A. Background

1.1 On 12 August 1997, the European Communities requested consultations with Korea regarding a definitive safeguard measure on imports of certain dairy products (WT/DS98/1). The European Communities made their request pursuant to Article 4 of the Understanding on Rules and Procedures Governing the Settlement of Disputes ("DSU"), Article XXIII:1 of the General Agreement.

1.2 On 25 August 1997 Australia, requested to be joined in the consultations (WT/DS98/2). The request was accepted by Korea on 28 August 1997 (WT/DS98/3).

1.3 Pursuant to this request, the European Communities consulted with Korea in Geneva on 10 September 1997 and 16 October 1997. Australia participated in these consultations as a third party. No mutually satisfactory solution was reached.

1.4 On 9 January 1998, the European Communities requested the establishment of a panel with the standard terms of reference provided by Article 7 of the DSU (WT/DS98/4). The European Communities made this request pursuant to Article XXIII:2 of the General Agreement on Tariffs and Trade ("GATT"), Articles 4 and 6.1 of the DSU, and Article 14 of the Agreement on Safeguards. At the Dispute Settlement Body ("DSB") meeting of 22 January 1998, the European Communities informed the DSB that they were for the time being not pursuing its Panel request.

1.5 On 10 June 1998, the European Communities reiterated its request for the establishment of a Panel.

B. Establishment and Composition of the Panel

1.6 At its meeting on 22 July 1998, the Dispute Settlement Body ("DSB") established a panel pursuant to the EC's request (WT/DS98/5). The Panel's terms of reference are:

1.7 The United States reserved its rights as to participate in the Panel proceedings as third party.

1.8 On 20 August 1998, the Panel was constituted with the following composition:

C. Panel Proceedings

1.9 The Panel met with the Parties on 10/11 November 1998 and on 16/17 December 1998.

1.10 The Panel submitted its interim report to the parties on 3 March 1999. On 17 March 1999, both parties submitted written requests for the Panel to review precise aspects of the interim report. At the request of the European Communities, the Panel held a further meeting with the parties on 29 March 1999 on the issues identified in the written comments. The Panel submitted its final report to the parties on 8 April 1999.

II. Factual Aspects

2.1 This dispute concerns definitive safeguard measures imposed by Korea on imports of skimmed milk powder preparations ("SMPP") classified under tariff headings HS 0404.90.0000 and 1901.90.2000. On 17 May 1998, based on a request by the National Livestock Cooperatives Federation ("NLCF") filed on 2 May 1996, the Korean Trade Commission ("KTC") decided on the initiation of the requested investigation.

2.2 On 11 June 1996, Korea notified the WTO Committee on Safeguards under Article 12.1(a) of the Agreement on Safeguards regarding the KTC's initiation of a safeguards investigation and the reasons supporting initiation. ¹

2.3 On 23 October 1996, the KTC completed its Investigation Report on Industrial Injury Caused by the Increase of Certain Dairy Product Imports. A Notice of this fact was published in Korea's Official Gazette dated 11 November 1996. Non-confidential copies of the Investigation Report on Industrial Injury by the Office of Administration and Investigation ("OAI Report") were available on request prior to that date.

2.4 On 2 December 1996, Korea notified the Committee on Safeguards under Article 12.1(b) of the Agreement on Safeguards that the KTC had made a finding of serious injury to the domestic industry caused by the increased imports of dairy products. ²

2.5 On 21 January 1997, Korea submitted a notification under Article 12(c) of the Agreement on Safeguards. ³ The notification informed the Committee that Korea proposed to apply a safeguard measure on imports of certain dairy products.

2.6 On 31 January 1997, Korea filed a notification pursuant to Article 9, footnote 2 of the Agreement on Safeguards regarding the non-application of safeguard measures to developing countries. ⁴

2.7 The final decision by Korea to apply the safeguard measure was made, and went into effect, on 7 March 1997.Notice of the application of the measure was published in Korea's Official Gazette.

2.8 On 24 March 1997, Korea submitted a supplemental notification to the Committee on Safeguards under Article 12(c) of the Agreement on Safeguards. ⁵ In its notification, Korea informed the Committee that it had taken a final decision on the application of a safeguard measure on certain dairy products.

III. Findings and Recommendations Requested by the Parties

A. European Community

3.1 The European Communities requested the Panel to find that Korea has violated Article XIX:1(a) of GATT and Articles 2.1, 4.2(a), 4.2(b), 5.1 and 12(1) to (3) of the Agreement on Safeguards.

