24 March 1988

50. Japan maintained that monitoring of semi-conductor exports by the Japanese Government was indeed merely watching cost and export prices. Monitoring was not intended to prohibit or restrict trade, nor did it in practice produce such results. There were no minimum price requirements. It was also contrary to the facts to say that export restrictions, production controls or artificial price increases existed. Through monitoring, Japanese companies were encouraged to prevent dumping, but this would only happen through a voluntary decision of the company concerned. The encouragement by the Japanese Government was not legally binding by any means, and there was no penalty even if the company did not comply with such encouragement. Companies were expected to refrain from dumping of their own will, taking into consideration factors such as the likelihood that importing countries would introduce anti-dumping measures which would adversely affect their business. Such voluntary actions of the companies were irrelevant to the provisions of Article XI which dealt with actions by governments.

51. The EEC said that in its Position Paper, the Government of Japan had admitted taking measures which were intended to bring about increased prices and reduced production. It had also been "monitoring" prices, in the context of its export approval system, and the purpose of this monitoring had been to ensure that export prices were not below certain levels. The question of whether the "administrative guidance" measures, used by the Japanese authorities to bring about increased prices, were or were not legally binding was irrelevant. The measures were intended to raise prices, and to reduce production in order to reduce exports so as to keep up export prices. It was admitted that the measures were taken either to implement the obligations imposed by the Arrangement with respect to the monitoring of exports to third countries or to carry out the purpose of the Arrangement as the Government of Japan understood it. It was generally admitted that Article XI:1 must be interpreted broadly and its wording proved this. What mattered was the intended result, not the method used. The EEC was not saying that all kinds of non-binding measures might infringe Article XI but that they could do so, at least when the following conditions were all fulfilled, as they were in this case:

52. Measures which were not legally binding could be completely effective to bring about a desired result if it was sufficiently clear that, if necessary, more effective measures and ultimately legally binding measures would be adopted. In the present circumstances, it had been known to Japanese industry that the Japan-US Arrangement had been concluded, and that Japan was considered to be therefore legally bound vis-à-vis the USA to carry out its obligations under this Arrangement. There was therefore an objective reason for Japanese industry to be conscious that legally binding measures would be adopted to fulfil Japan's obligations if non-binding measures proved insufficient. After the US had given warning of its intention to take retaliatory measures, and after these measures had been taken on 17 April 1987, there could have been no doubt in the minds of Japanese industrialists that the Japanese authorities would consider it essential to adopt binding measures if non-binding measures proved ineffective. If it were accepted that non-legally binding measures could never infringe Article XI, the result would be to discriminate in favour of contracting parties which, because of tradition or due to State involvement in the economy or for other reasons, preferred the use of non-binding measures to legally binding measures. Such discrimination would be totally unjustifiable and irrational.

53. In the case under consideration, the question of whether the administrative guidance by MITI were measures designed to reduce production for exports or measures to reduce exports directly was immaterial. Measures were contrary to Article XI if they were intended to reduce exports in order to increase prices at which goods were exported. It was irrelevant whether this result was achieved directly by restrictions on the quantities exported or on the prices at which the goods were exported, or by restrictions on the quantities produced which were available for export.

54. Japan stated that to consider whether or not certain government measures infringed Article XI, the intention of the government per-se was irrelevant, the consideration was on whether or not the measures concerned were of a binding nature, with trade distorting effect. Thus, it was wrong to consider government measures such as general appeal, public relations activities and supply of information which did not entail any binding nature to be violating Article XI. Under the Arrangement, the obligations with respect to monitoring aiming at exports to the United States did not apply to exports to third markets. Paragraph II.6 of the Arrangement provided that for exports to the United States, restrictive measures could be taken, if necessary, upon consultation. In practice, however, MITI was imposing no restriction except for COCOM enforcement. With respect to exports to third countries, the Arrangement did not obligate nor did it provide for any mechanism enabling the Japanese Government to invoke any legally binding measures. Moreover, the Japanese Government did not have the slightest intention of introducing any measure that would affect the rights and obligations of third countries in the absence of negotiation and their consents, as explicitly stated in Paragraph IV.7 of the Arrangement.

