24 May 1989

45. Australia rejected the argument that the merits of the case could only be reviewed under Article XXIII:1(b) or (c), an argument which was based entirely on acceptance of the validity of the finding in paragraph 4.16 of the Citrus Panel report. The flawed character of this finding and its lack of persuasive force had already been addressed. It was Australia's view that Korea's import restrictions on beef and their administration contravened and had contravened its obligations under the GATT. This was the position taken by Australia in its request for the establishment of this Panel and as such formed an integral part of the Panel's terms of reference. Therefore, the Panel was charged with making findings on whether the measures had and did contravene GATT obligations.

46. Korea replied that the Panel's terms of reference did not exclude reviewing Article XVIII:12(d) in relation to Article XXIII.

47. Australia argued that the right of recourse to Article XXIII for the examination of an alleged breach of GATT obligations where the defending party claimed Article XVIII:B coverage had been addressed by the GATT Council in a recent case. At its meeting on 10-11 November 1987, ¹³ the Council established a panel to examine India's import restrictions on almonds although India had argued in earlier Council meetings that the procedures of Article XVIII:B:12(d) should be followed instead. Korea was a party to the consensus which led to the establishment of this panel.

48. Korea replied that, in its opinion, the Council did not settle anything when it established the above-mentioned Almond Panel. While the issue of the relationship between Articles XVIII:B and XXIII was raised when the United States requested a panel to review import restrictions on almonds maintained by India, the Council drew no conclusion at the time. The discussions in the Council did however reveal that the relationship between Articles XVIII:12(d) and XXIII was controversial. When agreement was reached on the panel's standard terms of reference, several countries reserved the right to make submissions to the panel on this issue. And as in the present case, these terms did not exclude review of Article XVIII:12(d) in relation to Article XXIII. Accordingly, the fact that Korea was a party to the consensus establishing the terms of reference in the Indian Almonds case in no way prevented Korea from raising the relationship between Article XVIII:12(d) and Article XXIII as the fundamental issue which it was. The same argument was made with respect to Korea's agreement with the terms of reference of the present Panel.

49. Korea argued that none of the GATT precedents addressed the fundamental issue in this case. If the complaint of Australia were to be reviewed under Article XXIII, no country would even consider invoking Article XVIII:12(d). Korea had pointed out that Article XVIII:12(d) made it rather difficult for a country to complain about a BOP measure that had been reviewed by the BOP Committee. In fact, the requirements of this provision were rather more difficult to satisfy for a complaining country than the requirements of Article XXIII. There were good reasons for these differences. When countries applied restrictions under Article XVIII:B and held regular consultations concerning these measures with a qualified GATT Committee that took into account the relevant findings of the International Monetary Fund, they had a legitimate expectation that these measures could not simply be challenged under the relatively loose requirements of Article XXIII regarding nullification or impairment. Otherwise, the exercise of multilateral surveillance became meaningless.

50. Korea could conceive of only one approach that would not necessarily put the relationship between Article XXIII and Article XVIII:12(d) at issue in this case. For that, the Panel would have to distinguish the 1984/1985 intensification measures (which were not imposed for BOP reasons but for beef industry protection reasons) from the original BOP restrictions on beef imports. Korea, however, did not favour this approach, because it believed that BOP concerns continued to underlie and characterize the restrictions as a whole. Yet, Korea was of the view that an alternative approach was possible, which emphasized that the 1984/1985 intensification measures themselves were not motivated by BOP concerns.

