5.200 Costa Rica considered that the reply to this question was to be found both in the proposals made by the United States to Costa Rica and in the agreements reached with the other countries called for consultations in this category, and it was the following: what the United States was seeking to do was to protect the domestic industry that produced the fabric used in the production of underwear. For this purpose, the United States had followed two routes: firstly, it had sought to restrict access to its market for underwear made from fabric not produced in the United States, and secondly, it had guaranteed wider and substantial access to its market for underwear made from fabric formed and cut in the United States. As the same time as imports of underwear produced from non-US fabric were restricted, a guaranteed broad level of access was provided for imports using fabric formed and cut in the United States. That was why the various proposals made by the United States to Costa Rica to try to reach an agreement on the level of restriction were two-fold in nature: a lower access level for non­conditional or specific level (SL) trade - in the order of 1.5 to 4.5 million dozen versus the 14.4 million dozen which was the minimum guaranteed for Costa Rica by the ATC - and a "generous" level for conditional or GAL trade, amounting to as much as 40 million dozen depending on the specific proposal. That was also why among the agreements reached with the other countries called for consultation in this category, more than 80 per cent of the negotiated restraint volumes - or access volumes - required the use of United States formed fabric, while only the remaining 20 per cent may use non­United States formed fabric.

5.201 Costa Rica stated that the United States may wish to promote the use of fabric produced in that country; however, the problem lay in the mechanism it had decided to use for this purpose. Imposing a restriction on imports of underwear from a country in order to oblige that country to use United States cloth for the production of the underwear as a requirement for it to be able to enter the United States market was not a condition provided for in Article 6 of the ATC. The ATC did not allow imposition of a safeguard measure on a clothing product in order to protect the fabric used to produce it. The ATC only envisaged the safeguard governed by Article 6 of the Agreement to protect the domestic industry producing "like and/or directly competitive products". Underwear was not a like or directly competing product with respect to the fabric used to produce it, since these were products which had different characteristics from the standpoint of any objective or subjective criterion. The fact that underwear and fabric were not like or directly competitive products was recognized by the United States itself. This was shown by the fact that the United States had not even attempted to argue this openly, since in its reports it had always argued that the domestic industry allegedly affected was the underwear industry and did not mention the fabric industry explicitly. However, the reason why the case was confusing was that basically the United States was trying to justify an action whose true objective was very different from its apparent objective in order to try to bring it within the terms of a provision which did not authorize action to attain the objective which the United States was actually pursuing. By proceeding in this way, the United States had affected not only Costa Rica but also all the producers of this type of fabric, whose rights would be impaired in so far as the action restricted and possibly hindered their ability to become suppliers of this raw material.

5.202 The United States argued that they had properly based their determination on damage or threat to the domestic industry producing like or directly competitive products. The United States had satisfied the Article 6 requirement that the serious damage, or actual threat thereof, must be to the domestic industry producing like or directly competitive products, as could be seen from the March 1995 Statement and further confirmed by the US statements. Unlike agreements that permit other safeguard actions, the ATC did not provide a definition of domestic industry nor did it require that the importing member apply a transitional safeguard that corresponded exactly to the scope of the industry seriously damaged or actually threatened by serious damage. While the US fabric industry may incidentally benefit from the more favourable treatment provided for re-imports incorporating US formed and cut fabric, it had been made clear in the March 1995 Statement that the serious damage, or actual threat thereof determination was made solely on the basis of the situation in the US underwear industry, which included both vertically integrated firms which manufactured their own fabric and domestic firms that did not use offshore operations. There were approximately 220 underwear manufacturers in the United States, 85 of which used outward processing operations and the remaining 60 per cent, or 135 firms, which did not use offshore operations. In making its determination under Article 6.2 of the ATC, the CITA had examined the situation of the broad array of US underwear producers, including the integrated firms which spun their own yarn, knit fabric, and cut and assembled the finished product; the large number of small "cut and sew" operators who obtained their fabric and trim from a variety of independent sources, and did not have offshore operations; and those operators who knit fabric and cut pieces in the United States for final assembly overseas. The fact that the underwear industry in the United States was a diverse industry, and that some producers also made their own fabric, did not change the fact that the CITA's determination was based on the economic conditions in the underwear industry, not the industry producing only fabric.

5.203 The United States noted that many countries with outward processing programmes condition participation in that programme on use of fabric manufactured in their countries. They also maintain quantitative limits on how much of that trade can be re-imported.

5.204 In the view of the United States, the facts before the CITA and the record before the Panel demonstrated that US underwear producers (including both those which did and those which did not manufacture offshore) had been seriously damaged or actually threatened with such damage from a surge in re-imports. It was the responsibility of the United States to balance the damage to and interests of many different types of domestic underwear producers. The ATC permitted Members to impose a transitional safeguard even if the damage did not extend to 100 per cent of the industry. Any requirement that the damage must be sustained by a percentage or majority of the industry or a certain size or type of firm, was conspicuously omitted from the ATC. In other WTO safeguard procedures, there were express requirements with respect to the proportion of the affected industry represented. Clearly, the negotiators of the ATC had been aware of those procedures, but had chosen to continue the safeguard mechanism used under the MFA system.

