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Korea - Definitive Safeguard Measure on Imports of Certain Dairy Products

Report of the Panel

(Continued)


E. Korea's Application of Safeguard Measures to Agricultural Products

(a) Submission by Korea

4.280 Korea makes the following submission concerning the nature of the Korean dairy industry, and the application of a safeguard measure to an agricultural product:

4.281 The Agreement on Safeguards is the general safeguard mechanism under the WTO system, and its provisions are applicable to most products covered by the WTO system.Other safeguard measures are applicable to sectors that raise specific or unique issues, most notably, textiles and agricultural products.These other safeguard measures are designed to provide the appropriate degree of sensitivity required by those sectors or products.The Agreement on Safeguards inevitably does not afford the same sensitivity to the agricultural sector as the Agreement on Agriculture.

4.282 Article 5 of the Agreement on Agriculture recognizes the unique nature of agricultural markets and how even short term and relatively minor increases in imports can produce dramatic dislocations in the relevant industry.As a consequence, Article 5 has a much lower threshold for action than the Agreement on Safeguards.However, Korea was unable to invoke Article 5 of the Agreement on Agriculture to remedy serious injury to its dairy markets caused by increased imports.Instead, Korea followed the procedures under the Agreement on Safeguards and still concluded that serious injury had been caused to its domestic industry, even though the standards for the imposition of safeguard measures under the Agreement on Safeguards are higher than those under the Agreement on Agriculture.

(b) Response of the European Communities

4.283 The European Communities respond to Korea's submission as follows:

4.284 The European Communities consider that evaluating whether Korea's measure would have been consistent with the Agreement on Agriculture, and notably its Article 5, falls outside the terms of reference of this Panel. In any event, Korea cannot compensate the fact that it could not invoke the safeguard provision of the Agreement on Agriculture by arbitrarily lowering the standard of Article XIX of GATT and of the Agreement on Safeguards. Furthermore, quantitative measures, and for four years, are clearly not contemplated in Article 5 of the Agreement on Agriculture.

(c) Rebuttal response of Korea:

4.285 Korea makes the following rebuttal arguments:

4.286 As the general system of rules for imposing safeguard measures, the Agreement on Safeguards will be applied to a number of different product sectors and, thus, has a degree of flexibility built into its structure and individual terms.

4.287 Certain injury criteria relevant to industrial or manufactured products may not be relevant when applied to agricultural products because those criteria are not of an objective and quantifiable nature having a bearing on the situation of the particular agricultural industry, i.e., they do not reflect the unique nature of the agricultural sector. 122

4.288 If particular criteria listed in Article 4.2(a) of the Agreement on Safeguards are not relevant to a specific agricultural sector, Members should be accorded the flexibility to examine other listed criteria that more fully take into account the unique or specific nature of the products and industry under examination.Members should also be allowed to take into account unlisted criteria that are relevant to the industry under examination. 123

4.289 At the second meeting of the panel with the parties, Korea further advanced its arguments regarding the Agreement on Agriculture as follows:

4.290 Korea's purpose in referring to the Agreement on Agriculture, and Article 5 in particular, was to show that:

(a) in any investigation of any industry under the Agreement on Safeguards, the products and industry in question need to be carefully considered and any specific aspects identified need to be factored into the relevant determinations of serious injury and causation. Certain injury criterion may be relevant in one case but not in others. This view is shared by the Government of the United States

(b) due to circumstances beyond its control, Korea was required to investigate the dairy industry under the Agreement on Safeguards, as opposed to the Agreement on Agriculture. The Government of Korea undertook a full and proper investigation of its dairy industry under the Agreement on Safeguards, but would under normal circumstances have been able to use the specific provisions of the Agreement on Agriculture. Korea does not claim that it could replace the higher investigation standards of the Agreement on Safeguards with the lower standards of the Agreement on Agriculture, and the Panel must be clear that the Korean competent authorities complied fully with the requirements of the Agreement on Safeguards, and in no way referred to the standards applicable under the Agreement on Agriculture.

