V MAIN ARGUMENTS OF THE PARTIES

A. Introduction

5.1 The Panel noted that India had arranged its first submission in a sequence beginning with general points on the safeguard mechanism followed by arguments on burden of proof and standard of review (Part A). This was followed by an argument that the safeguard action on which the United States sought consultations was not the safeguard action endorsed by the TMB (Part B). There then followed the claim that the United States had failed to demonstrate serious damage in the consultations and, therefore, had acted inconsistently with Article 6 of the ATC (Part C); a consideration of supplementary information (Part D) and retroactive application (Part E). In this descriptive part of the Panel's report, much of India's structure has been used, but not fully. Rather, the descriptive part follows the approach adopted by the Panel in setting out its findings which, it was considered, would facilitate in relating the arguments of the parties to the Panel's findings on these arguments.

B. Burden of Proof

5.2 India argued that the United States bore the burden of proving that it had met the requirements of Article 6 of the ATC. The CONTRACTING PARTIES to GATT 1947 had consistently found that exceptions must be interpreted narrowly and that the party invoking an exception bore the burden of proving that it had met the legal requirements justifying the invocation. India referred to two documents in this context (BISD 30S/140 and 36S/345). Based on this principle alone, the Panel would need to find that it was the United States that bore the burden of proving that it had made the determination in accordance with Article 6 of the ATC. Moreover, Article 6.2 of the ATC clearly permitted safeguard action only if it was demonstrated that an increase in imports caused serious damage or actual threat thereof. It was, consequently, up to the Member taking safeguard action to make that demonstration. This followed not only from the general principle of law recognized by panels but also from the text of Article 6.2 of the ATC itself. It permitted safeguard action by a Member when "... 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 ..." and goes on to state that "[s]erious damage or threat thereof must demonstrably be caused by such increased quantities ...". The requirement to demonstrate an increase in imports, serious damage and the causal link between the two was clearly a requirement imposed on the Member that chose to apply the safeguard action, not on the Member(s) against which the action was directed.

5.3 India also considered that the Member invoking Article 6 of the ATC had the possibility to make the demonstration by submitting positive evidence on the basis of data it had collected. If the Member against which the action was taken had to bear the burden of proof, it would have to demonstrate the negative, which was often impossible, on the basis of the data available to it which were likely to be more limited than those available to the importing Member. The purpose of Article 6 of the ATC, which was to impose a strict discipline on the use of safeguards could, therefore, not be achieved if the burden of proof was shifted from the importing to the exporting Members.

5.4 The United States argued that, consistent with accepted GATT 1947 dispute settlement practice which had been carried over in the WTO, the burden was on India in the first instance to make a prima facie case that the United States' application of a transitional safeguard on imports of woven wool shirts and blouses from India had been inconsistent with the ATC. The language of Article XXIII of GATT 1994 and practice under GATT 1947 supported this principle. Article XXIII of GATT 1994, as referenced in Article 8.10 of the ATC, provided recourse to a dispute settlement proceeding when a Member considered that any benefit accruing to it directly or indirectly was being nullified or impaired as a result of the failure of another Member to carry out its obligations under that Agreement. In this case, India had the initial burden of demonstrating that the United States had failed to carry out its obligations under the ATC and, in the view of the US, India had failed to sustain that burden.

5.5 The United States further argued that the burden was not on the US to re-demonstrate that its actions were justified. The ATC allowed a Member to impose a safeguard when it had determined that imports were causing or threatened to cause serious damage to its market. It was the view of the United States that the task of the Panel was to determine whether India had advanced facts which provided convincing evidence that it was unreasonable for the United States to determine, in accordance with Article 6.2 and 6.3 of the ATC, that the adverse effects of increased woven wool shirt and blouse imports on the US domestic industry amounted to serious damage or actual threat thereof. If India had not advanced such evidence, then the Panel should find that the determination under Article 6.2 of the ATC had been properly made and was consistent with the United States' obligations under the ATC. A similar examination should be applied with respect to determinations under Article 6.4 of the ATC.

5.6 The United States considered that India's argument that the ATC was an exception to GATT 1994 and that this "inconsistency" was sufficient to place the burden on the defending Member to establish conformity with ATC obligations would overturn the balance of this Agreement and many of the other Multilateral Trade Agreements. In this respect the ATC was similar, for example, to the Agreement on the Application of Sanitary and Phytosanitary Measures, the Agreement on Technical Barriers to Trade and the Agreement on Safeguards and the Agreement on Trade-Related Aspects of Intellectual Property Rights.

