24 May 1989

1. In February and March 1988, the United States and the Republic of Korea held Article XXIII:1 consultations concerning Korea's beef import restrictions. These consultations did not lead to a mutually satisfactory solution. The United States therefore requested the Council to establish a panel to examine the matter (L/6316).

2. At its meeting on 4 May 1988, the Council agreed to establish a panel and authorized its Chairman to designate the chairman and members of the Panel in consultation with the parties concerned. Furthermore, since at the same Council meeting another panel concerning the same subject matter was set up at the request of Australia, it was decided that the Council Chairman would consult with the parties to the two Panels and with the secretariat concerning the appropriate administrative arrangements (C/M/220, item 3). Australia, Argentina, Canada, the European Community, New Zealand and Uruguay each reserved their right to make a submission to the Panel.

3. The following terms of reference were agreed upon:

4. In consultations among the parties it was agreed that both the United States/Korean Panel and the Australian/Korean Panel would have the same composition¹, as follows:

Chairman: Mr. Chew Tai Soo

Members:

Ms. Yvonne Choi

Mr. Piotr Freyberg

5. The Panel met with the parties on 28 November 1988 and on 20 January 1989. It received third country submissions from Australia, Canada and New Zealand. Their views are summarized below in paragraphs 102-110. The Panel submitted its report on the dispute to the parties on 25 April 1989.

6. In its first submission to the Panel, the Republic of Korea argued that the complaint had been improperly brought under Article XXIII of the GATT and that, therefore, the Panel should declare it inadmissible. Korea requested that the Panel rule on the issue of admissibility prior to considering the merits of the complaint.

7. Korea put forward the following arguments for its request: since its accession to the GATT, Korea had applied restrictions on beef, among other products, under Article XVIII:B. Korea had regularly held consultations about these restrictions pursuant to Article XVIII:12(b), under the aegis of the GATT's Balance-of-Payments Committee. The most recent report of this Committee was issued as BOP/R/171 (1987). A new round of consultations was scheduled to take place in June 1989.

8. Korea also argued that the General Agreement made specific provision for a complaint procedure in Article XVIII:12(d) if, despite the multilateral surveillance exercised pursuant to other provisions of Section B of Article XVIII, a contracting party wanted to challenge the consistency of restrictions that had been applied under this Section.

9. Korea further noted that the complaint procedures of Article XVIII:12(d) and Article XXIII differed in several important respects. For example, under Article XVIII:12(d), the complainant had to make a prima facie showing that the disputed restrictions were inconsistent with the provisions of Article XVIII:B. On the other hand, Article XXIII merely required a showing of nullification or impairment of benefits of the complainant, which was not dependent on a showing of inconsistencies with the General Agreement. There were valid 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 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 pursuant to Article XVIII:B became meaningless.

10. The Panel decided to make an immediate ruling on the question of admissibility as requested by Korea, valid for both the United States Panel and for Australia's Panel, as follows:

"After deliberation the Panels came to the conclusion that they clearly have a mandate to examine the merits of the cases in accordance with their respective terms of reference. The Panels also found that they cannot accede to the request of the Republic of Korea. The following considerations were taken into account by the Panels in arriving at their conclusions:

(a) At the GATT Council in May 1988, the United States and Australia requested the establishment of a panel under Article XXIII:2. The Republic of Korea agreed to these requests and asked for two separate panels to be set up. As is customary, the Panels were set up by the GATT Council by consensus. The Republic of Korea is a party to the consensus to set up the two Panels under Article XXIII:2.

(b) The terms of reference given to the Panels, and agreed to by the parties as well as the Council, require the Panels to examine, in the light of the relevant GATT provisions, the matter referred to the CONTRACTING PARTIES by the United States in document L/6316, and by Australia in document L/6332 respectively, and to make such findings as will assist the CONTRACTING PARTIES in making the recommendations or in giving the rulings provided for in Article XXIII:2.

(c) The terms of reference do not give the Panels authority to rule on the admissibility of the respective claims."

11. The case before the Panel concerned measures maintained by the Republic of Korea on imports of beef (CCCN 02.01).

12. Since its accession in 1967, Korea has maintained balance-of-payments (BOP) measures on various products. Since that year, and to date, Korea's BOP restrictions have been subject to regular review by the BOP Committee. During this period, Korea had abandoned or relaxed restrictions on some products. By 1988, restrictions for which Korea claimed BOP cover were still maintained on 358 items, including beef. In 1979, the Korean tariff on beef was reduced from 25 per cent to 20 per cent and bound at that level. Korean beef imports increased from 694 tons (product weight) in 1976 to 25,316 tons in 1981, 42,329 tons in 1982 and 51,515 tons in 1983.² Increased beef supplies, due to rising domestic production and the higher level of beef imports, resulted eventually in falling prices on the Korean domestic market and mounting pressures from Korean beef farmers for protection from the adverse effects of beef imports.

13. In October 1984, Korea ceased issuing tenders for commercial imports to the general market, and in May 1985 orders for imports of high-quality beef for the hotel market also ceased, leading to a virtual stop of commercial beef imports. These measures were neither notified to, nor discussed in, the BOP Committee. Between May 1985 and August 1988, no commercial imports of beef took place. Korea partially reopened its market in August 1988, permitting up to 14,500 tons (product weight) of beef to be imported before the end of the year. For 1989, a quota of up to 39,000 tons had been announced.

