(g) Additional arguments by the European Communities made at the second meeting of the Panel with the parties

4.232 At the second meeting of the panel with the parties, the European Communities observed that:

4.233 Korea both dismissed the "unforeseen development" requirement as repealed by the Agreement on Safeguards, and tried to justify its measure under that clause.As the European Communities have constantly said, and Korea has not challenged, it is hard to see how a deep imbalance in the tariff bindings of two competing products like SMPP and milk powder would not lead to a relative change in imports. The European Communities would also recall in this connection that in cases where a WTO Member miscalculated its concessions and is facing difficulties as a result of its tariff commitments it is entitled to negotiate and modify its schedule under Article XXVIII of GATT. It may not however use safeguard measures to achieve this result where the conditions for their application are not met.

4.234 As to the negotiating history of the Agreement on Safeguards, the European Communities observed the following.

4.235 Korea's view is that the requirement of unforeseen developments in Article XIX was in conflict with the Safeguards Agreement and therefore not applicable was supported by Mr Didier in a book published in 1997 where he reported that an early draft contained a provision "that there has been an unexpected, sudden and large increase in the quantity of such product being imported" but that this was later dropped.

4.236 Mr Didier considered that this provision related to the requirement of unforeseen developments in Article XIX. Korea argues from this that there was an intention to delete the requirement of unforeseen developments. It is interesting to note that later in the same contribution Mr Didier develops his thesis further. He considers that there is a need for a requirement of unforeseen developments since it cannot be any increase of imports which can be argued to cause injury which should be allowed to justify safeguard measures, but only increases which result from abnormal or unexpected situations. ¹⁰⁶

4.237 In fact, a closer look at the deleted draft text demonstrates that it had nothing to do with the requirement of unforeseen developments. Mr Didier was mistaken and could have saved himself the trouble of trying to invent a replacement for "unforeseen developments". The draft in fact referred to an unexpected increase of imports not of unforeseen developments leading to an increase in imports.

4.238 One way of understanding the requirement of unforeseen developments is to consider the continuum of causality starting with trade liberalisation, running into unforeseen developments which result in increased imports which occur under conditions which are such that serious injury results. This starts with loss of sales, continues with loss of sales and production, falling capacity utilisation, losses and finally unemployment.

4.239 In fact one might say that unforeseen developments is a defining feature of safeguard measures since it defines the circumstances in which they may become justified. As Korea said, Article 1 of the Safeguard Agreement expressly refers Article XIX as defining what a safeguard measure is.

4.240 In other words, Article XIX tells you what a safeguard measure is and the Safeguard Agreement tells you how to apply it. The consequence of this was however not mentioned by Korea. It is that the Safeguard Agreement is not exhaustive.

(h) Additional arguments by Korea made at the second meeting of the Panel with the parties

4.241 At the second meeting of the panel with the parties, Korea further advanced its arguments under Article XIX:1(a) as follows:

4.242 Korea has pointed out that this requirement was omitted from the Agreement on Safeguards, and maintains that it no longer applies. The European Communities refer to Article XIX GATT, and claims that the obligation to show "unforeseen developments" still exists.

4.243 First, if one looks at the Agreement on Safeguards, it is clear that it was meant to strike a new balance and move beyond Article XIX GATT, which had proved to be difficult to apply in practice. In its first Article, the Agreement states that it:

In other words, Article XIX GATT tells one what a safeguard measure is, and this new Agreement tells one how ('the rules for the application') to take those measures.

4.244 Second, in furtherance of the above purpose, Article 2 of the Agreement then goes on to lay out the 'conditions' for taking safeguard measures. Interestingly, it repeats almost verbatim what was said in Article XIX:1(a) GATT, except that:

4.245 Where a text is adopted almost word-for-word, but makes certain omissions and additions to it, it stands to reason that those omissions and additions were deliberate. The preparatory work to the Agreement on Safeguards further supports this conclusion.According to the respected academic Pierre Didier, "a 1990 draft of an agreement included ['unforeseen developments'] and amplified it by imposing the obligation to establish an 'unforeseen, sudden and significant increase'. Both the United States and the EU rejected this terminology as being too difficult or restrictive to apply." ¹⁰⁸ The entire reference to "unforeseen developments" was then dropped.However, now the European Communities want to characterize omission of the "unforeseen developments" criteria as a mere "failure to repeat" that language.Why would this deletion have happened, and why would the European Communities argue that it was too difficult and restrictive to apply if the obligation to consider "unforeseen developments" remained via Article XIX?

