33. Brazil argued that its statements contained in documents ADP/106, 113 and 121 showed that the issues regarding which the EC was presenting preliminary objections were addressed by Brazil during consultations, conciliation and in its request for the establishment of the Panel. Regarding the EC's determination of normal value on the basis of cost of production for certain companies in the last quarter of 1989, Brazil argued that it had stated in ADP/121 that "Normal value for the remaining sales was determined on the basis of cost of production. Brazil considers that this determination equally infringed Article 2:4 of the Agreement" (paragraph 18). Paragraph 16 of ADP/113 showed that the same claim was made by Brazil during conciliation. In that paragraph, Brazil had stated that "Normal value for the remaining sales was determined on the basis of costs of production. Brazil considers that this determination also infringed Article 2:4 of the Code." The claim was also raised during consultations, as shown by paragraph 2 of ADP/106, which referred to Brazil's view that the EC had violated Article 2:4 of the Agreement.

34. Regarding "zeroing", Brazil argued that this claim did not concern the EC's methodology of discounting negative dumping in general terms, i.e. in non-inflationary and stable exchange rate environments. Rather, it was concerned with the EC's failure to take into account the particularly distortive effects of that methodology in the circumstances prevailing in the case under review, namely high domestic inflation and frozen exchange rates. Brazil argued that this claim was contained in ADP/121 (paragraphs 13, 19 and 26), which stated that "in order to take account of the distortions arising from a situation whereby very high inflation on the domestic market was coinciding with a freeze in exchange rates", that the EC should have ignored "alleged dumping merely caused by temporary and unexpected exchange rate fluctuations", and that particularly in respect of exporting countries experiencing high inflation "the methodology adopted should permit a proper comparison". The same claim was made by Brazil during conciliation in ADP/113 (paragraphs 11 and 23), which stated that "allowance should have been made in order to take into account distortions arising from the artificial fixing of exchange rates ... or by simply ignoring alleged "dumping" merely caused by temporary and unexpected exchange rate fluctuations". Also, paragraph 17 of ADP/113 stated that "the methodology adopted should permit a proper comparison". During consultations this claim was raised in ADP/106, paragraph 2, which clearly referred to the EC's failure to address "the distortions arising from the prevailing exchange rate system".

35. Brazil argued that in view of the availability of ADP/113 and ADP/121, sufficient notice had been given to the EC and to other contracting parties of the nature of the matter to be placed before the Panel.

36. Brazil further argued that the correct legal basis for determining the limits of a panel's ability to review the factual and legal matters placed before it was the relevant GATT dispute settlement provisions. In this respect, Brazil recalled that the Agreed Description of the Customary Practice of the GATT in the Field of Dispute Settlement (Article XXIII:2) provided: "The function of a panel has normally been to review the facts of a case and the applicability of GATT provisions and to arrive at an objective assessment of these matters. ... The panel can question both parties on any matter which it considers relevant to the dispute ... Panels often consult with and seek information from any relevant source they deem appropriate . ... Panel reports have normally set out findings of fact, the applicability of relevant provisions, and the basic rationale behind any findings and recommendations that it has made" (paragraphs 3, 6(iv) and 6(v); emphasis added by Brazil).

37. Brazil also noted that the Understanding Regarding Notification, Consultation, Dispute Settlement and Surveillance provided: ".... a panel should make an objective assessment of the matter before it, including an objective assessment of the facts of the case and the applicability of and conformity with the General Agreement" (paragraph 16; emphasis added by Brazil). In this regard, Brazil noted that paragraph 3 of the 1989 Improvements to the GATT Dispute Settlement Rules and Procedures the Contracting Parties agreed that the existing rules and procedures of the GATT in the field of dispute settlement (i.e. those indicated above) shall continue to apply.

38. Brazil further argued that the issues to which the EC was objecting had been before the EC since before the adoption of provisional measures, and that the attitude of the EC had always been simply, to dismiss requests by Brazil without consideration. Brazil had not found any resolve on the part of the EC to facilitate a solution to the problems which had arisen in this case. In this context, Brazil referred to the 1966 Decision on Procedures under Article XXIII of the GATT¹¹, the recitals of which provide as follows : "Recognizing that the prompt settlement of situations in which a contracting party considers that any benefits accruing to it Directly or indirectly from the General Agreement are being impaired by measures taken by another contracting party, is essential to the effective functioning of the General Agreement and the maintenance of a proper balance between the rights and obligations of all contracting parties; Recognizing further that the existence of such a situation can cause severe damage to the trade and economic development of the less-developed contracting parties; and Affirming their resolve to facilitate the solution of such situations while taking fully into account the need for safeguarding both the present and potential trade of less-developed contracting parties affected by such measures; in conducting its examination and having before it all the background information, the panel shall take due account of all the circumstances and considerations relating to the application of the measures complained of, and their impact on the trade and economic development of affected contracting parties" (emphasis added by Brazil).

39. Brazil considered that it would be more in keeping with the spirit of these provisions if the EC would address the substance of the two arguments raised by Brazil.