14. At the last meeting of the BOP Committee in December 1987, "the Committee took note with great satisfaction of the improvement in the Korean trade and payments situation since the last full consultation".³ "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. The conditions laid down in paragraph 9 of Article XVIII for the imposition of trade restrictions for balance-of-payments purposes and the statement contained in the 1979 Declaration on Trade Measures Taken for Balance-of-Payments Purposes that 'restrictive trade measures are in general an inefficient means to maintain or restore balance-of-payments equilibrium' were also recalled. It also noted that many of the remaining measures were related to imports of agricultural products or to particular industrial sectors, and recalled the provision of the 1979 Declaration that 'restrictive import measures taken for balance-of-payments purposes should not be taken for the purpose of protecting a particular industry or sector'".

15. Therefore, the BOP Committee "stressed the need to establish a clear timetable for the early, progressive removal of Korea's restrictive trade measures maintained for balance-of-payments purposes. It welcomed Korea's willingness to undertake another full consultation with the Committee in the first part of 1989. However, the expectation was expressed that Korea would be able in the meantime to establish a timetable for the phasing out of balance-of-payments restrictions, and that Korea would consider alternative GATT justifications for any remaining measures, thus obviating the need for such consultations. The representative of Korea stated that he could not prejudge the policy of the next Government in this regard".⁴ Moreover, members of the Committee had stated that "they did not necessarily expect Korea to disinvoke Article XVIII:B immediately".

16. Economic indicators in Korea since its latest BOP consultations showed a continuation of the favourable economic situation of the recent past. Economic growth for the period January-September 1988 was expected to have reached 12 per cent as compared to the same period in 1987. Terms of trade improved by 2.5 per cent during the first nine months of 1988 while unemployment dropped from 4 per cent in 1985 to 2.6 per cent for the period January-September 1988. As regards BOP, the current account for the first nine months of 1988 showed a favourable balance of US$14.1 billion, compared to US$9.9 billion for the whole year of 1987. Official reserves (gross) passed from US$3.6 billion at the end of 1987 (enough to finance 1.1 months of imports) to US$12.3 billion at the end of 1988 (3 months of imports). Finally, the ratio of external debt to GNP decreased from 30 per cent in 1987 to 20.4 per cent for the period January-September 1988.⁵

17. During the late 1970's and early 1980's, Korea adopted a number of policies designed to promote a cattle herd build-up. These measures included banning the slaughter of all bulls under 350 kg. and cows of less than six years of age. In addition, Korea began to import large quantities of beef for domestic consumption. Finally, Korea undertook an expansion of credit to help cattle farmers build up their herds and provided producer incentives (5,000 won per head) for female calves. The credit programme and restrictive slaughter rules led to a sharp increase in imports of live cattle and beef. Korean live beef cattle imports increased from 8,138 head in 1979 to a peak of 67,706 head in 1983. During this period, Korean beef imports averaged 30,330 metric tons⁶ (product weight).

18. The success of the Korean programme led to a strong increase in domestic cattle numbers. Official Korean statistics showed that the beef cattle inventory nearly doubled between 1982 and 1986. The total beef inventory increased from 1,312,000 head on 1 January 1982 to 2,553,000 head on 1 January 1986. This build-up in cattle inventories eventually led to falling cattle prices. Livestock market prices for Korean native cattle (400 kg.) rose to a peak of 1.57 million won per head in February 1983 and then began to fall throughout 1984-1986, eventually reaching a low of 0.92 million won per head in February 1987. ⁷ The decline in cattle prices led to reduced profitability for cattle farmers.

19. Prior to 1 July 1987, Korea's beef imports were governed by the Foreign Trade Transaction Act (as amended) which came into force in 1967. The Foreign Trade Transaction Act provided, inter alia, that the Minister of Trade and Industry was obliged to publicly notify the classification of (a) automatic approval import items; (b) restricted approval items; and (c) prohibited items. For restricted items, the Minister was required to lay down procedures controlling their import, including any restrictions on quantity. These arrangements were published in a consolidated public notice (the Export and Import Notice). Meat and edible offals were classified in 1967 as restricted items for the purposes of the Foreign Trade Transaction Act. As restricted products, beef could be imported on the recommendation of the National Livestock Cooperatives Federation (NLCF) subject to the guidelines of the Ministry of Agriculture, Forestry and Fisheries (MAFF), which controlled the quota allocation. If import levels became too high in relation to the level of consumption, imports could be adjusted or suspended.

20. Under the Foreign Trade Transaction Act, the Republic of Korea handled beef imports via two separate mechanisms. One mechanism was concerned with imports of beef for general domestic consumption and generally covered more than 90 per cent of beef imports. These were administered by the NLCF which was established in 1981 by the Livestock Cooperative Law. It had the following functions: (a) administration of a Livestock Development Fund (funded by import levies and direct government contributions) with a prime responsibility of providing concessional loans to livestock farmers; (b) establishment of livestock markets; (c) intervention in the domestic market to stabilize prices through the purchase or sale of stocks; (d) import operations; (e) supply of farming material; (f) marketing of livestock products; (g) general banking business; and (h) extension services. The NLCF imported beef for the general market through a tender system, according to the MAFF's guidelines. Some of the imported beef was processed by the NLCF into packed beef, and some was released to a private entity called Korea Cold Storage Co., at prices lower than those of the domestic wholesale market in order for the latter to produce packed beef. The margin between the wholesale release price and the NLCF's costs, including the purchase price of imported beef, duty and handling charges, was allocated to the Livestock Development Fund.

