1. On 11 November 1991, consultations under Article 15:2 of the Agreement on Implementation of Article VI of the General Agreement on Tariffs and Trade (hereinafter "the Agreement") were held between Brazil and the European Community (hereinafter "EC") regarding the provisional anti-dumping measure imposed by the EC on cotton yarn from Brazil. Consultations on definitive anti-dumping duties by the EC on this item were held on 27 October 1993. The consultations failed to result in a mutually satisfactory solution to the dispute.

2. Brazil requested the Committee on Anti-Dumping Practices (hereinafter "the Committee") for conciliation under Article 15:3 of the Agreement (ADP/106) and a special meeting was held for this purpose on 20 December 1993 (ADP/M/43). There was no mutually satisfactory solution to the dispute and on 5 April 1994, Brazil requested the establishment of a panel under Article 15:5 of the Agreement (ADP/121). This request was considered by the Committee at its regular meeting on 26 April 1994. At that meeting, the Committee established a Panel as requested by Brazil (ADP/M/44).

3. On 17 June 1994, the Committee was informed by the Chairman in document ADP/125 that the terms of reference and composition of the Panel were as follows:

Chairman: Mr. Crawford Falconer

Members:

Mr. Mohan Kumar

Mr. Paul O'Connor

4. The Panel heard the parties to the dispute on 12 and 14 September 1994 and 9 and 10 November 1994. A finding regarding one preliminary objection by the EC was submitted by the Panel to the parties on 9 November 1994. The Panel submitted its complete findings and conclusions to the parties to the dispute on 12 June 1995.

5. On 22 March 1990, the EC published a notice in the Official Journal of the European Communities that it was initiating an anti-dumping proceeding against imports of cotton yarn originating in Brazil, Egypt, India, Thailand and Turkey.¹ The dumping investigation covered the period from 1 January 1989 to 31 December 1989, and the injury investigation covered the years 1986 to 1989.

6. On 23 September 1991, the EC imposed provisional anti-dumping duties on imports of cotton yarn originating in Brazil, Egypt and Turkey and terminated the proceeding in respect of India and Thailand.² Definitive anti-dumping duties were imposed by the EC on 23 March 1992 on cotton yarn originating in Brazil and Turkey.³ The duties were not imposed on Egypt because a de minimis dumping margin was determined for the imports from Egypt.

7. In the case involving Brazil, nine exporters returned completed questionnaire responses to the EC and those exporters were deemed to be co-operating. Three exporters, Nisshinbo, Renda and Kanebo, were selected as a sample and a separate dumping calculation was made for each of them. The dumping calculation for the remaining six co-operating exporters was based on the weighted average results for the three sampled exporters. Dumping calculation for the non-co-operating exporters was based on the facts available.

8. During 1989 (i.e. the investigation period for dumping), the official exchange rate between the cruzado and the United States dollar was temporarily frozen by the Brazilian authorities for January, February and March. In April, May and June 1989, the cruzado was allowed to depreciate gradually. For the rest of 1989, the cruzado depreciated more freely against the dollar.

9. In its calculations the EC used the official cruzado to United States dollar exchange rates published by Fundacao do Instituto Brasileiro de Geograpfia e Estatistica (FIBGE), a public organization linked to the Brazilian Ministry of Planning. The EC made its dumping calculation for the three sampled exporters by comparing each export transaction with an average monthly normal value expressed in cruzados; for one company (Kanebo), the EC used actual returns in cruzado, and for the other two it used end-of-month official exchange rates for the dumping calculation.

10. For October, November and December 1989, the EC calculated normal values for Nisshinbo and Kanebo on the basis of costs of production, on the grounds that domestic sales in those months had not been made in the ordinary course of trade.

