(a) Article 5.1 of the Agreement on Safeguards

4.615 Article 5.1 of the Agreement on Safeguards is clearly intended to avoid the quota being set at a level unrelated to historical import flows prior to its imposition, which would prove particularly disruptive for exporters. By limiting in principle the minimum quota level to the average of the last three representative years the Agreement on Safeguards establishes a presumption that for quotas such level is the maximum restriction which would be justifiable as "necessary" within the meaning of Article 5.1 Agreement on Safeguards. It is only if the Member seeking to apply a safeguard measure in the form of a quota is able to show that a quota level based on those data is not sufficient to remedy the serious injury in a specific case that a lower quota may be imposed. Since Korea has not considered the issue of necessity at all, it has taken no steps to rebut this presumption.

(b) The last three representative years for which statistics are available

4.616 In order to determine the "last three representative years" which Korea should have used in setting the quota level, the following issues must be addressed : (i) the starting time from which to calculate the three years, (ii) the availability of statistics for those three years and (iii) the representativity of those data.

(1) Starting time

4.617 As regards the relevant time to decide which are the last three years' available import statistics pursuant to Article 5.1 Agreement on Safeguards, the ordinary meaning of the provision already makes clear that it is the moment when a decision to take a measure in the form of a quota has been taken and the quota level is to be decided. The context of the second sentence of Article 5.1 further reinforces that interpretation. In fact the first sentence of Article 5.1 makes clear that the provision relates to the time when a Member "applies" safeguard measures. The Appellate Body Report US - Underwear removed any doubt as to the meaning of the term, by pointing out that the word "apply", when used as here in respect of a governmental measure - whether a statute or an administrative regulation - means, in ordinary acceptation, putting such measure into operation." ²⁹⁹ Thus, the European Communities submit that the starting time for the assessment of the "last three years" is the moment when action in the form of a quota was taken and the quota was calculated. Therefore, it is from that moment that a country should look retrospectively at imports trends until it finds three representative years of data. A final decision on a definitive safeguard measure in the form of a quota was taken by Korea on 7 March 1997. ³⁰⁰

(2) Availability of the data relating to the relevant period

4.618 The import statistics considered by the KTC in determining the appropriate level of the quantitative restriction relate to the period July 1993 through June 1996. ³⁰¹ While data relating to that period were certainly "available" within the meaning of Article 5.1 when the quantitative restriction level was set, it remains to be clarified whether more recent information was also available. In this respect the European Communities submit that, as made clear from Korea's Statistical Yearbook of Foreign Trade for 1996 ³⁰², import data relating to the whole 1996 were available to the Korean authorities before the amount of quota was finally calculated and that these data should therefore have formed the basis for calculation of the quota level.

(3) Representativity

4.619 The European Communities submit that Korea completely failed to address, either expressly or impliedly, the issue of whether the statistics on which it relied to set the quota level were indeed "representative". The ordinary meaning of the term and its context make clear that "representative" refers to import trends. The aim is to avoid the inclusion of periods where trade flows were abnormal. However, no such evaluation of the quality of the data relied upon is included in any of Korea's notifications to the WTO.

4.620 Moreover, the European Communities further contend that, if such evaluation had been carried out, it would have led to exclude data relating to the second semester of 1993 as not "representative" within the meaning of Article 5.1 of the Agreement on Safeguards. As indicated in Korea's Schedule of concessions, imports of item 1901.90.2000 ("food preparations") into Korea were still subject to Balance-of-Payment restrictions during that period. ³⁰³ Therefore, although the relevant tariff rates had been lowered to 40 per cent as of the beginning of 1993, their imports did not take place under conditions which would have made them "representative". This is an additional reason to conclude that Korea should have based its quota on the period January 1994-December 1996. In the light of the foregoing the European Communities consider that Korea based its calculation of the quota level on data that did not relate to the last three representative years available within the meaning of Article 5.1 of the Agreement on Safeguards.

4.621 In response to a question of the Panel ³⁰⁴ the European Communities further clarified their arguments under Article 5:

4.622 The first and second sentences of Article 5.1 contain complementary obligations which all have to be respected. The first and third sentences of Article 5.1 apply on their face to all safeguard measures. The second sentence contains an additional obligation which only applies to quantitative restrictions.

4.623 Also in response to a question of the Panel ³⁰⁵ the European Communities further argued:

4.624 The second sentence of Article 5.1 contains an additional obligation for quantitative restrictions. If there is no representative three year period the Member must then base its measure on "the level necessary to prevent or remedy serious injury", according to the second part of that sentence. The rule in the first part may still be relevant as a guide.

