VI INTERIM REVIEW

6.1 On 4 October 1996, the United States and Costa Rica requested the Panel to review, in accordance with Article 15.2 of the DSU, precise aspects of the interim report that had been issued to the parties on 20 September 1996. Both Costa Rica and the United States requested the Panel to hold a meeting for that purpose. The Panel met with the parties on 15 October 1996 to hear their arguments concerning the interim report. The Panel carefully reviewed the arguments presented by the parties.

6.2 In approaching the interim review stage, the Panel drew guidance from Article 15.2 of the DSU, which states that "a party may submit a written request for the panel to review precise aspects of the interim report prior to circulation of the final report to Members". While the Panel was willing to approach the interim review stage with the broadest possible interpretation of Article 15.2 of the DSU, it was of the view that the purpose of the review meeting was not to provide the parties with an opportunity to introduce new legal issues and evidence, or to enter into a debate with the Panel. The purpose of the interim review, in the Panel's view, was to consider specific and particular aspects of the interim report. Consequently, the Panel addressed the entire range of such arguments presented by the parties which it considered to be sufficiently specific and detailed.

6.3 The United States submitted to the Panel at the review meeting copies of press reports relating to the interim report. At the meeting, the Panel expressed its disappointment about the apparent breach of confidentiality and reiterated the utmost importance of maintaining confidentiality so as to preserve the credibility and integrity of the dispute settlement process, particularly at the interim review stage.

6.4 Regarding the timing of settlements with other exporters, the United States argued that the Panel had erroneously stated that the United States requested consultations with Costa Rica while at the same time it settled with other countries. In order to clarify its findings, the Panel introduced some drafting modifications in the final report at paragraphs 7.50 and 7.51.

6.5 The United States disagreed with the interim report that use of the ATC safeguard should be exceptional. It based its argument on the fact that Article 6.1 of the ATC couples the term "sparingly" with "as possible", suggesting that the standard was relative. The Panel was not persuaded by this argument, which in effect would result in reading the text of the Article as meaning that the transitional safeguard "should be applied sparingly if possible".

6.6 Regarding the causation analysis required under Article 6.2 of the ATC, the United States argued that the Panel's finding in paragraph 7.46 of the final report was a mischaracterization of the CITA's conclusions. The Panel slightly modified the language of this paragraph so as to avoid any misunderstanding of its findings.

6.7 In respect of the relationship between Articles 6.2 and 6.4 of the ATC, the United States argued that the Panel incorrectly merged the analyses under these two paragraphs. This was not the intention of the Panel. To clarify its findings, the Panel introduced certain drafting changes in paragraphs 7.23, 7.24, 7.47 and 7.48.

6.8 The United States argued that in its review of the March Market Statement, the Panel had erred by relying on the July Market Statement. It specifically argued that if Members were penalized in the dispute settlement process for supplying updated data to the TMB, there would be a disincentive to providing it at the TMB level. The Panel consequently examined the issue, as spelled out in paragraphs 7.29 and 7.45 of its final report.

6.9 Regarding the Panel's interpretation of Article 6.6(d) of the ATC, the United States argued that finding the United States in violation of this provision based on the requirements under Article 6.8 was erroneous because the US action was taken based on Article 6.10. The Panel's additional discussion on this point is reflected in paragraph 7.59.

6.10 Both the United States and Costa Rica disagreed with the Panel's interpretation of Article 6.10 of the ATC regarding the effective date of application of the restriction. The United States argued that the restraint was not a measure "of general application" within the meaning of Article X:2 of GATT 1994. It further argued that the restraint was not "enforced" until 23 June 1995, which was after the date of the publication. The Panel's finding on these points can be found in paragraphs 7.65 and 7.69 of the final report. Costa Rica questioned the compatibility of the Panel's general approach that Article 6 of the ATC should be interpreted narrowly and its interpretation of Article X:2 of GATT 1994. The Panel failed to see any incompatibility or contradiction between the two approaches. Costa Rica further questioned the Panel's consideration of practical aspects of this issue. The Panel carefully examined Costa Rica's argument, and decided to maintain paragraph 7.68 of the final report.

6.11 Costa Rica and the United States differed with respect to acceptable figures for the percentage of 807 or 807A trade in Costa Rican underwear exports to the United States. In the absence of clear verification by the importing country (i.e., the United States), the Panel decided to use the most conservative figure of 94 per cent, coupled with the expression "at least" in paragraph 7.46 of the final report.

6.12 Costa Rica and the United States made some other suggestions concerning language changes, which the Panel accepted and introduced in its final report.