11. Brazil requested the Panel to find that the EC, in imposing and maintaining anti-dumping duties on imports of cotton yarn from Brazil, had violated the following provisions of the Agreement:

12. Brazil requested the following remedy: (i) a recommendation that Council Regulation (EEC) No. 738/92 be withdrawn as far as imports of cotton yarn originating in Brazil were concerned; and (ii) a recommendation that duties paid under Council Regulation (EEC) No. 738/92 (i.e. both provisional and definitive duties) be repaid.⁴

13. The EC requested the Panel to recommend that the EC's definitive duty Regulation (EEC) No. 738/92 of 23 March 1992 (hereinafter the "Definitive Determination" or "Definitive Regulation") had not violated any provision of the General Agreement and the 1979 Agreement claimed by Brazil.

14. The EC also raised preliminary objections relating to the coverage of the Panel's terms of reference and to the scope of factual review by the Panel (see below).

15. The EC raised certain preliminary objections regarding Brazil's submission to the Panel. First, the EC argued that two "claims" put before the Panel by Brazil were not covered by the terms of reference of the Panel. The objections pertained to the "claims" concerning: (i) the EC's determination that domestic sales of Nisshinbo and Kanebo in October to December 1989 were not in the ordinary course of trade; and (ii) "negative dumping margins" or "zeroing". The EC argued that the Brazilian submission on both these points were outside the terms of reference of the Panel, and as there was by now well-established case law on this matter, the EC requested the Panel to issue preliminary rulings on these objections and determine that the Brazilian claims on these points were not admissible and/or were outside the terms of reference of the Panel.

16. Second, the EC raised certain preliminary objections pertaining to the scope of factual review by the Panel. For "negative dumping margins", in addition to the preliminary objection mentioned in the paragraph above, the EC raised a preliminary objection regarding the scope of factual review by the Panel. Moreover, with regard to the scope of factual review, the EC also objected to two sets of estimates of dumping margins that had been submitted by Brazil to the Panel. One set contained data on dumping margins provided by the EC in its disclosure letter of 4 January 1992, allegedly arranged in a chronological order by Brazil. The second set contained two different estimates of dumping margins presented to the Panel by Brazil on the basis of recalculations using two different exchange rates, namely, (i) exchange rates indexed to domestic inflation and (ii) lagged exchange rate, i.e the exchange rate prevailing two months after the shipment. The EC argued that consideration of both these sets of estimates of dumping margins would require the Panel to go beyond the proper scope of review to be respected by the Panel and would require the Panel to enter into a de novo review. The EC did not insist on a preliminary ruling from the Panel on the two issues, but argued that the Panel would exceed its competence if it were to rule on these points because the task of the Panel was not to re-do the factual investigation. The EC argued that for a proper review of the EC's determination in this case, the Panel should examine, as mentioned in Article 8:5 of the Agreement, whether the factual basis of the findings stated in the determination were discernable from the text of the public notice and reasonably supported those findings.

17. The EC further argued that Brazil's request to the Panel did not cover the EC's determination imposing provisional anti-dumping duties in this case. Thus, whatever the legal findings in this case, the validity of the EC's provisional duty Regulation (hereinafter "Provisional Determination" or "Provisional Regulation") could not be affected.

18. Brazil argued that it had not raised new claims in its submission to the Panel. In support of this contention, Brazil referred to its submissions to the Committee on Anti-Dumping Practices relating to consultations, conciliation and request for establishment of a panel in this case (ADP/106, 113 and 121). Regarding the estimates of dumping margins presented to the Panel, Brazil argued that one set of data was only a chronologically re-arranged data provided by the EC in this case, and the other set was merely an illustration of how attempts to correct for the situation which arose due to the freezing of the exchange rate would have resulted in de minimis dumping margins for Brazil. Brazil argued that its request covered both the Preliminary and Definitive Determinations in this case.

19. The arguments of the two parties relating to the EC's preliminary objections are provided below in three sections. The first section summarizes their arguments relating to the preliminary objection by the EC with regard to the Panel's terms of reference. The second section summarizes their arguments relating to the scope of a panel's factual review, and the third section summarizes the arguments relating to whether Brazil's request to the Panel covered the Preliminary Determination also.