21. The second mechanism was concerned with imports of high-quality beef for hotels and was handled by the Korean Tourist Hotel Supply Centre (KTHSC) between 1981 and 1985. The KTHSC, an organization representing Korea's major tourist hotels, was established in 1972, under the jurisdiction of the Ministry of Transportation, to import goods solely for tourist hotels. After application from the KTHSC, the Ministry of Transportation would forward the demand for beef imports to the MAFF. The KTHSC paid a levy of 2 per cent of the c.i.f. price of the imported beef to the NLCF for the Livestock Development Fund. The import operations of the NLCF were virtually suspended in October 1984 and those of the KTHSC in May 1985.

22. On 1 July 1987, the Foreign Trade Transaction Act was superseded by the Foreign Trade Act (Law No. 3895 of 31 December 1986). A new organization was established by the Korean Government, the Livestock Products Marketing Organization (LPMO), with effect from 1 August 1988. This organization administered on an exclusive basis the importation of beef within the framework of quantitative restrictions set by the Korean Government. According to its current by-laws, as amended on 29 December 1988, the LPMO was to:

- stabilize the prices of livestock products through smooth adjustment of supply and demand, supporting thereby, and at the same time, both livestock farmers and consumers; and

- contribute to improving the balance of payments.

The main function of the LPMO was the administration of the quota restrictions set by the government. The LPMO's board of fifteen directors included the following representatives:

President (NLCF)

Director-General, Livestock Bureau, MAFF

Chairman, Pusan Livestock Cooperative

Vice-President for Marketing, National Agricultural Cooperative Federation

Chairman, Baekam Agricultural Cooperative

President, National Headquarters for Korea Dietary and Life Improvement Campaign

Chairman, Korea Dairy and Beef Farmers Association

Professor, Livestock College, Kunkook University

Research Director for Agricultural Development, Korea Rural Economic Institute

Professor, College of Agriculture, Seoul National University

President, LPMO

Chairman, Tourist Hotel Subcommittee, Korea Tourism Association

Chairman, Korea Restaurant Association

Chairwoman, Korea Federation of Housewives Club

Senior Vice-President, Korea Consumers Protection Association

23. Under the current import arrangements, the MAFF sets a maximum import level on the basis of various criteria such as estimated domestic beef production and estimated domestic consumption. In 1988, the LPMO imported the beef through a system of open tenders and resold a major part of it by auction to the domestic market.

24. Before reselling the imported beef either through the wholesale auction system (61.2 per cent of total volume) or directly (38.8 per cent), for instance to hotels, the LPMO added its costs and a profit margin. Between August and October 1988, the LPMO imposed an announced base price under which the meat was not sold at the wholesale auction. Since October, no explicit base price had been announced on the understanding that a certain base price level had to be respected. After having deducted its overhead, the difference between the import contract price and the auction price (or derived direct sale price) was paid into the Livestock Development Fund. This difference varied from one month to another, and also for different types of beef, but was on average approximately 44 per cent of the contract price in the period August to November 1988.

25. The United States argued that the quotas, import bans, state-trading monopoly and other restrictions maintained by the Government of Korea were inconsistent with Articles II, X, XI and XIII, and nullified or impaired benefits accruing to the United States within the meaning of Article XXIII of the General Agreement. The United States therefore requested the Panel to find that:

(i) the Korean import ban and quantitative restrictions on beef imports were inconsistent with GATT Article XI;

(ii) the LPMO import surcharge violated GATT Articles II:1(b) and II:4;

(iii) the existence of the LPMO was a GATT-inconsistent restriction on trade within the meaning of Article XI;

(iv) the Republic of Korea had failed to satisfy its notification obligations under Articles X and XIII; and

(v) the Korean restrictions constituted prima facie impairment of benefits accruing to the United States under the General Agreement.

The United States further invited the Panel to recommend to the CONTRACTING PARTIES that Korea take action immediately to eliminate its restrictions on imports of beef so as to conform with Korea's obligations under the General Agreement.

26. The Republic of Korea argued that its restrictions on beef imports were covered by the balance-of-payments provisions of Article XVIII:B and thus permissible under the General Agreement. Furthermore, the United States complaint could not be reviewed under the standards of Article XXIII in view of the standards and procedures in Article XVIII:12(d).

27. 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 instituting or maintaining 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 GATT-inconsistent "quantitative restriction".

28. The United States also considered that, unless Korea's quantitative restrictions on beef imports could be justified under an explicit exception, they were in contravention of Korea's obligations under the General Agreement. Under GATT practice, it was up to the party invoking an exception to the General Agreement to demonstrate that it qualified for that exception. Accordingly, it would be incumbent on Korea to demonstrate that its actions fell within some exception to the general GATT prohibition on quotas and that each and every requirement of that exception had been met. The United States believed, however, that Korea could not demonstrate that its quotas met the requirements of Articles XI:2, XII, XVIII:B or any other GATT exception. If so, consistent with the aims of GATT, the issue should be resolved in favour of a recommendation that Korea remove its quotas on the importation of United States beef.

