24 March 1988

TABLE OF CONTENTS

I. INTRODUCTION

II. BACKGROUND

III. RECOURSE TO ARTICLE XXIII:2 BY THE EEC

IV. MAIN ARGUMENTS BY PARTIES TO THE DISPUTE

V. ARGUMENTS BY THE UNITED STATES

VI. SUBMISSIONS BY INTERESTED THIRD PARTIES

VII. FINDINGS

VIII. CONCLUSIONS

APPENDIX I
APPENDIX II
APPENDIX III

1. At its meeting on 27 October 1986, the Council considered a communication from the European Economic Community (L/6057, dated 18 October 1986) concerning a bilateral arrangement between the governments of Japan and the United States on trade in semi-conductor products (L/6076). The Community stated that it had already asked Japan and the United States for Article XXII:1 consultations, and proposed that these begin in the immediate future.

2. Such consultations were held on 20 November 1986 and 29 January 1987. As no satisfactory settlement was obtained, the Community, in a communication dated 19 February 1987, requested the formation of a panel to examine the matter pursuant to Article XXIII:2 (L/6129).

3. At its meeting on 15 April 1987, the Council agreed to establish a panel with the following terms of reference:

4. The Council also agreed that the Panel would be established on the basis of the following understanding related to the terms of reference:

5. Concerning the above understanding, the representative of the United States stated that "adequate opportunity to participate" had to be interpreted by the Panel in the same way as this phrase was interpreted in an earlier dispute addressed in document L/5776. The Council took note of this statement (C/M/208).

6. The representatives of Argentina, Australia, Austria, Brazil, Canada, Hong Kong, Republic of Korea, Malaysia, Mexico, Singapore, Sweden for the Nordic countries, Switzerland and Thailand reserved their rights to make submissions to the Panel (C/M/207 and C/M/208).

7. The composition of the Panel was announced in document C/149, dated 24 June 1987, as follows:

8. The Panel met five times, on 16-17 September, 5-6 November, 26-27 November 1987,4-5 February and 19-20 February 1988.

9. Information and arguments submitted by the two parties to the dispute, their replies to questions and requests put by the Panel, information and arguments submitted by the United States and by other interested parties, as well as relevant GATT and other documentation, served as the basis for the Panel's examination of the matter.

A. Developments leading to the Japan/US Arrangement in Semi-conductor trade

10. The United States and Japan are the largest producers and exporters of semi-conductors. The United States was the largest producer during the 1970's, but Japan became increasingly important as both a producer and exporter of semi-conductor products at the beginning of the 1980's. In 1981, its exports exceeded those of the United States for the first time. In February 1983, the United States' industry began to express concerns to the Government of the United States about the lack of access of non-Japanese companies to the Japanese market and possible unfair trade practices of Japanese companies in the US market.

11. On 14 June 1985, the United States Semi-conductor Industry Association filed a petition under Section 301 of the Trade Act of 1974 against the Government of Japan, alleging that Japan was restricting access to the domestic semi-conductor market for United States producers. This industry-wide action was followed by several complaints brought under the anti-dumping law. On 24 June 1985, an anti-dumping petition concerning 64K DRAMs from Japan was filed by Micron Technology Inc. Also, on 30 September 1985, a petition concerning the alleged dumping of EPROMs from Japan was filed by Intel Corporation, Advanced Micro-Devices, Inc. and by National Semi-conductor Corporation. Finally, on 6 December 1985 the United Sates Department of Commerce initiated an anti-dumping investigation to determine whether DRAMs of 256K and above from Japan were sold at less than fair value. Protracted negotiations between the governments of Japan and the United States led to the conclusion of a bilateral agreement in September 1986.

12. On 2 September 1986, Japan and the United States formally concluded an Arrangement concerning Trade in Semi-Conductor Products (hereinafter called "the Arrangement") which was subsequently notified to the GATT on 6 November 1986 in document L/6076. The Arrangement was linked to the suspension of anti-dumping procedures initiated in the United States against imports of certain categories of Japanese semi-conductors and to the suspension of the Section 301 proceedings on access to the Japanese market for US-made semi-conductors.

