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ARBITRAL PANEL ESTABLISHED UNDER CHAPTER TWENTY

OF THE NORTH AMERICAN FREE TRADE AGREEMENT


Secretariat File No.
USA-97-2008-01
January 30, 1998


IN THE MATTER OF:

The U.S. safeguard action taken on broom corn brooms from Mexico

Final Panel Report

Panel Members:

Paul O’Connor (Chair)
Raymundo Enríquez
Dionisio Kaye
John H. Barton
Robert E. Hudec


TABLE OF CONTENTS

I. FACTUAL BACKGROUND

II. ARGUMENTS OF THE PARTIES

III. FINDINGS

  1. The Panel’s Jurisdiction to Consider GATT/WTO Obligations
  2. Timely Notice of Claims Presented
  3. Process Requirements: Standards of Review

IV. CONCLUSIONS AND RECOMMENDATIONS

 


I. FACTUAL BACKGROUND

The U.S. Tariff Quota on Broom Corn Brooms

1. Since 1965, the United States of America (United States) has maintained tariff-rate quotas on imports of broom corn brooms. The structure of the most-favored-nation (MFN) tariffs has been as follows:

For broom corn brooms (other than whisk brooms), 121,478 dozen could enter at a duty of 8% ad valorem. For imports in excess of that amount, the applicable duty was 32 cents each for brooms valued at not more than 96 cents each 1 and 32% ad valorem for brooms valued at over 96 cents each. 2

For whisk brooms wholly or in part of broom corn, 61,655 dozen could enter at a duty of 8% ad valorem. For imports in excess of 61,655 dozen, the applicable MFN duty was 9.2 cents for whisk brooms valued at not over 96 cents each, and 24.8% ad valorem for whisk brooms valued at over 96 cents each. 3

The NAFTA Tariff Obligations on Broom Corn Brooms

2. Under the North American Free Trade Agreement (NAFTA), 4 the United States Government agreed to grant preferential tariff treatment to imports of broom corn brooms from Mexico, 5 as follows:

All whisk brooms wholly or in part of broom corn and all broom corn brooms valued at not more than 96 cents became duty-free as of January 1, 1994;

For broom corn brooms valued at over 96 cents, a tariff-rate quota was created under which the first 100,000 dozen were duty-free; imports in excess of 100,000 were subject to a duty of 22.4% ad valorem for calendar years 1994 through 1999; 16% for 2000 through 2004; and zero-duty thereafter.

3. These tariff rates were entered in the United States Schedule to Annex 302.2 of Chapter Three of NAFTA. Article 302 provides:

"1. Except as otherwise provided in this Agreement, no Party may increase any existing customs duty, or adopt any customs duty, on an originating good.

"2. Except as otherwise provided in this Agreement, each Party shall progressively eliminate its customs duties on originating goods in accordance with its Schedule to Annex 302.2."

The NAFTA Safeguards Provisions

4. Chapter Eight of NAFTA, entitled "Emergency Action," permits governments to impose temporary tariff increases or other trade restrictions otherwise prohibited by the obligations of Chapter Three, whenever it is determined that increasing imports are causing or threatening to cause serious injury to domestic industries under certain specified conditions. Trade restrictions to provide relief in such situations are known as "safeguard measures."

5. In general, NAFTA Chapter Eight has three major components:

Article 801, entitled "Bilateral Actions," allows a Party to withdraw a NAFTA tariff concession on a temporary basis if, as a result of that concession, goods from another Party are being imported in such increased quantities as to constitute a substantial cause of serious injury, or threat thereof, to a domestic industry producing a like or directly competitive product.

Article 802, entitled "Global Actions," reserves to each NAFTA member government the right to impose global safeguard measures authorized by General Agreement on Tariffs and Trade (hereinafter GATT) Article XIX and the World Trade Organization (hereinafter WTO) Agreement on Safeguards. Article XIX authorizes Members of the WTO to suspend obligations or concessions on a multilateral basis when imports of a good are a cause of serious injury, or threat thereof, to a domestic industry producing a like or directly competitive product.

Article 803 obligates the Parties to ensure that safeguard proceedings and determinations — both bilateral and global — comply with certain requirements designed to guarantee fair, objective, and transparent treatment.

United States Safeguards Procedures

6. Under United States law, domestic interests seeking the imposition of safeguard measures on imports of a particular product may file a petition with the International Trade Commission (ITC). 6 The ITC’s proceedings are divided into an injury phase and a remedies phase:

The ITC must first determine whether imports are a substantial cause of serious injury, or threat thereof, to the domestic industry producing a like or directly competitive product.

If the ITC injury determination is affirmative, the ITC then conducts a proceeding to determine what types of safeguard measures it should recommend that the President of the United States adopt. 7

7. Once the ITC has submitted its recommendations to the President of the United States, the President has broad discretion; he can accept or reject the ITC’s recommendations in their entirety, or adopt an alternative plan of action. 8 The President cannot impose safeguard measures, however, unless the ITC has made an affirmative determination of injury. 9

The U.S. Safeguards Proceeding on Broom Corn Brooms

8. On March 4, 1996, the U.S. Cornbroom Task Force, an industry group whose members account for more than 50 percent of domestic production of broom corn brooms, filed a petition under section 202 of the Trade Act of 1974, 10 the provision of U.S. law authorizing global safeguard actions. The petition alleged that broom corn brooms were being imported into the United States in such increased quantities as to be a substantial cause of serious injury, or threat of serious injury, to the domestic industry producing broom corn brooms.