(b) Response by Korea

4.625 Korea responds to the EC arguments as follows:

4.626 Korea based its quota level on the average of imports for the three years from July 1993-June 1996. Korea initiated its safeguards investigation in May 1996. After that date, imports of SMPP would be expected to increase abnormally, as foreign exporters and their Korean customers increase their volume of imports in anticipation of a safeguards measure. In fact, the use of three �representative� years was intended to prevent foreign exporters from manipulating quota levels by flooding the market with imports just prior to the decision to impose a safeguard measure. Therefore, Korea considered that the second half of 1996 was not �representative,� and it excluded imports from this period in calculating the quota level. Korea considered that the quota levels chosen were the most suitable for achieving the "objectives" identified in Article 5.1, i.e., preventing or remedying the serious injury and facilitating adjustment to the domestic industry in Korea. ³⁰⁶

4.627 Pursuant to a question by the Panel ³⁰⁷ Korea further clarified its arguments under Article 5 as follows:

4.628 In the view of Korea, the first two sentences of Article 5.1 of the Agreement on Safeguards do not impose a general obligation on Members to demonstrate that the specific level of quota that they decided to impose as a safeguard measure is necessary to prevent or remedy serious injury and to facilitate adjustment. Such an obligation only arises if the level of such quota is lower than the average imports during the three most recent representative years for which statistics are available. As the wording of the second sentence of Article 5.1 makes clear, Members must only justify the level of quotas if it is different (i.e., lower) than the average imports during the three most recent representative years.

4.629 The first clause of Article 5.1 does not impose any obligation but merely states a basic principle regarding the application of safeguard measures. This basic principle is that Members should apply safeguard measures only to the extent necessary to achieve the objectives of safeguard measures (i.e., to prevent or remedy serious injury and to facilitate adjustment). This basic principle is generally applicable whether the safeguard measure imposed is a tariff, a tariff-quota, or a quota. The first clause of Article 5.1 cannot be read as imposing an obligation on Members to demonstrate that a particular level of tariff or quota is necessary to prevent or remedy serious injury and to facilitate adjustment. Article 5.1 does not identify objective criteria that may be used to calculate the level of tariff, tariff-quota, or quota that would "remedy" serious injury or "facilitate adjustment" under the unique circumstances facing particular industries.

4.630 The second sentence of Article 5.1 only applies when a Member imposes a safeguard measure in the form of a quota. To give Members useful guidance, the drafters of this sentence established a minimum quota level that would be deemed necessary to achieve the objectives of imposing a safeguard measure. This level is set at the average of imports during the three most recent representative years for which statistics are available. To the extent that the quota is set at that level or at a higher level, Members are not required to prove that this quota level is necessary. This is not a strict minimum quota, however because the second sentence of Article 5.1 permits a Member to set a quota at a lower level than the average imports during the three most recent representative years, provided it presents clear justification that such lower level is necessary. If a Member decides to impose a quota that is not lower than the average imports during the three most recent representative years, it is not required to provide any explanation or justification as to the necessity of this quota level.

4.631 With regard to tariff-based safeguard measures, Article 5.1 does not obligate Members to provide any explanation or justification of the level of such measures. It is not for Korea to speculate why the drafters felt that a benchmark was necessary for quotas but not for tariff-based measures. The fact that the second sentence of Article 5.1 only refers to quotas, however, can only mean that there is no requirement to demonstrate that the level of a tariff-based measure is necessary to achieve the objectives pursued. In Korea's view, the obligation to justify the level of the safeguard measure only exists if the measure is a quota and if such quota is set at a level lower than the average imports during the three most recent representative years for which statistics are available.

4.632 In this case, Korea determined that application of a safeguard measure was necessary to remedy serious injury and facilitate adjustment because "[w]hile it was determined that the domestic industry has been suffering from serious injury caused by increased imports, the injury has not been relieved even by the continuing efforts of the relevant authorities and the petitioner. In this regard, it is agreed that the appropriate relief measures should be taken to resolve the problem." ³⁰⁸ Based on the guidance provided in the second sentence of Article 5.1, Korea rejected the alternatives suggested by the petitioner and recommended a quota at a level based on the three most recent representative years for which statistics were available. ³⁰⁹