VII FINDINGS

A. CLAIMS OF THE PARTIES

Introduction

7.1 We note that the issues in dispute arise essentially from the following facts: On 27 March 1995, the United States requested consultations with Costa Rica on trade in cotton and man-made fibre underwear (US category 352/652) under Article 6.7 of the ATC. As consultations between the two countries did not result in a mutually acceptable solution, on 23 June 1995 the United States implemented a restriction on underwear imports from Costa Rica for a period of 12 months starting from 27 March 1995. At the same time, the United States referred the matter to the TMB in accordance with Article 6.10 of the ATC. The TMB found that serious damage had not been demonstrated by the United States, but it could not reach consensus on the existence of actual threat of serious damage. The TMB recommended further consultations between the two parties. A series of further consultations was held in which the United States put forward several new proposals as far as the level of the restriction was concerned. However, the parties failed to reach a mutually agreed solution. The restriction, augmented by the application of a growth rate of 6 per cent, was renewed for a 12-month period on 27 March 1996.

Main substantive claims

7.2 Costa Rica essentially claims before the Panel that the United States, by imposing a unilateral quantitative restriction on cotton and man-made fibre underwear classified in category 352/652, has acted in violation of Articles 2, 6 and 8 of the ATC. Costa Rica requests the Panel to recommend that the United States withdraw the measure in question.

7.3 The United States essentially claims that it respected its obligations under the ATC when imposing the restriction on cotton and man-made fibre underwear classified in category 352/652. Consequently, the United States requests the Panel to dismiss Costa Rica's claim.

7.4 There is no disagreement between the parties to the dispute that the restriction applied by the United States is a "transitional safeguard" and that transitional safeguards are to be applied in accordance with Article 6 of the ATC. In this respect, Costa Rica claims that the United States has violated a number of provisions of this Article. In particular, Costa Rica claims that the United States violated its obligations under Article 6 of the ATC by:

(a) imposing a restriction on imports from Costa Rica without having satisfied the conditions laid down in Article 6.2 and 6.4 of the ATC, namely by not having shown that serious damage or actual threat thereof resulted from those imports;


(b) not granting, when applying the restriction, more favourable treatment to re-imports from Costa Rica in contravention of Article 6.6(d) of the ATC;


(c) not consulting with Costa Rica on the issue of actual threat of serious damage contrary to its obligations under Article 6.7 and 6.10 of the ATC; and


(d) applying the restriction retroactively in contravention of Article 6.10 of the ATC.

Costa Rica also claims that the United States violated Articles 2 and 8 of the ATC. In this respect, Costa Rica claims that the United States violated Article 2.4 of the ATC which stipulates that: " [n]o new restrictions in terms of products or Members shall be introduced except under the provisions of this Agreement or relevant GATT 1994 provisions". With respect to the alleged violation of Article 8 of the ATC, Costa Rica essentially claims that the United States has not respected the recommendations made by the TMB in this case.

7.5 We will deal first with what we view as Costa Rica's basic claim under Article 6 of the ATC: that the United States imposed restrictions on imports into the United States of underwear without having demonstrated, as required by Article 6.2 and 6.4 of the ATC, that the US underwear industry had suffered serious damage from Costa Rican imports or that there was an actual threat of such damage. In considering this claim, we examine the issues in the following order: First we consider general interpretative issues. Second, we consider Costa Rica's basic claim by reviewing the findings by the US investigating authorities on serious damage attributed to Costa Rica. Third, we consider the question of actual threat of serious damage - a matter relating to the scope of Costa Rica's basic claim. Finally, we consider Costa Rica's other claims, namely, its claims with respect to Article 6.6(d) of the ATC, with respect to the alleged failure of the United States to consult, with respect to the alleged retroactive application of the US restriction, with respect to the alleged violation of Article 2.4 of the ATC and with respect to the alleged violation of Article 8 of the ATC.

B. GENERAL INTERPRETATIVE ISSUES

7.6 Before turning to the examination of the specific import restriction, we deal with four interpretative issues relating to the application of the ATC, namely:

(a) the standard of review that should be applied in this case;


(b) the burden of proof;


(c) the interpretation of the ATC; and


(d) the structure of Article 6 of the ATC.

Standard of Review

7.7 We note that the two parties to the dispute present diverging views with respect to the standard of review to be applied by the Panel in this case. The United States advocates a standard of review similar to that applied in the "Fur Felt Hat" case¹⁴, in which the neutral members of the Working Party, examining a US escape clause measure in light of the requirements of Article XIX of the General Agreement on Tariffs and Trade (GATT) 1947, afforded to the US authorities considerable discretion by concluding that the United States was not called upon to prove conclusively that the degree of injury caused or threatened in that case should be regarded as serious. Costa Rica argues in favour of a five-step procedure whereby the Panel would certify whether the administrative authority of the importing country, when imposing the restriction had: (i) complied with the ATC's procedural rules; (ii) properly established the facts; (iii) made an objective and impartial evaluation of the facts in the light of the rules of the ATC; (iv) properly exercised its discretion in the interpretation of the rules; and (v) complied with the rules in general, while also having complied with the other four requirements mentioned above.