9. At the time it filed the section 202 petition, the Task Force filed a second petition with the ITC under section 302(b) of the NAFTA Implementation Act, 11 the U.S. legislation authorizing bilateral safeguards measures provided for in NAFTA Article 801. This second petition alleged that, as a result of the reduction or elimination of a duty provided for under the NAFTA, broom corn brooms from Mexico were being imported into the United States in such increased quantities (in absolute terms) and under such conditions that imports of that article from Mexico, alone, constituted a substantial cause of serious injury, or a threat of serious injury, to the domestic industry producing an article like or directly competitive with the imported article. As provided for under U.S. law, the ITC conducted a single investigation to examine the two petitions jointly. 12

10. The ITC made its injury determinations in the two investigations on July 2, 1996. It made affirmative determinations that petitioners were entitled to relief in both investigations, by a vote of 4-2 in the global safeguard case and a vote of 5-1 in the NAFTA bilateral safeguard case.

11. Following a second proceeding to determine its recommendations regarding the appropriate remedy to be provided, the ITC transmitted a report communicating its findings and recommendations to the President on August 1, 1996.

12. On August 30, 1996, the President of the United States determined that he would take appropriate and feasible action in the global safeguard case, but not take action in the NAFTA bilateral safeguard case. However, rather than implement action in the global safeguard case at that time, he announced that he would first seek a negotiated solution with appropriate foreign countries that would address the serious injury to the domestic industry, promote positive adjustment, and strike a balance among the various interests involved. Consultations were held with Mexico on September 6, 1996, and October 9, 1996, and with certain other countries with an interest in the matter. No agreement was reached.

13. On November 28, 1996, the President issued Proclamation 6961 adopting the following safeguard measures, in force as of that date, for a three year period. 13 They can be summarized:

Broom corn brooms (other than whisk brooms) from Mexico valued at no more than 96 cents, classified under item 9603.10.50, formerly entirely free of duty under NAFTA, remained free if imported in quantities within the global tariff quota of 121,478 dozen, but if imported in quantities over 121,478 dozen became subject to an over-quota tariff rate of 33 cents in the first year, to be reduced to 32.5 cents in the second year, to 32.1 cents in the third year, and then back to zero in accordance with the obligations in the U.S. Schedule to NAFTA.

Broom corn brooms (other than whisk brooms) from Mexico valued at more than 96 cents, classified under item 9603.10.60, formerly free of duty if imported in quantities within a tariff quota of 100,000 dozen but subject to an over quota tariff rate of 22.4%, remained free if imported in quantities within the quota, but became subject to an over-quota tariff rate of 33% for the first year, to be reduced to 32.5% in the second year, to 32.1% in the third year; and then to the rate of 16% in accordance with the obligations of the U.S. Schedule to NAFTA.

No change was made in the duty-free status of all whisk brooms wholly or in part of broom corn.

The NAFTA Dispute Settlement Proceedings

14. On August 21, 1996, shortly before the President determined that he would take action under the global safeguard measures by trying to negotiate an agreement, Mexico requested formal consultations under Article 2006(4) of the NAFTA. 14 Consultations took place on September 6, 1996 and on October 9, 1996, but failed to resolve the dispute. Therefore, pursuant to NAFTA Article 2007, on November 25, 1996, the Government of Mexico requested that the NAFTA Free Trade Commission meet regarding this matter. 15

15. On November 28, 1996, the President of the United States issued Proclamation 6961 imposing the three-year tariff increase described above. The Free Trade Commission met on December 11, 1996, but did not find a solution to this case.

16. On December 12, 1996, Mexico instituted retaliatory tariffs against certain imports from the United States, which Mexico asserted had substantially equivalent effect to the U.S. safeguard action. 16 According to Mexico, the trade effect of the U.S. action will be approximately $1.4 million in the first year. 17

17. On January 14, 1997, Mexico requested establishment of a panel under Article 2008 of the NAFTA. 18 The terms of reference were established for the panel on April 28, 1997.

"To examine, in the light of the relevant provisions of the North American Free Trade Agreement, the matter referred to the Commission as set out in the request for a Commission meeting, submitted by Mexico on November 25, 1996, and to make findings, determinations and recommendations as provided in Article 2016(2)." 19

18. The panel was constituted on July 17, 1997.

19. Mexico’s submission was filed before the Secretariat on July 31, 1997. The Counter Submission of the United States was filed on August 25, 1997. On September 9, 1997, a Hearing was held in Washington, D.C. The following day the Panel communicated additional questions to the parties in writing. On October 10, 1997, the Parties submitted their Replies to the questions asked by the Panel. On October 22, 1997, Mexico filed the Comments on the United States Reply to the Questions of the Panel. On November 3, 1997, both Mexico and the United States filed Supplementary Written Submissions.

20. On November 7-8, the members of the Panel met to prepare their report. The report was completed through written communications and telephone conference calls on December 8 and 16, 1997. It was initially circulated to the parties on December 23, 1997. The parties’ comments on the initial report were communicated to the Panel on January 16, 1998. The final text of the report was communicated to the parties on January 30, 1998.

II. ARGUMENTS OF THE PARTIES

21. In view of the limited nature of the Panel’s eventual findings in this matter, it is neither necessary nor appropriate to record in detail each of the legal arguments made by the parties during the course of this proceeding. The following is a summary of the parties’ principal arguments.