J. THE REQUIREMENT TO HOLD CONSULTATIONS

5.205 Costa Rica argued that even if, for illustration, it was considered that the United States had fulfilled the substantive requirements needed to have the right to apply a transitional safeguard measure to Costa Rican trade in category 352/652, which, as they had already shown, the United States had not done, the fact was that the unilateral restriction imposed was fraught with its own problems and in itself also violated the ATC. The adoption, maintenance and renewal by the United States of this unilateral restriction suffered from two serious flaws of different kinds. First, the United States had adopted, maintained and renewed a measure unilaterally, without having held consultations on the basis of the substantive requirement on which the measure was supposedly based, thus violating Articles 6.7 and 6.10 of the ATC. And second, it had applied the measure retroactively to the date of the call for consultations, thus violating Article 6.10 of the Agreement.

5.206 The request for consultations made by the United States, the information presented in the Statement on which the action taken was based, the consultations held with Members and the unilateral restriction adopted in this case all referred to the condition of the existence of serious damage to the United States industry. In other words, the United States made the call for consultations and proceeded thereafter until it adopted the transitional safeguard in June 1995 on the basis of the purported existence of serious damage to its industry.

5.207 Costa Rica noted that, at its July meeting the TMB had determined that serious damage did not exist. The United States should then have immediately withdrawn the measure. Nevertheless, it did not do so, but rather appeared to have interpreted that, as the TMB had not reached a conclusion as to the existence or not of actual threat of serious damage, it could continue maintaining the measure on that basis. By proceeding in this way, the United States had violated Articles 6.7 and 6.10 of the ATC, in so far as they contained an obligation to hold consultations during a 60-day period before a unilateral restriction may be adopted. In other words, it was impossible to adopt a unilateral restriction without having held consultations with the Member affected, as provided for by the various paragraphs of Article 6 of the ATC.

5.208 This meant that, in order to have been able to adopt a measure on the basis of the existence of actual threat of serious damage, the United States should have made the call, presented the information and held consultations on that basis. It could not be admitted that a unilateral restriction may be imposed without specifically having had the opportunity to rebut the alleged existence of a substantive requirement on which the measure was allegedly based. To maintain the contrary would imply leaving the exporting Member completely defenceless, because there would not be a point in the proceedings at which it could try to defend itself. In the case under consideration, if the United States had considered that the basis for its call was the existence of actual threat of serious damage, it should have said so in its call for consultations, and should have presented the factors and information required to demonstrate its existence, and then should have imposed the unilateral restriction on that basis.

5.209 The United States pointed out that Article 6.10 of the ATC regulated the date when, if consultations had failed to reach agreement, an importing Member may move ahead unilaterally with implementation of the textile restriction in question. Provision of such deadlines was fully consistent with the scheme of Article 6 of the ATC, which attempted to maximize the possibility that transitional safeguards would be applied on a consensual basis; any negotiator could appreciate that a lack of deadlines would mean lack of any incentive for negotiation and agreement. However, Article 6.10 of the ATC did not regulate the effective date for a unilateral transitional safeguard. The United States had applied its transitional safeguard with respect to imports of underwear from Costa Rica effective on 23 June 1995. This date fell within 30 days following the 60­day period for consultations after the initial call made on 27 March 1995. The reference year for imports within the levels specified in this transitional safeguard began on March 27. This reference year was fully consistent with US obligations under Article 6.10 of the ATC.

5.210 Costa Rica argued that, when the TMB determined that serious damage to the United States industry did not exist in this case, what the United States should properly have done was to withdraw the measure adopted on that basis and, if there really were grounds justifying the existence of actual threat of serious damage, begin the procedure anew on that ground, to comply with Articles 6.7 and 6.10 of the ATC, and give Costa Rica a chance to defend itself. By failing to do so, the United States violated the above-mentioned provisions.

5.211 The United States argued that they were not required by the ATC to choose between serious damage and actual threat in making their determination. The ATC standard allowed Members to assert, at the same time, both serious damage or actual threat. The plain meaning of the standard invoked merely the notion that there could be a determination on the basis of serious damage, or actual threat. Neither was exclusive of the other. There was no obligation in other safeguard proceedings that one standard must be alleged instead of the other. The ATC treated them equally, that is, without any special factors to establish a case for one or the other. The simple fact was that Members could allege both based on the same factors. In addition, contrary to the assertion of Costa Rica, it did not follow that if the TMB had found that there was no serious damage, and reached no consensus on threat, there was no threat. No consensus on threat was just that. No consensus on that finding, therefore, no finding or decision on threat.

