ARBITRAL PANEL ESTABLISHED UNDER CHAPTER TWENTY

OF THE NORTH AMERICAN FREE TRADE AGREEMENT

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

49. It will be recalled that the United States argued that the Panel did not have jurisdiction to adjudicate claims by Mexico based on the obligations of GATT Article XIX and the WTO Agreement on Safeguards — the GATT/WTO obligations that govern the type of global safeguard measure involved in this case.

50. The panel determined that it was not necessary to resolve this preliminary objection, because it was possible to dispose of the issues in dispute under the NAFTA agreement alone. After giving full consideration to Mexico’s legal claims under both the relevant GATT/WTO safeguards provisions and the NAFTA safeguards provisions that also apply to global safeguards measures, the Panel ultimately concluded that the dispute should be resolved under the rule that is stated, in virtually identical terms, in both NAFTA Annex 803.3(12) and Article 3.1 of the WTO Safeguards Code -- the rule requiring that the investigating authority publish a report setting out its findings and reasoned conclusions on all pertinent issues of fact and law. ⁴⁶ Since the NAFTA and WTO versions of the rule are substantively identical, application of the WTO version of the rule would have in no way changed the legal conclusion reached under NAFTA Annex 803.3(12). Accordingly, the Panel chose to rest its decision entirely on NAFTA Annex 803.3(12), without relying on Article 3.1 of the WTO Safeguards Code. It was thus unnecessary for the Panel to make any determination with regard to the preliminary United States objection concerning the Panel’s jurisdiction to consider the GATT/WTO provisions referred to in NAFTA Article 802.

2 - Timely Notice of Claims Presented

51. It will be recalled that the United States had argued that the only legal claims that Mexico had properly raised before this Panel were its legal claims based on NAFTA Articles 802 and 805. According to the United States’ argument, 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, because Mexico had not given timely notice of them in its request for consultations of August 21, 1996, and its request for a Commission meeting of November 25, 1996. 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.

52. 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 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.

53. The Panel agreed generally with the United States contention that timely notice must be given of legal claims to be considered in a dispute settlement proceeding. The Panel was unable to agree, however, with the determinative significance the United States had attached to the citation of specific NAFTA provisions in evaluating the adequacy of the notice actually given. The WTO standards for determining the adequacy of notice call for a more pragmatic appraisal of the notice that has been given. Article 6:2 of the WTO Understanding on Dispute Settlement specifies that requests for the establishment of a panel must "provide a brief summary of the legal basis of the complaint sufficient to present the problem clearly." In applying this standard, the panel in the Desiccated Coconut case stated:

In our view, at a minimum, it should have been possible, based on a reasonable reading of the documents determining the scope of the [Panel’s] terms of reference, to conclude that this Panel would be asked to make findings regarding Brazil’s failure to consult. ⁴⁷

The United States suggested that the adequacy-of-notice standard to be deduced from the combination of NAFTA Articles 2012 (3) and 2007 (3) is more stringent than the WTO standard, ⁴⁸ but the Panel was not persuaded that the requirement of Article 2007 (3) that the complainant’s request for a Commission meeting "indicate the provisions of this Agreement that it considers relevant" must be read as a strict requirement that every relevant provision be cited no matter how clearly the description of the legal claim indicates its applicability. The wording of Articles 2012 (3) and 2007 (3) does not require such a stringent interpretation, nor is such an interpretation in any way necessary to serve the purposes of a notice requirement.

54. In this case, Mexico had clearly stated from the beginning that its principal legal claim was that the ITC had reached an erroneous conclusion with regard to its determination of "domestic industry" by excluding U.S. producers of plastic brooms. ⁴⁹ In evaluating a determination applying a legal concept such as "domestic industry" with constituent concepts such as "like product" and "directly competitive product," it is almost impossible to separate the abstract legal standard from its application to the particular facts of the case. It is only by examining the decision-maker’s application of the legal standard to the particular facts of a case that a reviewing panel can determine whether the correct legal standard was applied. And in doing so, a panel must necessarily examine not only the legal standard articulated by the investigating authority itself, but also the process of decision by which that standard was applied, the factors or criteria considered, and the facts that the decision-making body had deemed sufficient or insufficient to meet the standard. The fact that the NAFTA agreement happens to have specific provisions addressed to the detailed elements of this process of decision does not make the process a legal issue separate and distinct from the central claim of error.