7.8 We note that the ATC does not establish a standard of review for panels, contrary, for example, to the WTO Agreement on Implementation of Article VI of the General Agreement on Tariffs and Trade 1994, where Article 17.6 defines the standard of review that panels have to apply when reviewing cases arising under that Agreement. We further note that the DSU does not contain a provision mandating a specific standard of review.

7.9 In our view, the main relevant provision of the DSU in this respect is Article 11, which reads as follows:

"The function of panels is to assist the DSB in discharging its responsibilities under this Understanding and the covered agreements. Accordingly, a panel should make an objective assessment of the matter before it, including an objective assessment of the facts of the case and the applicability of and conformity with the relevant covered agreements, and make such other findings as will assist the DSB in making the recommendations or in giving the rulings provided for in the covered agreements".

7.10 In our opinion, a policy of total deference to the findings of the national authorities could not ensure an "objective assessment" as foreseen by Article 11 of the DSU. This conclusion is supported, in our view, by previous panel reports that have dealt with this issue, and most notably in the panel report on the "Transformers" case.¹⁵

7.11 The panel in the "Transformers" case was confronted with the argument of New Zealand that the determination of "material injury" by the competent New Zealand investigating authority could not be scrutinized by the panel. The "Transformers" panel responded to this argument as follows:

"The Panel agreed that the responsibility to make a determination of material injury caused by dumped imports rested in the first place with the authorities of the importing contracting party concerned. However, the Panel could not share the view that such a determination could not be scrutinized if it were challenged by another contracting party. On the contrary, the Panel believed that if a contracting party affected by the determination could make a case that the importation could not in itself have the effect of causing material injury to the industry in question, that contracting party was entitled, under the relevant GATT provisions and in particular Article XXIII, that its representations be given sympathetic consideration and that eventually, if no satisfactory adjustment was effected, it might refer the matter to the CONTRACTING PARTIES, as had been done by Finland in the present case. To conclude otherwise would give governments complete freedom and unrestricted discretion in deciding anti-dumping cases without any possibility to review the action taken in the GATT. This would lead to an unacceptable situation under the aspect of law and order in international trade relations as governed by the GATT".

7.12 We see great force in this argument. We do not, however, see our review as a substitute for the proceedings conducted by national investigating authorities or by the TMB. Rather, in our view, the Panel's function should be to assess objectively the review conducted by the national investigating authority, in this case the CITA. We draw particular attention to the fact that a series of panel reports in the anti-dumping and subsidies/countervailing duties context have made it clear that it is not the role of panels to engage in a de novo review.¹⁶ In our view, the same is true for panels operating in the context of the ATC, since they would be called upon, as in the context of cases dealing with anti-dumping and/or subsidies/countervailing duties, to review the consistency of a determination by a national investigating authority imposing a restriction under the relevant provisions of the relevant WTO legal instruments, in this case the ATC. In our view, the task of the Panel is to examine the consistency of the US action with the international obligations of the United States, and not the consistency of the US action with the US domestic statute implementing the international obligations of the United States. Consequently, the ATC constitutes, in our view, the relevant legal framework in this matter.

7.13 We have therefore decided, in accordance with Article 11 of the DSU, to make an objective assessment of the Statement issued by the US authorities on 23 March 1995 (the "March Statement) which, as the parties to the dispute agreed, constitutes the scope of the matter properly before the Panel without, however, engaging in a de novo review.¹⁷ In our view, an objective assessment would entail an examination of whether the CITA had examined all relevant facts before it (including facts which might detract from an affirmative determination in accordance with the second sentence of Article 6.2 of the ATC), whether adequate explanation had been provided of how the facts as a whole supported the determination made, and, consequently, whether the determination made was consistent with the international obligations of the United States.¹⁸ We note in this respect, that in response to a question by the Panel, the United States argued that the Panel had to examine whether the domestic authorities had based their determination on an examination of factors required by the ATC and whether the basis for the determination was adequately explained. In the US view, such an approach was compatible with the standard of review adopted in the "Fur Felt Hat" case.¹⁹

Burden of Proof

7.14 The parties to the dispute have divergent views on the question of burden of proof. The United States essentially argues that it is not its duty to re-establish the consistency of the restriction with the relevant rules of the ATC, since it has already established that in the March Statement. Costa Rica, on the other hand, insists that in accordance with Article 6.2 and 6.4 of the ATC, it is incumbent upon the United States to establish to the Panel's satisfaction that the conditions required before imposing a restriction have in fact been met.

7.15 We recall in this context that one of the central elements of the ATC is the prohibition, in principle, for Members to have recourse to any new restrictions beyond those notified under Article 2.1 of the ATC. Article 2.4 of the ATC reads as follows:

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


We further note that Article 6.2 of the ATC reads as follows:


"Safeguard action may be taken under this Article when, on the basis of a determination by a Member, it is demonstrated that..." (emphasis added).