29. Korea did not deny that the beef restrictions maintained by Korea were contrary to the provisions of Article XI but claimed that they were justified under Article XVIII:B.

30. The United States also argued that the LPMO constituted an import monopoly controlled by domestic producers and was an "import restriction" within the meaning of Article XI. As discussed above, Article XI proscribed the use of "quotas, import or export licences, or other measures". The Interpretative Note ad Articles XI, XII, XIII, XIV, and XVIII stated that: "Throughout Articles XI, XII, XIII, XIV, and XVIII, the terms "import restrictions" or "export restrictions" include restrictions made effective through state-trading operations."

31. Referring to the findings of the Japanese Agricultural Panel⁸, the United States argued that the existence of the LPMO, a monopoly controlled by domestic producers, represented a serious barrier to trade. If import monopolies controlled by domestic producers were permitted, any government could destroy the value of tariff concessions by giving control over imports to organizations with an interest in restricting trade. The United States believed that the LPMO represented a separate and independent restriction on beef trade in violation of the General Agreement.

32. The United States considered that a state-trading monopoly had to be set up and implemented in a neutral and objective manner so that decisions were taken in accordance with "commercial considerations", as required by Article XVII. A government could not constitute these monopolies in such a way as to create clear disincentives to trade. In a situation involving a producer-controlled monopoly, "commercial considerations" would be presumed to be secondary to the basic self-interest of the domestic producers in limiting import competition. The United States believed that there was little prospect of increased trade as long as the LPMO remained. The LPMO operated in a manner which violated Article XI. The Panel should recommend to the CONTRACTING PARTIES that Korea eliminate it and refrain from establishing similar producer-controlled import monopolies in the future. Any other decision would create clear incentives for governments to set up such monopolies. The proliferation of such organizations would have disastrous implications for world trade.

33. Korea replied that the LPMO was not a state-trading monopoly; it did not decide independently on the quantities of beef which would be imported into Korea. The restriction levels were determined by the Korean Government. Furthermore, the United States reference to the Interpretative Note ad Articles XI, XII, XIII, XIV and XVIII was mistaken. At first glance, it was difficult to see what the Note added to the understanding of a BOP restriction under Article XVIII by including "restrictions made effective through state-trading operations". The Note merely said, according to Korea, that countries with state-trading enterprises could apply import restrictions just as well as market economy countries for, e.g., balance-of-payments reasons, which seemed irrelevant to Korea because of its market economy status. Korea believed that it was important to stress that the LPMO mechanism did not represent a separate import restriction. The LPMO simply had no authority to set or modify quantitative limitations on beef imports. Nor was the LPMO charged with making recommendations to the Korean Government on the appropriate level of imports. Rather, the LPMO administered the importation of beef within the framework of quantitative restrictions set by the Korean Government. Since the LPMO was just an implementing mechanism, the LPMO's objectives did not affect the justification of the Government's restrictions on beef imports.

34. The United States claimed that the LPMO was levying surcharges on imported beef, which averaged 36 per cent, for the purpose of equalizing import prices with high domestic prices. After negotiations with the United States, Korea bound its tariff on meat during the Tokyo Round of Multilateral Trade Negotiations. The concession was set out in Schedule LX. By agreement with the United States, Korea reduced its tariff on meat of bovine animals (0201.01) from 25 per cent to 20 per cent ad valorem and bound it at that rate. The imposition of surcharges on imported meat was plainly inconsistent with Article II:1(b).

35. The United States also argued that the LPMO appeared to have as its purpose, and had taken concrete steps to afford, protection for Korean beef farmers. As such, 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. As shown by the Canadian Liquor Boards Panel report, a government-sponsored import monopoly was not permitted to charge differential mark-ups on imported goods, much less generalized import surcharges. The imposition of such mark-ups constituted additional protection in violation of Article II:4.⁹ A state-trading organization was limited by Article II:4 to charging the landed costs, plus transportation, distribution, and other expenses incident to the purchase, sale or further processing, plus a reasonable margin of profit. In particular, the margin of profit charged was limited to a margin that would prevail under normal conditions of competition and had to be the same on average for domestic and imported goods. ¹⁰

36. The United States believed that the LPMO's practices fell squarely within the rule adopted in the Canadian Liquor Boards case. The LPMO was setting minimum bid prices that involved mark-ups of up to 56 per cent on United States boxed beef and up to 136 per cent for Australian carcass beef. These surcharges were far in excess of the "reasonable profits" permitted by Article II:4 and nullified or impaired the 20 per cent Tokyo Round tariff binding negotiated by the United States. In the view of the United States, the clear purpose and intent of the surcharges imposed by the LPMO was to afford extra protection to Korean beef farmers over and above the GATT-bound tariff in violation of Article II:4.

37. Korea replied that the United States reliance on the Canadian Liquor Board Panel case was misplaced. In that case, the panel was not concerned with the administration of a GATT-consistent import restriction. Rather the panel reviewed the import, distribution and sales practices of a state-trading monopoly that operated independently from any restriction. Canada did not impose any quantitative restrictions which its liquor boards were supposed to administer. In respect of beef products, the operation of the LPMO in no way resulted in surcharges that were far in excess of the "reasonable profits" permitted by Article II:4.