(b) Justification for restrictions

51. Korea argued that it could be that the present Panel, notwithstanding the Citrus Panel report and Korea's procedural arguments, believed that the mere existence of special review procedures in Article XVIII:B would not prevent Australia from challenging the GATT compatibility of Korea's restrictions under Article XXIII. In that event, Korea submitted that the actual results of the regular consultations under Article XVIII:B still blocked a challenge of the GATT compatibility of its restrictions. Korea further argued that the CONTRACTING PARTIES had authorized its restrictions on beef imports under Article XVIII:B and explained that Korea had maintained BOP restrictions on various products since its accession to the GATT. The number of the restricted imported products had however gradually been reduced in recent years, and currently some 358, mainly agricultural, products remained subject to restriction, including beef. Over the years Korea had regularly consulted about these restrictions under Article XVIII:B. The justification of its restrictions had not been called into question until the last round of full consultations in December 1987. ¹⁴ In the report of the BOP Committee from these latter consultations, the "prevailing" view expressed was that import restrictions "could" no longer be justified under Article XVIII:B. ¹⁵ It was clear that, for the first time, the BOP Committee thereby expressed doubts about the future justification of Korea's BOP restrictions. Yet, it was equally clear that the GATT's BOP Committee did not make a finding that the present or past application of Korea's BOP restrictions was inconsistent with Article XVIII:B.

52. Australia replied that Korea's BOP situation had been subject to only two full consultations with the BOP Committee in the period 1984-88. On neither occasion did the Committee "authorize" all or any measures claimed by Korea to be applied for balance-of-payments reasons. In fact, the Committee did not reach a consensus on any recommendations or findings. ¹⁶ The position of Korea was instrumental in preventing any consensus recommendations within the BOP Committee in the 1987 consultations. It could not, however, prevent the insertion in the report of the following statement: "The prevailing view expressed in the Committee was that the current situation and outlook for the balance of payments was such that import restrictions could no longer be justified under Article XVIII:B." There was also a view that no further Article XVIII:B:12(b) consultations would be necessary.

53. In response, Korea firmly rejected any suggestion that it had abused or frustrated the BOP process in the GATT. Furthermore, Korea asserted that the Committee's language was more guarded than Australia suggested. And if the Committee had established any inconsistency, it would have made explicit recommendations to that effect to the Council. ¹⁷ Perhaps even more significantly, the BOP Committee report stated that the Committee "did not necessarily expect Korea to disinvoke Article XVIII:B immediately, but to establish a clear timetable for the phasing out of remaining restrictions maintained for balance-of-payments purposes". ¹⁸ In other words, the BOP Committee accepted that Korea could still benefit from the cover of Article XVIII:B for some limited time to come. Indeed, Korea was currently preparing for further consultations under Article XVIII:B in June 1989. These would be meaningless if Article XVIII:B was no longer available to Korea, as Australia claimed. The BOP Committee reviewed restrictions under Article XVIII:B on behalf of the CONTRACTING PARTIES. ¹⁹ Since Korea's accession to the GATT, its restrictions under Article XVIII:B had been regularly examined, and the application of Article XVIII:B had never been disapproved. Korea respectfully submitted that the Panel could not, with retroactive effect, substitute its own judgment for that of the CONTRACTING PARTIES.

54. Korea argued that in recent years Australia had several times raised objections bilaterally about Korea's restrictions on beef imports. If these bilateral exchanges did not lead to the desired result for Australia, as they apparently did not, one would have expected Australia to take this matter up multilaterally, at the consultations before the GATT BOP Committee. Yet, even as late as the last BOP consultations, in December 1987, Australia remained silent on the matter.

55. Australia replied that the fact that Australia had not previously opposed in the GATT Korea's import restrictions on beef in no way prejudiced the right to have the restrictions examined under Article XXIII. At least two adopted panel reports had made findings that a breach of GATT provisions did not become legitimate because of a lack of challenge or because of the expiration of time. ²⁰ Australia had been forced to resort to GATT action in this case after pursuing extensive, but unproductive, bilateral discussions. The Government of Korea had consistently urged that the issue be kept at the bilateral level in recognition of the domestic political sensitivity of the beef access issue, particularly in 1987.