5.212 The United States also stated that it held consultations with Costa Rica in accordance with Article 6.7 of the ATC before placing a restriction. It then applied the restraint, and referred the matter to the TMB, pursuant to Article 6.10. Article 6.12 therefore permitted the United States to maintain the restraint for up to three years, without extension. Article 6.10 expressly allowed for the placement of a unilateral restraint before TMB review. Nothing in the text indicated that the restraint must be withdrawn in the absence of any recommendation to do so. A lack of consensus in the TMB, or even a finding without a recommendation to withdraw, did not obligate an importing Member to withdraw a restraint. Even if there was a recommendation to withdraw a restraint, Members must only "endeavour" to comply, and provide reasons to the TMB if they could not comply with the recommendation. In this case, the United States had complied with the TMB recommendation.

K. EFFECTIVE DATE OF THE RESTRICTION

5.213 Costa Rica also argued that the United States had applied retroactively the unilateral restriction imposed on trade with Costa Rica in category 352/652, thereby violating Article 6.10 of the ATC. This Article provided that:

"If, however, after the expiry of the period of 60 days from the date on which the request for consultations was received, there has been no agreement between the Members, the Member which proposed to take safeguard action may apply the restraint by date of import or date of export, in accordance with the provisions of this Article, within 30 days following the 60-day period for consultations ...".

5.214 In accordance with the above, if the Members failed to reach agreement on the application of the safeguard once the 60-day period fixed for holding consultations had expired, the Member which proposed to take safeguard action may do so unilaterally within the following 30 days. Thus, the provision under consideration granted the importing Member the power during a specified period to impose a unilateral restriction on the imports after a certain number of days had passed. Nowhere, in Costa Rica's view, did Article 6.10 of the ATC authorize the imposition of a unilateral restriction retroactive to the date of the call for consultations. The fact was that retroactivity could not be assumed, but must be explicitly authorized, as it was under the MFA. Article 3.5(i) of the MFA explicitly stated that:

"... If, however, after a period of sixty days from the date on which the request has been received by the participating exporting country or countries, there has been no agreement either on the request for export restraint or on any alternative solution, the requesting participating country may decline to accept imports for retention from the participating country or countries referred to in paragraph 3 above of the textiles and textile products causing market disruption (as defined in Annex A) at a level for the twelve-month period beginning on the day when the request was received by the participating exporting country or countries not less than the level provided for in Annex B ...".

5.215 Costa Rica further argued that, if retroactivity was not explicitly provided for, as in the case of Article 6.10 of the ATC, the measure in question must be applied "forwards". This was particularly clear in the case of this provision of the ATC which, when establishing a procedure similar to that provided for in the MFA for the imposition of a unilateral restriction, differed from the latter in respect of retroactivity, by eliminating the explicit provision the MFA contained in this regard. This interpretation was bolstered by the principles established in Article 6.1 of the ATC, according to which:

"... The transitional safeguard should be applied as sparingly as possible, consistently with the provisions of this article and the effective implementation of the integration process under this Agreement".

5.216 Since any gaps or doubts arising in the legal text governing the imposition of a transitional safeguard must be interpreted on the basis of the principles and spirit guiding the ATC, it was not possible to conclude that a restriction adopted under the Agreement may be applied retroactively in the absence of any explicit provision to that effect. This interpretation was supported by other agreements that were an integral part of the WTO Agreement and which therefore must also serve as interpretative sources for the ATC in the absence of any express provision in the latter. Thus, for example, Article XIII:3(b) of GATT 1994, referring to import restrictions involving the fixing of quotas, expressly authorized retroactive application of a restriction only for products that were en route at the time at which public notice was given of the restriction.

5.217 Accordingly, in the view of Costa Rica, the only possible conclusion was that, where Members had not reached agreement, the importing Member may, within the following 30 days, adopt a unilateral restriction which would begin to be applied as from the time when it was adopted, and not before. This meant that the imposition of the restriction by the United States should have begun as from 16 June 1995, the date when the restriction was established, and could not be made retroactive to 27 March 1995, the date of the request for consultations, as the United States in fact had done. By proceeding in this way, and by continuing to do so, the United States had disregarded the very significant revisions of the information presented as a basis for its action, disregarded all the aspects discussed in the consultations, and the conclusions of the TMB and had violated Article 6.10 of the ATC.

5.218 The United States argued that the ATC was silent concerning the effective date of safeguard measures, and did not prevent a Member from providing that the effective date would be the date of the request for consultations. The United States had held consultations with Costa Rica in accordance with Article 6.7 of the ATC before placing a restriction; had then applied the restraint at issue in this case; and had referred the matter to the TMB, pursuant to Article 6.10 of the ATC. Article 6.12 of the ATC therefore, permitted the United States to maintain the restraint for up to three years, without extension. When asked by exporting countries including Costa Rica to address this question, the TMB had responded recognizing this fact. The TMB had noted that

"with respect to the introduction of a safeguard measure, the [ATC] does not provide any indication with respect to the effective date of implementation of that measure" (G/TMB/R/2).