B. Main provisions of the Arrangement

13. The Arrangement contains three main sections. The first section relates to market access. It provides that the Government of Japan will impress upon the Japanese producers and users of semi-conductors the need to aggressively take advantage of increased market access opportunities in Japan for foreign-based firms which wish to improve their actual sales performance and position. Specifically, the Government of Japan will provide further support for expanded sales of foreign-produced semi-conductors in Japan through the establishment of an organization which will provide sales assistance, quality assessment, research fellowship programmes, exhibitions, etc., for foreign semi-conductor producers, and through promotion of long-term relationship between Japanese buyers and foreign producers including joint product development programmes. On the other hand, the Government of the United States will impress upon the US semi-conductor producers the need to aggressively pursue every sales opportunity in the Japanese market and will also provide support for the activities of the organization mentioned above. This section further provides that there should be full and equitable access for foreign companies to patents resulting from government-sponsored research and development, and that both Governments should refrain from policies or programmes which stimulate inordinate increases in semi-conductor production capacity.

14. The second main section of the Arrangement contains three sub-sections dealing with prevention of dumping. The first sub-section concerns the suspension of present anti-dumping cases on two types of semi-conductors: Erasable Programmable Read Only Memory (EPROM) and 256 Kilobits and above Dynamic Random Access Memory (DRAM). The second sub-section provides that, in order to prevent dumping, the Government of Japan will monitor cost and prices on a list of semi-conductor products exported to the United States. The format of the data report concerning company and product-specific cost and export price data on monitored products is contained in an appendix to the Arrangement. It has 35 entries, seeking information on production costs, packaging costs, freight, insurance, duty, commissions and rebates, charges, other expenses, and finally, net prices. This sub-section also provides that if any monitored product is being sold or exported at prices less than company-specific fair value, the Government of the United States may request immediate consultations. Based on monitoring and/or consultation, the Government of Japan will take appropriate actions available under laws and regulations in Japan to prevent such exports to the United States. The third sub-section relates to monitoring of third-country markets. It is stated that both governments recognize the need to prevent dumping in accordance with relevant provisions of the GATT and encourage respective industries to conform with the above principles. It is also stated that in order to prevent dumping, the Government of Japan will monitor, as appropriate, cost and export prices on the products exported by Japanese semi-conductor firms from Japan to certain markets.

15. The Third section contains general provisions on periodic and emergency consultations, on the conditions of amending and terminating the Arrangement, and on the preservation of GATT rights and the interests of third countries. The duration of the Arrangement is five years, ending on 31 July 1991.

C. Implementation of the Arrangement by Japan

16. According to information provided by the Japanese delegation, the following measures had been taken to implement the Arrangement.

(a) Access to the Japanese market

17. To promote the sales of foreign semi-conductors in Japan, the Japanese government encouraged Japanese users to purchase foreign semi-conductors from all sources on the whole range of semi-conductor products. Specifically, the Director-General of the Machinery and Information Industries Bureau sent letters in September 1986 and July 1987 to major domestic users or purchasers of semi-conductors, requesting their co-operation in increasing the purchase of foreign-based products. The Minister of the Ministry of International Trade and Industry (MITI) also organized meetings with the top ten major users of semi-conductors in March and May of 1987 to make the same request. Relevant governmental departments also made similar requests to users' associations and individual companies. In addition, surveys of the procurement situation of foreign-based semi-conductors were carried out regularly by MITI.

18. The International Semi-conductor Co-operation Centre, an organization to promote the sales of foreign semi-conductors, was established in March 1987. The activities of the Centre were open to all foreign companies. The Centre held exhibitions, conducted survey, offered sales-related information and organized other activities helpful to the promotion of sales of foreign semi-conductors. The Centre's first exhibition was held on 13 to 16 April 1987. A symposium was held on 6 October 1987.