22. The legal claims made by the government of Mexico in this panel proceeding center around a single overarching legal claim. Under the GATT/WTO rules that control the basic global safeguards measures authorized by NAFTA Article 802 20 and the NAFTA rules stated in Article 802 itself, 21 a government may apply a global safeguard measure to imported products only if those products are being imported into its territory in such increased quantities as to cause "serious injury" to a "domestic industry." Both the GATT/WTO and NAFTA agreements define "domestic industry" as the domestic producers of those products that are "like or directly competitive" with the imported article in question. 22 The United States safeguard action in this case rests on the ITC’s determination, in the virtually identical words of the U.S. statute, that broom corn brooms were being "imported into [the United States] in such increased quantities as to be a substantial cause of serious injury to the domestic industry producing an article like or directly competitive with the imported article." The central legal claim made by the government of Mexico is the claim that the ITC did not correctly define the "domestic industry" whose economic condition must be examined to determine the existence of "serious injury."

23. The ITC determined that the relevant "domestic industry" was the group of United States production facilities devoted to the production of broom corn brooms, and those production facilities alone. The ITC’s finding of "serious injury," accordingly, was based upon its analysis of the economic condition of those production facilities alone. The government of Mexico argues that the relevant "domestic industry" should have included the United States production facilities devoted to the production of plastic brooms. As a consequence, Mexico argues, the ITC’s analysis of "serious injury" should have been based on an analysis of the overall economic condition of both sets of United States production facilities — those producing broom corn brooms and those producing plastic brooms. Accordingly, the Mexican argument concludes, the ITC’s determination of serious injury is legally incorrect, because it was based on an analysis of only a part of the relevant "domestic industry."

24. The relevant text of the ITC’s determination with regard to the definition of "domestic industry" is as follows: 23

Domestic Industry

Under both sections 202 and 302 the Commission is required to determine whether increased imports are a substantial cause of serious injury or the threat thereof "to the domestic industry producing an article that is like or directly competitive with the imported article." 3 Section 302(c) of the NAFTA Implementation Act makes applicable to section 302(b) determinations the definition of domestic industry and factors to be considered that are set out in section 202(c) of the Trade Act.

Section 202(c)(6)(A)(i) defines the term domestic industry to mean:

with respect to an article, the producers as a whole of the like or directly competitive article or those producers whose collective production of the like or directly competitive article constitutes a major proportion of the total domestic production of such article. 4

The statute provides instruction in three areas in identifying the domestic industry: that the Commission (1) shall, in the case of a domestic producer that also imports, treat as part of the domestic industry only its domestic production, to the extent that information is available; (2) may, in the case of a domestic producer that produces more than one article, treat as part of such domestic industry only that portion or subdivision of the producer which produces the like or directly competitive article; and (3) may also find there to be a "geographic" industry when certain conditions are present. 5

We find that broom corn brooms represent a distinct product line and that the domestic industry consists of domestic producers of broom corn brooms. 6 Domestic broom corn brooms are "like" the imported broom corn brooms. Domestic and imported broom corn brooms are made of the same materials (for example, virtually all of the broom corn used in making domestic broom corn brooms and most of the broom corn used in making imported broom corn brooms is grown in Mexico), 7 and the imported and domestic products are generally regarded as interchangeable. 8 Broom corn brooms are further distinguishable from other types of brooms, in that they are made from different materials (broom corn) than other types of brooms (e.g., plastic brooms).

Production processes are generally different for broom corn and other brooms. About 84 percent of broom corn brooms produced in the United States in 1995 were produced using the wire-wound process, and nearly 16 percent were produced using the nailed-machine method. 9 The wire-wound method is very labor intensive, and requires skilled craftsmen; it requires months or even years of experience for a worker to become proficient in this process. 10 On the other hand, slightly more than 80 percent of plastic brooms manufactured in the United States in 1995 were produced using the staple-set process, with most of the remainder produced using the nailed-machine method. 11 The staple-set process is almost totally automated. 12

Firms that produce both broom corn brooms and plastic brooms were able to supply the Commission with separate financial, employment, production, and other data for their respective broom lines, further indicating that the firms producing both types of brooms recognize broom corn brooms and plastic brooms as distinct products. Broom corn brooms and plastic brooms are generally considered interchangeable in the marketplace, but there is evidence that broom corn brooms have sweeping and handling characteristics that are perceived by customers to be superior in some applications. 13 While broom corn brooms and plastic brooms tend to be sold through the same marketing channels, 14 and are often sold side-by-side, 15 they are labeled as corn brooms and plastic brooms and are often purchased by customers for different uses. 16

Thus, for the foregoing reasons, we conclude that the domestic industry for the purpose of these investigations consists of the facilities producing broom corn brooms.

25. The government of Mexico argued that the ITC determination that the "domestic industry" consisted only of broom corn brooms was erroneous in two principal respects: (1) The ITC determination rested on a definition of "like product" that was not in accordance with the correct legal definition of that term in the GATT/WTO and NAFTA agreements. (2) Certain elements of the ITC determination failed to conform to NAFTA Article 803 and Annex 803.3 requirements of completeness, consistency and transparency pertaining to the investigation and appraisal of factual and legal issues by the national investigating authority. Later, during the course of the panel proceedings, Mexico also called attention to certain parts of the ITC’s "domestic industry" determination which suggested that the legal basis of its decision might not have been the "like product" concept, and argued that the alternative legal theories suggested by these ambiguities were also a source of legal error.

26. The government of the United States interposed two preliminary objections to these arguments. The United States argued (1) that the Panel had no jurisdiction to adjudicate the conformity of "global safeguard measures" with GATT/WTO legal requirements, and (2) that the Panel was barred from considering Mexico’s claim that the ITC determination did not conform with the requirements of NAFTA Article 803 and Annex 803.3(12) because Mexico had failed to give timely notice of that claim.