7.16 In our view, Article 6 of the ATC is an exception to the rule of Article 2.4 of the ATC. It is a general principle of law, well-established by panels in prior GATT practice, that the party which invokes an exception in order to justify its action carries the burden of proof that it has fulfilled the conditions for invoking the exception. Consequently, in our view, it is up to the United States to demonstrate that it had fulfilled the requirements contained in Article 6.2 and 6.4 of the ATC in the March Statement which, as the parties to the dispute agreed, constitutes the scope of the matter properly before the Panel.

The Interpretation of the ATC

7.17 Article 3.2 of the DSU requires panels to interpret the covered agreements "in accordance with customary rules of interpretation of public international law". The customary rules of interpretation of public international law are embodied in the text of the Vienna Convention on the Law of Treaties (VCLT).²⁰

Article 31.1 of the VCLT reads:


"A treaty shall be interpreted in good faith in accordance with the ordinary meaning to be given to the terms of the treaty in their context and in the light of its object and purpose".

7.18 First, we pay attention to the phrase "ordinary meaning to be given to the terms of the treaty in their context". The reason why, in our view, particular attention is paid to the context is simply that the terms of a treaty should not be interpreted in isolation, but in their particular context in the entire agreement. We recall that Article 31.2 of the VCLT expressly defines the context of the treaty to include the text. Thus, it is clear that the entire text of the ATC is relevant in order to interpret Article 6.2 to 6.4 of the ATC.

7.19 Second, the overall purpose of the ATC is to integrate the textiles and clothing sector into GATT 1994. Article 1 of the ATC makes this point clear. To this effect, the ATC requires notification of all existing quantitative restrictions (Article 2 of the ATC) and provides that they will have to be terminated by the year 2004 (Article 9 of the ATC). The ATC allows adoption of new restrictions in addition to those notified under Article 2 of the ATC for products not yet integrated into GATT 1994 pursuant to Article 2.6 to 2.8 of the ATC only exceptionally and in accordance with the relevant provisions of the ATC or in accordance with the relevant provisions of GATT 1994. Article 2.4 of the ATC reads:

"...No new restrictions in terms of products or Members shall be introduced except under the provisions of this Agreement or relevant GATT 1994 provisions" (emphasis added).²¹

The exceptional nature of these restrictions is confirmed by the wording of Article 6.1 of the ATC which reads as follows:

"...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" (emphasis added).

7.20 Finally, we recall that the relevant provisions have to be interpreted in good faith. Based upon the wording, the context and the overall purpose of the Agreement, exporting Members can legitimately expect that transitional safeguards, adopted under Article 6 of the ATC, would only be applied sparingly in order to serve the narrow purpose of protecting domestic producers of like and/or directly competitive products. Exporting Members can, in other words, legitimately expect that market access and investments made would not be frustrated by importing Members taking improper recourse to such action.

7.21 We conclude from the interpretation of these provisions in the light of Article 31 of the VCLT that recourse to transitional safeguards should be taken on an exceptional basis only. Consequently, in our view, Article 6 of the ATC should be interpreted narrowly. This conclusion is consistent with the past practice of GATT panels.²²

The Structure of Article 6 of the ATC

7.22 Article 6.2 of the ATC conditions the application of a transitional safeguard on a finding that a product is being imported in such increased quantities so as to cause serious damage, or actual threat thereof, to the domestic industry producing like and/or directly competitive products. Article 6.2 of the ATC reads as follows:

"Safeguard action may be taken under this Article when, on the basis of a determination by a Member, it is demonstrated that a particular product is being imported into its territory in such increased quantities as to cause serious damage, or actual threat thereof, to the domestic industry producing like and/or directly competitive products. Serious damage or actual threat thereof must demonstrably be caused by such increased quantities in total imports of that product and not by such other facts as technological changes or changes in consumer preference".

Article 6.3 of the ATC contains an indicative list of economic variables that can be taken into account in order to assess the serious damage or actual threat thereof. After having satisfied the conditions of Article 6.2 of the ATC, Members must attribute the serious damage or actual threat thereof to a particular Member or Members, since, in accordance with Article 6.4 of the ATC, transitional safeguards "shall be applied on a Member-by-Member basis". Article 6.4 of the ATC reads as follows:

"Any measure invoked pursuant to the provisions of this Article shall be applied on a Member-by-Member basis. The Member or Members to whom serious damage, or actual threat thereof, referred to in paragraphs 2 and 3, is attributed, shall be determined on the basis of a sharp and substantial increase in imports, actual or imminent²³, from such a Member or Members individually, and on the basis of the level of imports as compared with imports from other sources, market share, and import and domestic prices at a comparable stage of commercial transaction; none of these factors, either alone or combined with other factors, can necessarily give decisive guidance. Such safeguard measure shall not be applied to the exports of any Member whose exports of the particular product are already under restraint under this Agreement."