56. Korea then argued that when the CONTRACTING PARTIES agreed to establish a panel, they limited its terms of reference to examining Korea's import restrictions on beef. Yet, these restrictions were part of a series of restrictions that remained to protect Korea's balance of payments. Accordingly, findings on the justification of Korea's restrictions on beef imports under Article XVIII:B were likely to reflect on the justification of these other restrictions as well. These latter, however, fell outside this Panel's terms of reference. And Korea could not agree to the challenge of all its BOP restrictions on the basis of the present Australian complaint. Assuming, nevertheless, that the Panel were to feel it could distinguish the restrictions on beef imports and thus limit its own analysis, Korea submitted that it was inconceivable that the International Monetary Fund could do likewise.

57. Australia replied that the Panel's terms of reference were agreed by a consensus which included Korea. Australia considered that the terms of reference clearly established that a finding had to be made on the GATT compatibility of Korea's beef import restrictions. Any possible wider implications of a finding against the compatibility of other import restrictions for which BOP cover was also claimed were not pertinent to the Panel's task. Certainly, Australia could not accept the argument that one breach of GATT provisions could not be examined by a panel because the findings might have implications for other measures imposed by the defending party or, indeed, any other contracting party. This approach would preclude virtually any findings at all by any panel on the meaning and application of GATT provisions and would therefore be a nonsense.

58. To this, Korea responded that this Panel's terms of reference, to which it had agreed, did not exclude review of Article XVIII:12(d) in relation to Article XXIII. Furthermore, Australia's assertion that Korea's position amounted to a nonsense was not substantiated. Nothing in the GATT, or in Korea's interpretation thereof, prevented a GATT contracting party from challenging restrictions across the board. Yet, it was impermissible for Australia to limit its request for a panel proceeding to Korea's restrictions on beef imports, and then to broaden its attack before the Panel by involving Korea's other BOP restrictions as well.

59. Korea submitted that without further advice from the IMF pursuant to Article XV:2, the Panel could not make any recommendations on the justification of Korea's restrictions on imports of beef under Article XVIII:B. Yet, it was open to question whether the Panel would be competent, without specific authorization from the Council, to consult with the IMF. To Korea's knowledge, panels had received no such authorization to date.

60. Australia responded that it did not insist that a report by the IMF was necessary to a finding in this case because, Australia contended, the import restrictions on beef had not and were not being applied for BOP reasons. However, Australia recognized the right of the Panel, as provided for in paragraph 15 of the 1979 "Understanding Regarding Notification, Consultation, Dispute Settlement and Surveillance", ²¹ to seek any information and advice from the IMF or any other body or individual that the Panel deemed appropriate. Australia believed that it was for the Panel to decide whether and from whom to seek advice and on the nature of advice to be sought. How any advice was applied to the making of findings was also a matter for the Panel which was acting on behalf of the CONTRACTING PARTIES.

61. In response, Korea expressed doubts that this passage in the 1979 Understanding addressed the Panel's authority to initiate consultations with the IMF under Article XV:2. When panels consulted an expert in the past they were not bound to accept the expert's advice, and neither were the CONTRACTING PARTIES. Advice rendered by the IMF under Article XV:2 on the BOP of a contracting party did bind the CONTRACTING PARTIES, however. Korea submitted there was no evidence that the CONTRACTING PARTIES, through the 1979 Understanding, intended to authorize a panel to request advice from the IMF which would bind them.

62. Korea argued that the question of whether the disputed restrictions were justified under Article XVIII:B essentially turned on whether Korea had cause to be concerned about the level of foreign reserves that were necessary for the implementation of its programme of economic development. Korea asserted that the restrictions which it currently maintained, including its restrictions on beef imports, were indeed necessary to secure an adequate level of reserves. Firstly, its present reserves provided no more than one month's import cover. Secondly, Korea's huge foreign debt, though declining, still posed a serious threat to Korea's balance of payments.

63. Furthermore, according to Korea, the beneficial effect of Korea's current account surpluses on its BOP position should not be overestimated. Korea's current account had only been in surplus since 1986. Its surplus, moreover, was very vulnerable because of its structure. There were several reasons for this, and by way of illustration, Korea mentioned two of them: first of all, the share of trade in total GNP was as high as 72 per cent in 1987. A worsening of the world market situation would therefore immediately affect Korea's balance of payments. Secondly, Korea had a population of 42 million people and more than 70 per cent of its land was non-arable. Moreover, Korea was poor in natural resources and did not produce any petroleum. Indeed, Korea had been able to run a surplus in its current account since 1986 mainly due to the decline in oil prices.