F. Claim under Article 4.2(a) of the Agreement on Safeguards

(a) Claim by the European Communities

4.291 The European Communities claim that Korea violated Article 4.2(a) of the Agreement on Safeguards by failing to show that serious injury occurred to the domestic industry. The following are the EC arguments in support of that claim:

(i) The definition of the "domestic industry"

4.292 Article 4.1.(c) of the Agreement on Safeguards provides that:

"in determining injury or threat thereof, a "domestic industry" shall be understood to mean the producers as a whole of the like or directly competitive products operating within the territory of a Member, or those whose collective output of the like or directly competitive products constitutes a major proportion of the total domestic production of those products."

4.293 For the purposes of its safeguard investigation, Korea defined 124 the "domestic industry" as :

"the industry that produces raw milk and milk powder. These products are directly competitive with the imported products under investigation.Raw milk producers consist of dairy farming households and milk processing companies which directly operate their own dairy farms; milk powder producers are livestock co-operatives and milk processing companies, including producers, who commission processing to third parties because of the absence of facilities for manufacturing milk powder."

4.294 The European Communities agree with Korea that this is an appropriate definition of the domestic industry. Production of raw milk and milk powder are interconnected and complementary activities.Not only does each depend on the other to be able to conduct its own business, but many raw milk producers are also milk powder producers or own milk powder producers (the livestock cooperatives are owned by dairy farmers).

4.295 The European Communities however take issue with the fact that Korea did not apply this domestic industry definition consistently for its determination of serious injury.Some injury factors were either examined only for the raw milk industry and others only for the milk powder industry.In many cases there is not even any explanation as to why only part of the domestic industry was examined and the only apparent explanation is that examination of the other part would not have supported a finding of serious injury.In other cases, the evaluation of the injury factors is flawed for other reasons.The incomplete examination of the injury factors arising out of the inconsistent application of the domestic industry definition and the other errors committed by Korea in the evaluation of injury factors renders the determination contrary to Article 4.2(a) of the Agreement on Safeguards.

(ii) Failure to examine correctly all relevant factors of an objective and quantifiable nature having a bearing on the situation of the domestic industry

4.296 Article 4.2.(a) of the Agreement on Safeguards requires that the serious injury investigation evaluate all relevant factors of an objective and quantifiable nature having a bearing on the situation of the domestic industry, in particular the rate and amount of the increase in imports of the product concerned in absolute and relative terms, the share of the domestic market taken by increased imports, changes in the level of sales, production, productivity, capacity utilization, profits and losses, and employment.

4.297 This provision lays down the principle that an injury investigation must be complete ("all relevant factors").Only factors that are not relevant, or not objective or quantifiable, or do not have a bearing on the situation, may be excluded.Clearly, it is necessary to examine a factor before it can be considered that it is not relevant, or not objective or quantifiable, or does not have a bearing on the situation.The European Communities note that this position has been supported in two recent Panel reports 125 which dealt with the standard of "serious damage" set forth in Article 6.3 of the ATC. 126 Both Panel reports stressed the obligation to examine each of the enumerated injury factors.In the US - Underwear case, the Panel criticized the United States for providing inconsistent and inadequate information. The Panel in the US - Shirts and Blouses case stated that "at a minimum, the importing Member must be able to demonstrate that it has considered the relevance or otherwise of each of the factors listed [...]". 127 Since the United States did not examine eight of these factors in the context of the particular industry without giving any explanation for not doing so, the requirements of Article 6 of the Agreement on Textiles and Clothing were not respected. 128

4.298 Even though the wording of Article 6.3 of the Agreement on Textiles and Clothing is slightly different from Article 4.2 (a) of the Agreement on Safeguards, both provisions nevertheless contain a list of injury factors which shall be evaluated by the investigating authority. Therefore, in accordance with the rationale stated in the above Panel reports, the European Communities submit that, at a minimum, a serious injury determination under the Agreement on Safeguards must demonstrate that the relevance or otherwise of each of the factors listed in Article 4.2(a) of the Agreement on Safeguards was considered.The European Communities would further submit that that provision requires each injury factor to be properly analysed unless it is explained for what reason the injury factor may be disregarded.