20. The EC recalled that the terms of reference of the Panel were:

The EC argued that previous panel Reports had clearly established that "a matter", including each claim composing that matter, cannot be examined by a panel under its terms of reference unless that same matter and claim were within the scope of, and had been identified in, the written statement or statements referred to in its terms of reference.⁵

21. The EC argued that the Brazilian exporters raised no objections to "negative dumping margin" or "zeroing" when the EC imposed provisional or definitive anti-dumping duties, and raised concerns regarding cost of production used as normal value for Nisshinbo and Kanebo at the stage of the imposition of definitive duties.⁶ Neither of these claims were raised by Brazil in the consultations and conciliation that took place in the period up to the establishment of the terms of reference of this Panel, and were not mentioned in ADP/121. Therefore, the Brazilian submission to the Panel on these points clearly exceeded the terms of reference of the Panel, which were based on ADP/121. Taking into account the established procedural principles of previous panel reports, the Panel should thus refrain from giving a ruling on these items. Making a ruling on these questions would amount to a violation of paragraph A.1 of the 1989 Improvements to the GATT Dispute Settlement Rules and Procedures⁷, and would diminish the rights of the EC under the General Agreement and the Agreement.

22. The EC said that in order to ensure a proper functioning of dispute settlement, it was essential to distinguish between "the matter", "a claim" and "an argument". This distinction contributed to an effective functioning of the consultation and conciliation stages, while protecting the rights of the defending party at the panel stage. This was also shown by the particular nature of dispute resolution under GATT and the Agreement, which required that a mutually satisfactory solution be sought during consultations and conciliation before resorting to a panel. The EC referred in this context to paragraph 6 of the Understanding Regarding Notification, Consultation, Dispute Settlement and Surveillance, adopted on 28 November 1979 (BISD 26S/210, hereinafter the "1979 Understanding"), which provided that contracting parties should attempt to obtain satisfactory adjustment of the matter in accordance with the provisions of Article XXIII:1 before resorting to Article XXIII:2. The EC argued that pursuant to Article 15:7 of the Agreement, this understanding applied mutatis mutandis to consultations, conciliation and dispute settlement under the Agreement. However, such a mutually satisfactory solution could not be reached if all the problems were not identified during the consultation/conciliation stage. The respondent was entitled to be clearly aware of the scope of the dispute by the time the panel was established. The respondent would be denied the rights of defense, and the purpose of the dispute settlement rules would be frustrated, if part of the problems were revealed only at the panel stage. This concern had been addressed by a number of panels which had clarified existing provisions and developed a number of principles intended to ensure a proper functioning of the dispute settlement mechanism.

23. The EC said that "the matter" was the part of the original problem on which consultations were sought and which remained outstanding at the end of the consultation/conciliation stage. Thus, "the matter" was the sum of the claims referred to a panel in the document attached to its terms of reference.⁸ The EC did not consider that there was much controversy on the definition of "the matter" in general or in the present proceedings.

24. The EC then argued that "a claim" was a specific legal claim (e.g., an infringement of the Agreement, an error of fact or of interpretation of the facts committed by the investigating authority) in relation to certain facts. It was a legal reason for, or a ground upon, which a party considered that an obligation under the Agreement had been violated. Thus, there could be a number of claims relating to the violation of a particular provision of the Agreement, each one of them being independent of the others. "An argument" was legal or factual reasoning advanced to support, clarify or explain a claim, or to rebut a claim or an argument from the other side. An argument could support one or more claims if the factual basis upon which the claims were based was the same. The link between an argument and the matter referred to a panel was not direct. Even though this link could be presumed, it was clearly established only through the claim.

25. The EC argued that in this dispute, Brazil's allegations relating to negative dumping margin or "zeroing", and to the determination of normal value for two firms on the basis of costs of production in the last three months of 1989, constituted "claims" and not "arguments".⁹ The first amounted to stating that through recourse to so-called "zeroing" (i.e. the use of a particular methodology which treated negative dumping margins as zero in the calculation of the average dumping margins), the EC had violated the requirements of Article 2:4 and 2:6 of the Agreement to make adjustments to ensure a fair and proper comparison.