38. Korea argued that as long as it maintained quantitative restrictions, justified under Article XVIII:B, these had to be administered. That was to say, these restrictions had to be allocated among the different suppliers. With respect to administering restrictions, Article XVIII:B referred to Article XIII principles to avoid discrimination among foreign suppliers. Article XIII was not the only standard that a country had to observe when it imported products which it had subjected to restrictions. The importing country had to continue to observe its tariff bindings as well, even if it had GATT justification to subject the products concerned to quantitative restrictions. Thus, while Article XVIII permitted a country to impose quantitative restrictions for BOP reasons, it did not make allowance for surcharges that increased import duties above the level bound in GATT. This was clearly established by the Working Party that reviewed the tariff surcharge imposed by the United States for BOP reasons in 1971.¹¹

39. Furthermore, Korea recalled that virtually all imported beef was resold through wholesale market auctions or at prices that were equivalent to or lower than an auction-based price average for imported beef. Korea argued that the real grievance of the United States was that the auction-based system operated by the LPMO in buying and reselling imported beef allowed Korea to capture the "quota rents". Quota rents were the price increases produced by the quantitative restrictions on imported beef. The United States mistakenly referred to these price increases as mark-ups or surcharges. Yet, quota rents simply represented the economic impact of quantitative restrictions. They did not constitute additional trade restraints such as surcharges or mark-ups that were impermissible under Article II. Nothing in the GATT, particularly Article XIII, prevented the importers (or the foreign suppliers, as the case might be) from collecting these price increases. Moreover, it had long been recognized that the auction method was superior to any other in achieving a non-discriminatory allocation of quota shares, consistent with Article XIII

40. Consequently, assuming that Korea was entitled to maintain quantitative restrictions under Article XVIII:B, then the LPMO's administration of these restrictions was subject to two GATT requirements: first, the LPMO had to administer these consistent with Article XIII; second, the LPMO could not impose surcharges on beef imports that exceeded Korea's tariff on beef which had been bound pursuant to Article II. These were the relevant standards, according to Korea, for this Panel's review of the LPMO's operation. Korea explained that quota shares were allocated to the foreign suppliers who submitted the lowest bid to the tender which the LPMO had issued. When the successful bidder then exported the beef to Korea, it was subject to the bound customs duty of 20 per cent. In addition, 2.5 per cent was levied pursuant to the National Defence Tax Law. This extra levy was not inconsistent with the GATT because the levy applied across the board, to foreign and domestic goods alike, and even to the income of wage earners. No other taxes, levies or charges were applied on imports of beef. Thus, in Korea's view, the LPMO's operation was also consistent with Article II. In conclusion, because it met the requirements of both Article II and Article XIII, the LPMO's operation was consistent with the General Agreement.

41. The United States argued 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 failed in its obligations under Articles X and XIII by not providing proper public notice of the import restrictions.

42. Korea submitted that the withdrawal of the intensification measures in 1988, and the import levels established for 1988 and 1989 had been widely publicized, both in Korea and abroad. Furthermore, the LPMO's tenders, implementing the quota shares, had been easily filled and no complaint had been raised by traders about the LPMO's import formalities.

43. The Republic of Korea argued that the United States could not challenge the GATT compatibility of Korea's restrictions under Article XXIII because of the existence of special review procedures in Article XVIII:B as well as the actual results of Article XVIII:B reviews by the Balance-of-Payments Committee. Korea referred to a recent panel case¹² in which the United States had challenged tariff preferences on citrus fruit granted by the European Community to certain Mediterranean countries with whom it had concluded free trade agreements. The Community argued in that case that the United States complaint was inadmissible under Article XXIII. It referred to Article XXIV:7 which, in the Community's view, represented the exclusive mechanism to review the consistency of the tariff preferences and the underlying free trade agreements with the GATT. The panel admitted the United States complaint, but refused to consider its merits under Article XXIII:1(a). Instead, the panel reviewed the merits of the United States complaint exclusively under Article XXIII:1(b), thus limiting its review to the issue of "non-violation" nullification or impairment. In Korea's opinion, even a "non-violation" nullification or impairment review of the present United States complaint by the Panel was not appropriate because contrary to Article XXIV, Article XXIII:B contained a specific complaint and compensation mechanism in Article XVIII:12(d). If anything, Article XXIV:7 could only be compared to the consultation mechanism of Article XVIII:12(b).

44. Referring to the above-mentioned case in which the panel considered that "the practice, so far followed by the CONTRACTING PARTIES never to use the procedures of Article XXIII:2 to make recommendations or rulings on the GATT compatibility of measures subject to special review procedures, was sound"¹³, thus ruling out the consideration of the United States complaint under paragraph 1(a) of Article XXIII, Korea argued that if Article XXIV:7 was deemed a special review procedure as in the above-mentioned case, Article XVIII paragraph 12 a fortiori set forward such procedures. This principle was self-evident, according to Korea. If measures were subject to GATT review, pursuant to special procedures, it made no sense to allow them to be challenged under Article XXIII as well. Such duplication wasted the resources of all concerned, in particular those of the GATT bodies charged with the special review, and of the country whose measures were being examined. Moreover, to the extent the standards of review under Article XXIII were different from or less stringent than the standards applied to the special review procedures, review under Article XXIII negated the latter.