The Panel’s Jurisdiction to Consider GATT/WTO Obligations

27. The United States argued that the Panel did not have jurisdiction to adjudicate legal claims based on the obligations of GATT Article XIX and the WTO Agreement on Safeguards. The United States took the position that both the Panel’s terms of reference and the general provisions of Chapter Twenty under which the Panel was created limited the Panel’s competence to legal claims based on NAFTA obligations. The United States thus argued that the Panel could not consider GATT obligations unless they had somehow been adopted by incorporation into the NAFTA agreement. In the view of the United States, the provisions of NAFTA Article 802, the NAFTA provision reserving to member governments the right to employ global safeguards authorized by GATT Article XIX and the WTO Agreement on Safeguards, did not incorporate the legal obligations of those GATT/WTO provisions into the NAFTA agreement. The United States contrasted the language of NAFTA Article 802 ("Each party retains its rights and obligations under Article XIX of GATT . . .") with the direct language of incorporation employed in NAFTA Articles 301(1) and 309(1) ("Article [III and XI] of the GATT and its interpretative notes . . . are incorporated into and made part of this Agreement."). The United States took the position that, while the Panel would have jurisdiction to consider legal claims based upon the additional conditions stated in NAFTA Article 802, it was the intention of the parties that claims based upon the GATT/WTO safeguards provisions themselves would have to be pursued through the GATT/WTO dispute settlement mechanism.

28. Mexico noted that NAFTA Article 2005(1) generally gives parties the right to initiate dispute settlement either in GATT or in NAFTA whenever a dispute involves a matter "arising under both this Agreement and the General Agreement on Tariffs and Trade." In Mexico’s view, its contentions with regard to the ITC’s definition of "domestic industry" raised an issue of U.S. compliance with the additional conditions stated in NAFTA Article 802 and the definition of "domestic industry" in Article 805 that pertains to those conditions, as well as U.S. compliance with the process requirements stated in Article 803 and Annex 803.3. Thus, Mexico argued, the present dispute does "arise" under both NAFTA and GATT/WTO within the meaning of Article 2005(1), and therefore can be brought in either a NAFTA or a GATT/WTO forum. Furthermore, since NAFTA Article 2005(6) provides that once a NAFTA or GATT forum is selected that forum "shall be used to the exclusion of the other," a NAFTA forum selected under Article 2005(1) necessarily has jurisdiction to dispose of all overlapping GATT issues involved in that dispute.

Timely Notice of Claims Presented

29. The United States argued that NAFTA imposes two notice requirements that must be satisfied before a particular legal claim can be considered by a Chapter Twenty dispute settlement panel. First, the United States contended, a legal claim must be raised in consultations pursuant to NAFTA Article 2006, the conduct of which are the first of two prerequisites to the appointment of a dispute settlement panel under Article 2008. Second, following consultations, the legal claim must also be raised in the complainant’s request for a meeting of the NAFTA Commission under Article 2007, the convening of which is the second of the two prerequisites to the appointment of a panel.

30. In support of the first notice requirement, the United States argued that the purpose of the consultation requirement necessitates that both the respondent and third parties be given notice of all legal claims, and cited a recent GATT panel decision construing GATT dispute settlement procedures to that effect. 24 In support of the second notice requirement, the United States noted that the standard terms of reference established by Article 2012(3) limit the panel to an examination of "the matter referred to the Commission (as set out in the request for a Commission meeting) . . ." In turn, Article 2007(3) requires that the request for a Commission meeting state "the measure or other matter complained of and indicate the provisions of this Agreement that it considers relevant . . ."

31. Applying these notice requirements, the United States noted that the only NAFTA provisions cited in Mexico’s request for consultations of August 21, 1996, and its request for a Commission meeting of November 25, 1996, 25 were NAFTA Articles 802 and 805. Consequently, the United States concluded, legal claims under other NAFTA Articles — particularly claims relating to the process requirements of Article 803 and Annex 803.3 — could not be considered by the Panel. In particular, the United States argued, Mexico’s failure to mention Article 803 in its November 25, 1996 request for a Commission meeting meant that legal claims under Article 803 and Annex 803.3 were not within the Panel’s terms of reference.

32. In response, Mexico argued that the adequacy of notice must be judged on whether it fairly informs the other party of the legal claims being made. In this connection, Mexico noted that both its request for consultations and its request for a Commission meeting had made clear that Mexico’s central legal claim concerned the legal inadequacy of the ITC’s definition of the "domestic industry" in this case, and the consequent legal inadequacy of the ITC’s "serious injury" finding based thereon. In Mexico’s view, its assertion that the ITC defined the wrong "domestic industry" necessarily involved all aspects of the ITC determination on that issue, not only the legal standard itself but also the application of that standard to the particular facts of the case, including the various elements of the ITC’s decision-making process dealt with in NAFTA Article 803 and Annex 803.3.

The Legal Definition of "Like Product"

33. Mexico argued that the definition of "domestic industry" in Article 4:1(c) of the WTO Agreement on Safeguards and in the parallel NAFTA provisions can be interpreted as stating two separate and alternative legal tests. The reference to "producers . . . of the like or directly competitive products" can be understood as saying that, in order to be included in the relevant domestic industry, a product must either be "like" the imported product being investigated, or it must be "directly competitive" with it. Mexico argued that "like" is a reference to the concept of "like product" that is employed in several provisions of the GATT, while "directly competitive" can be understood as a reference to products which, though not "like" the imported product, are nonetheless commercially interchangeable or substitutable for it.

34. Mexico’s claim of error was based on the contention that U.S.-made plastic brooms were "like" the imported broom corn brooms under investigation. Mexico considered that the "likeness" claim was sufficiently clear to make it unnecessary for Mexico to address the other part of the legal test — the issue of whether plastic brooms were "directly competitive" with imported broom corn brooms, or the legal consequences that would follow from an affirmative finding on that issue.