55. EEC's assertion that the Japanese Government would adopt legally binding measures as a result of pressure from the United States was totally unfounded because Japan had been repeatedly asking for the complete removal of the US sanctions. Article XXIII.1 consultations were held on 4 August 1987 when Japan condemned the US measure as a clear violation of GATT provisions. Since the measure was not lifted, Japan had expressed its intention, at the GATT Council on 11 November 1987, to ask for the establishment of a panel at an appropriate time.

(d) Article I

56. The EEC shared the views expressed by Canada (see paragraphs 32 and 88) regarding the incompatibility of the Third Country Market Monitoring System with Article I of the General Agreement. Since the system was applied to only 16 countries, 14 of which were contracting parties, it violated Article I to the extent that Japan granted immunity to all but the 14 contracting parties and that the Community did not benefit from the advantages granted to those countries to which the system did not apply.

57. Japan said that countries subject to the monitoring system were selected with a view to covering the entire export volume. Some minor markets were exempted solely for the sake of administrative efficiency and, in practice, 97 per cent of total export volume or virtually all exports were covered. The list of countries subject to export monitoring would be reviewed for necessary adjustment as export patterns changed. The system by no means violated the principle of most-favoured-nation treatment stipulated in Article I. Besides, the measures concerned were not restrictive in nature.

(e) Article XVII:1(c)

58. The EEC also shared Canada's view (see paragraphs 32 and 88) that the actions taken by the Japanese Government with a view to preventing Japanese companies from selling semi-conductor products in third markets below cost and reducing exports were inconsistent with the obligation in Article XVII:1(c) that no contracting party should prevent any enterprise, whether or not a state trading enterprise, from acting solely in accordance with commercial considerations.

59. Japan, referring to the finding in the panel report on "Canada - Administration of the Foreign Investment Review Act", adopted on 7 February 1984, said that Article XVII:1(c) was interpreted on the basis that "commercial considerations" referred to in sub-paragraph (b) was merely an articulation of the general principle of non-discriminatory treatment prescribed in Article XVII:1(a). Since the monitoring was implemented on a most-favoured-nation basis, and it did not contain any restrictive effect, Article XVII:1(c) was irrelevant in the consideration of the dispute.

B. Access to the Japanese market

60. The EEC said that the conditions surrounding the improvement of market access in Japan showed that Japan had been granting preferential market access to US producers and exporters of semi-conductors. Some of them had claimed that MITI was exercising "administrative guidance" to promote a "Buy American" policy among Japanese companies. The US Semi-Conductor Industry Association's report to President Reagan (see paragraph 49 above) also stated that, "Beginning in late March (1987), US companies operating in Japan indicated that they saw evidence of MITI administrative guidance to the larger Japanese companies, asking that they increase their purchase of US parts." The same report also indicated the existence of an "expectation" by the US industry on market share as well as Japan's recognition of such an expectation that, "... the US share in Japan must show a steady increase to a level slightly above 20 per cent by 1991. The Government of Japan recognized the US industry's expectation when it signed the Agreement." The preferential market access policy was also confirmed by the use of the terms "foreign-based" and "foreign capital-affiliated" companies in different context in the Arrangement. Since there was only one "foreign capital-affiliated" company which was of US origin operating in Japan, these terms and clauses were clearly tailor-made so as to accord preferential treatment to this company. To the EEC's knowledge, there had been no clear or published denial by the Government of Japan of the existence of preferential market access.

61. All the above, and the general tendency of the Arrangement to address issues on a bilateral basis, should lead to a prima facie conclusion that the Government of Japan had created a situation in which Japanese importers and users of semi-conductors were under strong political and administrative pressure which, even if indirect and implicit, could not but have discriminatory effects contrary to Article I of the General Agreement.

62. Japan said that measures taken for improving access to its semi-conductor market were non-discriminatory in that they applied not only to semi-conductors produced by US firms, but to all foreign-based semi-conductors. The terms "foreign-based" and "foreign capital-affiliated" meant substantially the same. They were enterprises owned or controlled, directly or indirectly, by nationals or companies of the countries other than Japan. The term "Foreign-based firms" was used with regard to market access, and the term "foreign capital-affiliated companies" was used concerning participation in research and development projects. Japan had never promised any specific market share or preferential access to any country, and had denied allegations of such promises to all concerned including the press at every opportunity. For instance, the Director-General of MITI's Machinery and Information Industries Bureau had publicly denied this allegation during a symposium held on 6 October 1987 in which many EEC companies had participated. The activities of the International Semi-conductor Co-operation Centre, created to promote foreign semi-conductor sales, were open to all foreign companies. One EEC company had become a member of this organization from the outset when no US company had joined. Semi-conductors of eight EEC companies out of 32 foreign companies were on display at the exhibition held on 13 April 1987 by the Centre. Furthermore, figures showed that the sales of non-US foreign semi-conductors were steadily expanding as well as those of US semi-conductors. The market share of foreign non-US semi-conductors in foreign semi-conductors had increased from 2.8 per cent in the first half of fiscal year 1986 to 4.2 per cent in the first quarter of 1987. With regard to the statements by the US Semi-Conductor Industry Association, its reference to "US" instead of "foreign" semi-conductors was simply because the Association was a US industry association, indifferent to non-US matters.