45. The United States replied that the 1950 GATT Report on "The Use of Quantitative Restrictions for Protective and Other Purposes" published in July 1950 showed unambiguously that the "misuse" of BOP restrictions could be challenged under the dispute settlement provisions of Article XXIII. While the consultation provisions of Article XVIII:12(d) duplicated to an extent the consultation and dispute settlement provisions of Article XXIII:2, this was not unusual, since the GATT frequently provided multiple avenues for consultations and dispute settlement.

46. The United States considered that the draft Citrus Panel report was not relevant to the present case and in any case, as interpreted by Korea, provided an erroneous description of GATT practice. First, the report had never been adopted and therefore had no legal status in GATT. Second, the draft report related only to Article XXIV and could not be regarded as an authoritative interpretation of Articles XII or XVIII:B. Indeed, the Panel had no authority to go beyond the Citrus dispute and interpret other provisions of GATT. Third, Korea's reading of the report was directly at odds with the clear statement in the 1950 Report on "The Use of Quantitative Restrictions for Protective and Other Purposes" that misuse of BOP measures could be brought to dispute settlement "under the procedures laid in the Agreement for the settlement of disputes". Korea's reading of the draft Panel report also contradicted a long series of decisions by the CONTRACTING PARTIES that actions covered by waivers granted under the "special review procedures" of Article XXV could be challenged under Article XXIII.

47. In response, Korea argued that logic supported the Citrus Panel's finding. If the United States complaint were to be reviewed under the standards of Article XXIII, this would negate the standards and procedures of Article XVIII:12(d), and amount to an improper amendment of the General Agreement.

48. Because Article XXIV contained no specific complaint and compensation mechanism, Korea argued, it was understandable that the Citrus Panel saw some role for Article XXIII. On the other hand, since Article XVIII:B did contain a specific complaint and compensation mechanism in Article XVIII:12(d) in addition to the consultation mechanism of paragraph 12(b), it was possible to distinguish the present case from the Citrus case. Thus this Panel would be entirely justified to conclude in the present case that Article XVIII:12(d) not only precluded review of the GATT compatibility of Korea's restrictions under Article XXIII:1(a), but also review under the "non-violation" nullification or impairment standards of Article XXIII:1(b) or (c). In this way, the Panel would respect the choice made by the drafters of Article XVIII:12(d), who - with good reason - subjected complaints about BOP reasons to higher standards than the standards of Article XXIII, and who did not include "non-violation" nullification or impairment standards, comparable to those of Article XXIII:1(b) or (c), in Article XVIII:12(d). Consequently, in accordance with the long-standing practice of the CONTRACTING PARTIES, the United States was not entitled to complain about the possible inconsistencies of the disputed beef restrictions with provisions of the General Agreement pursuant to Article XXIII:1(a).

49. The United States argued that despite citing BOP as the ostensible GATT justification for its beef ban, quotas, and surcharges, Korea appeared surprisingly reluctant to discuss the merits of the BOP issue and had put forward a number of procedural obstacles to prevent the Panel from examining the BOP issue and the GATT consistency of the trade restrictions. This reluctance appeared to rest on a (not unfounded) concern about the credibility of claiming BOP cover in Korea's current situation and the fact that these measures were taken for protectionist reasons wholly unrelated to Korea's strong BOP position. Notwithstanding Korea's current contention that the provisions of Articles XII and XVIII could not be challenged in Article XXIII proceedings, the United States believed that the Panel was required under the agreed terms of reference and GATT precedent to decide this issue. Korea had taken the position that the Panel could not examine the BOP issue. It contended that such matters were the exclusive business of the BOP Committee and that the "BOP Committee had continued to authorize Korea's restrictions on beef imports under Article XVIII:B". Under the agreed terms of reference, the Panel had a mandate to examine the beef import restrictions "in the light of the relevant GATT provisions". The agreed terms of reference were straightforward and unambiguous. They said nothing about excluding certain provisions of GATT, nor did they make any exception for BOP. Since Articles XII and XVIII were integral parts of the General Agreement and BOP had been put forward by Korea as a defence, it necessarily followed that the Panel had clear authority to examine the application of the BOP provisions to this case. Otherwise, the Panel could not fulfil its mandate to provide appropriate "recommendations" to the CONTRACTING PARTIES.

50. In response, Korea contested, first of all, that it had been reluctant to discuss the merits of the BOP issue. Korea had fully participated in the consultations before the BOP Committee over the years and was preparing for a new round of consultations in June 1989. Korea maintained that these consultations pursuant to Article XVIII:12(b), or a complaint pursuant to Article XVIII:12(d), remained the proper venue to discuss the BOP issue. Furthermore, Korea argued that the United States wrongly suggested that the Panel's terms of reference allowed the Panel to ignore the implications of Article XVIII:12(b) and (d). The CONTRACTING PARTIES did not exclude any GATT provisions or sub-provision when they adopted the standard terms of reference.