4.299 With respect to each of the factors set out in Article 4.2(a), the European Communities made the following arguments:

(a) Rate and amount of the increase in imports in absolute and relative terms

4.300 This factor was not fully examined by Korea with regard to the products which were finally covered by the measures.Paragraph IV.2 of the Notification of 1 April 1997, merely explains that there was an increase in absolute and relative terms for products within the headings of the Harmonized Tariff Schedule of Korea 0404.90.0000 and 1901.90.2000.However, Korea excluded certain products from the scope of the measure such as milk mineral (calcium) concentrated product, Chilean special products and raw material for production of Cerelac of Nestlé.No allowance is made for these excluded products in assessing the increase of imports.Indeed, during the dispute settlement consultations, Korea stated that it was not even in a position to give a reasonable estimate of the volume of the excluded products during the investigation period.Furthermore Korea did not consider the increase in imports in relation to the decline in imports of milk powder, which is a like product.

(b) Share of the domestic market taken by increased imports

4.301 This requirement was examined by Korea in Paragraph IV.3.4. of the Notification of 1 April 1997 where it is explained that the total market share of domestic raw milk and milk powder declined some 5.7 percentage points from 91.1 per cent to 85.4 per cent during the investigation period. Although this is one of the factors on which Korea subsequently relies to conclude that there was serious injury in its conclusion (Paragraph IV.4 of the Notification of 1 April 1997), there is no explanation of why such a small decrease in market share should be a cause for concern, let alone supportive of a serious injury finding.The only comment made in the Notification of 1 April 1997 is designed to excuse the small increase in market share from 1995 to 1996 as being "a temporary phenomenon triggered by sales of milk powder below manufacturing cost in order to reduce inventories which was incurring storage costs and expenses".

(c) Changes in the level of sales

4.302 This factor was to some extent examined in Paragraph IV.3.3 of the Notification of 1 April 1997 in the form of an examination of "consumption of domestic raw milk (including milk powder)". Again this was remarkably stable at 1,844,463 tons in 1993, 1,947,128 tons in 1994, 1,947,965 tons in 1995, and 984,934 tons during the first half of 1996 (presumably equivalent to 2 times 984,934, that is 1969,868, tons for a full year).Korea states that there was a decrease in 1996, but this seems to be an error on its part.

(d) Production

4.303 This factor was examined by Korea.As explained in Paragraph IV.3.1 of the Notification of 1 April 1997, production of raw milk and milk powder increased 3.2 per cent in 1994, 4.2 per cent in 1995 and 4.4 per cent during the first half of 1996. Korea does not attempt to present this as "serious injury" but merely to explain it away by stating that

"the production of raw milk cannot be temporarily reduced without resorting to the slaughter of dairy cows.Rather than reducing the size of their herds - the average size of which is quite small - Korean dairy farmers continue normal levels of raw milk production even during periods of weak demand, since excess raw milk is supplied to the livestock co-operatives for conversion into milk powder."

4.304 In the EC view Korea's explanation is not credible.Korea is not describing a "temporary" increase in production but a continuous increase over a period of three years.Not only can production be adjusted by varying the use of feed and additives and other technology, dairy cows have in any case a useful life of eight to ten years which means that 10 to 12 per cent are inevitably retired or slaughtered every year.Production can be reduced when necessary even in dairy farms and the fact that it nonetheless continues to increase in Korea demonstrates that there can be no serious injury.

(a) Productivity

4.305 This factor was examined only concerning the raw milk industry.According to Paragraph IV.3.2 of the Notification of 1 April 1997, productivity of dairy farmers has "slightly increased".In fact, productivity in Korean dairy farms has been quite significant. Again, Korea attempts to explain this away with some remarkable reasoning, stating that :

"This indirect indication of increased productivity is found to be the result of advances in technology, not of changes in the market condition. The fact that the domestic industry stagnated in spite of increased productivity, indicates that the injury to the domestic industry was caused not by its internal factors but by external factors, i.e., increased imports."

In effect, Korea assumes the conclusion to which it wishes to arrive at (injury or "stagnation") in order to explain away a positive factor and attribute the assumed stagnation to imports.

4.306 A further defect in this Paragraph of the Notification of 1 April 1997 is that productivity was not evaluated at all regarding the milk powder industry but an "explanation" is given for its absence since it is stated that :

"Because the production of milk powder is greatly affected by the supply and demand of raw milk, and as production facilities cannot accommodate drastic changes in the short term, a review [of] productivity can be replaced by a review of the production level."