63. The EEC was not convinced that the terms "foreign-based firms" and "foreign capital-affiliated companies" were used indiscriminately. If there had been no discriminatory intent, the term "foreign produced Semi-conductors" would have sufficed. The participation of one European company in the activities of the International Semi-conductor Co-operation Centre could not be regarded as proof of anything regarding effective access. Nor could the short-term statistics quoted by Japan be regarded as proof of the absence of preferential market access policies. Besides, an increase in imports said nothing about what the trade might have been in the absence of the Japanese measures. The denial by the Japanese Government on preferential access was hardly relevant to the purchasing behaviour of Japanese semi-conductor users who must have been influenced by the pervasive, uncontradicted and officially promoted impression that improved market access was exclusively foreseen for United States companies, including the one which had major production facilities in Japan.

C. Transparency

64. The EEC said that the absence of transparency on the Third Country Market Monitoring System and the market access arrangements increased the problems which they engendered. No information had been provided regarding the implementation of the Third Country Market Monitoring System except that obtained by the EEC when Japan had provided it bilaterally to the United States. It was still unclear whether the Japanese Authorities had systematically refused all export licence applications for exports below a given price. It was not clear whether different criteria were used for export approval; what were the sanctions for circumvention; which were the criteria for determining which markets would be covered, why certain export licences had been delayed seriously, etc. As for the market access issue, the conditions for improved access to the Japanese market were still surrounded by uncertainty and reports of preferential treatment. This was an unequivocal case of violation of Article X of the General Agreement.

65. Japan said that full transparency was ensured with respect to the improvement of market access measures and the Third Country Market Monitoring measure. This was exemplified by the fact that the text of the Arrangement had been notified to the GATT, and sufficient explanation had been provided in the forum of GATT and OECD. The monitoring measure was also implemented in conformity with Article X which required publication of trade restrictive measures. Not only were procedures of application for export approval made public, but detailed explanation had also been provided to the applicants concerning the procedures and necessary documents for application.

D. GATT objectives

66. The EEC stated that one of the objectives contained in the Preamble of the General Agreement was the "substantial reduction of tariffs and other barriers to trade", and that the objective of this reduction included the expansion of production and exchange of goods. The latter had, of course, led to greater international interdependence. To achieve these objectives, it was necessary for all contracting parties not to manipulate the system through the imposition of arbitrary, unilateral export restrictions especially in areas where they had gained a substantial degree of preeminence in terms of concentration of production of essential products. Export controls had, in the industrial field, so far largely been adopted either in concert with the importing country, or for reasons of national security. This was not the case for the Third Country Market Monitoring system applied by Japan to semi-conductors. This system was contrary to the basic philosophy and objectives of the General Agreement. It could not be the intention of the General Agreement to condone unilateral measures which, applied to the advantage of one or two contracting parties, led to the manipulation of supply of a key component of modern technology, to the detriment of other contracting parties. Nor could it be condoned that such action was taken bilaterally, in the absence of any form of meaningful consultation and without transparency.

67. Japan stated that measures taken by its Government were in line with the Japan-US Arrangement concerning trade in semi-conductor products. Measures for the improvement of market access benefited the EEC as well as other third countries. The Third Country Market Monitoring measures were exercised to prevent dumping which Article VI of the GATT condemned. All these measures were implemented with a view to achieving a sound development of world semi-conductor trade as well as to promoting a healthy growth of semi-conductor industries in the world under the aegis of a fair and free trade system. They accorded with the spirit and the basic objectives of GATT.

