being a temporary exception to free trade based on strict fulfilment of a number of requirements. Indeed, in so far as the transitional safeguard provided for by the ATC did not require compensation, its application must be strictly subject to the substantive criteria laid down by the ATC, and this must be judged very rigorously.

5.88 The United States noted that the ATC transitional safeguard departed from the GATT Article XIX requirement that the safeguard be applied on a non-discriminatory basis and that compensation must be provided. The safeguard standard was serious damage, or actual threat thereof. Under the ATC, Members must first determine that a product such as, in this case, underwear, was being imported in such increased quantities as to cause serious damage or actual threat thereof to their domestic industry producing like or directly competitive products. Article 6.2 of the ATC provided that:

"safeguard action may be taken under this Article when, on the basis of a determination by a Member,[footnote omitted] it is demonstrated that a particular product is being imported into its territory in such increased quantities as to cause serious damage, or actual threat thereof, to the domestic industry producing like and/or directly competitive products. Serious damage or actual threat thereof must demonstrably be caused by such increased quantities in total imports of that product and not by such other factors as technological changes or changes in consumer preferences."

5.89 Costa Rica submitted that to have the right to take safeguard action, the importing Member must fulfil the requirements established for this purpose in Article 6.2 of the ATC as developed in detail in that Article and in Article 6.3 of the ATC. Article 6.2 of the ATC obliged an importing Member to demonstrate that the substantive requirements had been met before imposing a transitional safeguard. This demonstration procedure required the Member to submit specific and relevant information on the facts giving rise to its claim and to make the required examination of this information in relation to the parameters of the Agreement. This information, together with the corresponding analysis, must be submitted at the correct time, namely the time the importing Member determines the state of the market, so that the exporting Member can exercise their right of defence. Any failure to observe the provisions could not be remedied by the subsequent submission of information (the July or October Statements) since, the information that was legally relevant for the purpose of analysing conformity of the measure with the ATC was that contained in the March Statement. The exhaustion of this first stage, with the fulfilment of each and every one of its requirements, was a sine qua non condition for acquiring what might be called a "generic" entitlement to the use of a specific safeguard measure, which may only be particularized or materialized against a specific Member when the second stage of the process had also been fulfilled. The United States had not fulfilled its obligation to demonstrate the existence of the substantive factors that were part of this first stage, and thus had failed to fulfil the requirements laid down in Articles 6.2 and 6.3 of the ATC.

5.90 The United States pointed out that Article 6.3 of the ATC required that in making a determination of serious damage, or actual threat thereof, a Member

"shall examine the effect of those imports on the state of the particular industry, as reflected in changes in such relevant economic variables as output, productivity, utilization of capacity, inventories, market share, exports, wages, employment, domestic prices, profits and investment; none of which, either alone or combined with other factors, can necessarily give decisive guidance."

This text required that a Member seriously examine the effects of imports on the industry as reflected in changes in economic data on that industry. However, it did not require that the importing Member examine only the listed variables, or all the listed variables. It only required that the importing Member examine variables such as those listed. CITA had in fact examined many variables including those listed as relevant in Article 6.3 of the ATC. The March Market Statement noted that CITA had examined production, market share, imports, employment, profits, investment, sales, capacity, prices and manhours. All of the information provided in the March Market Statement contained all the substantive economic information on which CITA's decision had been based. While Costa Rica had pointed in particular to exports, exports were only one variable of a long list in Article 6.3 of the ATC and as that Article stipulated, any one variable alone could not necessarily give decisive guidance.

TO CONTINUE WITH USA - RESTRICTIONS ON IMPORTS OF COTTON AND MAN­MADE FIBRE UNDERWEAR

³ "New Zealand - Imports of Electrical Transformers from Finland", BISD 32S/67, paragraph 4.4.

⁴ Steven P. Croley and John H. Jackson, "WTO Dispute Procedures, Standard of Review, and Deference to National Governments", in American Journal of International Law, Vol. 90, No. 2, April 1996, page 199.

⁵ Croley and Jackson, op. cit. page 196.

⁶ Citations include "United States - Restrictions on Imports of Tuna", DS29/R, paragraph 3.73; "United States -Imposition of Anti-Dumping Duties on Imports of Fresh and Chilled Atlantic Salmon from Norway", ADP/87, paragraph 232; "United States - Imposition of Countervailing Duties on Imports of Fresh and Chilled Atlantic Salmon from Norway", SCM/153, paragraphs 209-212.

⁷ Croley and Jackson, pages 212-213.

⁸ L/5814, adopted on 18 July 1985, BISD 32S/55, 67, paragraph 4.3.

⁹ Gerald M. Meier, "Externality Law and Market Safeguards: Applications in the GATT Multilateral Trade Negotiations", in Harvard International Law Journal, Volume 18, Number 3, Summer 1977, footnote 10, page 510.

¹⁰ Idem, page 515.

¹¹ Meier, op. cit., page 516.

¹² Kenneth W. Dam, The GATT Law and International Economic Organization, The University of Chicago Press, Chicago and London, 1970, page 103.