64. Australia replied that Korea's external economic situation had improved dramatically in parallel with the high growth rates being achieved by the economy overall. Its first ever trade surplus, of US$4.2 billion, was achieved in 1986, producing a current account surplus of US$4.6 billion. It was equal to 4.9 per cent of GNP compared to 4.4 per cent for Japan and the Federal Republic of Germany. Real GNP growth amounted to 12 per cent in 1987. The current account surplus increased to US$9.9 billion in that year, equivalent to 8.3 per cent of GNP, more than double the corresponding ratios for the Federal Republic of Germany and Japan. The current account surpluses had enabled Korea to make significant reductions in its foreign debt. Between the end of 1985 and May 1988 Korea's gross foreign debt was reduced from US$46.8 billion to US$34.3 billion and its net foreign debt from US$35.5 billion to US$16.2 billion. The most recent figures available to Australia confirmed that this strong economic performance was continuing in 1988. Revised estimates by the Korean Economic Planning Board in August 1988 projected a current account surplus in 1988 of US$9.5 billion and gross foreign debt of US$31 billion. Net foreign debt was expected to decline to US$13 billion in 1988 (8.4 per cent of GNP). Korea expected to register a net foreign credit of US$3.5 billion by 1991. Korean foreign exchange reserves were valued at US$9.6 billion in July 1988 and were under no pressure due to the continuing current account surpluses. In sum, Korea's current account surplus was the fourth largest amongst GATT contracting parties and its reserves were not being presented with any difficulties, threatened or actual.

65. Korea argued that it was certainly true that Korea's BOP position had improved since 1984/1985. Yet, without involving all other remaining BOP restrictions, this Panel could not decide whether and to what extent such improvement ought to translate into a further relaxation of the BOP restrictions on beef beyond the 51,500-ton (product weight) level existing in 1983. Thus, it would make no sense to find that Korea's restrictions on beef imports were no longer justified under Article XVIII:B, while maintaining that the other 357 restrictions continued to be justified as they were. Obviously, improvements in Korea's BOP position did not affect the restrictions on beef imports exclusively. Prescriptions for change required a global assessment. Yet, an across-the-board review of all of Korea's remaining BOP restrictions clearly fell outside this Panel's terms of reference.

66. Australia argued that Korea did not meet the appropriate requirements for coverage of its beef import measures under Article XVIII:B. Recognizing that recourse to Article XVIII:B was a legitimate right of developing countries in times of BOP difficulties, Australia considered, however, that the Korean beef import regime contravened both the spirit and the letter of Article XVIII:B, paragraphs 9, 10, 11 and 12(a), as well as the 1979 Declaration on Trade Measures Taken for Balance-of-Payments Purposes. ²² Firstly, Australia maintained that Korea had implemented an effective prohibition rather than a restriction on beef imports from 1984 to 1988. The wording of paragraph 9 of Article XVIII:B made it quite clear that the right of a contracting party to impose import restrictions consistent with the provisions of this paragraph was not an unqualified right, but was dependent on the restrictions not exceeding those necessary to achieve the objectives specified. Furthermore, such restrictions had to conform to paragraphs 10, 11 and 12 of Article XVIII. The nature of Korea's beef import regime from at least 1984 onwards was demonstrably not necessary to achieve the specified objectives. In 1984, the year in which Korea ceased to hold tenders for beef to be imported through the NLCF, it met none of the requirements of paragraph 9. The effective prohibition on beef imports took place at the same time as import controls on a wide range of other products, which had been imposed earlier for BOP purposes, were being removed. The statement of the IMF representative at the December 1987 BOP Committee consultations with Korea ²³ confirmed that Korea's actions with respect to beef since 1984 had been contrary to its actions with respect to other sectors of its economy. Korea had been pursuing a programme of import liberalization in other economic sectors which reflected an implicit recognition that it was no longer necessary for Korea to restrict the "general level of its imports" for BOP reasons.