E. Nullification and impairment

68. The EEC considered that the Third Country Market Monitoring system, the discriminatory effects of import market access, and the lack of transparency surrounding these aspects of the Arrangement were inconsistent with Japan's obligations under the General Agreement and that this resulted in the nullification or impairment of the benefits accruing to the Community under the General Agreement. The application of measures which were judged inconsistent with the GATT obligations of the contracting party concerned constituted, in accordance with established GATT practices, a prima facie case of nullification or impairment. It was therefore not necessary for the Community to provide evidence of the actual damage to its trade caused by these actions by the Japanese Authorities.

69. Even if there had not been a violation of the provisions of the General Agreement, the application of the Third Country Market Monitoring system by Japan had nullified or impaired benefits accruing to the EEC. In addition to the failure of Japan to carry out its obligations arising under the specific provisions of the General Agreement (Articles I, VI, X, XI and XVII), the Community was of the view that the attainment of the objectives of the Agreement had also been impaired. Any measure which significantly impeded exports to any contracting party without its consent and which was not covered by one of the exceptions foreseen in the General Agreement must be examined very critically. It would no doubt have been considered unnecessary when the General Agreement was drafted to include a specific Article to say that contracting parties were prohibited from adopting unilateral or bilaterally agreed measures which were intended directly and substantially to increase the price of components, or indeed other goods, to other contracting parties. Any such arrangement, whether unilateral or bilaterally agreed, was so clearly contrary to the basic principles of free trade that it did not need to be specifically prohibited by Articles separate from those already referred to. The Japan-US Arrangement constituted an intergovernmental agreement to increase the price of important components to buyers throughout the world, except in Japan itself. Any such intergovernmental agreement necessarily involved nullification or impairment of the benefits to other contracting parties resulting from the General Agreement, for the simple reason that it deprived the other contracting parties of the most basic benefit of free trade, which was the freedom to buy at prices at which companies were willing to sell.

70. Japan said that since the measures relating to semi-conductor trade had not had the effect of raising export prices nor reducing the export volume and were not inconsistent with GATT, benefits accruing to the EEC could not be nullified or impaired as defined in Article XXIII:1(a). Furthermore, even if there had been a rise in export price or reduction in export volume, as the result of "the application ... of any measure" not conflicting with the provisions of the General Agreement in the Article XXIII:1(b), or "the existence of any other situation", indicated in the Article XXIII:1(c), it was not right to conclude that "any benefit ... is being nullified or impaired". If such an argument were to be accepted, corporate marketing strategies, including their pricing policies, would have to be regarded as being within the mandate of the GATT. From this viewpoint, the General Agreement required discretion in the application of the Article XXIII in relation to the matter pertaining to (b) or (c) of the same Article. This was clearly indicated in paragraph 5 of "Agreed Description of the GATT in the Field of Dispute Settlement (Article XXIII:2)" which stated that if a contracting party bringing an Article XXIII case claimed that measures which did not conflict with the provisions of the General Agreement had nullified or impaired benefits accruing to it under the General Agreement, it would be called upon to provide a detailed justification.

71. The assertion by EEC that even if the measures of the Japanese Government were not in violation of GATT, they were still nullifying and impairing the EC's benefits by raising the price and reducing the volume of the exports meant that the EEC was claiming that the importing country had the right to purchase a limitless amount of semi-conductors at low prices. Clearly, GATT did not ensure such a right to contracting parties. The EEC was only saying that profits of the importers gained by importing inexpensive semi-conductors were lost as the exporters voluntarily eliminated any export practice which might be considered as dumping. Such corporate action was not the subject for the dispute settlement procedures of the General Agreement. In either case, the measures in question did not come within the purview of the nullification or impairment of benefits guaranteed under the GATT, and the EEC's claim was utterly unacceptable.