40. The EC noted that Brazil had not made its allegation to the use of "zeroing" in general, but only its application in the context of an inflationary environment or of a freezing of exchange rate. The EC considered that these two allegations were distinct claims. The latter claim related to the appraisal of a factual situation, whereas the former dealt with the use of a methodology ("zeroing") which was applied in all cases, irrespective of the existence of an inflationary situation. These two claims had no relation to one another, apart from the fact that they related to the alleged violation of the same provisions of the Agreement. On that basis, the Panel was free to reject one of them while, at the same time, accepting the other.

41. Regarding "zeroing", the EC said that the citations by Brazil to relevant parts of the documents as referring to this allegation¹² revealed that they all referred exclusively to the claims relating to whether the freezing of exchange rate led to a particular market situation. In none of these citations did Brazil make any reference to the methodology (i.e. "zeroing") used by the EC in this case. Brazil could not now contend that it had a claim relating to "zeroing" in its requests for consultation, conciliation and in document ADP/121. Moreover, given that the claim on the use of "zeroing" was different from the those identified in document ADP/121, one could not deduce from the text of that document that the claim on "zeroing" was implicitly included in the matter. In light of the purpose of consultations and conciliation, as well as the terms of reference of a panel (i.e. to identify among the issues discussed those claims which were still outstanding), the EC considered that there could not be any "implicit" identification of a claim in the document referred to in the mandate of the Panel.

42. The EC recalled Brazil's statement that paragraph 18 of document ADP/121 identified the claim pertaining to the use of constructed normal value for two of the investigated companies for the last three months of 1989. That allegation seemed to be based on the use of the term "cost of production", which appeared in that paragraph. However, paragraph 18 related to a totally different claim, i.e. that normal value should have been based on sales to third countries instead of domestic sales or costs of production. It did not relate at all to the claim which dealt with the issue of using an allegedly incorrect methodology in the calculation of the costs of production.

43. The EC then addressed the issue of the extent of the obligations of parties to an international agreement and its consequences on scope of review at a general level. The EC argued that it was one of the basic principles of international law that the liberty of subjects of international law was presumed to be unlimited, except by obligations stemming from international norms binding on them. This principle dated back to the very origin of international legal relations and had been expressly confirmed as early as 1927 by the Permanent Court of International Justice in the "Lotus" case¹³. Since international law did not create competence for parties but rather limited their original freedom through specific obligations¹⁴, limits to the liberty of international actors could not be presumed (for example, "Lotus" case cited above). They must come from international obligations, as interpreted in conformity with generally recognized principles of interpretation of international law. Therefore, it was clear that the liberty for GATT contracting parties to take anti-dumping measures does not result from the GATT, nor from the Agreement. It pre-existed these agreements. This right was acknowledged in a number of provisions of the General Agreement. Article II:2(b) recognized the right for contracting parties to raise duties beyond their bound rate when applying anti-dumping measures, and Article VI:1 confirmed the legitimacy of anti-dumping measures. Therefore, anti-dumping was one of the field of activities of international subjects where there existed a total freedom to act, unless this freedom was limited by international obligations. In the present case, if no obligation was created under the Agreement, then the EC was free to proceed as it wished (provided it did not act contrary to other obligations under international law), i.e., the above-mentioned principle implied that Brazil's contention according to which a practice that was not expressly allowed by the Agreement was forbidden could not be accepted as a matter of international law. The Agreement was not drafted with the view to be comprehensive.

44. The EC argued that the interpretation of the Agreement should be made on the basis of the generally accepted principles of interpretation of international agreements mentioned in Article 31 of the Vienna Convention on the Law of Treaties. In other words, either the obligation stemmed from the actual text of the Agreement, or it could be deduced from that text on the basis of an interpretation made pursuant to the principles recalled in Article 31. The burden of proof was initially on the investigating authority to establish the existence of injurious dumping. This burden of proof may be discharged by a publication of the findings, including a sufficient statement of reasons. Once this had been done, the obligation to discharge the burden of proof shifted upon the party which found itself aggrieved and requested the establishment of a panel. If the complaining party claimed that the investigating authorities of another party had disregarded their obligations under the Agreement, it would have to establish the existence of the obligations, the extent to which the investigating authorities of the other party were subject to the alleged obligations, as well as the manner in which they had infringed such obligations.

45. The EC argued that there was no trace in the Agreement of the obligations which, according to Brazil, were allegedly borne by the EC in the present case. Moreover, even if it was an obligation under the Agreement that the investigating authorities take into account all aspects that Brazil was claiming, such as the particular treatment to be accorded to exchange rate fluctuations (quod non), the Agreement did not specify any instructions on how such obligations should be fulfilled. This implied that, even if Brazil were correct about its claims regarding the existence of certain obligations, the EC would remain free to implement them in the way it found the most appropriate to satisfy the requirements of the Agreement.