(b) Monitoring

19. The third Country Market Monitoring measures could be discussed under two headings: (i) requests by Government to producers and exporters; (ii) export approval and monitoring costs and export prices.

(i) Requests by Government to producers and exporters

20. The Director-General of the Machinery and Information Industries Bureau and the Minister of MITI organized meetings with producers and exporters (in September 1986, March and May 1987) to request that dumping should be avoided. These requests were general appeal, not legally binding. The likely consequences of disregarding these requests were pointed out. If requests were not complied with, they were repeatedly made by MITI.

(ii) Export approval and monitoring costs and export prices

21. The export approval system for semi-conductors, based on the Foreign Exchange and Foreign Trade Control Law, was introduced for the purpose of COCOM enforcement. Since November 1986, this system had been used to monitor export prices of semi-conductors. Exporters of items subject to COCOM enforcement, including all semi-conductors, to be monitored under the Arrangement, were required to submit licence applications which were screened according to COCOM considerations and export licences were approved or rejected by MITI according to these considerations.

22. The threshold for shipments of semi-conductors requiring export licences was reduced from Y1 million to Y50,000 in January 1987. As a result of this change, the number of applications almost doubled, causing delay in the processing of certain licence applications. Incomplete information in applications also caused delay in some cases. There was no limit of processing time for export licence applications, whether maximum or minimum. Depending on various factors relating to individual applications, the time taken to process them ranged from a couple of weeks to several months.

23. Manufacturers and exporters were required to report data on export prices, and periodically on costs to MITI. The data collection procedures for prices were established in accordance with Article 67 of the Foreign Exchange and Foreign Trade Control Law and Article 10 of the Export Trade Control Order. Failure to report or submission of false reports were liable to penal servitude not exceeding six months or a fine not exceeding two hundred thousand yen. However, non-compliance in this regard would not lead to denial of export licence or prohibition of exports. When MITI found cases in which export prices were "extremely below costs", it would inform the companies concerned of the facts and of MITI's concern. MITI did not set minimum prices for exports and the communications by MITI to the companies were not legally binding. Companies were expected to understand that it was in their own self-interest to prevent dumping, and to take action accordingly.

24. The existence or non-existence of injury in foreign importing countries was not taken into consideration by MITI when watching costs and export prices.

25. Effective from 10 November 1987, the revised Foreign Exchange and Foreign Trade Control Laws to strengthen the regulations on reporting COCOM-related commodities had separated export approval from monitoring as far as semi-conductors were concerned. Under the new system, the licensing procedure was separated from the monitoring procedure. Exporters could either apply for licences and report on price information to MITI simultaneously or separately, but in any case prior to customs clearance. On receipt of a licence application and a report (in two separate documents), the licence application would be processed by the office dealing with COCOM screening. The report on prices would be processed in condiseraion of cost informtion obtained separately by the Monitoring Office. In cases where export prices were "extremely below cost", MITI would express its concern to the companies concerned. As there was no feedback from the Monitoring Office to the office dealing with COCOM screening, the approval or rejection of export licences was not affected by the contents of the reports. Under the old system, an export licence was approved only after the two consecutive processes of COCOM screening and monitoring, hence it took a longer time for processing and some misunderstanding seemed to have been created among exporters that delays had been caused by inappropriate pricing. The new system would eliminate such misunderstandings. MITI could not disapprove applications due to inappropriate pricing.

(c) Supply and demand forecasts

26. In relation to monitoring and improvement of market access, MITI compiled on a quarterly basis Semi-Conductor Supply-Demand Forecasts. It sent out questionnaires to all manufacturers and major users of various semi-conductors to seek data on production, demand and other information. Based on the results of the surveys, and taking into account information from foreign markets and various research organizations, a report was drafted for the deliberation of the Semi-conductor Supply-Demand Forecast Committee, composed of users, manufacturers, academics and experts. The report was then issued to the press and in MITI's public report. MITI also distributed it freely upon request.