B. Korea

3.2 Korea requested the Panel to find that the European Communities has not discharged its burden of proving that Korea failed to examine relevant facts or failed to explain adequately the basis for its determination and, therefore, conclude that the safeguard measure on SMPP was imposed by Korea in a manner fully consistent with its obligations under the Agreement on Safeguards.

IV. Main Arguments of the Parties ⁶

A. Procedural Objections

1. Lack of commercial interest and good faith by the European Communities

(a) Objection of Korea

4.1 Korea raised a procedural objection alleging a lack of commercial interest by the European Communities as well as a failure to act in good faith on their part. The following are Korea's arguments in support of its objection:

4.2 Korea argues that the EC submission admits that it has little or no commercial interest in bringing this matter before the Panel. ⁷ This admission coupled with the abortive settlement procedure suggests that the current procedure lacks any issue in dispute between the parties and is merely an attempt to use the DSU to establish a precedent on safeguards. Korea is also concerned that the European Communities interest in receiving an advisory opinion is especially onerous upon Korea given the substantive weakness of the EC case.

4.3 During the course of these proceedings, Korea urged the Panel to consider that the EC objective is not to preserve its rights with respect to its exports of SMPP, but to secure an advisory opinion from the Panel. Under these circumstances, the European Communities recourse to formal dispute settlement represents an abuse of the WTO dispute settlement system.

4.4 Korea requests that the Panel consider the EC motives underlying recourse to formal WTO dispute settlement proceedings.Korea considers that the EC actions during consultations and its expression of limited interest in its first submission are inconsistent with the object and purpose of the WTO dispute settlement proceedings. 4.4 Korea requests that the Panel consider the EC motives underlying recourse to formal WTO dispute settlement proceedings. Korea considers that the EC actions during consultations and its expression of limited interest in its first submission are inconsistent with the object and purpose of the WTO dispute settlement proceedings.

4.5 The DSU expressly provides that formal dispute settlement should be reserved for disputes where Members consider, in good faith, that their interests are being impaired.⁸ Moreover, Article 3.7 of the DSU specifically instructs Members to exercise restraint in bringing dispute settlement cases and articulates a preference for mutually agreed solutions over resort to formal dispute settlement.⁹

4.6 It is important to note that a key strand of the EC case is that in some way Korea failed to provide the requisite information to the European Communities to enable them to enter into meaningful consultations that might lead to a settlement (which is, after all, the key objective of the DSU). While Article 12 of the Agreement on Safeguards has a specific series of requirements, Korea considers that the information provided to the Committee on Safeguards more than complied with the pro forma standards laid down by that Committee ¹⁰, and that this enabled the European Communities to enter into meaningful but ultimately unsuccessful negotiations. Korea notes that if it had indeed abused its obligations to provide information and to permit meaningful consultations, then it is difficult to explain how the Director-General of DGI of the Commission of the European Communities could have provided the Korean delegation with a letter accepting a settlement.¹¹ The fact that the Director-General had to later withdraw his acceptance of the settlement proposed by Korea is evidence of lack of good faith on the part of European Communities, rather than on the part of Korea.

(b) Response of the European Communities

4.7 At the first meeting of the Panel with the parties the European Communities responded to Korea's procedural objection as follows:

4.8 As to the alleged lack of commercial interest of the European Communities in bringing this complaint, the European Communities would recall that in the EC - Bananas case the Appellate Body, in reply to an analogous objection by the European Communities, held that:

4.9 As to the alleged acceptance of a settlement offered by Korea, the European Communities assume that Korea is not seriously arguing that documents like the ones attached to its First Submission as Exhibit Korea-11 could be considered as a proposal and acceptance of a settlement for purposes of WTO provisions, nor, presumably, in any other legal system. In reality, it is apparent from that Exhibit that Korea cannot even demonstrate that it ever sent the European Communities a formal proposal in due form, let alone that the European Communities received and accepted it.

2. Inadequacy of the EC request for establishment of a panel

(a) Objection of Korea

4.10 Korea raises a procedural objection regarding the inadequacy of the EC request for establishment of a panel and requests the Panel to entirely reject the EC complaint on this basis. The following are Korea's arguments in support of this objection:

4.11 The EC request for the establishment of the Panel does not specify the nature of its dispute with sufficient clarity to permit Korea to conduct an effective defence.A detailed statement of the matter in dispute and the legal bases of the arguments is also necessary to permit third parties (who may not be intimately familiar with the details of the dispute) to assess whether or not to intervene.

