A. United States

5.1 The United States made the following arguments as third party:

(b) Standard of Review

5.2 The United States agrees with Korea's assertions concerning the standard of review applicable in safeguard cases.The United States recalls the panel's determination in US - Underwear, as cited by Korea, wherein the panel concluded that its function was not to engage in a de novo review, but rather to examine the consistency of a Member's actions with its international obligations. ³⁹⁸ The US - Underwear panel decided to make an objective assessment of the written decision of the US authorities embodying their determination and findings; this objective assessment entailed an examination of whether those authorities had examined all relevant facts before them, whether adequate explanation had been provided of how the facts as a whole supported the determination made, and, consequently, whether the determination made was consistent with the international obligations of the United States. ³⁹⁹ Similarly, the panel on US - Shirts and Blouses followed this standard of review in its assessment of another textile safeguard action by the United States.The panel made a close examination of the written decision of the US authorities; it commented on factors addressed in the written decision, and dealt as well with the decision's failure to address certain factors, and with the issue of causation. Finally, the panel made an overall assessment of the US determination. However, at no time did the US - Shirts and Blouses panel engage in a de novo review. The findings of these two panels concerning the issue of standard of review were adopted by the DSB without any modification by the Appellate Body.

5.3 The standard articulated above is also the appropriate standard of review for disputes involving the application of the Agreement on Safeguards in the context of safeguard determinations made by national authorities. National authorities are in the best position to evaluate the facts and determine the applicable weight to be accorded to various factors. As the Appellate Body properly noted in European Communities -- Measures Concerning Meat and Meat Products ("Hormones"), panels "are poorly suited to engage in such review." ⁴⁰⁰ The appellate body further noted in Hormones that the role of a panel is to make an objective assessment of the matter in dispute, both as to the facts and the law, as mandated by Article 11 of the DSU. ⁴⁰¹ The United States submits that a panel would be assured of arriving at an "objective assessment" of the matter in dispute if it applied a standard of review, consistent with US - Underwear and US - Shirts and Blouses, that considers whether (a) the domestic authority has examined all relevant facts before it; (b) adequate explanation has been provided of how the facts as a whole supported the determination made; and (c) consequently, whether the determination made is consistent with the international obligations of the Member.

(c) The Agreement on Safeguards has Subsumed the Applicable Provisions of Article XIX of GATT

5.4 The United States disagrees with the EC assertion that a Member may only impose a safeguard measure if, inter alia, the increase in imports results "from both unforeseen developments and compliance with GATT obligations, including tariff liberalization according to a party's schedules of concessions." Article XIX:1(a) of the GATT must now be read in accordance with the rights and obligations set out in the Agreement on Safeguards, as required by Article 11.1(a) of that Agreement. The Agreement on Safeguards has defined, clarified, and in some cases modified, the package of rights and obligations of a potential user of safeguard measures, and Article 2 of the Agreement on Safeguards makes clear that a demonstration of "unforeseen developments" and a causal nexus to GATT obligations are no longer prerequisites to the application of a safeguard measure.

5.5 The Agreement on Safeguards clarifies and expands on the provisions of Article XIX, and establishes procedures for the application of safeguards measures. Thus, the preamble to the Agreement on Safeguards "recogniz[es] the need to clarify and reinforce the disciplines of GATT, and specifically those of its Article XIX", while Article 1 "establishes the rules for the application of the safeguard measures . . . provided for in Article XIX of GATT." The two agreements must be read in tandem and, together, they create a new package of rights and obligations which are distinct from the rights and obligations contained in the original GATT provision. The United States recalls that the Appellate Body arrived at a similar determination in Desiccated Coconut, wherein the Appellate Body, quoting the panel, asserted:

5.6 In addition, the negotiators of the Agreement on Safeguards were specific in their intent to subsume Article XIX under the new regime established by the Agreement on Safeguards. Thus, Article 11.1(a) of the Agreement on Safeguards establishes the relationship between GATT Article XIX and the Agreement as follows:

