WORLD TRADE ORGANIZATION		WT/DS24/R 8 November 1996
		(96-4540)
Original: English

The report of the Panel on United States ­ Restrictions on Imports of Cotton and Man­Made Fibre Underwear is being circulated to all Members, pursuant to the DSU. The report is being circulated as an unrestricted document from 8 November 1996 pursuant to the Procedures for the Circulation and Derestriction of WTO Documents (WT/L/160/Rev.1). Members are reminded that in accordance with the DSU only parties to the dispute may appeal a panel report, an appeal shall be limited to issues of law covered in the panel report and legal interpretations developed by the panel, and that there shall be no ex parte communications with the panel or Appellate Body concerning matters under consideration by the panel or Appellate Body.

I Introduction
II Factual Aspects
- Outward Processing Regime: "807 Trade" and "Guaranteed Access Levels"
- Guaranteed Access Levels
- Specific Limits
- Chronology of Events
- Review by the TMB
- Further Consultations
- Action Under the Dispute Settlement Understanding
III Findings Requested
- Other Issues
IV Third Party Submission: India
V Main Arguments by the Parties
A. The Safeguard Action Taken by the United States
- Statement of Serious Damage: Category 352/652
(March 1995 Market Statement)
- Attribution to Exporting Countries
- Consultations with Costa Rica
B. Review by the Textiles Monitoring Body
- Determining Domestic Market Data
- The July 1995 Market Statement
- Outcome of the TMB review
C. The Standard of Review and Burden of Proof
- Standard of Review - the "Fur Felt Hat" Case
- Applying the "Fur Felt Hat" Case to the Present Case
- Views of Costa Rica on Standard of Review
- Views of Authors Relating to Standard of Review
- Relationship to Other GATT Provisions
- Deference to National Authorities 24
- Burden of Proof
D. Article 6 of the ATC: General Views on its Application
E. Requirements for the Application of a Safeguard Measure
- Determination of Serious Damage or Actual Threat Thereof
- Increase in Imports into the United States
- Application of Safeguard to Individual Member(s)
- Obligation of Demonstration ­ Fulfilment of Substantive Requirements
- Consultations on Safeguard
- Data Required for Consultations and Other Relevant Information
F. Serious Damage or Actual Threat Thereof
- The March 1995 Market Statement
- The July 1995 Market Statement
- Analysis of March and July Market Statements
- The Counting of Re-imports
G. Existence of Causal Link
- Restraint Agreements with Other Countries
- The US Policy in Applying the Safeguard
H. Attribution to Individual Exporting Country(ies)
- Obligation to Submit Specific and Relevant Information
- The Nature of Costa Rica's Exports
I. More Favourable Treatment for Re-imports
- The United States Fabric Industry
J. The Requirement to Hold Consultations
K. Effective Date of the Restriction
L. Article 2 of the ATC
M. A Member Must Endeavour to Accept Recommendations of the TMB 64
N. Nullification or Impairment of Benefits
VI Interim Review
VII Findings
A. Claims of the Parties
- Introduction
- Main Substantive Claims
B. General Interpretative Issues
- Standard of Review
- Burden of Proof
- The Interpretation of the ATC
- The Structure of Article 6 of the ATC
C. Review of the Findings by the US Investigating Authorities on Serious Damage Attributable to Costa Rican Imports
- The Scope of the Matter
- Serious Damage
- Overview
- Output (US Production)
- Market Share (Market Share Loss/Import Penetration)
- Employment
- Man-Hours
- Sales
- Profits
- Investment
- Utilization of Capacity
- Prices
- Causality
- Attribution of Serious Damage to Costa Rica
D. Actual Threat of Serious Damage
E. Other Claims
- Article 6.6(d) of the ATC
- Obligation to Consult
- Date of Application of the Restriction
- Article 2.4 of the ATC
- Article 8 of the ATC
VIII Recommendation
ANNEX: March 1995 Market Statement

I INTRODUCTION

1.1 On 22 December 1995, Costa Rica requested consultations with the United States under Article 4 and other relevant provisions of the Understanding on Rules and Procedures Governing the Settlement of Disputes (DSU), Article XXIII of the General Agreement on Tariffs and Trade 1994 (GATT 1994) and the corresponding provisions of the Agreement on Textiles and Clothing (ATC) (WT/DS24/1). Consultations were held on 18 January and 1 February 1996, however, no mutually satisfactory solution was reached. On 22 February 1996, Costa Rica requested the establishment of a panel (WT/DS24/2) which was considered by the DSB at its meeting on 5 March 1996 (WT/DSB/M/12). The Dispute Settlement Body (DSB) accordingly agreed to establish a panel with standard terms of reference in accordance with Article 6 of the DSU.