This explanation is, however, in the EC view insufficient, because, contrary to this explanation, productivity is a distinct factor listed in Article 4.2.(a) of the Agreement on Safeguards.The examination of this factor cannot be replaced by the examination of another factor.

4.307 In reality, the productivity of the milk powder industry can be expected to have increased since its total production has increased and there is no indication that the installed production capacity has been increased.

4.308 In the EC opinion examination of the injury factor of productivity does not support a serious injury finding, but rather the reverse.

(b) Capacity utilization

4.309 This factor was also addressed only concerning the raw milk industry.According to Paragraph IV.3.2 of the Notification of 1 April 1997, "capacity utilization was always 100 per cent in the raw milk industry since raw milk is produced by dairy cows, which cannot be left idle like some other form of production."

4.310 The European Communities maintain that this is not a serious examination of the injury factor.A farm which can support 100 cows can choose to only have 80, if economic conditions require this. Capacity utilization in the milk powder industry is not even mentioned. In reality, Korea has simply not examined capacity utilization for the domestic industry at all.

(c) Profits and losses

4.311 Profitability of the raw milk industry was examined by Korea in terms of the profit or loss per unit of production in Paragraph IV.3.9 of the Notification of 1 April 1997 and in the form of a "financial analysis" in Paragraph IV.3.10 of the Notification of 1 April 1997, but in both cases only in respect of the milk powder industry.

4.312 Korea considered exclusively the financial condition of the co-operatives and the milk powder operations of the milk processing companies and neglected to consider the profitability of dairy farmers.This gives a misleading picture because one of the most significant factors governing the profitability of the dairy cooperatives and milk processing companies is the price which they must pay for their raw material, and this price is inversely related to the profitability of the dairy farmers. For example, a 20 per cent increase in the guaranteed milk price would give a considerable increase in profitability to the dairy farmers but would severely squeeze the operating margins of the dairy cooperatives milk and processing companies.

4.313 The "financial analysis" in Paragraph IV.3.10 of Korea's Notification of 1 April 1997 reviews the turnover and operating profit/loss of two large co-operatives and four milk processing companies.

4.314 The profitability of these companies varies enormously.Of the two co-operatives referred to by Korea in its Notification of 1 April 1997, Seoul Dairy was making large and increasing profits, whereas Pusan-Kyungnam Dairy Co-operative was making large and increasing losses.If the figures for Seoul dairy were combined with those of any co-operative other than Pusan-Kyungnam Dairy Co-operative the picture would have been of large and increasing profits.

4.315 Similarly, in the case of the milk processing companies, Korea has omitted from its sample the second and third largest amongst them in terms of milk powder production, Maeil and Namyang, which coincidentally are extremely profitable.

4.316 The European Communities therefore conclude that Korea's examination of the profitability of the domestic industry is not in conformity with Article 4.2(a) of the Agreement on Safeguards since it does not examine the whole of an interconnected industry.

To continue with Employment


122 Article 4.2(a) requires an evaluation of "all relevant factors of an objective and quantifiable nature having a bearing on the situation of that industry". This appears to permit an investigation that takes into account the specific nature of the industry.

123 In light of the fact that Article 4.2(a) of the Agreement on Safeguards uses the term "in particular", factors other than those set forth in Article 4.2(a) may be used to determine injury to a particular sector, such as agriculture.

124 See, Paragraph III.2 of the Notification of 1 April 1998, G/SG/N/10/KOR/1/Suppl.1 (Exhibit EC-10).

125 See, Panel report in US - Shirts and Blouses, 6 January 1997, WT/DS33/R; US - Underwear, WT/DS24/6, 8 November 1996. Both Panel reports were subject to review by the Appellate Body which did, however, not rule on the standard of serious damage.

126 "In making a determination of serious damage, [...] the 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 investments; none of which, either alone or combined with other factors, can necessarily give decisive guidance." (emphasis added)

127 See, US - Shirts and Blouses, para. 7.26.

128 See, id. at para. 7.52.