4.246 Third, contrary to the EC assertions, Korea considers that the removal of the obligation regarding "unforeseen developments" was intended to strengthen the multilateral safeguard regime. The European Communities contend that Korea has not demonstrated why this would be the case. As stated above, both the United States and the EU considered that the "unforeseen developments" requirement was too difficult and restrictive to apply, and Korea seriously doubts whether it still served in state practice. The inability of Members to determine the scope of their rights under Article XIX led to the proliferation of "grey area" measures. By improving the safeguard regime and eliminating unworkable obligations, the drafters intended to strengthen the safeguard regime by ensuring that Members resorted to emergency action under the Agreement on Safeguards, rather than use trade-disruptive and non-transparent "grey area" measures.

4.247 Fourth, the European Communities assert that if the drafters had wanted to deviate from Article XIX, they had to do so expressly, and cites the EC - Bananas ¹⁰⁹ Appellate Body report as support for this contention. Korea notes that EC - Bananas case dealt with a different agreement, the Agreement on Agriculture, in which the drafters made express derogations. An example is Article 5 of the Agreement on Agriculture, although, Korea noted that Article 5 only makes an express derogation from Article II:1(b) GATT, not from Article XIX and the Agreement on Safeguards.

4.248 However, nowhere in the Agreement on Safeguards is there an express derogation.While the Agreement is full of fundamental changes (see, for example, the requirement to wait three years before retaliating against certain safeguard measures ¹¹⁰ (which is contrary to Article XIX:3(a)), or the requirement not to reduce the quantity of imports below that of a representative past period (which is contrary to Article XIX:1(a)) ¹¹¹, the Agreement did not need to expressly signal every derogation. Any doubt as to the precedence of those provisions over the provisions of Article XIX GATT is resolved by the General Interpretative Note to Annex 1A of the WTO. Indeed, if express derogations were required, one would wonder why this Interpretative Note was included.

4.249 Furthermore, the European Communities fail to mention that the Appellate Body in EC - Bananas only addresses the situation where the relevant WTO Agreement does not specifically deal with the subject matter of the relevant Article under GATT. In its Second Submission, the European Communities quoted a lengthy paragraph from the Appellate Body's report in EC - Bananas. The European Communities, however, tellingly omitted the second sentence of the paragraph that states that '[t]here is nothing in Articles 4.1 or 4.2, or in any other Article of the Agreement on Agriculture, that deals specifically with the allocation of tariff quotas on agricultural products.' In other words, no Article of the Agreement on Agriculture addressed the subject matter of Article XIII of GATT. The Appellate Body went on to conclude 'Therefore, the provisions of the GATT, including Article XIII, apply to market access commitments concerning agricultural products, except to the extent that the Agreement on Agriculture contains specific provisions dealing specifically with the same matter.' ¹¹² (emphasis added).

4.250 Here, the Agreement on Safeguards does explicitly deal with the conditions for adopting safeguard measures, under the very heading "conditions". The Agreement on Safeguards specifically lays out the conditions for adopting a safeguard. "Unforeseen developments" is not one of them.

4.251 Furthermore, if one reads the relevant texts according to the European Communities position, there would be a conflict between Article XIX and the Agreement on Safeguards. If one adheres to Article 2 of the Agreement on Safeguards and adopts a safeguard measure without meeting the "unforeseen developments" requirement, one would be in conformity with the Agreement on Safeguards but in violation of Article XIX. The General Interpretative Note to Annex 1A of the WTO clearly provides that in case of conflict between the GATT and an Agreement (like the Agreement on Safeguards), it is the Agreement, not the GATT, that takes precedence.

4.252 In that regard, this case is not the same as Guatemala - Anti-dumping Investigation Regarding Portland Cement from Mexico ¹¹³, to which the European Communities refer.That case involved the overall rules applying to dispute settlement in the WTO and the specific rules applying to anti-dumping, and the Appellate Body found that both sets of rules fit together to form a 'comprehensive, integrated dispute settlement system for the WTO Agreement.' ¹¹⁴ Even there, the Appellate Body said that if there were a conflict between the two sets of rules, the special anti-dumping rules would prevail in case of conflict. The Appellate Body clarified that a conflict would exist where "adherence to one provision will lead to a violation of the other provision". ¹¹⁵ Korea believes that here, such a conflict exists.