The MFA explicitly recognized the customary practice of counting imports during the consultation period against restraint levels, and the ATC did not change this practice. The universal application of textile restraints on this basis and the recognition accorded to this practice generally in the TSB and TMB, demonstrated that it was in fact a matter of accepted custom which constitutes "subsequent practice in the application of the treaty which establishes the agreement of the parties regarding its interpretation" in the sense of Article 31.3(b) of the Vienna Convention on the Law of Treaties (1969).

5.219 In this regard the United States (and Costa Rica) were of the view that the reference in Article XVI:1 of the WTO Agreement to "decisions, procedures and customary practices followed by the CONTRACTING PARTIES to GATT 1947 and the bodies established in the framework of GATT 1947" did not include the MFA. Costa Rica noted that GATT 1947 and the MFA were two independent, self­standing agreements while the United States pointed out that to some extent, the MFA was an agreement relevant to the history of the ATC, as even though the MFA had expired, many of the provisions of the ATC were drawn from the MFA.

5.220 The United States emphasized that the omission of an explicit reference to the effective date of the restriction in the ATC could not be construed as an attempt to prevent it. It was essential to the effective application of transitional safeguard as an adjustment mechanism. Textile restrictions would not work without the flexibility to set the effective date. Without it, a flood of imports would vitiate their adjustment function. Under Article XIX an importing country could simply act when it had made its determination of serious injury, but under the MFA and the ATC importing countries had been required to wait for consultations before acting. It was argued that the principle of effective treaty interpretation requires that transitional safeguards under Article 6 of the ATC must be permitted to have an effective date as of the date of the request of consultations as any contrary position would make the ATC­consistent transitional safeguards ineffective.

5.221 Along these same lines, it was observed that restraints were normally applied effective on the date of the call as a call would trigger speculative trade. If traders believed that imports before completion of the consultation process would not be counted, speculative imports would aggravate injury or bankrupt the remaining industry. A transitional safeguard was an adjustment measure which facilitated the ultimate accomplishment of the ten­year programme of the ATC. A sudden flood of speculative imports for stockpiling in warehouses could not be permitted to frustrate this adjustment process. The widespread recognition of application of textile restrictions as from the date of the request reflected a common­sense appreciation of the practical aspects of this larger policy imperative. As a matter of treaty law, the principle of effective application of treaties (ut res magis valeat quam pereat) argues that restrictions must be permitted to have an effective date as of the date of the request for consultations, as any contrary position would make ATC­consistent transitional safeguards ineffective.

5.222 Article 6.10 of the ATC expressly allowed for the placement of a unilateral restraint before TMB review. Nothing in the text indicated that the restraint must be withdrawn in the absence of any TMB recommendation to do so. A lack of consensus in the TMB, or even a finding without a recommendation to withdraw, did not obligate an importing Member to withdraw a restraint. Even if there was a recommendation to withdraw a restraint, Members must only "endeavour" to comply, and provide reasons to the TMB if they could not comply with the recommendation.

5.223 The United States noted that the ATC provided for an absolute sunset of three years for an Article 6 safeguard measure. Furthermore, it was recalled that such safeguards were transitional and could only be invoked until the ATC expired, eight and a half years from now. The United States had continuously reviewed data on products subject to restraint and monitored production and trade data on a voluntary basis, even though the ATC did not so require. When new data warranted review of a safeguard measure, the United States considered whether it was necessary to maintain the restraint.

5.224 With respect to the Panel's question to the United States concerning "retroactive application of treaty obligations"; this could be read to refer to Article 28 of the 1969 Vienna Convention. However, this was not a case of retroactive application of a treaty to events which took place before the treaty entered into force; Article 28 was not relevant at all. All events which had led to this dispute took place after entry into force of the WTO Agreement, and in particular took place within the time frame provided for under ATC Article 6, including Articles 6.7 and 6.8. It could not be argued that Costa Rica was unaware of the applicable treaty rules at the time these events took place.

L. ARTICLE 2 OF THE ATC

5.225 Costa Rica argued that the United States had introduced a new restriction on its trade in the clothing products classified in category 352/652, without basing itself on the provisions of the ATC, and thereby violated Article 2.4, of the said Agreement. As recalled in the Preamble of the ATC, the terms of reference of the Uruguay Round Negotiating Group on Textiles and Clothing had established that:

"Negotiations in the area of textiles and clothing shall aim to formulate modalities that would permit the eventual integration of this sector into GATT on the basis of strengthened GATT rules and disciplines, thereby also contributing to the objective of further liberalization of trade."