46. The EC argued that the above-mentioned principle had consequences for the work of panels and, in particular, for the scope of their review. Firstly, the task of panels should be limited to reviewing the conformity of the measures at issue with the obligations under the Agreement. Secondly, in carrying out their review of the conformity of the measures with the Agreement, panels were only asked to verify whether the determinations made by the investigating authority were based on an examination of all relevant facts and that the factual basis for a determination was discernible on the basis of the statement of reasons. Panels were consequently not asked to make their own independent evaluation of the facts before the anti-dumping authorities on whether the conditions for imposing anti-dumping duties contained in the Agreement were fulfilled or otherwise to substitute their own judgement as to the sufficiency of the particular evidence considered by the investigating authorities. Quite a number of panel reports had confirmed the above interpretation of the task of panels. Pursuant to this well established interpretation, the panel could review, on the basis of the reasoned determination, whether the facts which were taken into account by the investigating authority were all the facts relevant to the determination it had made. Thus, it was not enough for the investigating authority to mention, in its statement of reasons, "a sufficient number of accurate facts". It must be possible to identify, on the basis of the determinations, whether all relevant facts were considered.

47. The EC argued that panels were only asked to review the conformity of the determinations as made by the investigating authorities for consistency with the Agreement, and hence it was logically not within their task to consider whether another (or better) option was available than the one followed by the investigating authority, provided the latter was consistent with the Agreement. Moreover, the final consequence of the principle of freedom of subjects of international law in the absence of specific obligations limiting their liberty was that, where the Agreement was silent, investigating authorities were free to apply their anti-dumping legislation as they thought appropriate. However, given that the application of this legislation takes place within the context of an international framework on anti-dumping, the EC considered that there was a minimum obligation not to nullify the purpose of the Agreement when making determinations not otherwise subject to particular requirements under the Agreement. In such circumstances, the Panel was entitled, in the opinion of the EC, to determine whether the investigating authority had made a manifest error of fact or of interpretation of the facts or acted arbitrarily so that it nullified, by doing so, the purpose of the Agreement.

48. On the question of the scope of the Panel's review, Brazil argued that the objective of the EC's arguments was to restrict the Panel's ability to conduct a meaningful assessment of the matter placed before it by the Parties. Moreover, the Agreement was not silent, and even if it were, it did not follow that the parties were free to do anything. Contracting parties were required to ensure that they applied the Agreement in accordance with its general principles and in accordance with other relevant principles of international law. In Brazil's view the Panel was fully competent to examine all of the factual and legal issues that have been placed before it in this case.

49. Addressing the EC's argument that the Agreement was silent on the question of exchange rates, and that under international law "limits to the liberty of international actors cannot be presumed" (paragraphs 43 to 45 above), Brazil said that these arguments overlooked the fact that Brazil was not arguing that the EC should have used one exchange rate or another. Brazil's argument was that the Agreement imposed certain clear legal obligations, particularly the obligations that there be a fair and proper comparison between normal value and export price, with special regard to the special situation of developing countries. These were clear and objective obligations arising under the Agreement, which the EC had violated in this case. Brazil's arguments did not therefore require any "presumption" of obligations arising under the Agreement.

50. Brazil argued that it was not Brazil's view that a practice that was not expressly allowed by the Agreement was forbidden, nor did Brazil consider that pre-GATT anti-dumping actions were contrary to international law. These views were not even implied by any of the arguments made by Brazil. Brazil argued that it had clearly identified the provisions of the Agreement which it considered had been violated, as well as the factual circumstances of the relevant violations. In so doing, Brazil had more than discharged the burden of proof which may fall on it, either in the original investigation or during the course of the panel procedure.

51. The EC argued the requirements under Article 8:5 were to set forth the findings and conclusions reached on all issues of fact and law considered material and the reasons and basis therefor. In view of this requirement, a proper review of the EC's Definitive Determination in this case meant that the Panel should examine whether the factual basis of the findings stated in the Determination was discernible from the text of the public notice and whether such factual basis reasonably supported those findings. In carrying out its review, however, the Panel should normally not be allowed to conduct a de novo review of the evidence relied upon by the EC or otherwise to substitute its own judgement as to the sufficiency of the particular evidence considered by the investigating authorities of the EC. To do so would ignore the principle that the task of the Panel was not to make its own independent evaluation of the facts before the EC on whether the conditions for imposing anti-dumping duties contained in the Agreement were fulfilled, but to review the definitive determination as made by the EC for consistency with the provisions of the Agreement¹⁵. All the Panel needed to do was to satisfy itself that there was a sufficient reasoning in the EC's final determination as to the connection between the factual basis stated in that determination and the legal findings contained in it, and that the EC authorities had not relied upon incorrect factual information in making these findings¹⁶.

52. The EC further argued that there were some limits as to what should be mentioned in the statement of reasons. While there should be sufficient information regarding the elements upon which the investigating authority reached its findings in order to allow the Panel to undertake an effective review, investigating authorities were not required by Article 8:5 to mention in the published statement of reasons each and every argument discussed in the investigation. If it were otherwise, this would make procedures administratively unmanageable. More important, such a degree of detail was unnecessary for the purpose of panel review and accordingly was not required by the Agreement.