4.253 Finally, Korea questioned whether the European Communities even really believed in its own argument, noting that it did not include the "unforeseen developments" requirement in its own rules for the application of safeguard measures. ¹¹⁶ Its officials proceed with a set of rules that tell them everything they need to show in order to adopt a safeguard measure, yet that regulation does not mention or even refer to a couple of extra important requirements.

4.254 To shift attention from the discrepancy between its argument now and its own implementation of the Agreement on Safeguards, the European Communities refer to the legislation of a few other countries in which the "unforeseen developments" requirement was included. However, it is not disputed that WTO Members are permitted to adopt rules that are more restrictive of their use of safeguard measures than required by the WTO rules. What is at issue is what those WTO rules require. Korea maintains that those rules do not condition adoption of a safeguard measure on a showing of "unforeseen developments." ¹¹⁷

D. Claim under Article XIX:1(a) of GATT and Article 2.1 of the Agreement on Safeguards

(a) Claim by the European Communities

4.255 The European Communities claim that by failing to analyse the conditions under which the imported products enter the import market Korea has violated its obligations under Article XIX:1(a) of GATT and Article 2.1 of the Agreement on Safeguards. The following are the EC arguments in support of this claim:

4.256 Recalling and developing Article XIX:1(a) of GATT, Article 2.1 of the Agreement on Safeguards provides 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." (emphasis added).

4.257 In this respect the European Communities observe that, as they did with the "unforeseen developments" clause, by including a reference to the conditions of importation in the text of Article XIX:1(a) and of Article 2 of the Agreement on Safeguards, the drafters of both agreements have excluded that the volume and rate of increase of the imports be in itself sufficient to justify safeguard action.

4.258 However, Korea limited its consideration to the increase in imports and failed to examine under which conditions these occurred and in particular the prices at which the product was imported. The European Communities therefore submit that Korea failed to comply with its obligations under Article XIX:1(a) and Article 2 of the Agreement on Safeguards, to address whether the conditions under which importation of the products being investigated occurred were of such nature as to cause serious injury to the domestic industry producing like or directly competitive products.

4.259 At the first meeting of the panel with the parties, the European Communities further advanced their arguments under Article XIX:1(a) of GATT and Article 2.1 of the Agreement on Safeguards as follows:

4.260 By requiring that serious injury result both from an increase in imports and from the conditions under which this increase takes place, Article 2 of the Agreement on Safeguards clearly indicates that those "conditions" also need to be assessed. Among them, the European Communities asserted that import prices and their impact on domestic prices are clearly in the forefront.

4.261 In its April Notification to the Committee on Safeguards Korea attempts to dispose of this requirement in two lines reading "Although the sales price of imported products rose by 381 Won/kg during the period under investigation, the sales price of domestic milk powder dropped by 360 Won/kg." When reviewing the price conditions in its First Submission the European Communities, meant that in the EC view this was insufficient and Korea had failed to indicate whether and how import prices depressed or otherwise adversely affected those of domestic products.

4.262 In response to a question by the Panel ¹¹⁸, the European Communities further clarified that they believe that among the conditions to be considered under Article 2.1 price is paramount but other conditions such as superior quality or advertising can also be imagined in certain cases.

(b) Response by Korea

4.263 In response to a question by the Panel ¹¹⁹ Korea argued that the "under such conditions" language contained in Article 2.1 of the Agreement is merely part and parcel to the causality requirement that must be demonstrated under Article 4 of the Agreement on Safeguards. This language does not impose any separate or distinct obligation.

4.264 The special safeguard provision of the Agreement on Textiles and Clothing (ATC) supports this interpretation. Article 6 of the ATC states that a Member must demonstrate 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." The drafters did not consider it necessary to add the term "under such conditions," although a finding of causation is presumably still required. In addition, the superfluous nature of the language "under such conditions" is also supported by the fact that the Guide to GATT Law and Practice prepared by the GATT/WTO Secretariat refers to all other language except "under such conditions" in analyzing identical language under Article XIX of GATT 1947.