In order to carry out this mandate, Article 1.1 of the ATC, provided that:

"This Agreement sets out provisions to be applied by Members during a transition period for the integration of the textiles and clothing sector into GATT 1994."

Costa Rica further argued that for the purpose of attaining this objective, the ATC strictly defined, inter alia, what type of restrictions may be applied to trade in textiles and clothing under cover of the safeguard clause. These restrictions must necessarily fall within one of the following three categories:

(a) Quantitative restrictions within bilateral agreements maintained under the MFA in force on the day before the entry into force of the WTO Agreement and notified in accordance with Article 2.1 of the ATC, which would continue to be governed by the provisions of the ATC in this respect:


(b) restrictions established under the specific transitional safeguard mechanism governed by Article 6 of the ATC, which may be applied, in accordance with paragraph 1 of that Article, to all textile and clothing products that had not yet been integrated into GATT 1994; or


(c) restrictions established in accordance with Article XIX of GATT 1994, in the case of products already integrated into GATT 1994.

5.226 Thus, Article 2.4 of the ATC, provided very clearly that:

"No new restrictions in terms of products or Members shall be introduced except under the provision of this Agreement or relevant GATT 1994 provisions."

Conversely, it followed from this provision that the introduction of new restriction in terms of products or Members that had not been introduced in accordance with the rules of the ATC or GATT 1994 infringed Article 2.4 of the ATC.

5.227 In the case in point, imports into the United States from Costa Rica in category 352/652 were not subject to any quantitative restriction based on the Multifibre Arrangement prior to the entry into force of the WTO Agreement, and therefore the first option was ruled out. Furthermore, cotton and man-made fibre underwear was not a product that the United States had already incorporated into GATT 1994 and therefore Article XIX was likewise not applicable. Hence, the only possibility open to the United States to restrict the imports under consideration was to apply the specific transitional safeguard mechanism in accordance with the criteria established in Article 6 of the ATC. However, the United States had failed to demonstrate the existence of the requirements laid down in Article 6 of the ATC as an essential condition for being able to apply a transitional safeguard. Consequently, the United States had violated Article 2.4 of the ATC, as it had applied to Costa Rica a new restriction on trade in products classified in category 352/652 without complying with the provisions of Article 6 of the ATC.

5.228 The United States argued that because the safeguard action taken on imports of underwear in category 352/652 from Costa Rica was fully consistent with Article 6 of the ATC, there was no violation of Article 2 of the ATC.

M. A MEMBER MUST ENDEAVOUR TO ACCEPT RECOMMENDATIONS OF THE TMB

5.229 Costa Rica argued that the United States had violated Article 8 of the ATC, which in its paragraphs 9 and 10, defined the nature of the recommendations made by the TMB. Thus, the first of these paragraphs provided that: "The Members shall endeavour to accept in full the recommendations of the TMB ...". Paragraph 10 provided that:

"If a Member considers itself unable to conform with the recommendations of the TMB; it shall provide the TMB with the reasons therefor not later than one month after the receipt of such recommendations ...".

5.230 In the view of Costa Rica, it was clear from an analysis of these two provisions that the TMB's recommendations were not binding. However, it was also clear that the formulation of such recommendations must have some purpose, because it was meaningless for the ATC to provide for the TMB to carry out an exercise without any purpose. This aspect became clear from the reading of paragraphs 9 and 10 of Article 8 of the ATC, from which it may be concluded that although Article 8 does not impose the obligation to abide by the recommendations of the TMB, it does impose other obligations on Members. Article 8 of the ATC laid down two obligations on Members: firstly, in paragraph 9 it imposed an obligation for Members to endeavour to accept in full the recommendations of the TMB. This was a "best-endeavours" obligation, in the sense that while the TMB recommendations were not binding, there was an obligation for Members to do their best to accept them. If, given the TMB's recommendations, a Member did not even try to accept them, it would be violating the best­endeavours obligation of Article 6.9 of the ATC.

5.231 Secondly, Article 8.10 of the ATC imposed on Members another obligation that complemented the first, namely, that where a Member, having endeavoured to accept the recommendations of the TMB, found itself unable to conform with them, it shall provide the TMB with the reasons therefor. The imperative character of the verb used in this Article clearly indicated that, while the TMB recommendations may not be binding, this provision did impose on a Member the obligation to justify, "not later than one month after receipt of such recommendations", the reasons why it was unable to conform with them.

5.232 Costa Rica argued that in the case under consideration, the United States not only had not tried to accept the TMB recommendations, but furthermore did not submit to that body any document explaining the reasons why it considered itself unable to conform with the recommendations, and therefore it was in breach of Articles 8.9 and 8.10 of the ATC.