72. The United States said that for many years its Government had been greatly concerned about the continued health and vitality of the semi-conductor industry. This concern was derived from the role that mass production of certain semi-conductors known as "technology drivers" played in the US industry's ability to competitively produce a full range of semi-conductor products. If this essential segment were to disappear from US production, the entire microelectonics industry could be threatened or lost in subsequent years, potentially resulting in further damage to vital national interests. The focus of this concern had been Japan. For over ten years the United States Government had sought to improve access to the Japanese market. In June 1985, the US industry filed a petition under Section 301 of the Trade Act of 1974. Additionally, starting in the early 1980's, there had been evidence of below-cost sales by Japanese semi-conductor producers. This had led the US industry in 1985 to file two anti-dumping petitions on the two major semi-conductor products. In addition, the US Department of Commerce self-initiated an anti-dumping investigation on another semi-conductor product. The Administration could have continued to treat each issue separately, but it had decided that a comprehensive solution would be preferable. The Arrangement between the Governments of Japan and the United States of America had culminated the multi-year effort by the United States to enhance the ability of foreign semi-conductor manufacturers to compete in the Japanese market and to ensure that Japanese manufacturers competed fairly. For the United States, the fundamental principle in negotiating this Arrangement had been to take steps that would enable the free market to work. One aspect of this principle was to remove barriers to free trade in semi-conductors. The other was to ensure that market principles applied to the pricing and production decisions of semi-conductor manufacturers. As to this latter goal, there had not only been the short-term need to end the widespread resort to below-cost pricing by Japanese manufacturers, but also the more fundamental, long-term issue of eliminating over-capacity. In a free market, firms unable to operate profitably took whatever measures were necessary to attain or restore profitability. Such measures ranged from shifting lines of production, restructuring, closing down less efficient plants or laying off workers, to the ultimate step of going out of business. However, in Japan, semi-conductor producers had continued to make production capacity investments at a time when the semi-conductor industry had been experiencing a recession and operating unprofitably. This had resulted in further over-capacity, providing an added incentive for predatory below-cost pricing.

73. The United States believed the Arrangement constituted a major step forward in the conduct of high technology trade. It did not, as the European Communities and some others feared, promote US interests at the expense of third countries. To the extent its objectives were met and free trade in semi-conductors was enhanced, all benefited.

A. Access to the Japanese Market

74. There was no truth to the belief that the US had sought, expected or was receiving preferential access to the Japanese market. The Arrangement uniformly spoke of enhanced access for "foreign-based semi-conductors". There were no secret understandings on preferential access for US companies and that subject had never been discussed during the negotiations. It was true that the US industry had expressed on many occasions its expectations of a share of the Japanese market. However, statements of expectations, be they written or otherwise, simply reflected the expectations of those making the statements and certainly were not a commitment by governments. It was expected that US companies would benefit from the increased access opportunities, but equally it was expected that other foreign-based companies would benefit as well. The United States wanted semi-conductor producers from other countries to have improved access to the Japanese market as well. From a practical standpoint, improved broad-based access by non-US producers would provide indirect benefits to the US industry, as Japanese consumers of semi-conductors became accustomed to purchasing from non-Japanese producers generally. Statistics showed that there had been no growth in the US position in the Japanese market at the expense of other non-Japanese suppliers. EEC's allegation of preferential access in contravention of Article I was not established.

B. The Third Country Market Monitoring

(a) Article VI

75. EEC's claim that the monitoring measures were incompatible with Article VI had no foundation in fact or law. There was no foundation in fact because, on the one hand, the EEC complained about the alleged artificial increase in prices within the Community because of these measures. On the other hand, however, the EEC had recently initiated anti-dumping investigations against Japanese exports of two major semi-conductor products (DRAMs and EPROMs), complaining about low semi-conductor prices within the Community, based upon sales prices up to 30 per cent below the Japanese companies' cost of production. Artificially inflated prices and prices significantly below costs of production obviously could not co-exist. Assuming that EEC's initiation of anti-dumping investigations was warranted by credible evidence, the allegation of a supposed "spillover effect" and increase in prices was unsupportable and inconsistent. Legally speaking, the Third Country Market Monitoring provisions represented a commitment by the Government of Japan to implement a monitoring system to prevent predatory below-cost pricing by their semi-conductor exporters. Article VI of the General Agreement clearly was limited to actions taken by an importing country to counter "dumped" imports. Neither Article VI nor any other Article of the General Agreement covered efforts by an exporting country to prevent below-cost pricing at the source, before the product had entered international trade. The negotiating history of Article VI made no reference to consideration of the issue of an exporting country monitoring the exports of its own companies. There was no hint of any intention to preclude such actions and the EEC was unable to provide evidence to support its allegation. Finally, the United States asserted that EEC's argument depended on the panel finding that there was a GATT-protected right to dump, and that the Arrangement was a restriction on this normal trade practice. On the contrary, in the view of the United States, the General Agreement clearly considered dumping a trade-distorting practice and the EEC argument effectively stood the underlying principle of the General Agreement on its head.