53. The EC argued that the estimates of dumping margins and certain other documents submitted by Brazil as annexes to its main submissions to the Panel were of no relevance for the work of the Panel, which should base its determinations on the published findings of the investigating authorities. In fact, the documents submitted by Brazil (in particular "correspondence with the EC authorities") were part of the record of the case and were reviewed by the investigating authorities in due time in order to make their determinations. If the Panel were to review these documents with the intention of obtaining more than a confirmation of the findings contained in the published determinations, this would amount to a de novo examination, which the Panel was not entitled to carry out.

54. Brazil argued that while anti-dumping determinations must satisfy the requirements stated in Article 8:5, that Article did not represent an exhaustive statement of the role of a panel under the GATT dispute settlement procedures. It was illogical to start from a particular requirement, such as that contained in Article 8:5, and use it as the basis for general propositions about the limits of a panel's ability and duty to review the factual and legal matters placed before it. Brazil argued that according to the EC's interpretation, a correctly reasoned determination based on a sufficient number of accurate facts, would not be reviewable by a panel even in the presence of other facts, not referred to in the determination, which indicated that the determination violated the Agreement. Such a proposition (1) was contrary to the relevant GATT dispute settlement provisions; (2) was not supported by the case law; (3) would allow anti-dumping authorities undue opportunities to insulate their determinations from review by a panel; (4) would emasculate the GATT dispute settlement procedures in a manner not intended by the contracting parties; and (5) would almost certainly not be welcomed by the EC itself.

55. Brazil further argued the specific remarks contained in the Panel reports in question concerned only injury determinations and could not form the basis for the general propositions made by the EC regarding the limits of a panel's ability to review all legal and factual issues before it. Brazil argued that in the relevant Panel decisions referred to by the EC, the Panel had in fact concluded that claims at issue were within its terms of reference. Brazil noted that the authority cited by the EC suggested that a claim was covered by a request for the establishment of a panel, "however characterized" in that document. Furthermore, if the relevant reference in the request for the establishment of a panel could "reasonably be interpreted" as covering the claim in issue, the claim should be considered as within the panel's terms of reference¹⁷. Also, the Improvements to the GATT Dispute Settlement Rules and Procedures¹⁸ provided that a request for a panel shall provide "a brief summary of the factual and legal basis of the complaint". Brazil considered that these requirements had been met in this case. Thus, the preliminary objections raised by the EC in relation to the Panel's terms of reference were unfounded and should be rejected.

56. Brazil argued that the paragraphs of the Resin panel report that had been referred to by the EC (i.e. paragraphs 226 to 228; please see reference in footnote 16 above) were concerned with an entirely different matter, namely the interpretation of Article 3:1 of the Agreement, which related to the determination of injury. Paragraph 226 was a summary of the arguments of the parties and contained no findings of the panel. It was therefore irrelevant to the present issue under consideration. Paragraph 227 was concerned with the United States' claim that the relevant Korean authorities (KTC) had not carried out an objective assessment of the factors they were required to consider under Article 3 of the Agreement. Under Article 3, a number of different factors must be weighed and taken into consideration before making a determination on injury. In paragraph 227, the report stated that: "The Panel considered that a review of whether the KTC's determination was based on positive evidence did not mean that the Panel should substitute its own judgement for that of the KTC as to the relative weight to be accorded to the facts before the KTC. To do so would ignore that the task of the Panel was not to make its own independent evaluation of the facts before the KTC to determine whether there was material injury to the industry in Korea but to review the determination as made by the KTC for consistency with the Agreement, bearing in mind that in a given case reasonable minds could differ as to the significance to be attached to certain facts." (emphasis added by Brazil) Thus, Brazil argued that in its reference to paragraph 227 of the Resin panel report, the EC had not mentioned the fact that this paragraph was concerned with the weighing of different factors in the context of an injury determination. Paragraph 227 was certainly not persuasive authority for the far reaching general propositions put forward by the EC in its preliminary objections.

57. Brazil argued that paragraph 228 of the Resin panel report was also concerned with an entirely different matter, namely the attempts by Korea to refer to extraneous materials in order to meet the argument raised by the United States that there were insufficient findings and reasoning in its determination. Korea could not in this way retroactively cure the breach of Article 8:5 of the Agreement. Paragraph 228 of the report therefore had no bearing on the arguments raised by the EC in its preliminary objections.

58. Brazil noted that the EC had also referred to paragraph 295 the report of the panel on Milkpowder, and argued that the cited paragraph dealt with precisely the point raised in paragraph 228 of the Resin panel report. Hence paragraph 295 of the report of the panel on Milkpowder also had no bearing on the arguments raised by the EC.

59. In the light of the above, Brazil considered that the authorities cited by the EC, namely Article 8:5 of the Agreement, and the Resin and Milkpowder panel reports, offered no support for the EC's argument that certain facts contained in Brazil's first written submission may not be considered by the Panel, and for the far reaching propositions made by the EC concerning the limits of the Panel's ability to review the factual matters placed before it.