5.233 The United States argued that Costa Rica's allegation that the US had violated Article 6.9 of the ATC was without legal or factual foundation. They had proceeded in good faith to reach mutual understanding in consultations recommended by the TMB, consistent with obligations inherent in Article 8 of the ATC. They also noted that the TMB recommendation had been directed to both the United States and Costa Rica. Contrary to the assertion of Costa Rica, the United States had followed the TMB recommendation to consult and to take into account the considerations it had cited. Therefore, there was no need to invoke Article 8.10 of the ATC and provide reasons to the TMB for not accepting its recommendation in this case. As evidenced by the initiation of these Panel proceedings, it was Costa Rica that could not ultimately comply with the TMB recommendation. The TMB's response in October 1995 to the reports of the United States and Costa Rica did not characterize the United States as having failed to follow the TMB's recommendation. The TMB stated that:

"[i]t took note of the reports and of the fact that the two parties did not reach a mutual understanding during the consultations. The TMB's discussions confirmed the Body's previous findings in this matter (G/TMB/R/2, first two sentences of paragraph 16). There being no further requests by the parties involved, the TMB considered its review of the matter completed" (G/TMB/R/5).

5.234 Costa Rica argued that the violation by the United States of the best-endeavours obligation imposed by Article 8.9 of the ATC was clearly demonstrated by the following facts. In July 1995, the TMB, pursuant to Article 6.10 of the ATC, had proceeded to examine the unilateral restriction applied by the United States to Costa Rica in category 352/652. On that occasion, the TMB had found that "serious damage", as envisaged in Articles 6.2 and 6.3 of the ATC, "had not been demonstrated", but "could not, however, reach consensus on the existence of actual threat of serious damage". Therefore, the TMB recommended:

" ... that further consultations be held between the United States and the parties concerned, with a view to arriving at a mutual understanding, bearing in mind the above, and with due consideration to the particular features of this case, as well as equity considerations".

Thus, the recommendation of the TMB had been that Costa Rica and the United States should hold new consultations, but also that these consultations should be conducted on the basis of three considerations: (a) that it was clear that the United States had not demonstrated the existence of serious damage, but that a consensus had not been reached in the TMB as to the existence of actual threat of serious damage; (b) that trade in this category between the United States and Costa Rica had some particular features, which should be borne in mind; and (c) that equity considerations should be borne in mind, with respect to the levels of restriction agreed by the United States with other countries called for consultations on this same category.

5.235 In the view of the United States, the TMB recommendation went no further than a recommendation to consult further and report back to the TMB. The TMB did not recommend that the parties actually reach agreement, nor did it recommend that the United States withdraw the safeguard measure, nor did it recommend that the parties even discuss dropping the restriction. Also, a lack of consensus in the TMB did not translate into a recommendation to drop a restriction. In accordance with the TMB's recommendation, the United States had duly consulted, and duly reported back; thus, the United States had complied fully with the TMB recommendation. In its note of October 1995, the TMB had stated that the parties had reported no solution and that it considered its review completed.

5.236 In Costa Rica's view, what subsequently had occurred, however, showed that the United States had not fulfilled the obligation imposed by Article 8.9 of the ATC in the sense of at least endeavouring to proceed in accordance with the recommendations of the TMB. Firstly, the United States did not even attempt to justify the adoption of the safeguard measure on the basis of the alleged actual threat of serious damage. Once the TMB had determined that serious damage did not exist and that there was no consensus as to the existence of actual threat of serious damage, the United States - as a minimum at that stage of the proceedings - should have demonstrated the existence of this latter hypothetical condition brought to light by the TMB. However, the fact was that they did not even attempt to do so, nor did it take into account the special characteristics or trade between the two countries in this category - feigning to ignore the overriding importance of so-called 807 trade - nor did it take into account any considerations of equity because, even if there were grounds for imposing the safeguard in question, the levels of restriction proposed to Costa Rica were very different to those offered and granted to other countries involved in consultations.

5.237 The United States argued that Costa Rica had misinterpreted the TMB recommendation to mean that the TMB had asked the United States to reconsider, in consultations, its determination that there was serious damage, or actual threat thereof to the domestic underwear producing industry which had been attributed to imports from Costa Rica. Further, Costa Rica had misinterpreted the TMB recommendation to take into account equity considerations in light of the specific case to mean that the United States was to deem the re-import content in Costa Rica's trade not to cause or actually threaten serious damage to US industry. Based on these misinterpretations, Costa Rica had asserted that the United States was required in consultations to withdraw the restraint.