4.12 In a request for establishment of a Panel under Article 6.2 of the DSU, a Complaining Party must �provide a brief summary of the legal basis of the complaint sufficient to present the problem clearly.� In its request for the establishment of a Panel, the European Communities merely listed four articles of the Agreement on Safeguards. This listing of articles cannot satisfy the specific criteria of Article 6.2, especially in a request relating to the determination of a domestic authority under the Agreement on Safeguards. ¹³

4.13 Korea acknowledges that the Panel in EC - Bananas found that simply listing the articles and the relevant agreements in that case satisfied the �minimum requirements� of Article 6.2 of the DSU. Korea suggests that the Panel should refrain from following this interpretation, because such an approach encourages the establishment of imprecise and potentially speculative terms of reference, and, taking into account the general purpose of the DSU, undermines the object and purpose of Article 6.2.In any event, the instant case is distinguishable from the EC - Bananas case because, inter alia,:

4.14 Further, Korea submits that the EC failure to comply with Article 6.2 of the DSU demonstrates the European Communities lack of any fundamental economic interest in this case, its negligent consideration of Korea's (and third-party Members') rights under the DSU, and its failure to give due consideration to the object and purpose of the WTO dispute settlement system.To preserve the integrity of the WTO dispute settlement system and the specific principles established therein, the Panel should find that the European Communities violated Article 6.2 of the DSU and should reject the European Communities complaint in its entirety. ¹⁸

(b) Response of the European Communities

4.15 At the first meeting of the Panel with the parties the European Communities responded to Korea's position as follows:

4.16 The European Communities recall that, in the EC - Bananas case, the Appellate Body "accept[ed] the Panel's view that it was sufficient for the Complaining Parties to list the provisions of the specific agreements alleged to have been violated without setting out detailed arguments as to which specific aspects of the measures at issue relate to which specific provisions of those agreements". ¹⁹

3. The nature of the EC case and its request for rulings by the Panel

(a) Submission of Korea

4.17 Korea asserts that the European Communities cannot challenge, and has implicitly accepted, the report of the investigating authority because it has not made any claims under Article 3 and 4.2(c) of the Agreement on Safeguards. In support of its position, Korea makes the following arguments:

(i) Article 3 of the Agreement on Safeguards

4.18 The EC claims must be viewed in the context of the terms of reference it sought when requesting the establishment of the Panel.The terms of reference serve as the basis upon which panels decide cases and panels can only rule on those issues that have been raised by the complaining party in the terms of reference.

4.19 Korea draws the Panel's attention to the terms of reference cited by the European Communities.These only refer to Articles 2, 4, 5 and 12 of the Agreement on Safeguards. ²⁰ Further, the European Communities in their First Submission and Oral Statement request that the Panel limits its request for a ruling to whether "Korea has violated Article XIX:1(a) of the GATT and Articles 2.1, 4.2(a) and (b), 5.1, and 12(1) to (3) of the Agreement on Safeguards."

4.20 It is therefore clear that the European Communities have not invoked Article 3 of the Agreement on Safeguards in its request for a ruling from the Panel.Failure to invoke Article 3 has significant implications for the EC case because Article 3.1 deals with the adequacy of the competent authorities' report.The final sentence of Article 3.1 of the Agreement on Safeguards states that:

4.21 The EC failure to invoke Article 3, whether intentionally or erroneously, leads one to conclude that the European Communities are not challenging the OAI Report.The European Communities confinement of their request for a ruling to the adequacy of notification under Article 12 becomes all the more clear in reviewing its answer to one of the Panel's questions. In Korea's view, this question sought to clarify the nature of the EC case. ²¹Korea considered that the European Communities failed to answer this question, referring back to its answer in a previous question in which they state: ²²

4.22 The EC answer refers to Article 3 which had never been at issue between the parties.In the light of the Appellate Body's ruling in India - Patent Protection for Pharmaceutical and Agricultural Chemical Products ²³ and Argentina - Measures Affecting Imports of Footwear, Textiles, Apparel and Other Items ²⁴ that a claim "must be included in the request for establishment of a panel in order to come within a panel's terms of reference in a given case", the European Communities cannot augment the original terms of reference by invoking Article 3 at this stage of the proceedings.

4.23 The EC failure to invoke Article 3 leads to the conclusion that the European Communities references to serious injury in Article 4.2(a) and to causal link in Article 4.2(b) are used as standards of review in relation to the notification and consultation requirements of Article 12, which Korea maintains it has fully discharged.