60. Brazil further argued that the facts were not in dispute in this case. The effect of using the frozen exchange rate had been clear to all parties since well before the imposition of provisional measures, and had been repeatedly drawn to the attention of the EC. The EC did not dispute these effects, but was taking the position that, as a matter of principle, it was not required to take them into consideration. Therefore, Brazil was not asking the Panel to enter into a reassessment of the facts. Rather, Brazil was presenting to the Panel its legal arguments that, on the basis of the undisputed facts, known to both parties and accepted by them, the EC's determinations were not made in conformity with the Agreement.

61. Brazil argued that the data that it had presented to the Panel should not be called into question, since these were identical to or based on the figures provided by the EC in its disclosure letter. The integrity of those data could be easily demonstrated by comparing them with the data in the EC's disclosure in chronological order.

62. In the light of the above, Brazil considered that it was clear that the Panel was empowered to consider all of the factual arguments placed before it in this case.

63. With respect to the allegations of Brazil according to which the two panels reports cited by the EC in its first submission would not be relevant because they dealt with the weighing of facts in an injury determination, the EC argued that the findings of these two panels as regards the standard of review by a panel were of general applicability for all aspects of anti-dumping procedures (i.e. they were relevant also for dumping determinations, which involved choices such as, in the determination of normal value under Article 2:4, the selection between costs of production and sales to third countries).

64. The EC argued that Brazil's request to the Panel did not cover the EC's determination imposing provisional anti-dumping duties in this case, because Brazil had not mentioned the Provisional Determination in the paragraphs summarizing its complaint in both its first submission to the Panel as well as its request for the establishment of the Panel¹⁹. Therefore, the EC argued that whatever the legal findings in this case, the validity of the EC's Provisional Determination could not be affected.

65. Brazil argued that the scope of the Panel's review extended to both the Provisional Determination (Regulation 2818/91) and Definitive Determination (Regulation 738/92). In fact, Regulation 2818/91 was actually annexed (as Annex 1) to Brazil's first written submission, and that submission expressly referred to that Regulation. Furthermore, Brazil had also stated in that submission that "[i]t is Brazil's opinion that the anti-dumping duties imposed are not in conformity with the provisions of the Agreement ... ", and had referred to "the measures taken by the EC ...". These statements referred to both Regulation 2818/91 and Regulation 738/92. Furthermore, throughout its first written submission Brazil referred explicitly to, or used quotations from, Regulation 2818/91, and made arguments aimed directly at the EC's provisional determinations²⁰. In addition, the two Regulations were so inextricably linked, and the claims raised by Brazil so clearly directed at the foundation of the EC's methodology, that it was self evident that the EC's determinations in the two Regulations, on the points which formed the subject matter of Brazil's claim, must stand or fall together.

66. Brazil noted that the EC had referred to paragraph 13 of Brazil's first submission²¹ to argue that the Provisional Determination had not been mentioned in that paragraph, and therefore it was not part of the Brazilian complaint. Brazil argued that in that specific paragraph referred to by the EC, Brazil was not concerned with defining the scope of its claim because that had already been done. Rather, Brazil was concerned with identifying the legislative acts that it considered should not be applied to the Brazilian exporters, and the duties it considered should be repaid. Therefore, in that paragraph, Brazil had stated its view that Regulation 738/92 should not be applied to the Brazilian exporters, and that all duties paid under Regulation 738/92 should be reimbursed. Regulation 2818/91 was not mentioned in that paragraph because it was no longer in force and could not therefore be applied in any event to the Brazilian exporters. The request for reimbursement included all the amounts secured by way of provisional anti-dumping duty under Regulation 2818/91, but which were not paid until definitively collected²². This was clear from the fact that, in the absence of any definitive measures, provisional measures would lapse and no duties would be payable. Thus, Regulation 2818/91 was irrelevant to the points being raised in the paragraph mentioned by the EC and the fact that no reference to it appeared in that particular paragraph had no bearing on the scope of the Panel's review.

67. Brazil argued that Regulation 2818/91 was expressly referred to in its request for the establishment of the Panel. Document ADP/121 at paragraphs 3, 9 and 48 related to both Regulation 2818/91 and Regulation 738/92. ADP/121 contained numerous arguments aimed directly against the determinations contained in Regulation 2818/91, which was inextricably linked with Regulation 738/92, and paragraph 11 of ADP/121 was analogous to the paragraph mentioned by the EC.

68. Brazil argued that paragraph 3 of ADP/113 (i.e. Brazil's request for conciliation under Article 15:3 of the Agreement) referred explicitly to the Provisional Regulation, and paragraphs 9 and 13 referred to the duties imposed and the anti-dumping "action" as a whole, i.e. to both the provisional and definitive measures. ADP/113 contained numerous references to the "measures" and to arguments aimed directly against the determinations contained in Regulation 2818/91, which was inextricably linked with Regulation 738/92. At paragraph 46, ADP/113 quoted directly from recital 46 of Regulation 2818/91. Moreover, as stated in paragraph 4 of ADP/113, consultations were held between Brazil and the EC under Article 15:2 of the Agreement on 14 November 1991. These consultations related only to the Provisional Regulation, which had been adopted by the EC on 23 September 1991. They did not relate to the Definitive Regulation, which was not adopted until 23 March 1992.