55. The question of whether notice of a legal issue identified by citation to one provision of an agreement fairly includes notice of related issues explicitly dealt with in another provision of that agreement is a question that will always depend on the relationship among the particular legal issues involved. In this case, the Panel finds that the legal issues identified by a claim of legal error in the application of the "domestic industry" concept identified by reference to NAFTA Articles 802 and 805 necessarily include the more specific legal issues dealt with in NAFTA Article 803 and Annex 803.3. The Panel finds, therefore, that the notice given by Mexico in both its request for consultations of August 21, 1996, and its request for a Commission meeting of November 25, 1996, was adequate notice of Mexico’s legal claims under NAFTA Article 803 and Annex 803.3. Since the same adequate notice was given in both communications, it is unnecessary to decide whether notice in both communications was required.

56. In conclusion, the Panel must reject the preliminary objection entered by the United States pertaining to the adequacy of the notice given by Mexico. Accordingly, the Panel finds that its terms of reference authorize it to examine Mexico’s legal claims under NAFTA Article 803 and Annex 803.3, and that the Panel is not otherwise precluded from examining those legal claims.

3 - Process Requirements: Standards of Review

57. The Panel examined carefully the other arguments of the parties regarding the standard of review that the Panel was required to apply when appraising various elements of the ITC’s determination. The Panel reserved judgment, however, on these issues until it could be determined which points of disagreement would in fact need to be resolved in order to reach a decision in this case. As is explained in paragraphs 67-77, the Panel’s preliminary examination of the issues in this case forced it to the conclusion that other more basic problems made it unnecessary to address the more detailed factual issues to which the parties’ standard-of-review arguments were addressed. Accordingly, the Panel has made no separate findings on the standard-of-review issues raised by the parties.

58. The Emergency Action (Safeguard) provisions of NAFTA, Articles 801 through 805 define two safeguard procedures. One, Article 801, is a bilateral procedure designed for the situation in which imports from a NAFTA partner constitute the key source of imports that may be threatening a domestic industry. The other, Article 802, protects the rights of the Parties to apply WTO safeguards on a global basis. The latter is the NAFTA Article authorizing the safeguard measures at stake in this case.

59. As explained above, in reaching its determination that increasing imports of broom corn brooms had caused serious injury to a "domestic industry," producing a "like or directly competitive" product, the ITC’s report defined the affected U.S. "domestic industry" to include U.S. manufacturers of broom corn brooms, but not to include U.S. manufacturers of other brooms. ⁵⁰ Considering that, during the period under investigation, there was a displacement of domestic broom production from broom corn brooms to plastic brooms, ⁵¹ this definition of the domestic industry increased the likelihood of finding injury. Whether this definition was in accordance with the NAFTA treaty is therefore a central issue in this case.

60. Since there is no disagreement with the ITC’s conclusion that U.S.-made broom corn brooms are "like" the imported broom corn brooms that are the subject of this investigation — indeed, they are identical — the only issue as to the definition of the "domestic industry" in this case is whether U.S.-made plastic brooms are "like or directly competitive" with the imported broom corn brooms. It is the exact meaning and implications of the term "like or directly competitive" that define the controversy before the Panel.