1.2 On 19 April 1996, the DSB was informed that the terms of reference and the composition of the Panel (WT/DS24/3) were as follows:

Terms of Reference

"To examine, in the light of the relevant provisions of the covered agreements cited by Costa Rica in document WT/DS24/2, the matter referred to the DSB by Costa Rica in that document and to make such findings as will assist the DSB in making the recommendations or in giving the rulings provided for in those agreements".

Composition

1.3 The Panel heard the parties to the dispute on 24­25 June 1996 and 29 July 1996. The Panel also met with the parties on 15 October 1996 to review aspects of the interim report, at the request of the parties. The Panel submitted its complete findings and conclusions to the parties to the dispute on 25 October 1996.

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II FACTUAL ASPECTS

Outward Processing Regime: "807 Trade" and "Guaranteed Access Levels"

2.1 In the course of the last six years, there has been a significant change in the US cotton and man-made fibre underwear manufacturing industry which has significantly switched from producing and assembling underwear domestically to producing components in the United States for assembly in other countries and subsequent return to the same enterprises in the United States for marketing. This pattern of co­production has enabled the companies in this industry to maintain their share of the US market by making use of the labour force available outside the country while at the same time controlling the source of raw materials, the production timetable, the types and amounts of underwear to be produced and the marketing of the final product. Moreover, these co-production operations were consistent with the policies of the United States, which was encouraging investment and production in Mexico and the Caribbean Basin.

2.2 Item 9802.00.80 of the Harmonized Tariff Schedule of the United States (HTSUS)¹ provides for re­importation into the US of goods that have been assembled abroad from US­made components; it provides the basis for a type of outward processing regime which enables US manufacturers of relatively labour­intensive products to export US parts for assembly abroad and return of the assembled products to the United States with partial exemption from US duties. This programme is not limited to apparel, although it is widely used in apparel trade because of the high labour content and the substantial US duties on apparel imports. To qualify for partial duty exemption under item 9802.00.80, articles must be assembled abroad in whole or in part of fabricated components, the product of the United States, which has been exported in condition ready for assembly without further fabrication; has not lost its physical identity in such articles by change in form, shape or otherwise; and has not been advanced in value or improved in condition abroad except by being assembled and except by operations incidental to the assembly process such as cleaning, lubricating and painting.

2.3 The exported articles used in the imported goods must be "fabricated US components," i.e., manufactured articles ready for assembly in their exported condition, except for operations incidental to the assembly process. Integrated circuits, compressors, zippers, buttons and precut or preformed sections of a garment are examples of fabricated components in this sense. To be considered "US components," the exported articles do not necessarily need to be fabricated from materials or components wholly made in the United States. If a foreign product undergoes processing in the United States sufficient to confer US origin for customs purposes, then the resulting processed goods may be exported, assembled abroad and re­imported and still qualify for partial duty exemption under item 9802.00.80. Thus, in an 807 operation, the cloth can come from any country in the world: what is important is to have it cut in the United States. There is no obligation to re­import the articles assembled abroad into the United States; producers of underwear assembled from US components could sell the underwear to any market in the world.

2.4 An article imported under item 9802.00.80 is treated as a foreign article for customs purposes and recorded as a foreign article in US import statistics. Chapter 98, Subchapter II, Note 2 of the HTSUS, provides that any product of the US which is returned after having been advanced in value or improved in condition abroad, or assembled abroad, shall be a "foreign article" for the purposes of the Tariff Act of 1930, as amended. It is not legally of US origin even if the pieces of a garment re­imported are cut in the United States. This rule has been provided as an explicit exception to the US rule of origin for textiles and apparel, in force up to 30 June 1996, which normally deems such products to originate from the place where garment pieces are cut. This exception remains even in the revised rules of origin for textiles which took effect on 1 July 1996. HTSUS Note 2 also provided that textile or apparel articles are to be treated as foreign articles even if they are assembled or processed in whole of fabricated components that are a product of the United States or are processed in whole of ingredients (other than water) that are a product of the United States, in beneficiary countries of the Caribbean Basin Initiative.