67. There were, in Australia's view, clear indications that the Korean measures with respect to beef imports were not taken or maintained for BOP reasons, but to protect the domestic industry. Firstly, by admitting that its beef import restrictions over the 1984-1988 period were maintained for industry protection rather than BOP reasons, Korea had in fact conceded that its measures were not eligible for cover under Article XVIII:B. Korea could not now claim that measures, which it conceded it had maintained from 1984 until August 1988 for other than BOP reasons, had now somehow again become eligible for BOP cover merely on the basis of a unilateral declaration to this effect. Article XVIII:B simply did not allow for two primary simultaneous motivations for import restrictions, i.e., BOP and industry protection. Secondly, one of the key objectives of the LPMO was the protection of the domestic cattle industry. Thirdly, the Minister of Trade and Industry announced in January 1988 that "agricultural products are the only areas in which rapid import liberalization is not foreseeable due to the fact that approximately 20 per cent of the population still depends on farming for its livelihood". Fourthly, Korea's economic situation was certainly not such, in 1984 or since, as to justify the intensification of import restrictions under the provisions of Article XVIII:9. In fact, even when commercial beef imports were first suspended, Korea's current account deficit was rapidly declining, to which the report of the BOP Committee consultations with Korea in 1984 bore witness. ²⁴ Substantial BOP surpluses were then achieved in 1986 and 1987 and were forecast for 1988 and beyond. In conclusion, no grounds existed for invoking BOP problems as a justification for Korea's closing beef access between 1984 and 1988, nor did justification exist now for continuation of import restrictions, in view of the persisting improvements and current very healthy BOP situation in Korea.

68. Korea replied that the fact that its restrictions on beef imports had protected its cattle farmers did not render Article XVIII:B inapplicable. Trade restrictions imposed for BOP reasons had protective side effects, and tended to favour specific industries. The point remained, however, that the GATT as it was originally drafted, and as it stood today, did permit the use of trade restrictions for BOP purposes and thereby accepted such protective side effects.

69. Korea had never concealed that the BOP restrictions on beef imports protected its cattle farmers. Indeed, had they not, then Korea would have been forced to resort to other measures to protect its vulnerable and underdeveloped cattle farming industry. Accordingly, Australia's reference to the 1979 Declaration on Trade Measures Taken for Balance-of-Payments Purposes, which reaffirmed that "restrictive import measures taken for BOP reasons should not be taken for the purpose of protecting a particular industry or sector" was misplaced. Whatever this statement meant, it could not mean that restrictions which were legitimately taken for BOP purposes, as were Korea's restrictions on beef imports, could not have protective side effects. As was indicated above, such side effects were inherent in trade restrictions imposed for BOP purposes.

70. Korea further submitted that when it acceded to the GATT in 1967, the restrictions which it imposed for BOP reasons, including on imports of beef, were justified under Article XVIII:B. This had never been contested, and to do so now would amount to a retroactive withdrawal of the Article XVIII:B cover from all its BOP restrictions. However, Australia had pointed out that Korea tightened its beef restrictions at a time when Korea's BOP position was improving. That might indeed seem contradictory. But one had to appreciate that Korea was then faced with an unprecedented situation. In conjunction with its general liberalization efforts, Korea relaxed its restrictions on beef imports in the early 1980's. There were differences between products in this process. Some BOP restrictions were removed altogether. Some, like those on beef imports, were not eliminated but relaxed. This was consistent with the GATT, which did not require that all BOP restrictions be terminated at once. In deciding which BOP restrictions could be eliminated and which should be maintained or relaxed, so as to ensure an adequate BOP position overall, Korea obviously took into account the state of the various domestic industries that would be affected by these liberalization measures.