7.23 The overall purpose of Article 6 of the ATC is to give Members the possibility to adopt new restrictions on products not already integrated into GATT 1994 pursuant to Article 2.6 to 2.8 of the ATC and not under existing restrictions, i.e., not notified under Article 2.1 of the ATC. Article 6 of the ATC, in our view, establishes a three-step approach which has to be followed for a new restriction to be imposed. Articles 6.2 and 6.4 of the ATC constitute the first two steps which, taken together, amount to a determination that serious damage has occurred or is actually threatening to occur and that it may be attributed to a sharp and substantial increase in imports from a particular Member or Members: No action can be taken on the basis of Article 6.2 alone.

7.24 A determination under Article 6.2 of the ATC is, therefore, a necessary but not sufficient condition to have recourse to bilateral consultations under Article 6.7 of the ATC. Only when serious damage or actual threat thereof has been demonstrated under Article 6.2 and has been attributed to a particular Member or Members under Article 6.4 of the ATC, can recourse to Article 6.7 of the ATC be made in a way consistent with the provisions of the ATC.

C. REVIEW OF THE FINDINGS BY THE US INVESTIGATING AUTHORITIES ON SERIOUS DAMAGE ATTRIBUTABLE TO COSTA RICAN IMPORTS

7.25 We now turn to an examination of Costa Rica's basic claim: that the United States imposed restrictions on imports of underwear into the United States without having demonstrated, as required by Article 6.2 and 6.4 of the ATC, that the US underwear industry suffered serious damage from Costa Rican imports. We first discuss the scope of the matter before us, i.e., the information that we will consider in our examination of Costa Rica's claim. We then undertake an objective assessment of the US action and its conformity with the ATC in accordance with the standard of review set out above. In this respect, we will examine the determination by the United States in respect of (i) whether the US industry suffered serious damage, (ii) the cause of the serious damage and (iii) the attribution of serious damage to Costa Rican imports.

The Scope of the Matter

7.26 We agree with the parties to the dispute that we should restrict our review to an examination of the March Statement. We believe that statements subsequent to the March Statement should not be viewed as a legally independent basis for establishing serious damage or actual threat thereof in the present case. A restriction may be imposed, in a manner consistent with Article 6 of the ATC, when based on a determination made in accordance with the procedure embodied in Article 6.2 and 6.4 of the ATC. This is precisely the role that the March Statement is called upon to play. Consequently, to review the alleged inconsistency of the US action with the ATC, we must focus our legal analysis on the March Statement as the relevant legal basis for the safeguard action taken by the United States.

7.27 Costa Rica submitted to the Panel information concerning the bilateral negotiations that took place between Costa Rica and the United States before and after the imposition of the restriction. More specifically, Costa Rica submitted information relating to settlement offers made by the United States concerning the level of the restriction to be imposed. In this respect, we note that Article 4.6 of the DSU reads as follows:

"Consultations shall be confidential, and without prejudice to the rights of any Member in any further proceedings."

In our view, the wording of Article 4.6 of the DSU makes it clear that offers made in the context of consultations are, in case a mutually agreed solution is not reached, of no legal consequence to the later stages of dispute settlement, as far as the rights of the parties to the dispute are concerned. Consequently, we will not base our findings on such information.

Serious Damage

7.28 Article 6.2 of the ATC authorizes safeguard action following a demonstration that a particular product is being imported in such increased quantities as to cause serious damage, or actual threat thereof, to the domestic industry. The factors that should be taken into account in order to establish serious damage are listed in Article 6.3 of the ATC, which reads as follows:

"In making a determination of serious damage, or actual threat thereof, as referred to in paragraph 2, the Member shall examine the effect of those imports on the state of the particular industry, as reflected in changes in such relevant economic variables as output, productivity, utilization of capacity, inventories, market share, exports, wages, employment, domestic prices, profits and investment; none of which, either alone or combined with other factors, can necessarily give decisive guidance" (emphasis added).

The United States determination in this regard is contained in the March Statement.

7.29 The March Statement included under the heading "Market Situation" one sub-heading entitled "Serious Damage to the Domestic Industry" (sub-heading A), which contained general information about the effect of underwear imports in Category 352/652, and a second sub-heading "Industry Statements" (sub-heading B), which summarized statements to the US authorities by individual US companies. To some extent, there was an overlap between the information contained under the two sub-headings. The same categories of information were equally discussed in a statement submitted to the TMB by the United States in July 1995 (the" July Statement"). While we have concluded that the July Statement should not be viewed as a legally independent basis for establishing serious damage or actual threat thereof, we feel that we can legitimately take the July Statement into account as evidence submitted by the United States in our assessment of the overall accuracy of the March Statement. Consequently, we will use the July Statement for this limited purpose only. By doing so, we do not share the concerns expressed by the United States that such use of the July Statement would impair proceedings in the TMB in the future. We consider that a reluctance to submit updated information would normally adversely affect Members concerned. The interest to cooperate as required by Articles 6.7 and 6.9 of the ATC would prevail.