2.5 An article imported under item 9802.00.80 is dutiable under the rate otherwise applicable to the assembled product, but the dutiable value is reduced by deducting the cost or value of the exported fabricated components from the value of the imported assembled product. For instance, the underwear re­imports in the present case are subject to customs duties at the rate applicable to underwear, but their customs value is reduced by deducting the cost or value of the exported garment sections, elastic, zippers, buttons, thread, etc. used in assembling the underwear in Costa Rica. The duty reduction (which is not regulated by the ATC) is a key factor in making the offshore assembly operations in Costa Rica economically viable. The "807" programme is not mandated by tax, social or industrial requirements. However, the underlying intent encompasses a variety of broader social and economic objectives, such as aiding structural adjustment, assisting the economic development of foreign countries, maintaining the competitiveness of US industry, lowering prices for consumers, and reducing the tax burden on US companies.

Guaranteed Access Levels

2.6 Guaranteed Access Levels, or GALs, are provided for textile re­imports under the US Special Access Programme, a programme designed to develop and expand manufacturing in the Caribbean Basin, Andean Trade Preference countries and Mexico (under the North American Free Trade Agreement (NAFTA)) by allowing guaranteed access to the US market for re­imports of apparel made with fabric formed and cut in the United States. The United States employs this programme as a form of "more favourable treatment" for certain re­imports - those using US formed and cut fabric - as provided for in Article 6.6(d) of the ATC. Under this programme, guaranteed quota access ("GALs") for particular apparel products are specified by agreement with the relevant exporting country. Garment pieces cut in the United States from US­formed fabric (e.g. woven or knitted in the United States) are exported to that country, where they are assembled; the apparel assembled from them is guaranteed access to the United States at the negotiated level, and is entered under HTSUS subparagraph 9802.00.8015, which corresponds to the former Item 807A in the pre­HTSUS tariff nomenclature. Entries must be accompanied by an ITA 370­P form, which certifies the facts necessary for eligibility of the goods under this subparagraph. The Special Access Programme only affects access to the US market for textiles and apparel articles, and does not affect the effective duty rate for imports.

Specific Limits

2.7 A specific limit (SL) refers to the level of restraint (quota) on the exports or imports of the product in question during a set period of time. The ATC provision setting out the method for calculating the applicable restraint level is found in Article 6.8.

Chronology of Events

2.8 In early 1995 the United States Committee for the Implementation of Textiles Agreements (CITA) reviewed data on total imports of cotton and man­made fibre underwear (category 352/652) and examined the state of the domestic industry producing such goods. Based on the factors examined, the CITA determined that there was a situation of serious damage or actual threat thereof to the US underwear industry. The United States attributed the serious damage or actual threat thereof, to imports from seven countries, Colombia, Costa Rica, Dominican Republic, El Salvador, Honduras, Thailand and Turkey. (See Section V.A.)

2.9 Based on its findings, the United States requested consultations on 27 March 1995 with, inter alia, Costa Rica on trade in cotton and man­made fibre underwear (US textile category 352/652), with a view to initiating the transitional safeguard procedure for establishing a quantitative restriction on that product in accordance with Article 6 of the ATC and provided a statement of serious damage setting out the factual information in the matter (Annex). The United States proposed a level of restraint for underwear imports from Costa Rica pursuant to Article 6.8 of the ATC. On 21 April 1995, the United States published the contents of the request for consultations, including the restraint level and period, in the Federal Register.

2.10 Consultations were held on 1­2 June 1995 at which the United States proposed a two­part measure comprising a specific limit (SL) of 1.25 million dozen and a guaranteed access level (GAL) of 20 million dozen. Costa Rica did not consider that the United States had substantiated its case under the provisions of the ATC and the consultations did not result in a mutually acceptable solution.

2.11 On 22 June 1995, the United States made a new proposal for the establishment of a quantitative restriction at a level of 1.325 million dozen specific level (SL) with annual growth of 6 per cent and 20 million dozen GAL for 1996.

2.12 Because no mutual agreement had been reached between the United States and Costa Rica by the end of 30 days after the 60-day consultation period provided for in Article 6.7 of the ATC, the United States implemented a restraint on imports from Costa Rica effective 23 June 1995 for a 12­month quota period starting 27 March 1995 and referred the matter to the Textiles Monitoring Body (TMB), pursuant to Article 6.10 of the ATC.

2.13 On 10 July 1995, the United States sent Costa Rica a further proposal for a specific limit for 1996 of 3 million dozen with 6 per cent annual growth and a guaranteed access level of 30 million dozen. This proposal included a provision to reduce the specific limit to 1.5 million dozen in the event the US Congress passed a law providing for quota­free treatment for goods from the Caribbean Basin that prescribed certain rules of origin (the "ratchet­down" clause). Costa Rica continued to question the basis for the request for a restriction and did not respond to this proposal.