71. Thus, in deciding to relax the BOP restrictions on beef imports in the early 1980's, Korea not only assessed the effects on its overall BOP position, but also considered the impact on its cattle farmers. Now, with the benefit of hindsight, some might have said that the Korean Government miscalculated the level of imports to which its cattle farmers could adjust because, by mid-1984, many small cattle farmers were going bankrupt or incurring very heavy losses. That was when the Korean Government decided to intervene and intensify the Article XVIII:B restrictions on beef imports. It was a situation which the GATT regime, including its BOP provisions, did not envisage.

72. Korea explained further that, faced with an unprecedented situation in 1984-85, it nevertheless sought to stay close to the letter of the GATT. It did not pretend that the intensification of its BOP restrictions was motivated by a worsening of its BOP situation, and hence did not notify this measure pursuant to Article XVIII:12(a). Furthermore, Korea made an attempt to act within the spirit of Article XVIII:10, in that it sought to avoid unnecessary damage to the interests of its trading partners. Now that the domestic market situation had stabilized, Korea was retracting the intensification of its BOP restrictions.

73. Australia argued that the prohibition of commercial imports of beef by Korea between 1984 and 1988 clearly did not meet the objective of the drafters and was thus contrary to the requirements of Article XVIII:B, paragraph 10. Neither did the requirements of Article XVIII:B, paragraph 11, offer any scope for Korea to claim BOP grounds for its import controls on beef since Korea had strengthened its reserves and repaid external debt ahead of schedule. Also the current restrictions on beef imports were sectoral restrictions designed to protect a relatively high-cost domestic industry rather than "assuring an economic employment of productive resources".

74. Korea submitted that the 1984/1985 intensification measures could not be isolated and divorced from their BOP context. One should look at the whole picture. Ever since its accession to the GATT, Korea had maintained BOP restrictions on beef imports (among other products). Korea had BOP problems in 1984/1985 and was still recognized to have them at present by the BOP Committee. That was why Korea maintained that Article XVIII and its procedures were still relevant, even if one recognized that the intensification measures were not taken for BOP reasons but because of an unprecedented situation arising from the disruption of Korea's cattle industry. That was also why Korea maintained that, even if the 1984/1985 intensification measures were incompatible with the GATT, Korea should be allowed to restore the level of BOP restrictions on beef imports prevailing prior to the 1984/1985 intensification measures. In 1983, Korea imported a total of 51,500 tons (product weight) of beef. This would now again be the appropriate level of BOP restrictions on beef imports, until these restrictions could be further relaxed or removed depending on the development of Korea's overall BOP position. Australia could not reach above and beyond the total 1983 import level, because to do so required findings on Korea's past and present BOP justification. And any such findings would involve the BOP restrictions maintained on 357 other products.

75. In the event the Panel were to find that Korea's beef restrictions were not consistent with the provisions of Article XVIII:B, Korea argued that a novel situation would arise. There was no precedent in GATT addressing the proper course of action if a measure, which had otherwise been authorized under the review procedures of Article XVIII:B, was deemed incompatible with the GATT in an action under Article XXIII. Korea submitted that in such a case the defendant country would be entitled to a grace period, in which it could consider which GATT consistent measures it could and should take. As indicated, Korea's cattle farmers had derived protection from the BOP restrictions on beef imports. In case that protection were no longer available, the farmers would in principle be exposed to unbridled competition from abroad. The effects were bound to be disastrous. Accordingly, the Korean Government would need a grace period to implement another mechanism, consistent with GATT, that would offer some protection to its cattle farmers. To allow the Panel to appreciate this, Korea described the underdeveloped state of its agricultural sector, and of its cattle farming industry in particular. Korea aimed for controlled liberalization of imports of beef. It did not want a repetition of the early 1980's, when an explosive import growth ultimately necessitated a near-suspension of imports in 1984/85. Korea submitted that the avoidance of similar shocks in the future was also in the interest of foreign industries, including the Australian beef industry.