76. The United States questioned the accuracy of the graphic depiction of pricing data supplied by the EEC (Appendix I). The price breakpoints in the graphs did not consistently correspond to the Dataquest prices supplied by the United States. First, the EEC failed to report the monthly prices on a consistent basis. Instead of using, for instance, the first or last reported monthly price or the average monthly price in a consistent manner, the EEC selectively chose prices for a given month in one market in a manner different from its selection of a price in another market. Second, some of the prices in the EEC's graphs were simply inaccurate. For example, for 256K DRAMs sold in the European market, the EEC presented prices of $2.50 for May and $2.60 for June. However, Datquest reported 256K DRAM prices in Europe of $2.15 for May and $2.35 and $2.50 for June. There were other similar inaccuracies. In the U.S. view, the price graphs supplied by the EEC materially distorted actual pricing patterns in order to exaggerate purported differences in prices between various markets.

77. The United States considered all arguments relating to the Anti-dumping Code to be outside the mandate and competence of the Panel, which was constituted under Article XXIII of the General Agreement.

(b) Article XI

78. The EEC claimed that the Third Country Market Monitoring provisions were inconsistent with Article XI. The Arrangement did not require, or even suggest, quantitative restrictions within the meaning of Article XI. It called for the Government of Japan to monitor Japanese semi-conductor manufacturers' cost and export prices in order to prevent exports at below-cost prices. Quantity exported was irrelevant under the Arrangement. The key was whether the export price was below a company's cost. The focus was on pernicious below-cost pricing, not on quantities exported. Reports of minimum prices established on a product-specific basis and of restriction of export volumes referred to by the EEC were also received by the United States. When first received, the US reaction to those expressing this concern and to the Government of Japan had been that the Arrangement was meant to prevent below-cost pricing, not to restrict or disrupt exports. The intended prevention of dumping could be exercised only with reference to each Japanese semi-conductor exporter's cost of production for each product. Any other system, the US had stressed firmly, was not consistent with the terms and spirit of the Arrangement. The Government of Japan had repeatedly declared that it was not refusing to grant export licences except for COCOM purposes. Furthermore, on 3 November 1987, Japan affirmed tht it was not imposing any quantitative or other restrictions on the production, shipment or supply of semi-conductors. Moreover, the EEC had presented no evidence of a decrease in exports of semi-conductors from Japan attributable to the Arrangement. Indeed, exports of semi-conductors from Japan had actually increased significantly after the Arrangement came into effect. Thus, there was no basis for finding a "restriction" in contravention of Article XI.

(c) Article I

79. The United States concurred with the arguments of the Government of Japan with respect to Article I. It noted that Japan was monitoring virtually all semi-conductor exports, constrained only by administrative feasibility. Neither the EEC nor Canada had explained how such actions based on administrative feasibility were inconsistent with Article I.

(d) Article XVII:1(c)

80. The negotiating history of Article XVII indicated that the concern of the drafters had been that discipline on state trading enterprises not exceed that on private enterprises. Therefore, they had included sub-paragraph 1(c). There was no indication that the drafters had intended to use this Article as a vehicle for creating new disciplines with respect to private enterprises. An assessment of the scope of Article XVII:1(c) obligations had been undertaken by a dispute settlement panel in 1984 in "Canada - Administration of the Foreign Investment Review Act". The Panel had concluded that "the commercial considerations criterion becomes relevant only after it has been determined that the governmental action at issue falls within the scope of the general principles of non-discriminatory treatment prescribed by the General Agreement". Since there was nothing inherently discriminatory about monitoring export prices, the argument as to the applicability of Article XVII:1(c) did not stand. Furthermore, dumping could not be considered a normal "commercial consideration" as implied by the EEC and Canada. The United States considered it fundamental that the Panel not establish an affirmative right to engage in activities that all contracting parties had agreed at the very beginning of GATT were trade distorting.

C. Transparency

81. There was no lack of transparency. The Arrangement had been notified to the GATT, the US and Japan both had expended considerable time and resources explaining the Arrangement and responding to questions during the Article XXII consultations, and voluminous written answers had been provided to questions raised both in the GATT and in the Trade Committee of the OECD. N° more could or should be expected of either the United States or Japan.