69. Brazil argued that, in the light of the above, the argument raised by the EC to the effect that the scope of the Panel's review was limited to the EC Regulation imposing definitive measures should be rejected. The Provisional Regulation had been subject to consultation and conciliation and was clearly identified in Brazil's request for the Establishment of the Panel and in Brazil's first written submission.

70. The EC argued that Brazil had ignored the fact that the provisional duty measures were neither contested as such in the consultations nor in the conciliation leading to the establishment of this panel. They did not figure in ADP/121 or in the first submission to the Panel by Brazil. Moreover, the references made to the Provisional Determination by Brazil were for the purpose of getting information only. Brazil had never clearly asked the Panel to find that these measures were taken in violation of the Agreement. Therefore, even if the Panel were to find in favour of Brazil on the definitive duty regulation (which the EC was sure the Panel could not), it could not recommend reimbursement of duties for the provisional duty measures.

71. Brazil argued that the EC had violated Article 2:4 of the Agreement because it had failed to take into consideration the particular market situation that prevailed in Brazil during the investigation period, and therefore calculated its dumping margin on the basis of a normal value that did not provide for a proper comparison. Brazil argued that the EC should have used sales to third markets as the basis for normal value in view of the particular market situation in this case.

72. The EC argued that Brazil was not correctly interpreting the term "particular market situation" in Article 2:4. This term pertained to only the domestic market situation of the exporting country, and the EC had met all the requirements under Article 2:4 for selection of the normal value. Therefore, this claim of Brazil should be rejected by the Panel.

73. Brazil argued that the phrase "particular market situation" in Article 2:4 included the relevant situations external to the domestic market, such as exchange rates, which affect price comparability. Brazil argued that due to the exchange rate freeze in Brazil during the first quarter of 1989, the particular market situation in Brazil was such that under Article 2:4, only sales to third countries could be used as the normal value for determining the dumping margin. Brazil argued that the EC had violated Article 2:4 by not relying on normal value based on sales to third countries because the other methodologies for normal value provided under Article 2:4 would not have eliminated the effect of the distortions in the market.

74. Brazil argued that at the beginning of the investigation period, Brazil was experiencing a deep economic crisis, including very high inflation. Urgent economic policy measures of a general nature were therefore needed and were applied in a manner consistent with Brazil's obligations under the IMF, GATT and the Agreement. In particular, in the first quarter of 1989, the Brazilian Government froze exchange rates in order to decrease the money supply and thereby control inflation. However, domestic prices continued to rise, while export earnings converted into Cruzados remained stable. This evidently led to a gross distortion in the comparison between domestic and export prices.

75. Brazil argued that the exchange rate situation for Cruzado affected the dumping calculation for two reasons, i.e. temporary fluctuation and rapid depreciation of the Cruzado. The temporary exchange rate freeze generated artificially high dumping margins because the overvalued cruzado during the exchange rate freeze would tend to produce a higher dumping margin. Brazil said that if this argument were true, then higher dumping margins would have been found by the EC in the first six months of 1989 and low or zero dumping margins in the second half of 1989. A consideration of the chronologically arranged dumping margins showed that dumping margins had this characteristic²⁴.

76. Brazil argued that in a high inflation environment it was often logical for exporters to set export prices at a level which anticipated depreciation of the domestic currency, particularly if there was a temporary exchange rates freeze. The exporter had a reasonable expectation that by the time he would be paid the exchange rate would have returned to its normal level. Brazil argued that in such a situation, it would be reasonable to use the exchange rate prevailing at a later date, i.e. use a lagged exchange rate (Brazil's and the EC's arguments on this point are mentioned in greater detail in Section V.2).

77. Brazil emphasised that the overriding principle of Articles 2:4 and 2:6 of the Agreement, reiterated throughout the text of the Agreement, was that the methodology adopted should permit a proper comparison. Brazil believed that this fundamental principle had been violated in this case. Brazil argued that to ensure a proper comparison between normal value and export price, the EC should have taken further steps by acknowledging the particular market situation prevailing in Brazil and basing normal value on sales to third countries, or adjusting the normal value based on domestic data, or adjusting the exchange rate used.