76. Australia contended that the Panel should give no cognizance to arguments which appealed to difficulties in achieving compliance with the General Agreement as the Panel could not give such reasons for supporting a continuing breach. This was the position taken by the Panel which examined Japanese measures on imports of leather. ²⁵ It found that the probable effects on the domestic industry of the removal of a restriction inconsistent with the GATT could not justify the retention of that measure. The Panel on EEC - Quantitative Restrictions against Imports of Certain Products from Hong Kong made similar findings. ²⁶ It should also be clearly understood that, in Australia's view, there was no dishonour in a country being found in breach of the GATT as long as measures were put in place to rectify the breach to the satisfaction of the parties to the dispute. After a breach had been established, the avenues for its removal were matters for agreement between the parties.

77. Korea replied that the two above-mentioned cases involved residual restrictions, which had been in existence for a long time without GATT justification. To be precise, France's restrictions on quartz watches had not been covered under Article XII since 1960, and thus had remained without GATT justification for more than two decades until the panel invalidated them at Hong Kong's request. Similarly, Japan had already abandoned BOP cover in 1962 for its restrictions on leather, more than two decades before the United States brought the complaint. Korea, on the other hand, had not abandoned BOP cover for its beef restrictions; nor had the IMF or the BOP Committee to date obliged Korea to disinvoke Article XVIII:B. In other words, the present case did not concern residual restrictions at all. Moreover, neither the Hong Kong Quartz Watches nor the Japanese Leather cases concerned a grace period to retract intensification measures to the level of the BOP restrictions that continued to be justified under Article XVIII:B.

78. Australia argued that the violation by Korea of provisions of Articles XI and II of the General Agreement constituted a prima facie case of nullification or impairment of benefits accruing to Australia under the General Agreement.

79. The Panel received submissions from Canada, New Zealand and the United States as interested third countries. New Zealand and the United States both stated that their interests as exporters of bovine meat to the Republic of Korea had been affected by the Korean beef import measures. They considered, together with Canada, that these restrictions contravened the provisions of the General Agreement, in particular the provisions of Article XI:1, and nullified or impaired benefits accruing to them within the meaning of Article XXIII:2 of the General Agreement.

80. New Zealand argued that the Korean measures contravened the provisions of Article XI:1 since between 1984 and 1988 a de facto prohibition of beef imports existed; prohibitions were proscribed under this Article. New Zealand also considered that the import ceiling beyond which import licences would not be issued in 1988 indicated the existence of a restriction on the level of imports in addition to the bound tariff. Therefore, this was a prima facie breach of Article XI:1. New Zealand further considered that the restrictions made effective through the LPMO, which had a monopoly over beef imports, were covered by the interpretative note to Article XI:1. The protection afforded by the LPMO, moreover, restricted trade in the bound item. In particular, the LPMO applied a mark-up on the imported beef over and above the amount of protection provided in the Korean Schedule, thus contravening the provisions of Article II:4. In New Zealand's view, Korea could not justify its import measures under any provision of the General Agreement, in particular Articles XI:2(c)(i), XI:2(c)(ii) and XVIII:B. Article XVIII:B was not applicable since Korea was no longer experiencing BOP problems.

81. The United States considered that the Korean import ban and quantitative restrictions on beef imports violated GATT Article XI:1 since that Article prohibited any contracting party from imposing quotas, import or export licences or other measures to restrict trade. To the extent that Korea had banned imports of beef through MAFF's refusal to issue import licences, the Korean action was a "prohibition" in violation of Article XI:1. To the extent that Korea had in the past or might in the future restrict imports of beef entering under quota, its actions constituted a "quantitative restriction" inconsistent with the GATT.

82. The United States argued that the LPMO was an "import restriction" within the meaning of Article XI, and, as a monopoly, it operated in a manner which violated the provisions of that Article. The United States asserted moreover that Korea could not justify its beef import measures under Articles XI:2(c)(i), XI:2(c)(ii), XVIII:B or under any other provision of the GATT.