27. The forecast was formulated as a reference for manufacturers in their production schedules. MITI explained its objective to manufacturers and impressed upon them the need to reflect real demand in their production. Individual companies were expected voluntarily to bring their production almost in line with the forecasts, taking into account the appropriate total production. The forecasts were not legally binding and the Government did not allocate production volume to individual companies. For manufacturers to conspire on production volume was against the anti-trust laws in Japan.

D. Movement of prices in certain semi-conductors

28. Appendix I contains three line graphs supplied by the EEC, showing the movement of prices in the EEC, US and Japanese markets of 256K DRAMs, 256K EPROMs, and 128K EPROMs in the first nine months of 1987, and a bar chart showing the movement of prices of the three semi-conductors over the period from 1984 to 1987 in the EEC market. Appendix II shows the movement of export prices of 256K DRAMs and 256K EPROMs from Japan to Europe from September 1986 to August 1987. This information was supplied by Japan. Appendix III contains selective contract prices in the European market supplied by the United States on several kinds of semi-conductors, from August 1986 to October 1987.

29. The EEC contended that the price increase in early 1987, contrary to what had been forecasted by Dataquest, an international industry analyst (also used by the United States), was explained by MITI production and price control activities. Japan maintained that pricing was a decision by businessmen based on commercial considerations. Especially in the period following the conclusion of the Arrangement, pricing was affected by many factors such as trade issues with the United States, EEC anti-dumping investigations, industry's intention to avoid below cost pricing, recovery of balanced supply and demand relations and reduced supply capacity. Therefore, simple comparison of actual data with the forecast formulated by Dataquest on the basis of past data was not meaningful. The United States explained that prices of semi-conductors were affected by the elasticity of demand for the final product, for example, computers. Prices also fluctuated over the course of the year, depending on the time of contracts negotiated. The product life cycle of a particular type of semi-conductor, exchange fluctuations, and the initiation of anti-dumping investigations, and significant worldwide increases in downstream product demand were all factors which also influenced prices.

30. In its communication of 19 February 1987 (L/6129), the EEC claimed that the benefits accruing to it from the General Agreement were being nullified or impaired by the very nature of certain provisions of the Arrangement between Japan and the United States which constituted an unacceptable interference with the trade in, and production of, semi-conductors of contracting parties not parties to the Arrangement. Some of the measures so introduced were upsetting international competitive relationships unilaterally and artificially. This was all the more prejudicial in that the sector concerned was one in which the parties to the Arrangement had at present a dominant position in world production and trade, and was at the same time of fundamental importance to the industrial development of contracting parties concerned. Specifically, the Community considered that:

31. The Community invited the panel to recommend that the CONTRACTING PARTIES request Japan to take appropriate measures to eliminate the Third Country Market Monitoring system and to ensure that Japanese market opening in respect of foreign semi-conductors was applied in a non-discriminatory fashion.

32. The submission by Canada, dated 16 September 1987, added two aspects to the complaint on (i) above, claiming that the measures also violated Articles I and XVII:1(c). The Community, in a communication dated 22 October 1987, said that it agreed with the views advanced by Canada and requested the Panel to take these into consideration.

A. The Third Country Market Monitoring

(a) General

33. The EEC stated that the purpose of the export monitoring provision was clear. The implementation of the Arrangement had increased prices in the US market, thus placing US users at a disadvantage vis-à-vis their competitors in third countries and measures to increase prices artificially in those countries were therefore taken to the detriment of users in those countries. On the other hand, US producers and exporters of semi-conductors would, in the absence of such measures, remain exposed to reported Japanese dumping in markets other than the United States. In the Japanese Position Paper presented to the United States in the second week of April 1987, it was stated that "... Japan has taken appropriate action to ensure that Japanese semi-conductors are being sold at not less than their cost in third country markets." The EEC rejected the justification given during Article XXII consultations that the monitoring of cost and export prices on products exported by Japanese semi-conductor firms was "the need to prevent dumping in accordance with the relevant provisions of the GATT" (sub-paragraph 1 of sub-section 3 of the Arrangement). The EEC also rejected the explanation given by the United States that the provision on Third Country Market Monitoring was necessary in order to avoid circumvention of the suspension agreement by exports from Japan to the United States through third country markets. This argument would imply that all contracting parties could apply export controls in respect of any product of their choice to all destinations in order to prevent circumvention and dumping on any one single market, and could do so with the agreement of only one contracting party, instead of with all parties concerned.

