(d) Employment

4.317 This factor was only examined by Korea with regard to raw milk producers in Paragraph IV.3.6 of the Notification of 1 April 1997, where it is shown that the number of dairy farmers is slowly decreasing.The European Communities would observe however that within the context of increasing production of dairy farms, this is indicative of a healthy consolidating industry and certainly not of serious injury.

4.318 There is no evaluation of the employment injury factor with regard to the milk powder industry. Korea merely states that employment of milk powder industry is difficult to evaluate. However, this statement is clearly insufficient since at least a reasonable estimate would have to be provided in an acceptable serious injury investigation; the investigating authority is obliged to collect such data or explain why reliable collection is impossible.

(e) Other factors

4.319 Korea examined and referred to other factors in its conclusion that are not contained in the list in Article 4.2(a) of the Agreement on Safeguards.

4.320 The first of these is sales prices, which is examined by Korea in Paragraph IV.3.7 of the Notification of 1 April 1997, but only with regard to milk powder, it being stated that the price of raw milk is kept stable by the government (in fact it is regularly increased).Korea states that:

4.321 Objective examination of these figures shows remarkable stability in the price obtained, there being an increase over the three years 1993 to 1995.Only in 1996 is there a decrease.Korea forgets to mention in this regard the special factor which it stressed when explaining away the increased market share of the domestic industry in 1996 - that this was "a temporary phenomenon triggered by sales of milk powder below manufacturing cost in order to reduce inventories which was incurring storage costs and expenses". ¹²⁹ Thus the European Communities conclude that it is apparent that sales prices of raw milk are increasing and the sales price of milk powder is stable, except for "a temporary phenomenon" in 1996.This does not support a serious injury finding.

4.322 The second additional injury factor considered by Korea in its conclusion is the level of inventory of domestic milk powder.

4.323 The evolution of inventory is described in Paragraph IV.3.5 of the Notification of 1 April 1997.It is explained that:

4.324 According to Article 4.1(a) of the Agreement on Safeguards, serious injury shall be understood to mean a significant overall impairment in the position of the domestic industry.

4.325 In the EC view Korea's determination of the existence of serious injury cannot be justified by the injury factors which it cites in this regard, even if they could be considered complete and to the extent that they may be considered correct.

4.326 Korea's conclusion on serious injury is set out in Paragraph IV.4 of the Notification of 1 April 1997 as follows:

4.327 With respect to the factors cited by Korea the European Communities make the following arguments:

• Market share - The European Communities submit that a decline of 5.7 percentage points from 91.1 per cent to 85.4 per cent during the investigation period cannot be considered supportive of a finding of serious injury.
• Increase in inventory - The European Communities do not consider, and find no explanation by Korea why, an inventory level equivalent to one and a half months total demand can be considered supportive of a finding of serious injury.The increase of inventory occurred at the end of 1995.
• Sales price drop while manufacturing costs increased - The European Communities assume that Korea is not suggesting that the increase in manufacturing costs can be blamed on imports, according to Korea's own data, sales prices of raw milk are increasing and the sales price of milk powder is stable, except for what it has termed a "temporary phenomenon" in 1996.This is therefore also not supportive of a finding of serious injury. In this connection the European Communities would stress that the price of imported SMPP or a price difference between it and domestic milk powder are not identified as an element of alleged serious injury.Indeed, it could not have been since Korea, for its own reasons, did not investigate prices or price differences or indeed the price relationship between SMPP and the different categories of milk powder (skimmed and whole).The prices which are given in the table on page 11 of the Notification of 1 April must represent some kind of average of various categories of product and are in any event not comparable between imports and domestic products.
• The financial situation of certain livestock co-operatives.The European Communities note that the situation of these livestock co-operatives cannot be considered to support a finding of serious injury for the domestic industry as a whole which consists not only of the livestock co-operatives but also of milk processing companies and dairy farmers.
• Decrease in employment.The European Communities note that this finding relates exclusively to the dairy farmers and, since their production has increased, is indicative of a healthy consolidating industry and certainly not of serious injury.

4.328 Korea does preface its list of injury factors on which it based its determination with the words "in particular".However, none of the other factors support the determination. Indeed, the limited data supplied by Korea does not show an industry in distress. Several injury indicators in fact pointed at a positive development and were disregarded by Korea.

4.329 The domestic industry in this case is characterized by increasing production and productivity. The only information available on employment is the gradual decrease in the number of dairy farmers, which is a positive indicator in the light of increasing production and is also an objective of Korean government policy.Furthermore, since production and prices of raw milk increased, domestic sales must have increased in 1995 and the first half of 1996. Market share of raw milk and milk powder fell by only 5.7 percentage points from 1993 until 1995 but increased again in 1996.Korea itself stated that this was only a temporary phenomenon, but, in any event, such a small decrease cannot be accepted as an indicator of a significant overall impairment of the industry.

4.330 The only clearly negative factor is the difficult financial situation of some of the dairy cooperatives.However, the financial position of these companies appears to be very variable and in any case is of lesser importance than the raw milk industry, even according to the incomplete and inconsistent investigation conducted by Korea.

4.331 The European Communities consider that on the basis of the limited data provided by Korea, the picture that emerges is that even if the domestic industry is consolidating (a feature which it shares with many other OECD countries), it is nonetheless healthy.There is no evidence of a "significant overall impairment of the domestic industry" which would be required to support a finding of serious injury.

4.332 Therefore the European Communities conclude that Korea violated Article 4.2(a) of the Agreement on Safeguards by making a determination of serious injury which is unsupported by the facts.