5.7 The explicit terms of the Agreement on Safeguards make clear that Article XIX does not maintain an existence separate and apart from the Agreement; rather, those provisions of Article XIX that remain in force are incorporated into the Agreement on Safeguards. Moreover, the Agreement on Safeguards does not merely establish a procedural framework for the application of GATT Article XIX. Instead, the Agreement subsumes Article XIX under its umbrella and thereby creates a new package of rights and obligations that defines, clarifies and, in some cases, modifies the rights and obligations articulated in Article XIX. In this instance, the Agreement on Safeguards modifies the package of rights to ensure that a Member may impose a safeguard action without regard to the question of whether the increase in imports (or threat thereof) was "as a result of unforeseen developments and of the effect of the obligations incurred by a contracting party under this Agreement, including tariff concessions . . ." as originally articulated in Article XIX. ⁴⁰³ Under this new regime, Article 2 establishes the threshold conditions a Member must satisfy before a safeguard measure properly can be imposed. This interpretation is further borne out by the fact that the negotiators of the Agreement on Safeguards conspicuously reiterated in Article 2 every sentence of Article XIX:1(a) except the language regarding "unforeseen developments" and GATT obligations.

5.8 Accordingly, the United States respectfully submits the EC assertion that the safeguard measure imposed by Korea violates the "unforeseen developments" provision of Article XIX:1(a) of GATT is erroneous because Article 2 of the Agreement on Safeguards contains no such requirement.

(d) Safeguard Measures Must Be Imposed in Accordance with the Requirements of Article 4 of the Agreement on Safeguards

5.9 The United States agrees with the European Communities that a Member, in making its injury determination, must examine all of the relevant factors bearing on the condition of the industry as a whole, as required by Article 4 of the Agreement on Safeguards. To the extent that Korea examined relevant factors only with respect to the condition of a portion of an industry without relating that examination to the condition of the industry as a whole, Korea's determination is deficient. Article 4.2(a) states that the Korean authorities in the Member "shall evaluate all relevant factors of an objective and quantifiable nature having a bearing on the situation of that industry, in particular . . . " (a list of factors follows). This requirement, read in conjunction with the definition of domestic industry in Article 4.1(c) -- "the producers as a whole . . . or those whose collective output . . . constitutes a major proportion of the total domestic production" -- indicates that the evaluation should be in terms of the whole industry, and not just one or another part of it. While injury to an industry can be analysed in terms of a portion of an industry, the implication is that information relating to a portion of the industry must be shown as relating to the condition of the industry as a whole. Thus, to the extent that Korea failed to examine all the relevant factors set out in Article 4.2(a), its investigation is deficient.

5.10 Similarly, the European Communities enumerate a number of factors that Korea allegedly failed to evaluate in arriving at its affirmative injury determination.In response to this claim, Korea furnished a number of tables and other information. It is unclear from Korea's submission, however, whether this information was before the KTC and considered by the KTC when it made its determination, or whether this information was compiled after the fact to support the KTC's determination. There are no citations to the record of the KTC investigation or to the KTC's report demonstrating that such information was evaluated by the KTC. While a decision on the merits of the evidence submitted must be left to the discretion of the domestic competent authority, Article 4.2(a) clearly requires that the competent authority evaluate all such relevant evidence. If the KTC did indeed fail to evaluate relevant evidence, such an act would violate the explicit terms of Article 4:2(a).

(e) The Agreement on Safeguards Does Not Establish a Numerical Market Penetration Threshold

5.11 Both Korea and the European Communities erroneously suggest that there is an implicit but undefined numerical threshold in Article 5.2(a) relating to market share for determining whether increased imports are causing or threatening serious injury. The European Communities indicate that the 5.7 per cent decline in domestic market share of Korean raw milk and milk powder producers is too small to be a cause for concern, while Korea counters that the 5.7 per cent decline indicates serious injury to the domestic industry.In support of its position, Korea cites to the March 1998 affirmative injury determination of the US International Trade Commission (USITC) in Wheat Gluten, in which the USITC found that imports increased their share of the US market by 8.8 per cent during the period of investigation.

5.12 The United States submits that Article 4.2(a) contains no numerical test or threshold requirement for market penetration, explicit or implied. Instead, Article 4.2(a) requires that the competent authority evaluate "all relevant factors," of which the percentage share of the domestic market is only one. If the percentage share change were taken as the sole benchmark, it would be contrary to the requirement that the competent authorities evaluate all relevant factors. As demonstrated by the USITC determination in Wheat Gluten, at the pages in the USITC report cited by Korea, the increase in market share held by imports was only one of several factors that the USITC considered in determining that increased imports were a substantial cause of serious injury in that particular case.

5.13 Furthermore, no single number could logically serve as a benchmark for evaluating the significance of market penetration. The importance of any given change in market share will vary from case to case. Whether a change of 5.7 per cent is significant or insignificant will depend in large part on the nature of the product and the nature of competition in the market.