5.238 Costa Rica held that if the United States genuinely had accepted to consider the recommendations of the TMB, when taking into account that the TMB had not reached a consensus as to the existence of actual threat of serious damage it should have lifted the quota unilaterally imposed on Costa Rica in category 352/652. This was because the letter and spirit of the ATC were very clear: the ATC was conceived as a transitional system whose essential function was to integrate trade in textiles and clothing into the rules and the disciplines of GATT 1994. From this statement, the transitional safeguard provided for in Article 6 of the ATC was extraordinary by nature and should be applied only in cases where it had been possible to demonstrate the existence of the requirements laid down by paragraphs 2 and 3 of that Article, and where consequently the TMB had arrived at a consensus that the existence of the threat had been demonstrated. Conversely, if the TMB had not arrived at a consensus to that effect, a restriction that had been imposed could not be maintained, because it would mean that the TMB had not found the necessary justification for taking such action. There was nothing in the ATC to establish a presumption that, in the absence of consensus in the TMB, it should be presumed that the importing Member had the necessary justification to impose the measure. In the absence of any explicit provision to that effect, following Article 6.1 of the ATC and the spirit of the ATC it was necessary to proceed in the least restrictive manner, that is to say, the imposed restriction should have been lifted as there was no justification for adopting it.

5.239 In this respect, the United States considered that Costa Rica had construed the TMB recommendation to mean that the United States was to rescind the restraint on Costa Rican exports by including an analysis of Article 6.1 of the ATC. Reference to integration and the taking of transitional safeguard action and the re-import content of Costa Rican exports supported the notion that the United States was required to rescind the restraint when it consulted with Costa Rica. Costa Rica's argument consistently depended on the assumption that the ATC integration process must be read into Article 6 so as to accelerate the pace of the integration. This was not the case. It was clear in the ATC that integration was an independently determined process, and that Article 6 applied only to products not yet integrated. Article 2 of the ATC specifically allowed Members to designate what products would be integrated and when, as long as they were chosen from the Annex to the ATC, from certain product groups and comprised the appropriate proportion of trade indicated for each stage of the transition. Nothing in the ATC required the United States or other Members to schedule sensitive products at certain stages for integration. The negotiators had specifically left that decision to the importing Members. Thus, Costa Rica could not use this Panel proceeding to compel integration of this category.

5.240 Costa Rica also argued that, in accordance with the TMB's recommendations, the United States was obliged to take into consideration the particular features of the trade in this category between the two countries. This meant that the United States should have borne in mind that, given that virtually all exports from Costa Rica in category 352/652 were "807 trade" , the possibility that they should have been causing serious damage or actual threat thereof was really non-existent. If the United States had endeavoured to accept the recommendation of the TMB to consider the particular features of trade with Costa Rica in this category, it would clearly have appreciated how absurd it was to impose a quota in such circumstances. However, the United States had not made any effort to accept the recommendation of the TMB.

5.241 The United States further argued that the TMB recommendation did not say what Costa Rica claimed it did. Again, the TMB had not, in its 25 October 1995 note, responded to Costa Rica's same assertions in their report back to the TMB dated 24 August 1995. (G/TMB/SPEC/107) The lack of TMB consensus on actual threat of serious damage did not translate into a "recommendation" that a restraint be withdrawn. Accordingly, there was no obligation on the United States, in consultations, to assume such a proposition.

5.242 In the view of Costa Rica, if the United States had insisted on adopting a safeguard measure in these circumstances - when in fact it should have withdrawn the measure - it should at least have borne in mind the obligation to grant more favourable treatment to re-imports from Costa Rica, as provided for in Article 6.6(d) of the ATC. In this regard, however, the position of the United States appeared to have been somewhat self-contradictory. On the one hand, it started from the position that the rise in imports of these products was causing serious damage to its industry, but on the other, the level of these imports was of no importance whatsoever provided the product in question was produced using fabric formed and cut in the United States. The ATC established this obligation to grant more favourable treatment to re-imports - which the United States had never tried to fulfil in any of its proposals - but what it certainly did not provide for was the establishment of new restrictions in order to ensure that future trade consists solely of re-imports.

5.243 Costa Rica noted that the TMB had also indicated that equity considerations should be borne in mind, by which it was referring to the fact that the same treatment should be accorded to those who were in the same position. In this connection, apart from Costa Rica, the United States had called for consultations six other countries concerning this category, had withdrawn the call addressed to one of them and had reached an agreement with the remaining five. In the case of each of the latter, the United States had agreed on specific level (SL) restraints that were much higher than the respective "call" levels. Thus - and assuming that the United States had the right to adopt a safeguard, which, in the view of Costa Rica, was not the case - in order to comply with the TMB's recommendation it should have made restraint proposals to Costa Rica that reflected SL restraint levels which provided for increases in relation to the call level, in the same way as it had granted to the other countries. In none of the proposals formulated by the United States to Costa Rica was this equity factor taken into consideration, because not even in its last proposal did the United States propose a SL restraint level approaching the call level, still less exceeding it. In fact, the highest level that the United States had offered at any time for the establishment of the SL restraint was about 40 per cent below what should have been the level for Costa Rica in accordance with the ATC itself - assuming that the necessary requirements for imposing it had been demonstrated, which was not the case.