4.265 The object and purpose of the Agreement on Safeguards is to accord Members the right to impose a safeguard measure as a last resort when increased imports are causing injury or threat of injury to a particular domestic industry. The Agreement does not specify that causation must be based solely on price undercutting or on any other factor. Increased imports may displace competing domestic products, and cause injury to a particular domestic industry, for a wide range of reasons, including image, quality, style, structure of the industry, technical assistance, etc. A Member could also find causation when the prices of imports are increasing, because the prices of domestic products may still be selling at a loss or at a level that gives insufficient return on investment. Provided a Member demonstrates that increased imports are causing serious injury or threat thereof to the domestic industry and provided it discounted injury potentially caused by other factors, the panel should find that such Member satisfied its obligations under Articles 2 and 4 of the Agreement on Safeguards.

(c) Rebuttal arguments made by the European Communities

4.266 The European Communities made the following arguments in rebuttal:

4.267 Korea has not rebutted EC claim that it did not analyse the impact of import prices on the domestic prices of raw milk and milk powder and, to the extent that it gathered information in this respect, this information could not support a finding that the conditions under which imports increased were such as to cause serious injury. Furthermore, Korea did not indicate any other prevailing "conditions" that it considered relevant under Article 2.1 of the Agreement on Safeguards, but simply omitted to review whether that provision was fulfilled. In its reply to the Panel's questions, the European Communities has indicated what those factors, in addition to prices, can be, for instance, the quality of the imports or their promotion on the importing market could also be relevant, as could e.g., the rapidity of market penetration (as opposed to market share).

4.268 Although there is a table in Korea's Notification of 24 March giving prices of domestic milk powder and imported SMPP, Korea has failed to conduct any analysis of these prices. The European Communities consider that it is not sufficient simply to compare these prices. The products involved in this case, raw milk, milk powder and SMPP are substitutable and competing to some extent but still have different characteristics and different uses. Indeed, Korea asserts that, "most Korean users of milk powders state ... that the domestic products are of higher quality than the imported SMPP." Furthermore, the KTC investigation report highlights the differences between these products in relation to their end uses. It is stated in the report that the Food Industry Handbook allows different end uses for them. No analysis is given of the proportion of the market held by the products for which SMPP can be used, in comparison with the products for which milk powder can be used or with those produced from raw milk. The conclusion is that a direct comparison cannot be made between milk powder and SMPP, firstly because of the different characteristics of the products and secondly because of the different opportunities for their end use. Korea is wrong to assume price undercutting on the part of SMPP imports simply because they were available at a lower price than domestic milk powder. No mention is made in Korea's Notification or the KTC Report of how the differences in the two products, both in terms of inherent characteristics and end use, were taken into account in the price comparison. Indeed, comparing the price differences between domestic milk powder and imported SMPP is analogous to comparing prices between butter and margarine. In many markets the price of these competing and substitutable products will be very different.

4.269 In the response to questions by the Panel ¹²⁰ posed at the second meeting, the European Communities further clarified their arguments as follows:

4.270 The "under such conditions" requirement must primarily be related to the imported products and not to the domestic market.Semantically, the term "under such conditions" in Article 2.1 relates to the imported product and not to the state of the domestic market or the industry which are susceptible to be affected by the increased imports.One of the conditions of imports which is always present and always relevant is price.

4.271 It is clear from the presence of the word "and" in Article 2.1 that "under such conditions" constitutes a separate requirement from imports being "in such increased quantities".

4.272 The conditions under which the imports occur, together with increased imports, are at the beginning of the causality continuum which terminates in the injury. In fact they are not quite at the beginning, they come after trade liberalization and unforeseen developments. The important point is that the increased imports and the "such conditions" causally precede the injury. Accordingly, the criteria which are relevant for establishing the conditions under which imports take place are not the same as the ones determining the causal link. In other words, the criteria examined under this concept of "under such conditions" relate to the objective existence of certain conditions whereas causality requires a reasoned analysis of cause and effect between increased imports and those conditions on one side and injury on the other side. Concretely, the examination of the concept of "under such conditions" will require an examination of prices whereas an examination of the causal link will require an examination of the way in which those prices cause injury to the domestic industry.The existence of low-priced imports by itself is not injury, it is only a circumstance susceptible to lead to injury.