61. The ITC ruled that the relevant domestic industry was the domestic producers of broom corn brooms and those producers alone. The full text of the ITC’s explanation of this conclusion is reproduced at paragraph 24 above. The ITC’s explanation of its conclusion can be read to imply that it relied on a subsidiary conclusion that plastic brooms were not "like" the imported broom corn brooms that were the subject of the safeguard proceeding. Several elements of the ITC explanation made that implication quite strong. The ITC began its analysis by explaining that in determining "domestic industry" it traditionally applied a multi-factor approach that took 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." ⁵² he first, second, and fourth of these factors are factors that have been looked to in most applications of the "like product" concept by GATT/WTO panels. The impression that these factors defined a "like product" analysis was reinforced by the ITC’s explicit conclusion that domestic broom corn brooms were "like" imported broom corn brooms. When juxtaposed against the apparent "like product" orientation of the ITC’s factor analysis and the explicit "likeness" finding as to broom corn brooms, the ITC’s ultimate conclusion that domestic plastic brooms could not be included in the relevant domestic industry would quite naturally be read as a finding that plastic brooms were "not like" broom corn brooms, especially since that conclusion had been explained by stressing the differences between plastic and broom corn brooms. That implication was further reinforced by the fact that the ITC never mentioned any other legal standard under which the finding as to plastic brooms might have been made.

62. In their first submission to the Panel, both parties framed the legal issue before the Panel on the basis of the same assumption about what the ITC had ruled. Both parties defined the question before the panel as a question of whether the ITC’s conclusion was or was not a correct application of the "like product" concept. Mexico argued specifically that "[p]lastic and [b]roomcorn [b]rooms [a]re ‘[l]ike [p]roducts.’" ⁵³ The United States summarized an important conclusion in its submission: " . . . the ITC reasonably concluded that the product "like" imported broom corn brooms was domestic broom corn brooms." ⁵⁴ The Panel itself shared this assumption during and immediately after the September 9, 1997 oral hearing, to the extent of drafting a set of questions asking the parties for greater precision in their legal arguments about the meaning of the "like product" concept. 

63. During the course of further deliberation and analysis, it became clear to the Panel that the ITC had never explicitly stated that its conclusion excluding plastic brooms from the domestic industry was in fact based on a "like product" analysis. When describing the five factors the ITC traditionally applies in defining "domestic industry," the ITC never actually stated that these five factors were addressed to the issue of whether the products in question were "like products." Instead the ITC stated that these factors were addressed to the issue of whether the products in question were "like or directly competitive products." ⁵⁵ This description of the issue in terms of the bare statutory language leaves it unclear whether the five factors are somehow addressed to one or both of two separate issues — "likeness" or "direct competitiveness" — or whether these factors are addressed to yet another distinctive legal test for which the phrase "like or directly competitive" is merely a term of art -- a legal test which is neither "likeness" nor "direct competitiveness," but which looks to one or more other concepts, for example a concept such as "industry." The ITC’s ultimate conclusion did nothing to clarify this ambiguity. Its ultimate conclusion was stated simply by restating the conclusion that domestic producers of broom corn brooms, and those alone, are the relevant "domestic industry" in this case.

64. Mexico’s written answers to the Panel’s questions drew the Panel’s attention to this ambiguity in the ITC’s explanation of its conclusions, but Mexico continued to request the Panel to rule on the question of whether plastic brooms were "like" imported broom corn brooms. ⁵⁶ As an initial matter, Mexico’s request was legally proper. It can be argued that the ultimate conclusion the ITC did clearly reach — that plastic brooms were not part of the domestic industry for purposes of the serious injury analysis — necessarily raises a "like product" issue about the relationship between broom corn brooms and plastic brooms. Both parties appear to agree that, under GATT/WTO law, U.S.-made plastic brooms could not be excluded from being considered as part of the same "domestic industry" as U.S.-made broom corn brooms if those plastic brooms were "like" imported broom corn brooms. ⁵⁷ If this were so, then the ITC’s ultimate conclusion excluding plastic brooms from the relevant domestic industry could not be correct as a matter of GATT/WTO law unless plastic brooms were "not like" broom corn brooms.