(b) Response by Korea

4.333 Korea responds to the EC arguments as follows:

4.334 In order to impose a safeguard under Article 2 of the Agreement on Safeguards, Korea must show that:

4.335 In its attempts to depict the Korean dairy industry as being healthy, the European Communities provide the Panel with incorrect or misleading facts and unsubstantiated allegations.The European Communities even engage in the selective use of evidence and also discards the relevant parts of the evidence when they do not suit its purpose.

4.336 When it cannot produce evidence in support of its contention, the European Communities conveniently claim that Korea did not consider various serious injury criteria. In the view of Korea, the EC claim that Korea did not take into account certain injury criteria may stem from its failure to examine the investigation report ¹³⁰ and related documents ¹³¹ which were made publicly available at the time of the public hearing.However, it is clear that during the course of the Article 12 and Article XXII negotiations, all the issues considered by Korea in its investigation, and reported to the Committee of Safeguards and the Members, were exhaustively discussed with the European Communities.

4.337 A review of the investigation report and the interim report shows that Korea considered all relevant factors �of an objective and quantifiable nature having a bearing on the situation of that industry.� As the industry in question was an agricultural one and given the unique nature of agriculture recognized by the WTO Members, Korea examined the following criteria during its investigation.These elements taken together as a whole, pointed to an industry suffering serious injury.

(i) Domestic industry and like or directly competing products

4.338 Korea determined that the "domestic industry" under investigation was the industry that produces raw milk and milk powder.These products are directly competitive with the products under investigation ¹³².As established by the relevant Korean law, and consistent with the Agreement on Safeguards, the investigation discounted the import activities of the "domestic industry".Korea notes that the European Communities agree with this definition of "domestic industry" and does not appear to dispute its definition of "directly competitive products".

(ii) Increase in imports

4.339 During the investigation period (January 1993 - June 1996), imports of SMPP increased as follows: ¹³³

Based on the above data, Korea found that imports increased in absolute terms during the period of investigation.

4.340 There was also a significant increase in imports of SMPP relative to domestic production of raw milk, as evidenced by the following: ¹³⁴

(a) Profit and loss of the domestic industry, declining prices, and sales below production costs

4.341 During the period of investigation, the livestock cooperatives incurred an operating loss of 755 million Won in 1993, 622 million Won in 1994, 1,244 million Won in 1995, and 681 million Won in the first four months of 1996 from their milk powder operations, representing an annual loss rate (defined as operating loss over net revenue) of -6.3 per cent, -6.5 per cent, -10.7 per cent, and -29.5 per cent, respectively. Given that dairy farmers owned and capitalized the livestock cooperatives, these losses reflect injury to the dairy households.

4.342 Similarly, the processing companies experienced losses from their milk powder operations. ¹³⁵ The difference between sales price and production cost per kilogramme (periodic average price) was as follows: ¹³⁶

4.343 In the raw milk sector, Korea suggests a reference price for raw milk to promote fair transactions between individual dairy farmers and large users, such as the processing companies. Using the suggested reference price as a surrogate, however, the dairy farms experienced a declining profit margin during the investigation period.

The above figures show that the difference between the suggested reference price and production cost had declined until 1996 when this price did not even cover production costs. The combination of this declining profit margin and the compensatory practice of providing 70-80 per cent in cash and the rest in kind for purchases of raw milk by the cooperatives during difficult periods aggravated the weak financial condition of the dairy farms.

4.344 In the milk powder sector, the price is set by market forces. During the period of investigation, with the exception of 1993, domestic milk powder prices were less than production costs. This loss grew larger each year.

Korea is not suggesting that the increase of manufacturing cost can be blamed on imports. However, the low price of imports had a suppressing effect on the price of domestic raw milk and milk powder, suppressing the price of raw milk to levels that in 1996 did not even cover the production costs.

4.345 Korea determined that these sales below costs indicated serious injury to the domestic industry, especially given that both milk powder producers and dairy farmers (by virtue of their ownership of the cooperatives) share in the losses from such sales.

(b) Increase in inventory

4.346 Korea determined that inventories of milk powder increased and remained at high levels during the period of investigation. ¹³⁸

The total value of inventories as of June 1996 was estimated at 92,633 million Won (about US$122 million). ¹⁴⁰

4.347 Given the unique nature of dairy industries generally and the Korean dairy industry specifically, as discussed in detail above, Korea considered that the accumulation of inventories indicated serious injury to the domestic industry.

To continue with The rise in unemployment

¹²⁹ Para. IV.3.4. of the Notification of 1 April 1997.

¹³⁰ Korea made the results of the injury investigation publicly available and the EC obtained a copy thereof. The Korean version was translated into English by the EC and was referred to many times during the consultations. Korea even took the step to point out numerous translation errors for the benefit of the EC during the prior consultations.

¹³¹Korea made public the interim investigation report which was used and distributed at the public hearing to determine whether a safeguard measure should be applied, at which the Netherlands Embassy official, Agriculture Counsellor A C van Arnhem was present.

¹³² See, Notification, paragraph III.2.

¹³³ See, Notification IV.2.

¹³⁴ See, Notification, paragraphs IV.2 and IV.3.1.

¹³⁵ See, Notification IV.3.10.b.ii.

¹³⁶ See, Notification IV.3.7, and the table on page 11 thereof.

¹³⁷ Source: NLCF. These production costs were obtained by surveying 150 dairy farms.

¹³⁸ See, Notification, IV.3.5.

¹³⁹ Inventory ratio is defined as the inventory amount divided by the production of milk powder.

¹⁴⁰ See, Notification, IV.3.5.