35. Mexico argued that the commonly understood meaning of the English word "like" and its Spanish and French equivalents similar and similaire in the other two official language texts of GATT and NAFTA does not require that the goods in question be identical, but merely that they be substantially similar in all important respects. As is made clear in Article 15 of the WTO Customs Valuation Code, those who drafted GATT/WTO legal texts have used the term "identical goods" when they meant to require that goods be identical. Prior GATT/WTO panel decisions have likewise interpreted the "like product" concept to include goods that are similar although not identical. 26

36. Mexico noted that GATT and WTO precedents had consistently interpreted "like product" as a concept whose application requires the consideration of the following factors: "the product’s end-uses; consumer tastes and habits; and the product’s properties, nature and quality." 27 Comparison of broom corn brooms and plastic brooms under these three criteria showed in each case a degree of similarity and interchangeability that required classifying them as "like products." Similarly, in Mexico’s view statements in both the ITC determination and the ITC staff report acknowledging the commercial interchangeability of broom corn brooms and plastic brooms confirmed the conclusion that they were "like products." Concerning the somewhat different factors considered in the ITC’s determination, Mexico argued that the ITC’s findings that broom corn brooms were a "distinct product line," were made by different production processes, were tracked with separate financial records, or were made from different materials were not relevant to a determination of "like product" status. In Mexico’s view, the great weight the ITC placed on the difference in production processes employed for making broom corn brooms was incorrect as a matter of law.

37. The United States argued that the generally understood meaning of the word "like," while not synonymous with the word "identical," did call for a greater degree of similarity than is commonly associated with the English word "similar."

38. The United States called attention to the same multi-factor definition of "like product" found in GATT precedents cited by Mexico. It contended that determinations of "likeness" have tended to focus more on intrinsic physical properties rather than commercial interchangeability. The United States also called attention to statements in a recent decision by the WTO Appellate Body affirming that "like product" is to be assessed on a case-by-case basis, and will always involve "an unavoidable element of individual discretionary judgment." 28 In the view of the United States, such case-by-case analysis requires individual consideration of the particular contextual elements involved in each case, including the particular legal provision in which the term "like product" is being employed. In this connection, the United States called attention to the adjustment purposes of the safeguard measures authorized by GATT Article XIX, and argued that in this particular legal context it was appropriate for the ITC to consider, in determining "likeness," whether the production methods and worker skills currently employed in U.S. production of broom corn brooms could be used in making other brooms.

Process Requirements: Standards of Review

39. Mexico also argued that some of the subsidiary determinations made by the ITC, even though relevant to a correct definition of "like product," failed to satisfy the requirements of NAFTA Article 803 and Annex 803.3 pertaining to the process of decision that must be followed by national investigating authorities. The chief legal claims of this kind related to the ITC’s findings on the subsidiary issue of whether broom corn brooms and plastic brooms were commercially interchangeable. Mexico’s first claim was that the ITC had failed to investigate all the facts relevant to this issue, noting that the ITC’s initial questionnaire sought no information at all about the market characteristics of plastic brooms, and that a subsequent telephone survey of plastic broom producers, the results of which the Mexican government was unable to evaluate because of its confidentiality, did not suffice. 29 Mexico’s second claim was that the ITC’s apparent finding that broom corn and plastic brooms were not entirely interchangeable was both in conflict with the ITC’s own staff report, and not supported by objective evidence in the record before the ITC.

40. In support of these legal claims, Mexico argued that the Panel was obligated to subject the ITC determinations to a rigorous standard of review, albeit not de novo review. First, Mexico contended, since NAFTA Chapter Eight and GATT Article XIX are exceptions to the basic free trade obligations of NAFTA, under Rules 33 and 34 of the Model Rules of Procedure for Chapter Twenty of the North American Free Trade Agreement the burden is on the United States to establish compliance with the requirements of those exceptions. Next, Mexico called attention to the provisions of NAFTA Article 803 that require governments to ensure the "consistent, impartial, and reasonable administration of laws, regulations, decisions and rulings governing all emergency action proceedings," and the specific requirements of Annex 803.3(9) and (10) calling for national investigating authorities to investigate all relevant information, evaluate all relevant factors, and make decisions on the basis of objective evidence. Mexico then cited two recent WTO decisions involving measures taken under the safeguard provisions of the WTO Agreement on Textiles and Clothing, calling for panels to make an "objective assessment" of whether the decision-making body examined all relevant facts before it, and provided an adequate explanation of how the facts as a whole supported the determination made. 30

41. The United States argued that the ITC’s investigation sought and obtained substantial information on the question of "domestic industry," received extensive argumentation on that issue, and made all the necessary findings of fact called for by the relevant safeguards provisions. The United States further contended that each of the necessary ITC determinations complied with the NAFTA provisions and WTO precedents cited by Mexico, having been adequately explained and supported with citations to the relevant evidence summarized in the Staff Report.