65. The Panel gave careful consideration to the question of whether it was possible to reach a conclusion about whether plastic brooms were "like" or "not like" imported broom corn brooms, even though it was unclear whether the ITC’s ruling was in fact based on the "like product" concept. The Panel considered whether the factors examined by the ITC in its analysis were factors that could have been relevant to an analysis of "like product," whether the ITC failed to consider factors essential to a "like product" analysis, whether the ITC’s conclusions as to particular factors would have been legally adequate as a matter of "like product" analysis, and whether both the ITC’s subsidiary conclusions and its overall conclusions could be considered reasonable under the applicable standard of review.

66. In attempting to perform this analysis, the Panel carefully examined the way in which the "like product" concept had been defined in prior GATT/WTO decisions, and noted, in particular the degree of discretion accorded to governments and panels in applying those definitions. It noted, for example, that, as stated in the Japan--Taxes on Alcoholic Beverages case, a factor test has been used:

The Panel noted that previous panel and working party reports had unanimously agreed that the term "like product" should be interpreted on a case by case basis. The Panel further noted that previous panels had not established a particular test that had to be strictly followed in order to define likeness. Previous panels had used different criteria in order to establish likeness, such as the product’s properties, nature and quality, and its end-uses; consumers’ tastes and habits, which change from country to country; and the product’s classification in nomenclatures. ⁵⁸

The Panel also noted that the Appellate Body in the same case had explained the degree of discretion involved in applying the factor test just described:

In applying [the first three factors listed in the previous quotation] to the facts of any particular case, and in considering other criteria that may also be relevant in certain cases, panels can only apply their best judgment in determining whether in fact products are "like". This will always involve an unavoidable element of discretionary judgment. ⁵⁹

And the Panel likewise noted the extent to which the Appellate Body’s definition of "likeness" indicated that the definition can vary from WTO provision to WTO provision according to the legal context in which it is being used:

The accordion of "likeness" stretches and squeezes in different places as different provisions of the WTO Agreement are applied. The width of the accordion in any one of those places must be determined by the particular provision and the circumstances that prevail in any given case to which that provision may apply. ⁶⁰

67. As the Panel worked through this analysis, it became clear that the issue of legal correctness — whether the analysis offered by the ITC in support of its ultimate conclusion would have been erroneous in one or more respects if it had been offered in support of the legal conclusion that plastic brooms were "not like" boom corn brooms — would depend on whether the ITC’s appraisal and weighting of the various factors was within the range of discretion permitted by the case-by-case approach and the multi-factor definitions employed in the GATT/WTO definitions of "like product."

68. The Panel, however, was forced to conclude that it would not be proper, or even logically coherent, to resolve points of issue on the ground that the ITC could have so decided in the exercise of discretion permitted under these "like product" definitions when there was no way of knowing whether the ITC was in fact applying such a "like product" standard or was consciously employing the type of discretion it permits. In short, an attempt to review the ITC’s determination on this hypothetical basis, as though it had been a "like product" determination, would be an untenable way to review a safeguards decision under NAFTA Chapter Twenty. The Panel’s ultimate conclusion, therefore, was neither that the ITC’s decision was legally correct or incorrect as an application of the "like product" concept, but rather that the ITC’s legal explanation was simply inadequate to permit review on this issue.

69. A GATT panel confronted a similar situation in the Polyacetal Resins case, where it was asked to review an antidumping determination by the Korean Trade Commission (KTC) that failed to make clear the grounds on which the KTC had determined "material injury." The panel stated:

If the determination before the Panel were the result of affirmative findings based on different standards of injury, a necessary condition of effective review by the Panel of the consistency of these findings with the [1979 Antidumping Code] would be that the determination contain specific conclusions with regard to each of these standards and sufficient reasoning to explain how the factors discussed in the determination were relevant to each particular standard. Accordingly, in order for the Panel to be able to review the KTC’s injury determination against the criteria of Article 3 [of the 1979 Antidumping Code], the Panel first had to satisfy itself that this determination was sufficiently clear with regard to the standard(s) of injury on which the KTC had based its conclusions. This question was therefore properly before this Panel, regardless of whether or not the United States had raised it in this form during the prior stages of the dispute settlement process. ⁶¹

70. The Polyacetal Resins panel concluded that KTC’s failure to make clear the basis of its decision violated the provisions of Article 8.5 of the 1979 Antidumping Code requiring investigating authorities to include in their public determination "the findings and conclusions reached on all issues of fact and law considered material by the investigating authorities, and the reasons and basis therefore." ⁶² Moreover, as explained in the text quoted above, the panel felt compelled to reach this conclusion even though the fatal ambiguity of the KTC determination had not been raised by the complaining party prior to the panel proceeding itself.