26. The EC argued that the second allegation, which pertained to the use of constructed normal value for two of the investigated companies for the last three months of 1989, was "a claim" relating to the violation of Article 2:4 of the Agreement. It was not related to the question of taking into account a particular market situation and thus had no connection with the other claim of Brazil concerning Article 2:4. Rather, it was based on an alleged methodological mistake in the calculation of costs of production in comparison to domestic sales price. The EC argued that Brazil had in fact made two distinct claims under Article 2:4 before the Panel, i.e., the claim that since domestic sales prices did not permit a proper and fair comparison, the EC should not have used costs of production but sales to a third country in order to establish normal value, and the (new) claim that the establishment of normal value on the basis of cost of production the EC used a wrong methodology as regards "financing costs".

27. The EC argued that pursuant to Salmon AD and Non-Rubber Footwear panel reports, a claim must at the very least be identified in the document referred to in the terms of reference of a panel in order to be properly put before that panel. In this case, this meant that each claim had to be made clearly and separately by the complaining party in document ADP/121. However, nowhere in document ADP/121 nor in other documents issued during the consultation/conciliation stage was there any trace of the claims of Brazil regarding which the EC had raised preliminary objections.

28. Therefore, the EC argued that both the allegations to which it had objected were "claims", that these "claims" were not identified in document ADP/121, and that they were not properly before the Panel. Therefore, the EC asked the Panel to issue a preliminary ruling that these "claims" were not covered by the Panel's terms of reference.

29. Brazil agreed with the EC on the need for certainty and clarity in procedural matters before a panel, and argued that there was a need to distinguish between a claim and an argument. While new claims may not be raised in a first written submission to the Panel, new arguments to support the claims could be so raised. Brazil argued that the preliminary objections raised by the EC were unfounded because they failed to make a clear distinction between a claim and an argument. What the EC was arguing to be "claims" by Brazil were in reality "arguments" supporting claims. In this regard, Brazil argued that the EC had itself stated in its first submission that "Brazil is raising new arguments" and that "These new arguments relate to .." (emphasis added by Brazil)¹⁰. Brazil considered that this language was effectively an admission by the EC of the true nature of the two points raised. They were arguments supporting claims that had been made throughout consultation, conciliation and in the request for the establishment of the panel. As such, they were clearly within the Panel's terms of reference. Brazil argued that the EC had subsequently also followed the same approach when it had suggested that a number of references to "arguments" were "typographical" errors and should be "clarified" as "claims" in order to support its new position. Brazil argued that far from being mere clarification or typographical corrections, these changes were changes of substance which reflected the EC's attempts to substantiate its (unfounded) arguments on the question of whether or not the two arguments concerned were within the Panel's terms of reference.

30. Brazil argued that the importance of the terms of reference was that the parties to the dispute must have been given an opportunity to reach a mutually satisfactory resolution of the matter, and sufficient notice must have been given to the defending party and other contracting parties that could be affected by the panel decision and the outcome of the dispute. Brazil argued that the purpose of consultation and conciliation was to clarify the facts and arguments in dispute, and to frame the dispute concerning the matter in terms which a panel may resolve. Brazil considered that both of these objectives had been met in this case. Brazil considered that the EC had been given every opportunity to reach a mutually satisfactory resolution of the matter, but had consistently shown itself unwilling to do so.