5.244 Costa Rica argued that, on the basis of the above explanation, it was clearly demonstrated that the United States had completely disregarded the recommendations adopted by the TMB in July 1995, without even endeavouring to accept them as provided for in Article 8.9 of the ATC. Furthermore, the United States had violated Article 8.10 of the ATC, which imposed on Members another obligation that complemented the obligation established in Article 8.9 of the ATC. That is to say, the United States had not fulfilled the obligation of presenting to the TMB its reasons explaining why it considered itself unable to conform with the TMB's recommendations. Suffice it to say that the United States had never at any time presented to the TMB any document to that effect. Failure to comply with this requirement imposed under Article 8.10 of the ATC may be due to the fact that, since the United States had not even attempted to follow the TMB's recommendations, it would be difficult, if not impossible, for it to justify a hypothetical failure in its attempt to accept those recommendations, since it had made no such attempt.

5.245 Costa Rica also noted that the United States had declared that they did not agree with the finding of the TMB that the existence of serious damage had not been demonstrated. Moreover, as in the US view there was no provision in the ATC that made the TMB's findings binding, the Panel was obliged to consider the question of serious damage. In this connection, Costa Rica emphasized that the United States had not contested at the appropriate moment in the procedure the TMB's finding that the existence of serious damage had not been demonstrated, as required by Articles 6.2 and 6.3 of the ATC. Costa Rica was, therefore, concerned that contesting the action of the TMB at this stage of the procedure and calling into question its decisions would mean divesting the Body of any function related to monitoring the implementation of the ATC.

5.246 The United States argued that they had made efforts to reach a mutual understanding with Costa Rica. As recommended by the TMB, the United States had taken into account that the TMB could not reach consensus on actual threat of serious damage (though they maintained that they had demonstrated the existence of serious damage); had examined the nature of trade from Costa Rica; and, in the interest of equity, had again compared Costa Rica's trade with trade from other countries to which the serious damage and actual threat had been attributed. The record showed that Costa Rica had refused to respond. In so doing, the United States had made a proposal to Costa Rica that, in its view, took these factors into account in an effort towards mutual understanding. The United States stated that the record showed that Costa Rica had refused to respond. The United States stated that there was no requirement in the ATC that the United States respond to "findings" but must "endeavour to comply" with TMB "recommendations". The United States did comply with the TMB recommendation.

N. NULLIFICATION OR IMPAIRMENT OF BENEFITS

5.247 Costa Rica argued that the unilateral restriction imposed by the United States on trade in clothing classified in category 352/652 from Costa Rica was a blatant violation of the obligations laid down in the ATC, in particular Articles 2, 6 and 8. On this basis, and given that the ATC was a "covered agreement" within the meaning of Article 1 of the DSU, the provisions of Article 3.8 of the DSU applied. That Article stated:

"In cases where there is an infringement of the obligations assumed under a covered agreement, the action is considered prima facie to constitute a case of nullification or impairment ...".

It clearly followed from the above provision that in the case under consideration, given the infringement of Articles 2, 6 and 8 by the United States, benefits accruing to Costa Rica under the WTO Agreement, and in particular under the ATC, had been nullified or impaired.

5.248 Considering that Article 3.1 of the DSU stipulated that

"Members affirm their adherence to the principles for the management of disputes heretofore applied under Articles XXII and XXIII of GATT 1947 ...",

it was important to note that these Articles had established that the benefits accruing under the GATT Rules - and consequently the WTO Rules - did not comprise exclusively those derived from the Agreement at the time when a concession came into effect, but also the future trading opportunities that would result from that concession. Thus, and by virtue of the prima facie case of nullification or impairment of benefits that existed in cases of infringement of the obligations assumed under a covered agreement, such as the ATC, the claims presented by one or more Members relating to the imposition of infringing unilateral measures must be accepted even where statistical evidence of commercial damage cannot exist.

5.249 It was also necessary to emphasize that nullification or impairment should be considered not only in relation to the effect which the violation in question may have had on the volume of trade but also in relation to possible increases in transaction costs and the creation of uncertainty liable to affect investment plans.

5.250 As a result of all the foregoing, Costa Rica considered that the Panel should find that the unilateral restriction imposed by the United States on the trade of Costa Rica in category 352/652 infringed Articles 2, 6 and 8 of the ATC and that, consequently, these infringements entailed the nullification or impairment of benefits accruing to Costa Rica under the WTO Agreement. Accordingly, Costa Rica urged the Panel to find in its report that the United States should proceed to bring its measure into conformity with the ATC, which implied immediately withdrawing it.

5.251 The United States argued that Costa Rica's rights and benefits under the ATC had not been nullified and impaired. The United States had demonstrated that they had not violated Articles 2, 6 or 8 of the ATC. Thus, nullification and impairment of any benefits and rights accruing to Costa Rica in this case could not be presumed.

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TO CONTINUE WITH USA - RESTRICTIONS ON IMPORTS OF COTTON AND MAN­MADE FIBRE UNDERWEAR