78. Brazil argued that the EC's determination in this case was based on the legal rule that in determining the correct method for establishing normal value in the context of Article 2:4, the investigating authorities may have regard only to the circumstances prevailing on the domestic market. This rule, whose application resulted in the investigating authorities determining the existence of the exchange rate freeze was irrelevant to the operation of Article 2:4, was not in conformity with the Agreement because it was not a correct interpretation of Article 2:4. Article 2:4 was concerned with "the particular market situation" which was not in any way limited to the domestic market. Moreover, Article 2:4 was concerned with ensuring a proper comparison. Since this could only be understood as comparison with the export price, the contracting parties were required to consider in any selection of normal value whether or not the method of selecting the normal value would permit a proper comparison with the export price. It followed therefore that where the characteristics of the export market were such that a proper comparison with the normal value could not be achieved on the basis of one method provided for in Article 2:4, but could be reached by the use of an alternative method provided for in that Article, the alternative method was to be preferred.

79. Brazil argued that Article 2:4 provided that where the particular market situation prevailing in the exporting country did not permit a proper comparison, the margin of dumping had to be determined on the basis of a normal value other than the domestic price, i.e. on the basis of cost of production, or sales to third country markets. Brazil argued that during the first half of the investigation period, there was a particular market situation prevailing in Brazil within the meaning of Article 2:4 of the Agreement, as a result of which the establishment of normal value on the basis of domestic sales of the like product did not, in the exceptional conditions prevailing, permit a proper comparison with export prices. Despite this, the EC determined normal value during this period on the basis of domestic sales of the like product, without giving due consideration to the special circumstances prevailing, and thus infringed Article 2:4.

80. Brazil argued that the rule applied by the EC in this case was not in conformity with the EC's own legislation and established practice. The EC's anti-dumping Regulation provided that alternative methods for establishing normal value may be considered where "for any reason" domestic sales did not form a proper basis for determining the existence of dumping. Furthermore, in its anti- dumping investigations, the EC considered that if the volume of an exporter's domestic sales of the like product represented less than 5 per cent of the volume of its export sales, the appropriate method for determining normal value was not domestic sales, but costs of production. Hence, the EC itself interpreted Article 2:4 as referring to situations outside the domestic market, and as permitting investigating authorities to have regard to characteristics of the export market in selecting the method for establishing the normal value.

81. Brazil then addressed the EC's argument in the EC's conciliation statement that the "question of the exchange rate evolution in relation to domestic inflation is a completely separate matter that has nothing to do with the determination of whether or not domestic market conditions and price mechanisms are an appropriate basis for the determination of normal value."²⁵ Although Brazil agreed that the determination of normal value and the comparison of normal value and export prices were distinct stages in the dumping calculation, Brazil argued that Article 2:4 of the Agreement was concerned with the selection of the method of establishing normal value and with ensuring a fair comparison between normal value and export price. It was not possible to make such a comparison without using an exchange rate, and the selection of the exchange rate, particularly in the light of domestic inflation, was critical for the comparison. Article 2:4 therefore recognized the link between the establishment of normal value and evolution of exchange rates. The "particular market situation" referred to in Article 2:4 included precisely the situation in which the Brazilian exporters found themselves: high inflation and frozen exchange rates. The Agreement established an obligation to take into account distortions arising from temporary exchange rate fluctuations, especially in the context of proceedings concerning exports from developing countries. If the interpretation of Article 2:4 by the EC were correct, Article 2:4 should refer to the "particular market situation in the domestic market" and to the need to ensure "a proper establishment of normal value". However, neither of these statements were contained in Article 2:4.

82. Brazil also recalled that from October to December 1989, the EC determined normal value for Nisshinbo and Kanebo on the basis of cost of production, on the grounds that domestic sales in those months had not been made in the ordinary course of trade. Brazil argued that this determination was inconsistent with Article 2:4 because in this case the nature of the particular market situation (high inflation combined with a frozen exchange rate) had the effect of making cost of production equally unreliable as a basis for normal value. The use of cost of production as the basis for normal values for Nisshinbo and Kanebo for October to December 1989 artificially inflated the dumping margin for those companies. Brazil argued that the use of normal value based on sales to third countries would have eliminated the effect of the distortions introduced by the particular market situation.

83. The EC argued that its determination was consistent with the requirements of Article 2:4. Exchange rates were not the subject of Article 2:4, and the phrase "particular market situation" included external factors only to the extent that they affected domestic sales. No argument had been presented in this case that external factors had had such an effect. Also, the phrase "particular market situation" in Article 2:4, interpreted in the light of its object, purpose and context, did not have the meaning attributed to it by Brazil. There was nothing in the text of Article 2:4 to suggest that the phrase "particular market situation" was meant to cover high inflation in the domestic market and "freezing" of currency exchange rate. The drafting history of Article 2:4.,to the extent it existed, did not support Brazil's claim either. The phrase "particular market situation" clearly referred to domestic sales and to the prices at which they were made, and it was on these sales and prices that a "particular market situation" must have an impact before a decision could be made that these prices were unusable. If there was such an impact, Article 2:4 permitted a comparison either with a comparable price of a like product when exported to any third country or with the cost of production in the country of origin plus a reasonable amount for sales, general and administrative expenses and for profits. Even if the domestic sales were not appropriate as normal value, the Agreement provided a choice, and not an hierarchy, between two alternative methodologies for determining normal value. The EC's usual practice in the situation when domestic sales cannot be used as basis for normal value was to resort to the method based on costs of production, not export prices to third countries.