4.633 In response to another question by the Panel ³¹⁰ Korea also argued that:

4.634 In the view of Korea, Article 5.1 does not impose an obligation on Members to demonstrate that a particular level of a tariff (or tariff-quota) is necessary or that it is the most suitable means to remedy injury and facilitate the adjustment. In this respect, it is important to distinguish between two issues: (i) whether the particular type of safeguard measure (i.e., tariff, quota, tariff-quota) is the most suitable means for achieving the objectives sought, and (ii) whether the level of the tariff, quota, or tariff-quota imposed (as the most suitable measure) is necessary to achieve such objectives. In this regard it is necessary to consider the first and third sentences of Article 5.1. The first sentence states the basic principle that a safeguard measure should be applied only to the extent necessary to prevent or remedy serious injury and to facilitate adjustment. The third sentence of Article 5.1 provides there is no obligation to demonstrate that a tariff (or tariff-quota) is the most suitable measure to achieve these objectives, nor to demonstrate that the level of such tariff (or tariff-quota) is necessary or appropriate to achieve these objectives.

4.635 In this case, it is noteworthy that the KTC Commissioners examined the relief measures requested by the petitioner, including:

4.636 The KTC stated that:

4.637 In another response to a Panel question, Korea further clarified its arguments on the "representative" three-year period for purposes of Article 5.1:

4.638 Korea considers that each of the three years prior to the filing of a safeguards petition is normally representative of the import levels on which a quota restriction may be based, absent clear justification otherwise and notwithstanding the existence of import restrictions during any particular year. The "representative" nature of imports under Article 5.1 of the Agreement on Safeguards must be determined with reference to the normal level of imports for the particular Member concerned, regardless of any import "restrictions" then in force. Notably, "representative" under Article 5.1 cannot reasonably be interpreted to mean "fully liberalized" or absent any tariff or non-tariff restriction potentially affecting imports.

(c) Additional arguments by the European Communities made at the first meeting of the Panel with the parties

4.639 At the first meeting of the panel with the parties, the European Communities further advanced their arguments under Article 5.1 as follows:

4.640 The European Communities noted that in their endeavours to justify the exclusion of the second semester of 1996 by saying that in that period imports would have "increased abnormally" in anticipation of the measure. The European Communities would like to recall that in 1996 imports recorded an increase of approximately 15 per cent as compared to 1995, which increase appears much less "abnormal" i.e., more "representative", than the increases of approximately 384 per cent from 1993 to 1994 and 80 per cent from 1994 to 1995. The European Communities would also recall that, as demonstrated by its Exhibit EC-20 and not contested by Korea, full 1996 data were available when the quota was finally decided.

(d) Additional arguments by Korea made at the first meeting of the Panel with the parties

4.641 At the first meeting of the panel with the parties, Korea further advanced its arguments under Article 5.1 as follows:

4.642 Korea not only fully complied with its obligations under Article 5 of the Agreement on Safeguards, but also exercised its good faith in expanding the amount of the quota based on requests during consultations from the European Communities and other WTO Members. In its decision of 2 December 1996, the KTC Commissioner evaluated the appropriate relief measures, stating that "[b]efore recommending the relief measures, the KTC commissioners agreed that close considerations should be made beforehand for each relief measure on its impacts on the domestic dairy industry, national economy, and bilateral/multilateral trade." ³¹⁵ The KTC then listed the information examined regarding the range of proposed relief measures. A majority of the KTC Commissioners then determined that a quota was the most suitable relief measure, with one commissioner offering a minority opinion that a tariff-rate quota would be preferable.

4.643 Korea does not understand the EC argument that Korea failed to consider whether other types of measures would have been more suitable. ³¹⁶ In Korea's view, the European Communities are simply wrong.

4.644 The volume of the quota was based on the average level of imports of the three most recent representative years for which statistics were then available, from June 1993 to June 1996. Korea refused to increase the quota further by including the remainder of 1996 in the historical bases for calculating the quota. This period was not representative because exporters can be expected to increase artificially the volume of their exports in anticipation of the safeguard measure.

4.645 During consultations under Article 12.3 of the Agreement on Safeguards, the European Communities objected to the calculation of the quota level. After considering the European Communities concerns, Korea decided, in good faith, and without being obligated to do so, to raise the quota level by almost 5,000 tons.