(f) The Agreement on Safeguards Does Not Require Adjustment Plans

5.14 The United States disagrees with the EC assertion that Korea violated Article 5.1, inter alia, because it "did not submit any information as to adjustment plans to restore the industry's competitiveness. . ." and that "by omitting to give any consideration to adjustment plans, a fortiori Korea has failed to examine how its safeguard measure could be necessary or even helpful to their implementation." The Agreement on Safeguards does not require that an industry submit an adjustment plan, thus, the Panel cannot read such a requirement into the Agreement. Article 5.1 provides solely that "[a] Member shall apply safeguard measures only to the extent necessary to prevent or remedy serious injury and to facilitate adjustment. . . ." Although submission and consideration of an adjustment plan may be desirable as a means of substantiating that a Member has satisfied the objective of Article 5.1, there is no specific requirement in the Article that either refers to adjustment plans or requires that a member consider such plans.

VI. Interim review

6.1 On 17 March 1999, The European Communities and Korea requested the Panel to review, in accordance with Article 15.2 of the DSU, certain aspects of the interim report that had been transmitted to the parties on 3 March 1999. The European Communities requested the Panel to hold an additional meeting. This additional meeting of the Panel with the parties took place on 22 March 1999.

6.2 We have reviewed the arguments and suggestions presented by the parties, and finalized our report, taking into account those comments by the parties which we considered justified. In doing so we have ensured that no new arguments were introduced at this stage of the panel process. In this context we have made slight modifications to certain paragraphs, including those made to paragraphs 4.325, 4.416 to 4.419, 4.449 and 4.452 of the descriptive part and paragraphs 7.16, 7.18, 7.23, 7.24, 7.30, 7.31, 7.46, 7.49, 7.55, 7.70, 7.72, 7.73, 7.75, 7.77, 7.78, 7.79, 7.86, 7.87, 7.96 and 7.116 of the findings. In addition, we have made other minor modifications including linguistic and typographical corrections.

VII. Findings

A. Procedural Matters

7.1 In the present section, we address two procedural objections raised by Korea in its first submission. We also recall an oral ruling made at the end of the first substantive meeting of the Panel with the parties regarding Korea's request to file the English version of its OAI Report, at a date following the first substantive meeting of the Panel. Finally, we address Korea's challenge of the scope of this dispute, namely the consequences of the absence of any claim by the European Communities under Article 3 of the Agreement on Safeguards.

1. Insufficiency of the EC Request for Establishment of the Panel

7.2 Korea requests the Panel to reject the European Communities' complaint in its entirety on the basis of the insufficiency of its request for establishment of a panel, in violation of Article 6.2 of the Understanding on the Rules and Procedures Governing the Settlement of Disputes ("DSU"). Korea argues that the EC panel request is in violation of Article 6.2 of the DSU as it simply lists four articles of the Agreement on Safeguards, which, it argues, is insufficient "especially in a request relating to the determination of a domestic authority...". For Korea the panel request must contain a detailed statement of the matter in dispute and the legal basis of the European Communities' claims, in order to permit the defendant to conduct an effective defense and the third parties to assess whether or not to intervene. Korea requests this Panel to refrain from following the interpretation given by the Appellate Body in the EC - Bananas ⁴⁰⁴case, where it was stated that it was sufficient under Article 6.2 of the DSU for a panel request to list the articles of the relevant agreements.

7.3 On this issue the European Communities refers the Panel to the conclusions of the Appellate Body in EC -Bananas:

7.4 Article 6.2 of the DSU reads as follows:

7.5 We consider that a request for establishment of a panel is sufficiently detailed if it contains a description of the measures at issue and the claims, i.e. the violations alleged. ⁴⁰⁶

7.6 We note that the EC request for establishment of a panel contains the following references:

7.7 We consider, therefore, that the EC request for establishment of a panel is sufficiently detailed as it contains a description of the measures at issue and the claims, i.e. the violations alleged.

2. Lack of Economic Interest

7.8 Korea also claims that the European Communities admits having little or no commercial interest in bringing this matter before the Panel. For Korea this admission, coupled with the failure to settle the dispute during the consultations, suggests that the current proceeding is merely an attempt by the European Communities to use the DSU to establish a precedent on safeguards by way of an advisory opinion from the Panel. Korea argues that this goes against the spirit of the DSU which provides that formal dispute settlement should be reserved for disputes where Members consider, in good faith, that their interests are being impaired, and that 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.