84. The EC argued that in the case under consideration the EC based its determined normal value in accordance with Article 2:1 of the Agreement, i.e. on the comparable prices, in the ordinary course of trade, for the like products destined for consumption in Brazil. With the exception of Nisshinbo and Kanebo for which normal value for the last three months of 1989 was constructed using a method based on the cost of production, these prices were found to be at arm's length between independent parties under competitive conditions in a market economy. In this context, the evolution of the exchange rate of the cruzados against the currency in which exports were made had no direct bearing on the functioning of the domestic market, where transactions in the ordinary course of trade continued to be carried out in the domestic currency. It could not, therefore, be claimed that the external developments during the investigation period had affected the domestic transactions so that they could not be used by the EC to establish normal value. A high rate of domestic inflation need not necessarily imply that producers of cotton yarn were discouraged from selling to the domestic market. Since only the proceeds of exports in United States dollar were affected by the freezing of the exchange rate (when the exporter had to convert the proceeds into cruzados), the freeze could not have affected their incentives to sell in the local market. Therefore, Brazil could not claim that a "particular market situation" existed which made the calculation of normal value on the basis of sales in the domestic market unsuitable.

85. The EC further argued that while a particular market situation mostly resulted from the domestic market itself (e.g. monopoly situation), it could also arise due to an external factor, provided the external factor affected domestic sales and prices, which were the sales and prices considered by Article 2:4. In the present case, at no time did Brazil or the exporters supply evidence that the particular situation of the exchange rate of Cruzados affect the sales and price situation on the domestic market. Therefore, the EC was fully entitled to use either domestic sales or a constructed normal value.

86. The EC argued that Brazil did not appear to argue that the EC had calculated the normal value incorrectly. Rather, Brazil had stated that: "Clearly during the first half of the investigation period, there was a particular market situation prevailing in Brazil within the meaning of Article 2:4 of the Agreement, as a result of which the establishment of normal value on the basis of domestic sales of the like product did not, in the exceptional conditions prevailing, permit a proper comparison with export prices." This showed that Brazil was apparently not distinguishing between the determination of normal value and its comparison with the export price for the purpose of establishing the dumping margin. However, the term "particular market situation" referred to in Article 2:4 could not, and was not intended to, apply to the situation of high inflation and "freezing" of exchange rates for the purpose of establishing the normal value. The issue of comparison was a matter potentially relevant under Article 2:6 of the Agreement, but not in the context of Article 2:4 thereof. It should be concluded, therefore, that the alleged violation of Article 2:4 of the Agreement should be rejected as unfounded.

TO CONTINUE WITH EC - IMPOSITION OF ANTI-DUMPING DUTIES ON IMPORTS OF COTTON YARN FROM BRAZIL

¹¹ BISD 14S/18.

¹² Paragraph 2 of document ADP/106; paragraphs 11 and 23 of document ADP/113; and paragraphs 13, 19 and 26 of ADP/121.

¹³ P.C.I.J. Lotus Judgement, 7 September 1927, Series A. No. 10.

¹⁴ They referred in this regard to Ian Brownlie (1979), Principles of International Law, Oxford, third edition, page 288 et seq.; Hubert Thierry, Jean Combacau, Serge Sur, Charles Vallée (1984), Droit International Public, Paris, pages 36 and 233.

¹⁵ The EC referred to the report of the Panel on "Korea - Anti-dumping duties on imports of polyacetal resins from the United States" (hereinafter "Resin"), ADP/92, adopted on 27 April 1993, paragraphs 226-228.

¹⁶ The EC referred to the report of the Panel on "Brazil - imposition of provisional and definitive countervailing duties on milkpowder and certain types of milk from the EEC" (hereinafter "Milkpowder"), SCM/179, adopted 28 April 1994, paragraph 295.

¹⁷ Salmon AD, paragraphs 341 and 345.

¹⁸ BISD 36S/63.

¹⁹ In this context, the EC referred to paragraphs 11 and 48 of ADP/121 and to paragraph 13 of Brazil's first submission to the Panel.

²⁰ Brazil provided references to the relevant portions of its submission.

²¹ In paragraph 13 of the first submission to the Panel, Brazil stated that: "Brazil therefore considers that Council Regulation (EEC) No. 738/92 should be withdrawn as far as imports of cotton yarn originating in Brazil are concerned and that duties paid by Brazilian exporters under that Regulation should be reimbursed."

²² In this context, Brazil referred to Article 2 of Regulation 738/92.

²³ A number of documents were provided by the two parties as annexes to their submissions to the Panel. These included, inter alia, relevant EC determinations, EC's disclosure letter and data, Brazil's recalculations of dumping margins, CACEX export data, and certain case law from other countries referred to by Brazil.

²⁴ Brazil provided to the Panel chronologically arranged data on dumping margins based on the data supplied by the EC in its disclosure letter.

²⁵ ADP/M/43, paragraph 5.

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