(e) Rebuttal arguments made by the European Communities

4.646 The European Communities made the following arguments in rebuttal:

4.647 In the EC view a "necessity" requirement is embodied in Article 5.1 of the Agreement on Safeguards, which requirement must be met in order for a measure to be authorized under that provision. A general "necessity" requirement is laid down in the first sentence. Furthermore, there is a specification of that requirement for safeguard measures in the form of quantitative restrictions to the effect that, in principle, quota level lower than the average of imports in the three representative years is not (never) necessary, unless clear justification is given in this respect. Of course, this principle cannot entail at all that whichever is in compliance with that threshold is automatically necessary.

4.648 The European Communities further maintain that the years used by Korea to calculate its quota level were not the "last three representative available". In the case at issue in this dispute, Korea has neither calculated the quota consistently with this required threshold nor, a fortiori, has been able to show that it did.

4.649 The interpretation of Article 5.1 of the Agreement on Safeguards, in the light of its wording, context and purpose and in accordance with the principle of effective treaty interpretation, mandates this conclusion: each provision was drafted with its own meaning and must be given its autonomous meaning when being interpreted. On the contrary, by denying the binding character of the necessity requirement except within very strict limits, Korea is trying to unduly reduce the scope of its obligations under the WTO Agreements, and thus the rights arising thereunder to the European Communities. Reduction or modification of rights and obligations is emphatically not allowed under the WTO. ³¹⁷

(i) Necessity is a requirement laid down in Article 5.1, first sentence in respect of all safeguard measures

(a) Wording

4.650 The European Communities reiterate that the term "necessity" is binding language, both in the first and in the second sentence of Article 5.1 of the Agreement on Safeguards. Both sentences impose obligations upon WTO Members wishing to adopt safeguard measures to do so only to the extent they are necessary to prevent or remedy serious injury and to facilitate adjustment, although the second is a specification of the first one, applicable in respect of one type of measure only. As the Appellate Body pointed out in US - Underwear, far from suggesting non-binding character, "a contention of necessity may be seen to assume that no other recourse is available to the importing country." ³¹⁸

4.651 The European Communities find it curious that, in trying to unduly restrict its obligations and EC rights under the Agreement on Safeguards, just as it does for its obligations arising under Article XIX of GATT, Korea is using the opposite tactics. In the case of Article XIX, lack of repetition of the "unforeseen developments" requirement in the Agreement on Safeguards is deemed to show its abrogation by the latter. In the case of Article 5.1 of the Agreement on Safeguards, in spite of repetition of the word "necessary" in two consecutive sentences of the same Article, Korea is able to deny the binding character of the word in the first sentence but finds unexpectedly that it is binding in the second sentence- be it by further limiting the scope of that more specific obligation.

To continue with Context

²⁹⁹ Id., p. 8.

³⁰⁰ See, WTO Doc. G/SG/N//10/KOR/1/Suppl/1, 1 April 1997, p.1 (Exhibit EC-10).

³⁰¹ See, Exhibit EC-8.

³⁰² See, Exhibit EC-20.

³⁰³ See, Exhibit EC-17.

³⁰⁴ The Panel recalls that the question was:

³⁰⁵ The panel recalls that the question was:

³⁰⁶ See, Exhibit Korea-8 in which only one of the seven KTC commissioners considered that a tariff rate quota was the more appropriate measures for dealing with the serious injury caused by the increased imports.

³⁰⁷ The Panel recalls that the question was: "If a quota is established based on the level of imports for the three representative years, does the importing country still have an obligation to prove that such level was necessary? In other words, does the level established pursuant to the three representative years constitute a minimum quota, the level of which must still be proven to be 'necessary'? Please comment and discuss the relationship between the first and second sentence of Article 5.1 of the Agreement on Safeguards."

³⁰⁸ See, Exhibit Korea-8, at 3.

³⁰⁹ Id.

³¹⁰ The Panel recalls that the question was:

³¹¹ See, Exhibit Korea-8, at 3.

³¹² Id. at 3-4.

³¹³ Id. at 4-5 (see minority opinion of Jeong Mun-Su).

³¹⁴ Id. at 4.

³¹⁵ See, Exhibit Korea-8.

³¹⁶ Id.

³¹⁷ See, Article 3.2 and 3.9 of the DSU, respectively providing: "Recommendations and rulings of the DSB cannot add or diminish the rights and obligations provided in the covered agreements" and "The provisions of this Understanding are without prejudice to the rights of Members to seek authoritative interpretation of provisions of a covered agreement through decision-making under the WTO Agreement" (emphasis added).

³¹⁸ See, Appellate Body Report in US - Underwear, 10 February 1997, WT/DS24/AB/R, p. 11.