71. In the present case, the panel is compelled to reach the same conclusion. A clear explanation of the legal basis for determinations such as the ITC’s "domestic industry" determination is an essential condition of effective review of safeguard measures by a Chapter Twenty panel, and effective review, in turn, is essential to the realization of the NAFTA Preamble’s objective to "establish clear and mutually advantageous rules governing [the Parties’] trade." Accordingly, the inadequacy of the ITC’s explanation of its "domestic industry" determination must be held to be equally inconsistent with the parallel provisions of Annex 803.3(12) of the NAFTA agreement, which requires that safeguard determinations provide "reasoned conclusions on all pertinent issues of law and fact." Likewise, even though the inadequacy of the ITC’s determination in this regard had neither been raised before the later stages of this proceeding nor fully briefed by the parties, ⁶³ the Panel was compelled to rule on this issue in order to discharge its responsibility to rule on claims of legal error that had been properly raised under one or more of the several possible meanings of this ambiguous determination.

72. Accordingly, the Panel therefore determines that in this respect the ITC’s determination on the issue of "domestic industry" is inconsistent with the United States obligations under NAFTA, Annex 803.3(12) of the NAFTA Agreement.

73. As noted above, the ITC’s decision is also unclear as to one other aspect of the legal definition of "domestic industry"— the meaning to be given to the particular phraseology of the definition which uses two separate terms, "like" and "directly competitive," separated by the disjunctive "or."

74. The terms "like" and "directly competitive" may be interpreted as expressing two separate and distinct legal tests — the former requiring a certain degree of physical and functional similarity in addition to market interchangeability and the latter focusing on market interchangeability alone. Under this interpretation, all "like" products would be "directly competitive,’ but some products that are not "like" could still be "directly competitive."

75. If these two terms do in fact represent separate and distinct legal concepts, some clarification would be needed as to the legal consequences of a situation in which one domestic product is found to be "like" the imported product, but another domestic product is found "not like" but "directly competitive."

76. The ITC’s report does not indicate whether the ITC regards "like" and "directly competitive" as separate legal tests, or whether it views "like or directly competitive" as a single term of art for a single legal test having its own distinctive content. Mexico’s final submission included a list of cases in which the ITC had used the language "like or directly competitive" as if it were one concept. ⁶⁴ The way the ITC describes its five-factor "product line" approach in this case is likewise suggestive of that unitary concept. ⁶⁵ A statement by one individual commissioner suggests a view that "like" and "directly competitive" are separate tests, stating that "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." ⁶⁶ And one of the dissenting commissioners concluded that plastic brooms should be part of the same domestic industry because they were "directly competitive." ⁶⁷

77. In sum, while it is clear that the ITC ruled that plastic brooms were not part of the relevant domestic industry, the reasoning in its determination never explained how the ITC interpreted the term "directly competitive" in reaching that result. It neither deals with the consequences that would follow if plastic brooms were found to be "not like" but still "directly competitive" with broom corn brooms, nor does it exclude that possibility. Without further explanation, this aspect of the decision is also unreviewable and thus also fails to meet the requirements of NAFTA Article 803 Annex 803.3(12).

78. The safeguard measures currently in force pursuant to Proclamation 6961, ⁶⁸ having been based on an ITC determination that fails to provide "reasoned conclusions on all pertinent issues of law and fact," constitutes a continuing violation of United States obligations under NAFTA. This measure has already been in force for two years. The Panel therefore recommends that the United States bring its conduct into compliance with the NAFTA at the earliest possible time.