42. In support of its position, the United States argued that the NAFTA provisions and WTO precedents cited by Mexico did not require as demanding a review as Mexico had interpreted them to require. The United States stressed the consistent admonition in these authorities that panels were not to conduct de novo review of the facts, nor were they to substitute their judgment as to the weight of evidence for the judgment of the national investigating authorities. 31

43. On the question of burden-of-proof, the United States called attention to a recent NAFTA dispute settlement decision in which the burden of establishing compliance with an exception was treated as a burden of production rather than a burden of persuasion, 32 and a recent WTO precedent rejecting a claim that the transitional safeguards provisions of the WTO Agreement on Textiles and Clothing were the type of exception that required shifting the burden of proving compliance to the respondent. 33

The Legal Basis of the ITC Determination

44. Mexico’s arguments in support of its legal claim that the ITC’s "domestic industry" determination was legally incorrect also included several other arguments that arose from ambiguities and omissions in the ITC’s explanation of the legal standards upon which its "domestic industry" determination rested. The ambiguities and omissions concerned the meaning of the term "like or directly competitive products" used in both the NAFTA and GATT/WTO definitions of "domestic industry." The initial submissions of the parties were addressed to the correctness of the ITC "domestic industry" determination on the assumption that the ITC’s determination rested on a legal conclusion that plastic brooms were not a "like" product to broom corn brooms. The arguments of the parties focused on the legal standards that have been used in GATT/WTO legal decisions defining the "like product" concept, and on the application of those legal standards to the factual characteristics of plastic brooms and broom corn brooms. Although the United States argued that Mexico had waived any other claim of error by taking this approach, 34 Mexico explicitly declined to waive such other claims of error, both in the initial hearing before the panel and on all subsequent occasions. 35

45. On several occasions during the panel proceedings, Mexico called attention to elements of the ITC’s explanation of its "domestic industry" determination that did not conform to the assumption that that determination had been based on the legal conclusion that plastic brooms were not "like" imported broom corn brooms. Mexico noted that the five factors applied by the ITC in determining whether plastic brooms should be included in the domestic industry were identified as factors to determine whether goods are "like or directly competitive," rather than factors directed to the issue of "likeness" alone. 36 Mexico also observed that the ITC had never actually stated that plastic brooms were not "like" imported broom corn brooms. 37

46. Then, after having also pointed out that the ITC determination contained no finding as to whether plastic brooms were "directly competitive," 38 Mexico went on to raise several different possible interpretations of the legal theory that could be deduced from the ITC’s unexplained use of the term "like or directly competitive" in the absence of any further findings on "likeness" and "direct competitiveness". One possibility was that, despite general agreement that "like" and "directly competitive" are separate concepts defined by different criteria, the ITC was making negative findings as to both concepts simultaneously. 39 Another possibility was that the ITC was accepting the view, stated in footnote 3 of its determination, that identification of a "like" product made it unnecessary to include "not-like-but-directly-competitive" products in the same domestic industry -- despite the fact that apparently only one member of the ITC majority had subscribed to that view. 40 Still another possibility, suggested by ITC practice in other safeguard determinations, was that the ITC treated "like and directly competitive" as a unitary concept, often including both "like" and "directly competitive" goods in the "domestic industry" without drawing a clear distinction between them;  41 Mexico considered that the instant decision had been an "arbitrary and inconsistent" exception to that practice. 42

47. Each of Mexico’s suggested legal interpretations of the ITC’s "domestic industry" determination was accompanied by a claim of legal error -- a claim that the interpretation was either inconsistent with prevailing interpretations of "like or directly competitive," or internally inconsistent, or arbitrary. Each of these claims was stated in contingent terms, because its applicability was dependant upon the interpretation to be given to the ITC’s legal explanation.

48. The United States took the position that the ITC "domestic industry" determination must be interpreted as a finding, based on application of the "like product" concept, that plastic brooms were not "like" imported broom corn brooms. 43 The United States asserted that that meaning was clear from the fact that the ITC did find explicitly that U.S.-made broom corn brooms were "like" imported broom corn brooms, and that its conclusion excluding plastic brooms from the relevant "domestic industry" was explained in terms of differences between plastic and broom corn brooms. 44 The United States argued, in addition, that it was not a violation of NAFTA for the ITC, having determined that plastic brooms were not "like" imported broom corn brooms, not to make any finding on whether plastic brooms were "directly competitive" with imported broom corn brooms. 45 The United States observed that the term "like or directly competitive" is expressed in the disjunctive, and argued that an interpretation requiring that both "like" and "directly competitive" products be included in the relevant "domestic industry" would render the term "like" redundant, since all "like" products also fall into the category of products covered by "directly competitive."

 

Continuation: III. Findings - Preliminary Issues


1 Items 9603.10.40 and 9603.10.50 of the United States Harmonized Tariff Schedule (USHTS). This summary is based on the discussion at page II-9 of the ITC Staff Report, appended to the ITC Report, U.S. International Trade Commission, Broom Corn Brooms, Investigations Nos. TA-201-65 and NAFTA 302-1 (Publication No. 2984, August 1996 [hereinafter: ITC Report]).

2 Id. Item 9603.10.60.

3 Id. Items 9603.10.05, 9603.10.15, and 9603.10.35.

4 North American Free Trade Agreement, 32 I.L.M. 612, signed Dec. 17, 1992, [hereinafter NAFTA].

5 Similar whisk brooms and other brooms imported from Canada have been subject to various rates of duty through 1997, and became free of duty on January 1, 1998.

6 The ITC is an independent, quasi-judicial fact-finding agency of the U.S. Government established by legislation enacted in 1916. A principal function of the ITC is to determine the impact of imports on U.S. industries under several statutory provisions, including the U.S. safeguard laws and antidumping and countervailing duty laws, and, upon request, to provide information and advice to the Congress and the President on tariff and trade matters.

7 Trade Act of 1974 §§ 201-02, as amended, 19 U.S.C. §§ 2251-52.

8 Trade Act of 1974 § 203, as amended, 19 U.S.C. § 2253.

9 Id.

10 19 U.S.C. § 2252

11 19 U.S.C. § 3352(b).