34. To implement the Third Country Market Monitoring provision, an export licensing system was used for the monitoring according to which licences were issued to applications which respected certain price guidelines, i.e. a minimum price fixed for individual products. Since Japan and the United States directly produced, or controlled through overseas manufacturing plants, a pre-dominant share of world semi-conductor production, the government-mandated export price control would lead to a situation in which importing countries would be forced to pay a price for such imports in excess of what normal conditions of competition would imply. This situation could force, induce or permit Japanese producers to exercise quantitative export limitations which could subject foreign competitors producing competing final products to considerable uncertainty and risks in their production plan or even prevent them from producing at all. The Community had been informed by some Japanese manufacturers that MITI was putting pressure on them through administrative guidance to restrict overall export volumes of certain semi-conductors, resulting in severe reduction of supplies, delays in the granting of export licences and other disruptions with potentially serious consequences.

35. The EEC went on to state that the Japanese administrative guidance not only controlled export prices and export volume, but also production volume and other aspects in relation to exports. In the Japanese Position Paper mentioned above, it was stated that "Japan exercised administrative guidance to achieve production cutbacks and adopted more stringent export licensing practices with a view to aiding the US efforts over and above Japan's obligations under the Arrangement ... In February 1987, MITI exercised administrative guidance to the companies to reduce production during the first quarter of 1987 by 23 per cent below fourth quarter 1986 levels. Last month, MITI again exercised administrative guidance to the companies to reduce production still further in the second quarter to 32 per cent below fourth quarter 1986 levels." The Position Paper also stated that the Japanese government "has taken steps above and beyond its obligations under the Arrangement in part for the purpose of demonstrating its desire to cooperate with the United States during earlier consultations under the Arrangement." Thus, in November 1986, MITI had invoked the Export Trade control ordinance in order to prevent below-cost exports. Thereafter, in January 1987, Japan lowered the minimum level for export licences from Y1 million to Y50,000. In February 1987, Japan increased scrutiny of export licence applications for third country exports in order to prevent grey market sales. In March 1987, the MITI Minister had convened an emergency meeting with the Chairman or President of each of the ten major semi-conductor companies to impress upon them the importance of avoiding dumping in third country markets.

36. The Japanese Position Paper provided further insights into the operation of the Third Country Market Monitoring System. Following US Government's allegations in early 1987 that Japanese semi-conductors were still dumped on third markets, the Japanese Government had made known its readiness to share relevant data with the United States on a reciprocal basis in order to dispel these allegations. In other words, information regarding third markets would be exchanged between the two parties with a view to proving that Japanese export prices had increased by the amount defined by the United States Government as being necessary to bring such prices up to the "fair market value" set for the US market by the US Department of Commerce. This, according to the EEC, clearly showed that the Japanese authorities had not been merely "watching" and passively issuing export licences but had acted in response to the restrictive purpose behind the Third Country Market Monitoring System. Finally, the fact that domestic prices remained well below government controlled export prices, provided Japanese users of semi-conductors with a further competitive advantage vis-à-vis their foreign competitors who had to pay for the essential inputs at higher prices.