51. The United States also argued that having introduced BOP to this case, Korea could not object to the Panel's examination of the BOP issue on its merits, or object to a request for relevant IMF advice pursuant to paragraph (iv) of the Annex to the Understanding Regarding Notification, Consultation, Dispute Settlement and Surveillance (28 November 1979). ¹⁴

52. According to Korea, the United States was asking for more than it bargained for. Following the request of the United States, the CONTRACTING PARTIES limited the Panel's terms of reference to reviewing Korea's restrictions on beef imports. The United States fully realized all along that Korea invoked the cover of Article XVIII for these restrictions, which continued to be reviewed by the BOP Committee. Yet it was not possible for the Panel or the IMF to review Korea's balance-of-payments position in respect of the restrictions on beef imports in isolation. Any review of Korea's balance of payments would also affect the restrictions on 357 other products for which Korea claimed BOP cover as well.

53. The United States argued that the CONTRACTING PARTIES had stated unambiguously that the misuse of BOP measures was actionable under Article XXIII. In 1950, shortly after GATT entered into force, the CONTRACTING PARTIES had occasion to examine carefully the application of the BOP provisions of the General Agreement to Article XXIII. At that time, there was serious concern about the misuse of quotas and other trade-restrictive measures. These concerns were equally relevant today. The conclusions of the CONTRACTING PARTIES were set out in the 1950 Report "The Use of Quantitative Restrictions for Protective and Other Commercial Purposes". This report was drafted in the knowledge that quantitative restrictions had been widely applied by most countries since World War II and that many countries had used such measures in order to redress their external financial position and strengthen their monetary reserves. As noted in the preface to the report, many quantitative restrictions had "remained in force after the need for them has passed away, and some of the quantitative restrictions applied for financial reasons may have been retained to protect domestic producers against foreign competition". The report specifically pointed out that quotas had been maintained which gave "priority to imports of particular products upon the basis of the competitiveness or non-competitiveness of such imports with a domestic industry". In other cases, the quotas were "unreasonably small having regard to the exchange availability of the country concerned and to other relevant factors".

54. The United States further argued that the problems examined by the CONTRACTING PARTIES in 1950 were closely analogous to those involved in the present case. The legal conclusions of the report were therefore highly relevant. The CONTRACTING PARTIES summed up as follows:

By their choice of the word "inconsistent", the CONTRACTING PARTIES clearly contemplated that such measures could be challenged under Article XXIII:2 as violations of the General Agreement pursuant to Article XXIII:1(a). Thus, the report directly refuted Korea's claims that purported BOP measures could not be challenged in dispute settlement.

55. As concerned the 1950 Working Party report, Korea argued that it reflected the economic position of the European countries in the years just after World War II. For various reasons, these developed countries, which had been heavily affected by the war, maintained import or export quotas. The report disapproved of the use of quantitative restrictions for protective and other commercial reasons, that is for reasons not justified under the GATT. The preface of the report indicated that some quantitative restrictions remained in force after the need for them had disappeared, and that some of those originally applied for financial reasons were retained to protect domestic producers against foreign competition. Any individual contracting party which considered that such a situation existed and that its trade was harmed thereby should have recourse to the complaint procedure of the General Agreement, according to the working party. The 1950 Report, according to Korea, did not examine carefully the application of the BOP provisions of the General Agreement to Article XXIII. It merely said, in the passage highlighted by the United States, that if an import restriction was not justified under Article XII-XIV or under any other GATT provision, then it should be reviewed under the dispute settlement "procedures" of the General Agreement. There were arguably over thirty such procedures in the GATT. The report did not single out Article XXIII; nor did it consider the relationship between Article XXIII and Article XVIII:12(d) (or rather Article XII:4(d), its corresponding provision at the time). Korea pointed out as well that the 1950 Report did not even cite these provisions or any other procedural provisions, while citing many of the GATT's substantive rules. This report was the first signal of the problems which the GATT was beginning to experience with so-called "residual" restrictions. In 1955, the CONTRACTING PARTIES tried to solve this problem by providing in advance for a type of waiver (the "hard-core waiver"), which would establish a transitional period for the adjustment of domestic firms to the competitive impact caused by the elimination of quantitative restrictions. These restrictions, which were no longer justified as BOP measures, became known as "residual" restrictions.

56. Korea further argued that the problems caused by residual restrictions grew more serious during the 1950's, and in 1960 the CONTRACTING PARTIES decided to initiate a thorough inventory of such restrictions maintained by GATT members. It was then explicitly agreed that the consultation provisions of Article XXII and the nullification or impairment procedures of Article XXIII might be invoked by contracting parties affected by residual restrictions.¹⁶ The GATT report in which this was established was entitled "Procedures for Dealing with New Import Restrictions Applied for Balance-of-Payments Reasons and Residual Import Restrictions".¹⁷ This report confirmed that residual restrictions could be challenged under Article XXIII. Residual restrictions were restrictions which a country applied to protect its own market without invoking a GATT justification. Most residual restrictions were once maintained under the BOP cover of Articles XII or XVIII, but were retained after this cover was abandoned. The conclusions reached in 1950 and 1960 made perfect sense according to Korea. No longer subject to the special review procedures of Articles XII and XVIII, the residual restrictions should be open to challenge under Article XXIII. Otherwise, they would become sacrosanct. Yet, however sensible these conclusions were, they did not concern the present case. Korea's restrictions on beef imports were clearly not residual restrictions. They had been and were still subject to multilateral review under Article XVIII:B.