7.30 In the following paragraphs, we evaluate the information in the March Statement in light of the economic variables listed in Article 6.3 of the ATC, to the extent and in the order that they were raised in the March Statement.

Overview

7.31 The March Statement under the heading "Industry Profile" refers to 395 establishments that manufacture cotton and man-made fibre underwear, while the July Statement under the same heading refers to "approximately 302 establishments". In our view, this basic and substantial inconsistency concerning the scope of the domestic industry raises serious questions about the accuracy of the information contained in the March Statement and the conclusion that serious damage exists.

Output (US Production)

7.32 The March Statement contains general information on the evolution of US production of underwear. In this connection, however, Costa Rica argues that the US restriction was introduced to protect the US fabric-producing industry and not the US underwear industry. We see two aspects to this argument. First, this argument may be viewed as a claim that the United States had not demonstrated the existence of serious damage to the US domestic industry producing products that were like and/or directly competitive with products imported from Costa Rica (i.e., underwear). In this connection, we do not see anywhere in the March Statement where fabric producers were treated as the domestic industry. Rather, the Statement consistently refers to the industry that manufactures "cotton and man-made fibre underwear", which is the subject of the restriction in question. The statistics all purport to relate to that industry. Thus, the claim by Costa Rica would seem to lack a factual basis.

7.33 There is, however, a second aspect to Costa Rica's argument. The parties agree that the industry situation within the United Sates is different between those manufacturers that produce underwear in a totally domestic process and those that utilize the outward processing regime ("807 or 807A trade"). The manufacturers in the latter category are engaged in the cutting process, while assembly of the cut pieces is contracted out to overseas manufacturers and then the finished products are re-imported by the US manufacturers for sale in the US market. It is quite possible that in the case of increased imports damage could occur to manufacturers in the former category, while those in the latter category could see their position improve. The March Statement contains no breakdown of the effect of imports on these two components of the US industry. That such an analysis would have been appropriate is indirectly confirmed by statements of the United States, which recognize that the nature of the effect of 807 or 807A trade on the domestic industry could be significantly different than non 807/807A trade (paragraph 5.158).

7.34 Finally, we would note that the general statistics on declining production of underwear only weakly support a demonstration of serious damage. For example, if those firms with declining underwear production shifted their capacity to other products (see below under "Utilization of Capacity", where this is reported as occurring), then it is quite possible that neither the firms nor their workers would be seriously damaged. This uncertainty about the relation of production declines to serious damage arises because of the limited statistics and cursory analysis contained in the March Statement.

Market Share (Market Share Loss/Import Penetration)

7.35 The March Statement contains general information on the market share of US underwear producers and on import penetration levels. As noted in the preceding paragraph, however, the failure of the March Statement to analyze the extent of 807 or 807A trade detracts from its conclusion that serious damage was caused by the increase in imports.

7.36 With respect to the US analysis of imports, Costa Rica argues the volume of importation is overstated because 807/807A trade should not be counted as imports by the United States. We disagree with this assertion. Article 6.6(d) of the ATC clearly acknowledges the possibility that Members might impose restrictions on re-imports "as defined by the laws and practices of the importing Member". According to the United States, 807/807A trade is considered as re-imports. Consequently, the United States could consider 807 and 807A trade originating in Costa Rica in its analysis of whether the US underwear industry had suffered serious damage and could impose a restraint on such trade, provided that the rest of the conditions of Article 6 of the ATC were met.

Employment

7.37 With respect to "Employment", the March Statement reads as follows:

"Employment in the US cotton and man-made fibre underwear industry dropped from 46,377 production workers in 1992 to 44,056 workers in 1994, a five percent decline and a loss of 2,321 employees".

The same heading in the July Statement reads as follows:

"Employment in the US cotton and man-made fibre underwear industry dropped from 35,191 production workers in 1992 to 33,309 workers in 1994, a five percent decline and a loss of 1,882 employees".

As we noted in respect of the general industry description discussed above, the extent of the discrepancy between the statistics in the March and July Statements, which purported to cover the same time period, raises questions about the accuracy of the information contained in the March Statement. This concern was not alleviated by the industry statement in sub-heading B since information as to employment was obtained from only two companies out of the more than 300 establishments in the industry, of which only one was apparently suffering damage. The March Statement reads in this respect as follows:

"... one company reported that employees were also being transferred to production of other types of garments. Employment losses have also occurred because of import-related plant closing. A company that has already closed two plants employing 165 workers is anticipating two additional closures in 1995 representing total employment of about 400".