83. The United States considered that the Korean measures could not be justified under Article XVIII:B since Korea did not have a BOP problem as defined by the GATT. If, however, it was considered that Korea could restrict imports for BOP reasons, the United States argued that the restrictions on beef imports did not qualify as BOP measures since, inter alia, these measures were taken for domestic, political purposes, i.e., for the purposes of protecting a Korean industry, rather than for BOP reasons.

84. The United States further asserted that the LPMO was levying surcharges on imported beef which averaged 36 per cent for the purpose of equalizing import prices with high Korean domestic prices in excess of its bound tariff of 20 per cent ad valorem. The imposition of surcharges on imported meat was plainly inconsistent with Article II:1(b). Also, the LPMO appeared to have as its purpose, and had taken concrete steps to afford, protection to Korean beef farmers. As such, the United States argued that it was fundamentally inconsistent with Article II:4. Article II:4 barred a contracting party from using import monopolies to restrict trade or afford protection in excess of a bound tariff concession.

85. The United States also considered that the general lack of transparency of the Korean beef import system violated the provisions of Articles X:1 and XIII:3(b). In short, under Articles X:1 and XIII:3(b), any contracting party that introduced import restrictions had to give public notice of the total value or quantity of the restrictions and publish them promptly so as to enable governments and traders to become acquainted with them. Korea did not meet its obligations under Articles X and XIII since it did not provide proper public notice of the import restrictions.

86. Canada considered the Korean measures to be in contravention of Korea's GATT obligations under Article XI:1 which prohibited the maintenance of quantitative restrictions through quotas, import licences or other means. The import regime protected Korean beef and discriminated against imported beef. By granting licences only for amounts which represented the shortfall in domestic production, the import regime had been established with the clear intent to ensure Korean beef primary access to the market. Canada further argued that these measures could not be justified under the provisions of Article XI:2, Article XVIII:B, or under any other exception of the General Agreement.

87. It was also Canada's view that the practices of the LPMO represented a barrier to trade with respect to the variable surcharge it added when reselling imported beef in the domestic market. As the MAFF only approved import licence requests from the LPMO, this latter organization was in effect a monopoly within the meaning of Article II:4. Article II:4 prohibited such monopolies from operating "so as to afford protection on the average in excess of the amount of protection provided for in that schedule". The interpretative note to Article II:4 indicated that the provisions of this paragraph should be applied in the light of the provisions of the Havana Charter (Article 31.4). This permitted differential mark-ups to offset additional costs of transportation, distribution, and other expenses incident to the purchase, sale, or further processing, and a reasonable margin of profit. This had been interpreted as meaning a margin of profit that would be obtained under normal conditions of competition.

88. It was moreover Canada's understanding that the variable surcharge administered by the LPMO was designed to increase prices of imported beef to the level of domestic beef which resulted in surcharges from 30-200 per cent over the landed duty price paid. Such surcharges could not be justified under Article II:4 as the value of the tariff concession was thereby nullified or impaired. In the event the LPMO were not considered to be in a monopoly position, the surcharge imposed above the 20 per cent bound rate would be in violation of Article II:1(b).

89. Canada argued that the quantitative restrictions on beef had no justification under the BOP exceptions of the GATT. In its report on the 1987 consultation with Korea, the BOP Committee stressed the need to establish a clear timetable for the progressive removal of Korea's trade measures maintained for BOP purposes. In Canada's view, adoption of the BOP Committee report by the GATT Council did not mean that all trade practices of a contracting party were in conformity with the GATT. At the 10-11 November 1987 GATT Council meeting, Canada indicated that it did "not accept the position put forward by some contracting parties that review - including full review of trade restrictions - by the BOP Committee constituted acceptance of such measures as being GATT consistent". The change from a ban on beef imports during the period 1984-1988 to import restrictions which were in any case contrary to the GATT, was not in keeping with the decision of the BOP Committee following the 1987 consultation with Korea.

TO CONTINUE WITH RESTRICTIONS ON IMPORTS OF BEEF - COMPLAINT BY AUSTRALIA

¹³ See document C/M/215.

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