37. Japan stressed that monitoring was mere watching. In cases when exports were made at prices "extremely lower" than the cost, MITI might present the facts and communicate its concern to the manufacturer. MITI's requests for dumping to be stopped were not export restrictions. N° export licence had ever been denied to any application because of inappropriate pricing. When MITI had lowered the maximum amount per contract requiring no export approval from Y1 million to Y50,000 in January 1987, the number of applications had almost doubled, causing delays in processing applications at the beginning, but the situation had been improved since then. The lowering of the threshold had been necessary because some exporters had tried to circumvent the export licence system by dividing a contract into several smaller consignments. The supply and demand forecasts issued by MITI served only as a guideline to manufacturers, whereby MITI expressed its expectations that it was desirable to avoid over-production which far exceeded actual demand. The relationship between price and supply and demand in the semi-conductor industry was characterized by a learning curve effect in the sense that an increase in production and productivity brought about a sharp decline in costs. In these circumstances, the possible decrease in prices was liable to create a high expectation of demand expansion, leading to capacity investment, over-production and excessive competition over market shares. These conditions of over-production and excessive competition might promote a price war and destabilize the balance between demand and supply. On the other hand, if low-priced products were exported and regarded as dumped, or if low domestic prices prevented an increase in imports of foreign semi-conductors, international cooperation might be harmed. MITI's efforts to request manufacturers to allign their production levels to reflect the real demand and to prevent dumping had not had a restrictive effect on exports, but were made with the objective of contributing to international co-operation.

38. Since production costs decreased sharply as a result of the learning curve effects, and since most semi-conductors had a short life-span, manufacturers tended to attempt to recoup their investments quickly by expanding production. They normally set price levels taking into account anticipated levels of supply and demand at a future period of time. This meant that typically the cost at the targetted production point would be lower than the current cost since a downward cost curve was expected. Consequently, sales prices, though not intended, could possibly be found to be below cost. This problem involved some basic issues related to the method of calculating costs when long-term pricing practices of high-technology goods with rapid technological innovation were involved. In addition, it was observed that unit cost became higher as production decreased. Therefore, when a producer decreased his production, he was likely to set higher prices to reflect the higher production cost. Thus, it was not abnormal that semi-conductor producers set higher prices in the process of adjusting production in accordance with the principle of profit-maximization.

39. Some Japanese manufacturers might think it convenient, in the light of the good relationship with foreign clients, to hold MITI responsible for their failure to fulfill some of their obligations under contracts because of adjustments in their production and shipment plans adopted for commercial reasons, which included their intention to avoid both a rapid price decline caused by over-production and a deterioration of their image caused by the allegation of suspected dumping.

40. The administrative guidance as reported in the Japanese Position Paper were taken for the following reasons. Since the Japanese companies raised their prices in the US market in accordance with the Suspension Agreement in the summer of 1986, export volume to the US market was reduced, causing an increased supply in the domestic market which in turn exceeded actual demand and prices declined rapidly. At the same time, US users had attempted to increase their procurement of semi-conductors in third country markets, mainly in South East Asia, because of the high prices of Japanese semi-conductors in the US market. Under such circumstances, some brokers had purchased semi-conductors in Japan and resold them in third country markets in order to benefit from the price differential. Since the supply and demand imbalance in the domestic market was harmful to the sector and because some of the sales at cheap prices might be regarded as dumping, MITI had revised its quarterly supply and demand forecast in February 1987 and had communicated its expectation to manufacturers that they should produce in reasonable volumes to restore the domestic supply and demand balance. Furthermore, the expression "more stringent export licensing practices" referred to the fact that MITI decided, also in February 1987, to request the submission of additional materials for clarification in the pre-sales monitoring in cases where it was deemed necessary because it appeared that some traders cheated in their applications through package deals. All these measures did not constitute export restrictions.

41. The EEC asked how mere watching by MITI could effectively ensure the prevention of dumping. Even if the measures taken by MITI were not binding in a legal sense, they were binding in a practical sense and were restrictive. Besides, if monitoring were mere watching, then there would be no need for the setting up of an entire system for that purpose, nor would there be any need to conclude a formal international agreement to that effect.