Man-Hours

7.38 Under the heading "Man-Hours", the March Statement reads as follows:

"Average annual man-hours dropped from 86.2 million in 1992 to 81.5 million in 1994, a five per cent decline."

The same heading in the July Statement reads as follows:

"Average annual man-hours worked dropped from 65.4 million in 1992 to 61.6 million in 1994, a six per cent decline."

In our view, as expressed above, the extent of the discrepancy in the information included in the two statements casts doubts as to the sufficient accuracy of the data included in the March Statement.

Sales

7.39 The March Statement reads as follows:

"Sales have slowed, and one company reported that their sales were down about 17 per cent in 1994".

The information on only one company, however, does not suffice, in our view, to support the general statement that sales have slowed.

Profits

7.40 The March Statement reads as follows:

"Profits were down 18 per cent at one firm, and there is pressure on the bottom line throughout the industry due to rising costs and stiff import competition".

Again, information on only one company does not suffice, in our view, to support the general statement that profits were under "pressure" (whatever that may mean) generally.

Investment

7.41 The March Statement reads as follows:

"Because of the impact of imports and the uncertainty they have caused in the market, US companies generally have been postponing investment in this industry. Some companies have closed plants permanently or shifted production off-shore, and additional disinvestment of this nature is being contemplated by underwear manufacturing firms".

In our view, the information contained in this statement is not sufficiently conclusive. We fail to see, for reasons discussed above (paragraph 7.34), a sufficient causal link between imports and "postponing investment" in the US industry. Moreover, the second sentence of this statement is indefinite ("some companies") and merely speculative ("is being contemplated") and cannot support any definite conclusion on the reasons why investment were slowing down in the United States. Finally, we note the absence of any statistics on, or analysis of, the evolution of investment in the US industry.

Utilization of Capacity

7.42 The March Statement reads as follows:

"Because of the import competition, firms report shifting production capacity to other product lines including outerwear".

Again, the statement is vague as no quantification is given. Moreover, it is not clear that a shift of production, as opposed to a decline, would support the determination of serious damage in any event.

Prices

7.43 The March Statement indicates that the US producers' average price was $30.00 per dozen in 1994, while the July Statement indicates that the average US price was $20.00 per dozen. The extent of this discrepancy between the March and July Statements raises serious questions about the accuracy of the information contained in the March Statement.

7.44 In addition, in respect of "Prices", the March Statement reads as follows:

"Import prices in these sectors have been very low which has placed considerable pressure on domestic producers:

(a) Raw cotton costs in the United States have increased substantially, seriously eroding US underwear producers' margins. These cost increases have not been recouped because prices cannot be raised without becoming uncompetitive with imports.


(b) Competing imports enjoy a price edge over domestically produced goods because the imports are produced with lower priced foreign fabric which often reflects a subsidized cotton price. As a result of the increased import market share in underwear, average retail prices of underwear in the United States have generally declined during the past two years at a time when US manufacturers' costs, particularly for raw cotton, have increased substantially. This development has seriously eroded the profitability of US underwear manufacturing".

It could be argued that points (a) and (b) show that the damage to the US industry was not due only to imports, but also to increases in the US price for raw cotton. The relative importance of these two causes is not analyzed. There is, for example, no discussion of why US cotton prices increased and, more to the point, whether the price increases are expected to continue in effect. Moreover, to the extent that imports are 807A trade, the increase in cotton prices would be reflected in their prices as well, but here again there was no consideration of 807A trade in respect of this item. Finally, we find that the conclusion that profitability has been "seriously eroded" is not sufficiently precise to serve as a basis for establishing serious damage.

7.45 In conclusion, in our view, the information submitted in the March Statement under the heading "Market Situation" suffers from two important weaknesses: the information in some cases is inconsistent with other information later submitted by the United States to the TMB and in other cases is inadequate to demonstrate serious damage to the US industry. This latter problem is generally true in respect of the information supplied by specific companies in sub-heading B, where the March Statement typically refers to only one or two companies of indeterminate size or market share out of an industry consisting of 395 establishments. Moreover, while there are general statistics on declines in production and market share, there is no information at all on the general state and performance of the US underwear industry. For example, the discussion of profits in the industry refers to only one company. In this connection generally, we note that the TMB, in its more fact-intensive review in accordance with Article 8.3 of the ATC, has by consensus concluded in this case that there was absence of serious damage caused to the US industry. The weaknesses in the March Statement that are discussed above raise considerable doubts as to whether serious damage has been demonstrated. However, we refrain from making a finding on this point of law. The factors listed in Article 6.3 of the ATC do not provide sufficient and exclusive guidance in this case. We are, therefore, not in a position to conclude that the United States has failed to demonstrate serious damage or actual threat thereof.