Signed in the original by:

Submitted to the disputing Parties on January 30, 1998

⁴⁶ The two texts are as follows:

Annex 803.3(12): "The competent investigating authority shall publish promptly a report, including a summary thereof in the official journal of the Party, setting out its findings and reasoned conclusions on all pertinent issues of law and fact."

Article 3.1: "The competent authorities shall publish a report setting forth their findings and reasoned conclusions reached on all pertinent issues of fact and law."

⁴⁷ Brazil -- Measures Affecting Desiccated Coconut, WT/DS22/R (1996), at paragraph 289.

⁴⁸ Counter Submission of the United States of America, at footnote 28.

⁴⁹ This was clear in Mexico’s August 21, 1996 letter requesting consultations and its November 25, 1996 letter requesting a meeting of the Free Trade Commission, quoted at notes 14 and 15 above.

⁵⁰ ITC Report, at pages I-9 to I-11.

⁵¹ Id. at page II-14.

⁵² Id., at pages I-9 and I-10, footnote 5.

⁵³ Initial Submission submitted by the United Mexican States, at paragraph 76 (heading).

⁵⁴ Counter Submission of the United States of America, at paragraph 92.

⁵⁵ The relevant statement read, "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." Id. at I-9--I-10.

⁵⁶ Response to the Questions of the Panel to the Parties, submitted by the United Mexican States, at page 2.

⁵⁷ To be precise, this argument appears to rest on the further assumption that domestic and imported broom corn brooms are identical products (as both parties agree they are). This being so, domestic plastic brooms that are "like" imported broom corn brooms must necessarily also be "like" domestic broom corn brooms, and this in turn means that there can be no basis for separating plastic brooms and broom corn brooms into separate domestic industries.

⁵⁸ Japan--Taxes on Alcoholic Beverages, WT/DS8/R (1996) (Panel Report), at paragraph 6.21.

⁵⁹ Japan--Taxes on Alcoholic Beverages, WT/DS8/AB/R (1996) (Appellate Body) at pages 20-21.

⁶⁰ Id. at page 21.

⁶¹ Korea--Anti-Dumping Duties on Imports of Polyacetal Resins from the United States, ADP/92 (1993) at paragraph 217.

⁶² Id., at paragraphs 223-224.

⁶³ As noted in paragraphs 44-47 above, Mexico did call attention on several occasions to the fact that, in the absence of any further findings or explanations, the ITC’s conclusion that plastic brooms were not "like or directly competitive" with imported broom corn brooms was open to a variety of different interpretations, each leading to a different claim of legal error. The Panel considered that these various claims of legal error amounted to a further claim of legal error that, in view of the ambiguities and omissions in the ITC’s explanation of the legal basis of its "domestic industry" determination, its explanation of its legal ruling was simply too incomplete and unclear to be a legally adequate basis for taking a safeguard measure in the first place.

In its Comments to the Initial Panel Report, the United States argued that Mexico had waived reliance on the requirements of Annex 803.3(12) by having dismissed the relevance of Annex 803.3(12) to the legal adequacy of the ITC’s factual analysis of the five factors it had listed as its criteria of decision. Comments of the United States of America on the Initial Panel Report" (January 16, 1998) at page 5, citing Comments on the United States Government Reply to the Questions of the Panel, Submitted by: United Mexican States (October 22, 1997) at paragraphs 21-23. The Panel considered that the statement in question was addressed to the proper legal criteria for measuring the adequacy of particular factual determinations, and not the criteria governing the legal adequacy of the investigative authority’s explanation of the legal basis for its decision.

⁶⁴ Supplementary Written Submission, submitted by the United Mexican States, at paragraph 31.

⁶⁵ ITC Report, at footnote 5.

⁶⁶ Id., at footnote 3.

⁶⁷ Id. at I-53.

⁶⁸ 61 Fed. Reg. 64431 (Dec. 4, 1996).