57. The United States replied that the 1950 Report was determinative in the present case. The report was adopted by the CONTRACTING PARTIES as a binding legal interpretation of the relevant provisions of the GATT. While the GATT had been amended since 1950, the BOP review and consultation procedures and the dispute settlement provisions of Article XXIII had remained essentially unchanged. Indeed, the BOP review and consultation provisions of Article XVIII:B that were added in 1955 were virtually identical to those of Article XII and were drawn directly from that Article. There was nothing in the 1955 negotiating record to suggest that the CONTRACTING PARTIES intended to limit existing rights to challenge the misuse of BOP measures under Article XXIII. Consequently, the legal interpretations set out in the report applied equally to Articles XII and XVIII:B.

58. Korea argued that this conclusion of the United States rested on a mistaken assumption. It assumed that the CONTRACTING PARTIES first established the principle that measures with BOP cover under Article XII and subject to the special complaint procedure of Article XII:4(d) could nevertheless be challenged under Article XXIII, when they adopted the 1950 Report. According to Korea, the 1950 Report did not establish such a principle.

59. The United States asserted that Korea distinguished the 1950 Report by arguing that it related to "residual" restrictions involving countries which had disinvoked Article XII. Accordingly, Korea contended that the report did not apply to Korea which still claimed BOP cover. However, this argument rested on a major factual error. It was true that the "residuals" issue involved European countries which had disinvoked Article XII, but continued to maintain "residual" import restrictions. In 1950, however, when the CONTRACTING PARTIES made their report, these countries were still invoking Article XII, just as Korea continued to seek to invoke Article XVIII:B today. Consequently, the 1950 Report showed that Article XXIII could be applied against a country which was invoking BOP, but misusing alleged BOP measures, e.g., Korea. In short, the United States believed that the Panel had clear authority to review the merits of Korea's BOP defence.

60. In response, Korea recalled it had not argued that the 1950 Report dealt with residual restrictions, because no country obviously had yet formally abandoned its BOP cover at that time. Korea had merely indicated that the 1950 Report signalled the problem which later came to be known as residual restrictions, e.g., restrictions which were retained by countries after BOP cover was no longer available to them. These restrictions could well be challenged under Article XXIII, because there was no other remedy in GATT to do so. Korea reiterated, however, that its beef restrictions were not "residuals" because it still claimed BOP cover for them, and because these restrictions were still under review by the BOP Committee. Furthermore, a specific remedy was available to complainants like the United States that wanted to challenge the GATT justification of these restrictions: Article XVIII:12(d). In addition, Korea argued that the United States made a very important concession: by conceding that Korea's restrictions were not "residual restrictions", the United States agreed unambiguously that Korea still had BOP cover. Korea reiterated that the 1950 Report provided no support for the unprecedented initiative of the United States to remove Korea's BOP cover in an action under Article XXIII, rather than Article XVIII:12(b) or (d).

61. The United States provided additional arguments as to why Korea's reliance on an alleged rule regarding the special review procedures was misplaced. The CONTRACTING PARTIES had said repeatedly that practices covered by special review procedures could be examined under Article XXIII. Indeed, they made this point specifically with respect to BOP procedures in the 1950 Report. They had made the same point with respect to other GATT special review procedures, including those of Article XVIII. Article XVIII:C, for example, provided a procedure whereby a developing country could seek to deviate from its GATT obligations in order to assist the establishment of an industry. Such measures could only be implemented after notice to, and in some cases, the concurrence of, the CONTRACTING PARTIES. The 1955 Working Party report on Quantitative Restrictions stated:

Thus, in Article XVIII:C, which was drafted at the same time as the provisions of Section B, the CONTRACTING PARTIES did not foreclose Article XXIII rights for practices concurred in by the CONTRACTING PARTIES. It followed that the draft Citrus Panel report was irrelevant here and that Korea's reliance on its alleged description of GATT practice was wrong.

TO CONTINUE WITH REPUBLIC OF KOREA - RESTRICTIONS ON IMPORTS OF BEEF - COMPLAINT BY THE UNITED STATES

¹Later, it was agreed that the New Zealand/Korean Panel on the same subject would also have the same composition.

²Figures provided by the Republic of Korea.

³The last full consultation before 1987 was held in November 1984.

⁴The full text of the Balance-of-Payments Committee's conclusions is set out in Annex I on p. 230 (Australia).

⁵Figures derived from tables in Annex II.

⁶Korean figure.

⁷Figures derived from National Livestock Cooperatives Federation statistics.

⁸Japan - Restrictions on Imports of Certain Agricultural Products, L/6253.

⁹Import, Distribution and Sale of Alcoholic Drinks by Canadian Provincial Marketing Agencies, L/6304, pp. 45-47.

¹⁰Idem, page 46.

¹¹United States Temporary Import Surcharge, BISD 18S/213, 223.

¹²European Community - Tariff Treatment on Imports of Citrus Products from Certain Countries in the Mediterranean Region, L/5776, 7 February 1985. This report was not adopted by the GATT Council.

¹³Idem, paragraph 4.16.

¹⁴BISD 26S/210.

¹⁵The Use of Quantitative Restrictions for Protective and Other Purposes, 1950, paragraph 22.

¹⁶Dam, The GATT: Law and International Economic Organization, page 165 (1970).

¹⁷BISD 9S/18.

¹⁸BISD 3S/188, paragraph 63.