(d) Rebuttal arguments made by Korea

4.273 Korea makes the following rebuttal arguments:

4.274 Article 2 of the Agreement on Safeguards (Conditions) provides that a Member may apply a safeguard measure to a product if:

4.275 Korea complied with the conditions established under Article 2 because it complied with Articles 4.2(a) and (b) in making its determination of serious injury and causal link, with Article 5 in applying the safeguard measure, and with Article 12 in properly notifying and consulting with the Committee on Safeguards and interested Members.

4.276 In response to questions by the Panel ¹²¹ posed at the second meeting, Korea further clarified its arguments as follows:

4.277 In Korea's view the language "under such conditions" can only be interpreted as relating to imports.

4.278 Korea considers that "under such conditions" is part and parcel of the causality analysis. This language does not impose any separate or distinct obligation on the investigating authorities.

4.279 Korea is of the view the criteria examined by the investigating authorities under the concept "under such conditions" are not different from those examined under causal link. In other words, it is the conditions under which imports enter a market that link such imports to the serious injury to the domestic industry.

To continue with Korea's Application of Safeguard Measures

¹⁰⁶ Pierre Didier, Les principaux accords de l'OMC et leur transposition dans la Communauté Européanne (Bruyland, 1997) p. 272, where reference is made to the need to "limiter la prise de mesures aux cas sinon anormaux, du moins imprevus".

¹⁰⁷ See, Article 1 of the Agreement on Safeguards.

¹⁰⁸ Les pricipaux accords de L'OMC et leur transoposition dans la Communaute Europeene (Bruyland, 1997) pp.271-272

¹⁰⁹ Appellate Body Report on EC - Bananas, WT/DS27/AB/R, 9 September 1997, at para. 155.

¹¹⁰ Article 8(3) of the Agreement on Safeguards.

¹¹¹ Article 5(1) of the Agreement on Safeguards.

¹¹² Appellate Body Report on EC - Bananas, WT/DS27/AB/R, 9 September 1997, at para. 155.

¹¹³ Appellate Body Report on Guatemala - Anti-dumping Investigation Regarding Portland Cement from Mexico, WT/DS60/AB/R, 2 November 1998.

¹¹⁴ Appellate Body Report on Guatemala - Anti-dumping Investigation Regarding Portland Cement from Mexico, WT/DS60/AB/R, 2 November 1998, para. 66.

¹¹⁵ Appellate Body Report on Guatemala - Anti-dumping Investigation Regarding Portland Cement from Mexico, WT/DS60/AB/R, 2 November 1998, para. 65.

¹¹⁶ EC Regulation 3285/94 on the common rules for imports, OJEC 1994 L349/53.

¹¹⁷ However, "unforeseen" factors were present in this case, as the Korean Government did not foresee that the EC would dramatically shift the balance of exports from milk powder to SMPP in order to take advantage of the Korean tariff structure. According the EC's formulation of "unforeseen circumstances", the existence of such factors is simply a question of fact, and will justify the imposition of a safeguard measure provided all other required conditions are present.

¹¹⁸ The Panel recalls that the question was: "What factors, other than price, can be considered under the proposition 'under such conditions as to cause or threaten to cause injury . . . ', mentioned in paragraph 2.1 of the Agreement on Safeguards?"

¹¹⁹ The Panel recalls that the question was: "What factors, other than price, can be considered under the proposition 'under such conditions as to cause or threaten to cause injury . . . ', mentioned in paragraph 2.1 of the Agreement on Safeguards?"

¹²⁰ The Panel recalls that the questions were: "Article 2 of the Safeguard Agreement refers to 'under such conditions'. Does 'under such conditions' refer to criteria related to the imports? the domestic market? or both?" "Does 'under such conditions' constitute a separate requirement from the increased imports causing injury?" "What is the difference between the criteria examined under the concept 'under such conditions' and those to be examined under the causal link?

¹²¹ The Panel recalls that the questions were: "Article 2 of e Safeguard Agreement refers to 'under such conditions'. Does 'under such conditions' refer to criteria related to the imports? the domestic market? or both?" "Does 'under such conditions' constitute a separate requirement from the increased imports causing injury?" "What is the difference between the criteria examined under the concept 'under such conditions' and those to be examined under the causal link?