12 19 U.S.C. § 3357

13 Proclamation No. 6961, 61 Fed. Reg. 64431-33 (December 4, 1996) (To Facilitate Positive Adjustment to Competition From Imports of Broom Corn Brooms).

14 Letter from Minister Blanco to Ambassador Barshefsky, Mexico Exhibit 13. The letter stated in part:

The injury findings issued by the Commission were a direct consequence of having defined the "domestic industry" taking into account only the production of broom corn brooms and not that of plastic brooms. Given that these latter goods are "like or directly competitive goods" with respect to broom corn brooms, the Commission’s definition of "domestic industry" is not in accord with Articles 801(1) and 805 of the North American Free Trade Agreement (NAFTA), or with Article 4 of the WTO Agreement on Safeguards. On the basis of these reasons, the Government of Mexico considers that the injury determinations were issued in a manner incompatible with the requirements of NAFTA, especially those of Chapter VIII.

15 Letter from Minister Blanco to Ambassador Barshefsky, Mexico Exhibit 14. The letter stated in part:

Determinations [of the ITC] were based on a definition of ‘domestic industry’ that considered only the production of broom corn brooms and not that of another type of brooms that are "like or directly competitive goods" and consequently the ITC’s determination of "domestic industry" is not in accord with Articles 802 and 805 of NAFTA.

16 Notice from Diario Oficial, Mexico Exhibit 14, and letter from Minister Blanco to Ambassador Barshefsky, Mexico Exhibit 15.

17 Initial Submission submitted by the United Mexican States, at paragraph 26.

18 Letter from the Mexican Government requesting the establishment of a Panel, January 14, 1997, Mexico Exhibit 16.

19 Letter of Hugo Perezcano Díaz to NAFTA Secretariat of April 28, 1997, Mexico Exhibit 18. The Mexican request of November 25, 1996, referred to in the terms of reference, is quoted in footnote 14.

20 WTO Agreement on Safeguards, Article 2.

21 For example, NAFTA Article 802 prevents application of global safeguard measures to the products of other NAFTA Parties unless imports from that Party "contribute importantly" to the serious injury.

22 WTO Agreement on Safeguards, Article 4(1)(c); NAFTA Article 805.

23 ITC Report at pages I-9 to I-11. Footnotes 3-16 of the ITC report have been reproduced with their original numbers.

3 In the view of Commissioner Newquist, if there is an industry producing an article that is "like" the imported article, it is usually unnecessary to consider whether there are also industries producing "directly competitive" articles, absent specific allegations that producers of directly competitive articles are also injured.

4 Section 202(c)(6)(A)(i). This definition was added by the Uruguay Round Agreements Act and is based on that in paragraph 1(c) of Article 4 of the Safeguards Agreement. The Statement of Administrative Action notes that this definition "codifies existing ITC practice, which is consistent with the meaning given to the term in the safeguards agreement." Statement of Administrative Action, submitted with the implementing bill on Sept. 27, 1994, published in H.Doc. 103-316, vol. I (103d Cong. 2d Sess.) at 961. The language "or those producers whose collective production of the like or directly competitive article constitutes a major proportion of the total. . ." (emphasis added) codifies the expectation that the Commission, as a practical matter, will not always obtain 100 percent participation in its fact gathering process.

5 Sections 202(c)(4)(A)-(C). In determining whether there are one or more domestic industries corresponding to producers of a like or directly competitive product, the Commission traditionally has followed a "product-line approach, taking into account such factors as the physical properties of the article, customs treatment, where and how it is made (e.g., in a separate facility), uses, and marketing channels. See, e.g., Fresh Winter Tomatoes, Inv. No. TA-201-64 (Provisional Relief Phase), USITC Pub. 2881 (April 1995) at I-7. The Commission traditionally has looked for clear dividing lines among possible products, and has disregarded minor variations. See, e.g., Stainless Steel Table Flatware, Inv. No. TA-201-49, USITC Pub. 1536 (June 1984) at 3-4.

6 In its posthearing brief on injury, petitioner stated that the domestic industry producing the like product in these investigations consists of the facilities producing broom corn brooms. Importers (the Mexican National Cornbroom Association), on the other hand, asserted in their posthearing brief on injury that, applying the Commission’s "product-line" analysis, there is no separate industry producing broom corn brooms, but rather a single industry producing a single product—brooms. They further asserted that broom corn and plastic brooms have exactly the same uses, are made by the same companies, are made using the same production processes, are made by the same employees, and are sold through the same marketing channels.

7 Report at II-4, 5.

8 We do not draw any distinctions among the three types of broom corn brooms: whisk, upright, and push brooms. All three types are imported into the United States. All three involve the same raw materials and production processes and are produced by the same group of producers. Although the uses tend to be different, all are distributed through the same marketing channels.

9 Report at II-7.

10 Report at II-4, 7.

11 Report at II-8.

12 Report at II-8.

13 Report at II-8, 9.

14 Report at II-16 and petitioner’s brief on provisional relief at 34-35.

15 Report at II-9.

16 Id.

24 United States — Imposition of Anti-dumping Duties on Imports of Fresh and Chilled Atlantic Salmon from Norway, ADP/82 (1994) at paragraph 337.

25 The relevant texts of these letters are quoted in notes 14 and 15 above. The request for consultations also cited Article 801, which related to the bilateral safeguard portion of the ITC determination that was never acted upon.

26 Mexico cited, inter alia, Japan — Customs Duties, Taxes and Labeling Practices on Imported Wines and Alcoholic Beverages, L/6216 (1987) at paragraph 5.5; New Zealand — Imports of Electrical Transformers from Finland, L/5814 (1985) at paragraph 4.6; Japan — Taxes on Alcoholic Beverages, WT/DS8/R (panel report, 1996) at paragraph 6.3; id. WT/DS8/AB/R (Appellate Body, 1996) at page 5.