42. Japan reiterated that none of the measures was legally binding. The Japanese society was not so feudalistic that non-binding requests by government would be accepted readily and administrative guidance by MITI did not always work. If the semi-conductor manufacturers were to pursue their own profits and ignored MITI's concern, the whole dumping prevention mechanism would collapse. However, these manufacturers were fully aware that dumping would not be beneficial on a long-term basis. They had learned lessons from the disputes with the United States. They had realized that excessive competition using below-cost pricing was undesirable and that avoiding such situations would benefit not only themselves but also the world's semi-conductor industries in the long-run. The monitoring system was needed in the light of the present status of the industry. Although monitoring by MITI was limited in scope, it was still meaningful because MITI represented a neutral and objective figure overseeing the entire industry while taking into account cost and prices among competing companies in Japan. Monitoring also helped to stamp out suspicion among companies that others were cheating or resorting to dumping. It contributed to the establishment and maintenance of a healthy competitive environment.

(b) Article VI

43. The EEC considered that the Third Country Market Monitoring System was incompatible with the obligations arising from Article VI. This Article clearly provided for the exclusive right of the importing country to decide whether or not to take action against dumping. The reasons for this were obvious. Only the importing country could decide whether, on balance, the low prices of dumped goods were beneficial or harmful to its interests. Only the importing country could decide how much injury, if any, the dumping was causing, and what action, if any, was appropriate to eliminate it. Only the importing country could impose an anti-dumping duty which was appropriate to the conditions in its particular market. Only the importing country could satisfactorily monitor the implementation of an undertaking in relation to dumping. Nowhere in Article VI was it foreseen that such decisions, fundamental to the notion of sovereign choice of the importing country as to whether or not to take actions to protect the industry in question from dumping, could be taken by any other country. The drafting history of Article VI was also relevant. The intention of the drafters of the Article had not been to condemn dumping itself but to limit the possibility of taking measures to counteract dumping and subsidization. The history also showed that there had never been agreement, including during the Tokyo Round negotiations which eventually led to the adoption of the Anti-Dumping Code in 1979, to encourage or justify actions by the exporting country to prevent dumping. If alleged anti-dumping measures could be taken by exporting countries, such measures could be misused to put up the price of sometimes indispensable and irreplaceable inputs to foreign competitors of the industries in the exporting country. The adoption of autonomous action by an exporting country was therefore a clear breach of Article VI.

44. It was obvious that the risk of circumvention of the Arrangement by exports being shipped from Japan to the United States through third countries should be dealt with according to normal practice. Article 12 of the Anti-Dumping Code provided a mechanism for dealing with third country dumping. In such a situation, the Code provided that the third country could request the importing country to seek the approval of the CONTRACTING PARTIES to take action against such imports. In considering such a request, the importing country was to be provided with adequate information regarding dumping and injury and was to consider the effect of the alleged dumping on the industry concerned as a whole in the third country. No requests had been made by the US for the EEC to seek the agreement of the CONTRACTING PARTIES to take action against imports of Japanese semi-conductors into the Community. The avoidance of circumvention could in no way be considered as warranting the imposition of measures with a much wider effect, nor as justifying the adoption of measures contrary to the basic principles of Article VI.

45. Japan argued that Article VI and the Anti-Dumping Code provided for anti-dumping measures by importing countries, but they did not contain any explicit provisions concerning actions taken to prevent dumping by exporting countries. There was no specific provision to prohibit such measures, non-restrictive in nature, conducted by exporting countries. Monitoring with the purpose of preventing dumping which Article VI condemned was not inconsistent with the Article, but on the contrary, accorded with the spirit of the GATT. History had showed that there had been rampant resort to anti-dumping duties, for the purpose of protecting domestic industries, resulting in severe distortion of world trade. The actual anti-dumping investigations, as well as the preceding uncertainty pending the imposition of anti-dumping duties had significant adverse impact on exports. Article VI, therefore, did not prohibit exporting countries from taking measures, consistent with GATT provisions, to prevent dumping. It was groundless to maintain that Article VI granted an exclusive right to importing countries with respect to anti-dumping measures. What it stipulated was that importing countries were only entitled to decide whether or not to levy anti-dumping duties when dumping took place and when their industries were injured or where injury was threatened. Besides, it should be noted that when measures designed to prevent dumping were ineffective, importing countries were free to resort to anti-dumping measures according to the rules of GATT. In this sense, the monitoring measures by Japan did not infringe upon the rights of importing countries.