Causality

7.46 In addition to establishing serious damage or actual threat thereof, the United States was required to demonstrate that such damage or threat was caused by imports. Article 6.2 of the ATC, second sentence, reads as follows:

"Serious damage or actual threat thereof must demonstrably be caused by such increased quantities in total imports of that product and not by such other factors as technological changes or changes in consumer preference" (emphasis added).

Nowhere in the March Statement could we find a discussion or demonstration of causality as required under this provision, beyond the mere statement that the imports were responsible for the damage. This assertion is inadequate, in our view, because of special factors affecting trade in underwear between the United States and a number of exporting Members including Costa Rica. (As noted above, most of this trade with Costa Rica -- at least 94 per cent -- is apparently 807 or 807A trade.) While such trade may certainly cause damage to the domestic industry, the nature of the trade is such that it may benefit the domestic firms that participate in it (see paragraph 7.44). Thus, in a discussion of whether such trade has caused serious damage, it is necessary to look at this trade to determine its effects on the industry. Because of the nature of the trade it is not possible in these circumstances to conclude from the simple fact that there has been a fall in production that there has also been serious damage. The March Statement undertakes no such discussion. Moreover, the March Statement suggests other possible causes of serious damage, such as rising cotton prices (see paragraph 7.44), but does not consider their role as a cause of such damage. Thus, it cannot be said that the March Statement "demonstrably" shows that serious damage was caused by increased levels of imports. We find, therefore, that an objective assessment of the March Statement leads to the conclusion that the United States failed to comply with its obligations under Article 6.2 of the ATC by imposing a restriction on imports of Costa Rican underwear without adequately demonstrating that increased imports had caused serious damage.

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

¹⁴ See "Report on the Withdrawal by the United States of a Tariff Concession Under Article XIX of the General Agreement on Tariffs and Trade", GATT document CP/106, adopted on 22 October 1951 (CP.6/SR.19), version published by the Secretariat in November 1951, preface by E. Wyndham White.

¹⁵ "New Zealand - Imports of Electrical Transformers from Finland", adopted on 18 July 1985, BISD 32S/55.

¹⁶ See the panel reports on "Korea - Anti-Dumping Duties on Imports of Polyacetal Resins from the United States", adopted on 27 April 1993, BISD 40S/205; "United States - Imposition of Anti-Dumping Duties on Imports of Fresh and Chilled Atlantic Salmon from Norway", adopted on 27 April 1994; "United States -Initiation of a Countervailing Duty Investigation into Softwood Lumber Products from Canada", adopted on 3 June 1987, BISD 34S/194.

¹⁷ A de novo review, if at all, is to be conducted by the TMB. Article 8.3 of the ATC reads as follows: "The TMB...shall rely on notifications and information supplied by the Members under the relevant Articles of the Agreement, supplemented by any additional information or necessary details they may submit or it may decide to seek from them". Article 8.5 of the ATC calls for a "thorough and prompt" review of the matter by the TMB.

¹⁸ This approach is largely consistent with the approach adopted by the panel reports cited in footnote 16, although it should be pointed out that the standard of review was expressed in slightly different terms in each of the aforementioned panel reports.

¹⁹ See paragraph 5.45 above.

²⁰ See the Appellate Body Decision on "United States - Standards for Reformulated and Conventional Gasoline" (WT/DS2/AB/R).

²¹ We note that a footnote to Article 2.4 of the ATC reads as follows: "The relevant GATT 1994 provisions shall not include Article XIX in respect of products not yet integrated into GATT 1994, except as specifically provided in paragraph 3 of the Annex".

²² See the panel reports on "Canada - Administration of the Foreign Investment Review Act (FIRA)", adopted on 7 February 1984, BISD 30S/140; "United States - Customs User Fee", adopted on 2 February 1988, BISD 35S/245; "Japan - Restrictions on Imports of Certain Agricultural Products", adopted on 22 March 1988, BISD 35S/163; "European Economic Community - Restrictions on Imports of Dessert Apples", Complaint by Chile, adopted on 22 June 1989, BISD 36S/93; "Canada - Import Restrictions on Ice Cream and Yogurt", adopted on 5 December 1989, BISD 36S/68; "European Economic Community - Regulation on Imports of Parts and Components", adopted on 16 May 1990, BISD 37S/132; "United States - Countervailing Duties on Fresh, Chilled and Frozen Pork from Canada", adopted on 11 July 1991, BISD 38S/30; "United States - Definition of Industry Concerning Wine and Grape Products", adopted on 28 April 1992, BISD 39S/436; "United States - Measures Affecting Alcoholic and Malt Beverages", adopted on 19 June 1992, BISD 39S/206.

²³ Footnote 6 accompanying this text reads: "Such an imminent increase shall be a measurable one and shall not be determined to exist on the basis of allegation, conjecture or mere possibility arising, for example, from the existence of production capacity in the exporting Members".