27 Initial Submission submitted by the United Mexican States, at page 40. Mexico cited a 1970 GATT working party report on border taxes as the initial source of this list of factors, L/3464 (1970) at paragraph 18, and the following Panel reports as having cited this list with approval: United States — Measures Affecting Alcoholic and Malt Beverages, DS23/R (1992) at paragraphs 5.23-5.26; Canada — Measures Affecting the Sale of Gold Coins, L/5863 (1985, unadopted) at paragraph 51; Canada — Certain Measures Concerning Periodicals, WT/DS/31/R (1997) at paragraph 5.22.

28 Japan — Taxes on Alcoholic Beverages, WT/DS8/AB/R (1996) at page 21.

29 Mexico suggested that the scope of the ITC investigation may have been influenced by a passage in the Statement of Administrative Action that accompanied the United States legislation implementing the NAFTA Agreement, H.R. Doc. No. 103-159 (1993). The passage referred to U.S. producers of broom corn brooms as the "U.S. broom corn industry." Supplementary Written Submission submitted by the United Mexican States, at page 25, footnote 40.

30 United States — Restrictions on Imports of Cotton and Man-made Fiber Underwear, WT/DS24/R (1996), at paragraphs 7.7 to 7.13; United States — Measure Affecting Imports of Woven Wool Shirts and Blouses from India, WT/DS33/R (1997) at paragraphs 7.13 to 7.17.

31 In addition to the two WTO precedents cited by Mexico, at note 27 above, the United States cited a 1951 working party report reviewing an Article XIX safeguard measure, Report on the Withdrawal by the United States of a Tariff Concession under Article XIX of the General Agreement on Tariffs and Trade, GATT Doc. CP/106, at paragraphs 33, 40, and three recent GATT panel reports involving review of antidumping determinations: United States — Imposition of Anti-Dumping Duties on Imports of Fresh and Chilled Atlantic Salmon from Norway, ADP/87 (1994), at paragraphs 492-494; Korea — Anti-Dumping Duties on Imports of Polyacetal Resins from the United States, ADP/92 (1993) at paragraph 227; United States — Measures Affecting Imports of Softwood Lumber from Canada, SCM/153 (1993), at paragraphs 334 - 335.

32 In the Matter of Tariffs Applied by Canada to Certain U.S.-Origin Agricultural Products, Secretariat File No. CDA-95-2008-01 (1996).

33 United States — Measure Affecting Imports of Woven Wool Shirts and Blouses from India, WT/DS33/AB/R (1997) at page 16.

34 See, Transcript of Panel Hearing of September 9, 1997, at pages 100, 119, 123. See also, Answers to the Questions of the Panel to the Parties, submitted by the United States of America (October 10, 1997) at pages 25-26.

35 See, Transcript of Panel Hearing at pages 68-70, 130. See also, Answers to the Questions of the Panel to the Parties, submitted by the United Mexican States (October 10, 1997) at page 3; Supplementary Written Submissions submitted by the United Mexican States (November 3, 1997) at page 18.

36 Answers to the Questions of the of the Panel to the Parties, submitted by the United Mexican States (October 10, 1997) at pages 4-5, 7; Comments on the United States Government Reply to the Questions of the Panel submitted by the United Mexican States (October 22, 1997) at page 11.

37 Id., at paragraph 12.

38 See, Transcript of Panel Hearing at pages 69-70, 130. See also, Answers to the Questions of the Panel to the Parties, submitted by the United Mexican States (October 10, 1997) at page 3.

39 Id.

40 Id.

41 Id., at page 4. Supplementary Written Submission submitted by the United Mexican States (November 3, 1997) at page 18 and at Exhibit 2.

42 Id., at page 18.

43 Transcript of Panel Hearing of September 9, 1997, at pages 112-113. Answers to the Questions of the Panel to the Parties, submitted by the United States of America (October 10, 1997) at paragraphs 4, 6, 13. Post-Hearing Submission of the United States of America (November 3, 1997) at page 11.

44 Id.

In its comments on the initial report of the panel, Comments of the United States of America on the Initial Panel Report (January 16, 1998) at pages 9-11, the United States also pointed out that the ITC had referred, in an earlier phase of its proceedings, to a statement in the legislative history of the U.S. safeguards legislation making clear that "like" and "directly competitive" are separate and distinct concepts. United States International Trade Commission, Broom Corn Brooms, Investigation No. NAFTA-302-1 (Provisional Relief Phase), USITC Publication 2963 (May 1996) at I-13 to I-14, citing H.R. Rep. No. 571, 93rd Cong., 1st Sess. 45 (1973) and S. Rep. No. 1298, 93rd Cong., 2nd Sess., at pages 121-122 (1974). The cited House and Senate Reports state as follows:

The words "like" and "directly competitive", as used previously and in this bill are not to be regarded as synonymous or explanatory of each other, but rather to distinguish between "like" articles and articles which, although not "like," are nevertheless "directly competitive." In such context, "like" articles are those which are substantially identical in inherent or intrinsic characteristics (i.e., materials from which made, appearance, quality , texture, etc.), and "directly competitive" articles are those which, although not substantially identical in their inherent or intrinsic characteristics, are substantially equivalent for commercial purposes, that is, are adapted to the same uses and are essentially interchangeable therefore.

45 Transcript of Panel Hearing of September 9, 1997, at pages 118-119, 135. See also, Post-Hearing Submission of the United States of America (November 3, 1997) at page 10.