To continue with Absence of claims under Article 4.2(c)

¹ G/SG/N/6/KOR/2 (1 July 1996).

² G/SG/N/8/KOR/1 (6 December 1996).

³ G/SG/N/10/KOR/1 (27 January 1997).

⁴ G/SG/N/11/KOR/1 (21 February 1997).

⁵ G/SG/N/10/KOR/1/Suppl.1 (1 April 1997)

⁶ The Panel notes that, unless otherwise specified, the footnotes in this section are those of the parties as they appear in their different submissions.

⁷ See, in particular, EC's First Submission where the European Communities states: "The EC would stress that its complaints in this case, and notably those concerning the injury determination and procedural violations, are complaints of principle and that it considers all should be addressed by the Panel in its report."

⁸ Article 3.3 of the DSU provides that WTO dispute settlement is reserved for cases where a Member's benefits "are being impaired by measures taken by another Member." Article 3.10 states that "all Members will engage in these procedures in good faith in an effort to resolve the dispute."

⁹Article 3.7 provides that:

¹⁰ WT/TC/NOTIF/SG/1 (15 October 1996).

¹¹ See, Exhibit Korea-11

¹² See, the Report of the Appellate Body in European Communities - Regime for the Importation, Sale and Distribution of Bananas ("EC- Bananas"), WT/DS27/AB/R, 9 September 1997, paragraph 135.

¹³ In Argentina - Safeguard Measures on Imports of Footwear ("Argentina - Footwear"), for example, the EC's request, although still inadequate, included more specificity, stating that the European Communities:

¹⁴ WT/DS27/R/USA, paragraph 7.3 (22 May 1997).

¹⁵ Article 31 of the Vienna Convention on the Law of Treaties provides that a treaty must be interpreted in accordance with the ordinary meaning to be given to its terms in their context. The Panel in EC - Bananas considered that the appropriate context for interpreting Article 6.2 was Articles 3.2 and 3.3 of the DSU, and that such context does not support any interpretation not resulting in a prompt settlement of the dispute. Id. at paragraphs 7.6 to 7.8. Korea considers that Article 4.4 of the DSU is the more relevant context, given that it is the parallel provision to Article 6.2 addressing requests for consultations. Article 4.4 of the DSU requires that a request for consultations include "an indication of the legal basis for the complaint." Assuming the mere listing of articles satisfies Article 4.4, the drafters of the DSU must have intended that the language of Article 6.2 should be interpreted to require more specificity in a request for establishment of a Panel.

¹⁶ In Brazil - Measures Affecting Desiccated Coconut ("Brazil - Dessicated Coconut"), the Appellate Body stated:

¹⁷ United States - Anti-Dumping Duties on Imports of Fresh and Chilled Atlantic Salmon from Norway, ADP/87, paras. 333-335 (adopted 26 April 1994); United States - Countervailing Duties on Imports of Fresh and Chilled Atlantic Salmon from Norway, SCM/153, paras. 208-214 (adopted 27 April 1994); European Communities - Imposition of Anti-Dumping Duties on Imports of Cotton Yarn from Brazil, ADP/137, paras. 438-466 (adopted 4 July 1995); EC - Anti-Dumping Duties on Audiotapes in Cassettes Originating in Japan, ADP/136, para. 295 (28 April 1995 (not adopted)). The Appellate Body in Brazil - Dessicated Coconut cited the cases under the Tokyo Round Anti-Dumping Code favourably in stating that a Complaining Party must precisely identify the claims in its request for establishment of a Panel. (WT\DS22\AB\R (21 February 1997))

¹⁸ The Panel should not now try to assess whether the rights of Korea and third-party Members have been prejudiced by the EC's failure to comply with its obligations under Article 6.2. As a previous GATT Panel stated,

¹⁹ See, EC - Bananas, WT/DS27/AB/R, 9 September 1997, paragraph 141.

²⁰ WT/DS98/4 (12 January 1998).

²¹ Korea recalled that the question read: "Does the EC believe that the obligation in Article 3 and 4 of the SA are evidence in the WTO notification? Why does the EC concentrate its argumentation only on what was reflected in these notifications?"

²² Korea recalled that the previous question read: "Where should the information used and analysis performed by the national authority of Korea for its determination of a safeguard measure be found?"

²³ WT/DS50/AB/R (19 December 1997) AB-1997-5.

²⁴ WT/DS56/AB/R (27 March 1997) AB-1998-1.