2.14 On 12 July 1995 the US made a proposal to Costa Rica with the same levels as on 10 July but which did not specify the reduction in the specific limit in the event of the above­mentioned law being passed and subjected reduction in SL to subsequent negotiations.

Review by the TMB

2.15 The TMB reviewed this case, and others, in accordance with Article 6.10 of the ATC and heard presentations from the United States, Costa Rica, Honduras, Thailand and Turkey from 13­21 July 1995. During the proceedings, the United States provided updated data and other relevant information (July 1995 Market Statement, see paragraphs 5.135-5.138). These data were used to update the data presented in March so that all of the data would be consistent with the reference period of the call, the year ending in December 1994. The United States also supplied the TMB with additional information requested by Members subject to the call and by the TMB members concerning the industry, re-imports and exports.

2.16 During its review of this safeguard action by the United States against imports of category 352/652 from inter alia Costa Rica, the TMB found that serious damage had not been demonstrated. The TMB could not, however, reach consensus on the existence of actual threat of serious damage. The TMB recommended that further consultations be held between the United States and Costa Rica,

"with a view to arriving at a mutual understanding, bearing in mind the above, and with due consideration to the particular features of this case, as well as equity considerations" (G/TMB/R/2).

2.17 A new round of consultations was held on 16­17 August 1995 at which a number of issues were raised by Costa Rica with respect to the justification of US actions. The consultations did not produce an agreement and both parties reported the situation to the TMB.

2.18 At its meeting on 16­20 October 1995, the TMB received reports from Costa Rica and the United States on the bilateral consultations they had had following the TMB recommendation. It took note of the reports and of the fact that the two parties had not reached a mutual understanding during the consultations. The TMB's discussions confirmed the Body's previous findings in this matter; there being no further requests by the parties involved, the TMB considered its review of the matter completed (G/TMB/R/5).

Further Consultations

2.19 On 22 November 1995, a further consultation was held at which the United States made a new restraint proposal for a specific limit of 7 million dozen (sub­limit of 4 million dozen for knit products) and a GAL of 40 million dozen for the period 1 April 1996 to 31 March 1997 and also including the previously mentioned "ratchet­down" clause and 6 per cent growth. Costa Rica submitted a proposal for a specific limit of 21 million dozen for 1996 followed by a second proposal fixing SL and GAL access for the period corresponding to 1996­1997 at 15.4 and 40 million dozen respectively. These were not accepted by the United States. Thereafter, Costa Rica requested consultations under Article 4 of the DSU.

2.20 The restriction, augmented by the application of a growth rate of 6 per cent was renewed for a second 12-month period on 27 March 1996.

* * * * *

Action Under the Dispute Settlement Understanding

2.21 On 22 December 1995, Costa Rica requested the US Government to hold consultations under Article 4 of the ATC and the other relevant provisions of the DSU, Article XXIII of GATT 1994 and the corresponding provisions of the ATC. The two countries met on two occasions, on 18 January and 1 February 1996.

2.22 At the first of these meetings, Costa Rica raised a number of questions, which it subsequently submitted in writing, requesting the earliest possible written reply. Moreover, reiterating its view that the call for consultations was not justified under the ATC, Costa Rica again requested that it be withdrawn. On 18 January 1996, Costa Rica proposed establishing, instead of a restriction, a mechanism for monitoring the composition and patterns of trade between the two countries in the category in question. However, this suggestion was not accepted by the United States.

2.23 At a meeting held on 1 February 1996 the United States made a new proposal to Costa Rica offering access for 57 million dozen during the period 27 March 1995 to 30 September 1996. In addition, access for the 18-month period from 1 October 1996 to 26 March 1998 would be fixed at 12 million dozen SL, with a sub-limit of 6.8 million dozen for knitwear, and 30 million GAL. This restraint proposal included a "ratchet­down" clause, in accordance with which SL access would be reduced to 1.5 and 1.6 million dozen for each of the periods covered by the restriction. Once again, Costa Rica rejected this proposal as inconsistent with the corresponding provisions of the ATC.

2.24 The period of 60 days for consultations provided for in the DSU ended without any satisfactory agreement having been reached between the parties, and the United States continued to maintain its unilateral restrictions on the products in question. Consequently, on 5 March 1996, Costa Rica made a request to the DSB, which was granted, for the establishment of a Panel.

* * * * *

TO CONTINUE WITH USA - RESTRICTIONS ON IMPORTS OF COTTON AND MAN­MADE FIBRE UNDERWEAR

¹ This provision is frequently referred to as "807 trade" as it was covered by that chapter in the former US tariff schedules.