46. Furthermore, Article VI did not guarantee profits of importing countries accruing from dumped exports, and importing countries had no legitimate right to ask for the continuation of dumping.

47. The EEC stated that Japan had constantly failed to quote fully the words of Article VI which lay down that, "... dumping is to be condemned if it causes or threatens material injury." These words showed, when they were properly considered, that anti-dumping measures could be taken only by or with the consent of the importing country, as only the importing country could determine whether injury had been caused by dumped products. If anti-dumping action by the exporting country had been thought to be acceptable, the conditions for its application would have required definitions which were as detailed as those provided in Article VI for action by the importing country, since such action would be allowed only in derogation from other Articles of the General Agreement, in particular from Article XI. The Japanese statement seemed to recognize that anti-dumping action by exporing countries was incompatible with Article VI if it contravened any other provisions of the GATT. Since the anti-dumping action adopted under the Third Country Market Monitoring System was, in the Community's view, incompatible with Articles XI, I and XVII of the General Agreement, it followed logically that such measures were also incompatible with Article VI. As for the statement that when dumping occurred despite the measures to prevent dumping, importing countries were free to take anti-dumping actions, it was only formally correct. An importing country could, in theory, still take anti-dumping actions even if it had been pre-empted in doing so by the exporting country, but this would expose its users and consumers to the risk of incurring a multiple penalty created by the combined effect of the price increase imposed by Japan and the eventual anti-dumping duty collected by the importing country. It could also provide producers in the importing country with an excessive degree of protection.

48. Japan stressed that measures taken by the Japanese Government were intended to prevent "dumping to be condemned" as stipulated in Article VI, and were permitted as long as they did not violate any provision of the General Agreement, including Article XI. Japan considered that such measures should not be merely judged in relation with Article XI. Rather, it should be taken into account that the measures were employed in line with the spirit of Article VI. What Article VI stipulated was that importing countries were entitled to decide whether or not to levy anti-dumping duties when dumping occurred. Paragraph 1 of that Article did not make any distinction between exporting and importing countries and it did not prohibit measures to be taken by exporting countries. The negotiating history also showed that there had never been any consensus that measures taken by exporting countries should be prohibited. Therefore, if, through monitoring and communicating concern by governments of exporting countries, "dumping to be condemned" was prevented as the result of voluntary decisions by exporting firms to set export prices at certain levels so as to avoid dumping, such government measures should not be condemned, but should be considered as in accord with the spirit of Article VI. There was no justification for the multiple penalty alleged by the EEC as Japan was not pre-empting any of the Community's rights concerning anti-dumping procedures and the Community was free to take any appropriate actions.

(c) Article XI

49. The EEC considered that the Third Country Market Monitoring System was incompatible with the provisions of Article XI relating to export restrictions. Firstly, the Arrangement had a restrictive intent in that the purpose of the Third Country Market Monitoring System was to artificially raise Japanese export prices through government intervention. This intent was explicitly acknowledged in the Japanese Position Paper in which the Japanese authorities had emphasized their determination to implement more stringent export licensing practices "to prevent below-cost exports". Secondly, the restrictive effects of the licensing system were universally recognized, not only by EEC users and importers, but by those in other importing countries like Australia, Canada or Hong Kong, and even by the United States. In a report to the President of the United States, dated September 1987, the Semi-Conductor Industry Association had stated that, "through the use of production controls and floor price measures, the Government of Japan has disrupted the pricing and supply of key semi-conductor products. These policies have meant artificially high prices and short supply for US semi-conductor users ...". It was irrelevant under Article XI whether the Government of Japan would subject the granting of export licences to the observance by exporters of the "fair market value" defined for the US market or of other criteria such as the avoidance of exports below-cost. The fact was that controls with price and quantitative effects had been imposed on the exports of semi-conductors, violating Article XI.

TO CONTINUE WITH TRADE IN SEMI-CONDUCTORS