31. Brazil argued that "the matter" was the sum of the claims referred to in the request for the establishment of the Panel, i.e., ADP/121 in this case. An argument and a claim corresponded to an argument and conclusion in a syllogism. A syllogism consisted of two or more premises (or facts), a number of connecting statements (or arguments) and one or more conclusions (claims) deduced from the premises. Therefore, a claim was a statement about certain facts or legal provisions. On the other hand, an argument was a logical construction supporting a claim. For example, Brazil was claiming that the EC breached Article 2:4 of the Agreement because it used costs of production as the basis for establishing normal value in October, November and December 1989 for the Brazilian exporters Nisshinbo and Kanebo. In support of that claim, Brazil had argued that the EC should have had regard to the existence of the frozen exchange rate in selecting the method for determining normal value, and that the EC incorrectly determined that sales made by those companies in the relevant months were not made in the ordinary course of trade. Both these arguments led to the same conclusion, i.e. the claim that, in using costs of production as the basis for establishing normal value, the EC had breached Article 2:4 of the Agreement. Similarly, Brazil argued that it had made a number of arguments in support of the claim that the EC should have taken account of distortions arising from the unstable financial environment prevailing at the time of the investigation, particularly because of the facts of high domestic inflation and exchange rate freeze. These arguments included that the EC's "zeroing" methodology led, in these circumstances, to particularly strong distortions in the calculation. Thus, Brazil argued that all of the factual and legal matters before the Panel in this case were clearly within the Panel's terms of reference.

32. Brazil disagreed with the EC's statement that the essence of a claim was that it was not "related" to another claim, in the sense that the panel may accept one claim and reject another. Brazil argued that two arguments may also be "unrelated" in this sense, and thus the method proposed by the EC offered no reliable way of distinguishing between a claim and an argument. Brazil considered that, in reality, the question of the distinction between a claim and an argument was as much a question of fact, as it could be of law. The key to determining what, in any particular case, may be considered a claim and what an argument may be found in a consideration of the objectives of the GATT rules on admissibility. Brazil argued that the objectives of the rules on admissibility had been more than adequately fulfilled in this case.

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

¹O.J. 1990, No. C 72

² O.J. 1991, L 271/17.

³ O.J. 1992, L 82/1, Council Regulation (EEC) No. 738/92. The proceedings against India and Thailand were terminated on the grounds that their import volumes were negligible.

⁴ This request was a clarification by Brazil of its request contained in its first submission to the Panel, where Brazil had 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."

⁵ "United States - Imposition of Countervailing Duties on Imports of Fresh and Chilled Atlantic Salmon From Norway", SCM/153 (adopted on 28.4.1994), paragraphs 208 and 214 (hereinafter "Salmon CVD"); United States - Imposition of Anti-Dumping Duties on Imports of Fresh and Chilled Atlantic Salmon from Norway", ADP/87, adopted on 25.4.1994, paragraphs 333 and 335 (hereinafter "Salmon AD"); "United States - Anti-Dumping Duties on Grey Portland Cement and Cement Clinker from Mexico", ADP/82, paragraph 5.12 (hereinafter "Cement").

⁶ Recital 14 of the Definitive Regulation.

⁷ BISD 36S/61

⁸ Salmon AD, paragraph 342 stated that "this matter consisted of the specific claims stated by Norway in these documents [ADP/65 and Add.1,i.e. Norway's request for the establishment of the panel] with respect to the imposition of these duties by the United States."

⁹ In its first submission to the Panel, the EC had presented its preliminary objections against "new arguments", and subsequently the EC had clarified that the term "claim" should replace "arguments" in that context. In the first submission, the EC had stated as follows: "Before developing its legal arguments on the substance of all allegations made by Brazil in its first submission the European Community would like to submit to the panel certain procedural objections. In accordance with the terms of reference, the "matter" before the panel is the allegations and arguments referred to by Brazil in document ADP/121. In its first written submission, however, Brazil is raising new arguments which have not been the subject of consultation and conciliation between the parties, and are not contained in document ADP/121. These new arguments relate to ... The objection mentioned under (a) above is a true preliminary objection as to admissibility of certain claims which do not fall within the mandate of the panel. As the Brazilian submission on these points clearly exceeds the terms of reference of the panel (see footnote 1 above), the Commission respectfully requests the panel to issue a preliminary ruling at its first meeting with the parties, determining that the Brazilian claims mentioned under (a) above are not admissible and/or outside the terms of reference of the panel." (emphasis in original)

¹⁰ Please see the previous footnote for more detail on this point.