D. Nullification and Impairment

82. Just as the EEC could not establish that the Arrangement was inconsistent with any provision of the General Agreement, it also could not establish that any benefit accruing to it was being nullified or impaired. With regard to market access, EEC-based semi-conductor firms had the same opportunity to benefit from the market access provisions of the Arrangement as US-based firms. This equal opportunity already had been acted upon, witnessed among other things by the participation of a European company in Japan's International Semi-conductor Co-operation Centre. With regard to dumping, the General Agreement did not preclude a govenrment from taking steps to prevent dumping by its exporters. Therefore, the EEC could not claim that any benefits were being nullified or impaired. The EEC had not shown as a factual matter that there was a nullification and impairment in third country markets. Also, as a factual matter, the EEC had not shown how any increases in prices of semi-conductors within the EEC could be attributed to Japan's efforts to prevent dumping by its exporters.

83. Several interested third parties submitted to the Panel arguments on Articles VI and XI similar to those advanced by the EEC. To avoid repetition, details of these arguments are not recorded in the following paragraphs.

A. Australia

84. Australia considered that the Arrangement nullified and impaired the benefits accruing to Australia and other affected contracting parties to the General Agreement. In particular, the provisions of the Arrangement relating to the monitoring and control of semi-conductor exports to third country markets were in contravention of the provisions of Articles VI and XI and were also contrary to Articles 2, 3, 5, 7.6 and 12 of the Anti-dumping Code and probably also Australia's Trade Practices Act. The Arrangement constituted a government sanctioned cartel which not only attempted to fix prices but also apparently involved the implicit assumption that the US share of the Japanese market for semi-conductors would be more than doubled to about 20 per cent by 1991. There was a lack of transparency. It was not clear what "appropriate actions" the Japanese Government would take to prevent exports at prices less than company-specific fair values, nor on what basis the US authorities assumed that US firms would obtain a 20 per cent share of the Japanese market as a result of the Arrangement.

85. The Arrangement also constituted an assertion of a right of the US Government to exercise remedies against alleged dumping in third countries which pre-empted the rights of other GATT members. It had the intention and the effect of raising prices for semi-conductors sold in third country markets to levels based on US prices, which might not necessarily reflect normal market conditions in those markets. Complaints had already been received by the Australian Authorities on the price rise of certain important components. Prices of products containing semi-conductors were also likely to be increased. This mechanism of fixing prices for particular semi-conductors in specific markets could be used for cross-subsidization and to suppress comparative advantage for finished products incorporating semi-conductors by differential pricing to discriminate between producers so as to favour the products of related or vertically integrated producers. The export control provisions of the Arrangement were potentially detrimental to the development of indigenous capacity in high technology in countries such as Australia which were mainly dependent on imported semi-conductors since such countries could have their access to state of the art chip technology inhibited as a result of extension of the effects of the cartel. In October 1987, the Australian Computer Equipment Manufacturers' Association had complained that the prices for memory chips purchased by Australian firms had increased from $A4.16 to $A6.20 over the past few months. This increase exceeded any adjustment that could be attributed to movements in exchange rates. The Association also advised that deliveries from Japan had moved from "off the shelf" to quotations of up to six months on chips other than memories. A six to eight week delay was being quoted for supply of 256K DRAM chips with small quantities impossible to obtain. One Australian company had reported that leading edge memory products, such as 256K 100 nanosecond Dynamic Random Access Memory chips had been placed on strict allocation in Japan. There were other serious longer term effects arising out of the possible extension of the export control provisions in the Arrangement. In Australia, the vulnerability to disruptions in supplies of chips as a result of this Arrangement could have a highly negative effect by discouraging investment in manufacturing capacity in areas utilizing new technologies. This would frustrate industrial restructuring and the expansion and diversification of the manufacturing sector. Finally, this bilateral arrangement might, if it were allowed to succeed, become the model for further attempts at trade and market fixing in other areas, particularly in high technology product areas. It represented a continuation of a growing trend in recent years towards managing trade flows through the use of measures such as orderly marketing arrangements and voluntary export restraint arrangements.

86. Australia asked that the Panel find the Arrangement to be contrary to the obligations of the two parties concerned and recommend that the Arrangement be terminated.