7.9 The European Communities responds that in the EC - Bananas case, the Appellate Body, in reply to a similar objection by the European Communities, held that:

7.10 Korea also alleges that after intensive consultations the parties appeared to have settled their dispute. For Korea, the fact that the European Communities later withdrew its acceptance of the settlement proposed by Korea is evidence of lack of good faith on the part of the European Communities.

7.11 As to the alleged acceptance of a settlement offered by Korea, the European Communities responds that there never was any formal proposal or acceptance of a mutually agreed settlement. For the European Communities, each side negotiated in good faith in an effort to reach a mutually satisfactory solution in this case, but that solution did not materialise. The European Communities concludes by stating that if Korea wants to challenge the European Communities' good faith in negotiations and in bringing this dispute, it must bear the burden of proving its allegations.

7.12 First, we note that Korea is not clear as to what it wants the Panel to do in response to its argument. Korea does not request the rejection of the complaint for lack of economic interest on the part of the European Communities or for lack of good faith on the part of the European Communities during the negotiations. However, assuming that Korea's position is that there is a requirement for the European Communities to have some economic interest and that the European Communities has failed to meet it, the Panel would have to decide what action is appropriate. We consider therefore that we should rule on this issue.

7.13 Regarding Korea's reference to the lack of economic interest of the European Communities, we consider that under the DSU there is no requirement that parties must have an economic interest. In EC - Bananas, the Appellate Body stated that the need for a "legal interest" could not be implied in the DSU or in any other provisions of the WTO Agreement and that Members were expected to be largely self-regulating in deciding whether any DSU procedure would be "fruitful". We cannot read in the DSU any requirement for an "economic interest". We also note the provisions of Article 3.8 of the DSU, pursuant to which nullification and impairment is presumed once violation is established.

7.14 Even assuming that there is some requirement for economic interest, we consider that the European Communities, as an exporter of milk products to Korea, had sufficient interest to initiate and proceed with these dispute settlement proceedings.

7.15 Concerning Korea's reference to the unsuccessful settlement negotiations, we can only note that the European Communities considers that the offers by Korea were not acceptable to it, and both parties admit that no formal settlement of the present dispute was ever reached and approved by the relevant national authorities. The DSU favours the conclusion of mutually acceptable solutions. We note that, for the present dispute, no mutually agreed solution was notified to the DSB. We can only recall that when a WTO Member considers that its rights have been nullified by the actions of another Member it is entitled ⁴⁰⁸ (under Article 14 of the Safeguards Agreement and Articles XXII and XXIII of GATT 1994) to initiate the dispute settlement procedures envisaged in the DSU.

To continue with Submission of the OAI Report

³⁹⁸WT/DS24/R (8 November 1996) 7.12-7.13

³⁹⁹ See, US - Underwear at 7.13.

⁴⁰⁰ WT/DS26/AB/R (16 January 1998), 117.

⁴⁰¹ Hormones at 118.

⁴⁰² WT/DS22AB/R (21 February 1997), at p.16 (emphasis in original).

⁴⁰³ Indeed, such a modification was necessary in order to reflect actual practice. It is simply not credible to suggest that a trade Minister would negotiate a particular concession if it could be foreseen that such a concession would result in increased imports that, in turn, would seriously injure an industry in the country granting the concession. A Minister who engaged in such conduct would, quite properly, be relieved of his or her post. Thus, the use of the term "unforeseen developments" is surplusage because circumstances where increased imports cause or threaten serious injury are, almost by definition, "unforeseen".

⁴⁰⁴ European Communities - Regime for the Importation, Sale and Distribution of Bananas ("EC- Bananas"), adopted on 25 September 1997, WT/DS27/AB/R.

⁴⁰⁵ EC - Bananas, Appellate Body Report, para. 141.

⁴⁰⁶ See for instance, the Appellate Body statement in EC - Bananas, Appellate Body Report, para. 141. In the recent Report on Guatemala - Antidumping Investigation Regarding Portland Cement from Mexico (adopted on 25 November 1998, WT/DS60/AB/R) ("Guatemala - Cement") the Appellate Body reiterated that these were the two requirements prescribed by Article 6.2 of the DSU. We see no reason to depart from this position.

⁴⁰⁷ See EC - Bananas, Appellate Body Report, para. 135.

⁴⁰⁸ See Appellate Body Report on United States - Measures Affecting Imports of Woven Wool Shirts and Blouses from India, adopted on 23 May 1997, WT/DS33/AB/R ("US - Shirts and Blouses"), at page 13.