B. Canada

87. Canada said that the Arrangement was contrary to the spirit of the General Agreement, undermined the integrity of the international trading system and contravened Articles VI, XVII.1(c) and 1 of the General Agreement. Canada was concerned that the Arrangement, particularly through monitoring prices to third country markets, in effect constituted a world-wide market sharing and price arrangement which would increase prices for Canadian users of semi-conductors. The Arrangement went beyond what was required to address the anti-dumping action in a strictly bilateral context, to the detriment of third party interests. The agreement of the Japanese Government to control export prices of a wide variety of semi-conductors also went against the spirit and principles of the General Agreement. Such an arrangement lay open the likelihood of cartelization of the world market, since the US and Japan overwhelmingly dominated world production of semi-conductors. Moreover, by taking action against allegedly dumped exports to third markets without recourse to established GATT procedures, the Arrangement further undermined the international trading system. The precedent set by this Arrangement created the danger that others, faced with similar protectionist pressures, might see no option but to emulate such behaviour.

88. Canada believed that the unilateral determination by the United States which underpinned the Arrangement that semi-conductor products were being dumped in third country markets was contrary to Article VI of the General Agreement. Article VI and the Anti-dumping Code were quite precise regarding the circumstances under which contracting parties could take action against dumping, a matter of concern only where material injury occurred or was threatened. Neither the GATT nor the Code envisaged unilateral or bilateral action to counteract the effects of dumping in third markets which was precisely what the Arrangement was directed at. Canada also considered that the provisions in the Arrangement whereby Japan agreed to monitor, as appropriate, semi-conductor firms from Japan was contrary to Article XVII:1(c) which stipulated that "no contracting party shall prevent any enterprise (whether or not a state trading enterprise) under its jurisdiction from acting in accordance with the principles of sub-paragraphs (a) and (b) of this paragraph". Paragraph 1(b) of Article XVII stipulated, inter alia, that enterprises should make their sales abroad solely in accordance with commercial considerations, including price, quality, availability, marketability, transportation and other conditions of sale. By monitoring cost and export prices of semi-conductor products, the Government of Japan was in effect undertaking to prevent Japanese companies within its jurisdiction from acting in accordance with commercial considerations, particularly with respect to prices. The intention of the Arrangement, regardless of how it was being implemented, was to prevent Japanese companies from selling their semi-conductor products in third country markets below what had been deemed to be "fair value". This view was confirmed by the action taken by the President of the United States on 17 April 1987 to introduce a punitive tariff of 100 per cent on certain Japanese products, because "Japan has not enforced major provisions of the arrangement aimed at preventing dumping of semi-conductor chips in third country markets and improving US producers' access to the Japanese market". The White House Fact Sheet released in conjunction with the imposition of this tariff stated in part that "A comprehensive Commerce Department analysis of Japanese pricing activity in third country markets conclusively demonstrates that significant dumping was still occurring as of the 28 February deadline. At that time, Japanese-produced DRAMs were being sold on average at 59.4 per cent of the fair value, while EPROMs wee being sold at 63.6 per cent of the fair value. If dumping of this magnitude were to continue, US semi-conductor companies would have little or no chance to compete in overseas markets." These quotations demonstrated that it was the US Government's view that the Government of Japan had undertaken to ensure by means of this Arrangement that the semi-conductor products would be sold at "fair value" (whatever value that had been determined to be). As the clear intention of the Arrangement was to prevent Japanese companies from selling semi-conductor products in third markets below cost, and no determination of dumping or finding of injury had been made with respect to the sale of these products in third country markets by these countries, Canadian authorities considered that the Arrangement was inconsistent with Article XVII:1(c). Canada also contended that the Third Country Market Monitoring provisions of the Arrangement were inconsistent with Article I of the General Agreement with respect to most-favoured-nation treatment. Article I stipulated that "any ... immunity granted by any contracting party to any product ... destined for any other country shall be accorded immediately and unconditionally to the like product ... destined for the territories of all other contracting parties". As Japan granted immunity to all but fourteen contracting parties from the undertaking to monitor cost and export prices on the products exported by Japanese semi-conductor firms, it was acting in a manner contrary to Article I of the General Agreement.

89. Canada requested that Japan withdraw its monitoring undertaking with respect to Japanese semi-conductor products destined for export to third markets. It also reserved its rights on the Arrangement's provisions on the subject of access for foreign companies to patents resulting from government-sponsored research and development activities.

TO CONTINUE WITH TRADE IN SEMI-CONDUCTORS

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