C. Standard of Review

5.7 In the view of India, there was no standard of reasonableness foreseen in the ATC and given the highly exceptional character of the ATC's safeguard provisions, it would be legally inadmissible to "import" into the ATC the standard of review included at the request of the United States in the Anti-Dumping Agreement⁵. In fact, the Ministerial Decision on Review of Article 17.6 of the Agreement on Implementation of Article VI of the General Agreement on Tariffs and Trade 1994 clearly implied that this standard was relevant only for the Anti-Dumping Agreement and that it had no general applicability. According to the DSU, the dispute settlement system served, inter alia, to clarify the provisions of the WTO agreements "in accordance with the customary rules of interpretation of public international law".⁶ According to general principles of international law, every treaty must be performed in good faith.⁷ The task of the Panel was, consequently, to ascertain whether the United States had carried out its obligations under Article 6 of the ATC in good faith. India was not requesting the Panel to conduct a de novo review of the matter and to replace the United States' determination by its own, but was asking the Panel to objectively assess, in accordance with Article 11 of the DSU, whether the United States had made its determination in accordance with its obligations under Article 6 of the ATC.

5.8 In a response to the Panel, India pointed out that in applying the United States' domestic law, in particular the law governing the review of anti-dumping and countervailing duty actions, courts had accorded deference to administrative agencies in accordance with the "Chevron doctrine". Courts did not review whether the agency administering anti-dumping or countervailing duties had interpreted the law correctly, but whether its interpretation was reasonable. Similarly, United States courts did not examine whether the agency had applied the law correctly but whether their application was reasonable. The notion of "reasonableness" was, thus, used to define the scope of a legal doctrine that had created considerable scope of discretion for agencies and a significant shift of power from the courts to the executive branch. Article 17 of the Anti-Dumping Agreement was a reflection of the "Chevron doctrine". During the course of the proceedings of this Panel, the United States, without referring to Article 17 of the Anti-Dumping Agreement directly, had presented arguments to the Panel which, if accepted, would constitute an incorporation of the principles of that provision into the ATC.

5.9 The United States argued that all parties to an agreement must apply it in good faith. This was an important principle in treaty and domestic contract law. Making a determination in a reasonable manner and in good faith followed from the first step of applying a treaty in good faith. It did not "replace" the obligation to apply a treaty in good faith. The United States had stated that, in applying the provisions of Article 6 of the ATC in good faith, it had made a reasonable determination after examining relevant data that a transitional safeguard was necessary. It had also followed Article 6.7 of the ATC and ultimately Article 6.10 when no mutual solution was reached with India. The TMB findings required under Articles 6.10 and 8 of the ATC had supported the US application of the safeguard.

5.10 The United States further argued that there was no need for a specific provision on standard of review in the ATC or in any other agreement, although the negotiators of the Anti-Dumping Agreement had seen the need to negotiate a specific standard of review for those cases because of the nature and problems found in the anti-dumping area. The standard of review in Article 17.6 of that Agreement was not relevant in this matter and the United States had not advanced that standard for this case. The US had not cited any anti-dumping or subsidy case law, as India had done. India's assertion that the United States had sought to apply anti-dumping and subsidy standards to this case was incorrect.

5.11 India recalled that the role of panels was, according to Article 3.2 of the DSU, to preserve the rights and obligations of WTO Members. If this Panel were to sanction "reasonable" deviations from the requirements set out in Article 6 of the ATC rather than determine whether they had been observed in good faith or if it were to sanction an exercise of discretion on the grounds that it was "reasonable" rather than determine whether the Member had exercised it in good faith, it would effectively diminish the rights and obligations of Members and, therefore, act inconsistently with that basic principle of the DSU. The text of the ATC clearly delineated the range of discretion available to Members making determinations for the purpose of imposing safeguard actions. If the Panel were to expand that range by applying the notion of reasonableness, it would be acting without any basis in the text of the ATC and contrary to the general principles of international law and it would, therefore, not be finding and confirming the existing WTO law, as was its task. Rather, it would be inventing new law which no Member had accepted. This could not, in India's view, but undermine the Members' confidence in the newly established dispute settlement procedures.

5.12 The United States reiterated that the appropriate standard of review was one of reasonableness and good faith examination of the data. The principle of "good faith" application of treaties was relevant, but it was argued that this principle was integral to the standard of reasonableness. One resulted from the other. The US considered it self-evident that all Members must follow the international law principle of good faith application of treaties and in doing so they must come to "reasonable" conclusions based on the examination conducted. The United States had applied the ATC consistently with that entire precept. Referring first to the relevant Uruguay Round principles other than under the ATC, it was noted that Article 3.1 of the DSU provided that: "Members affirm their adherence to the principles for the management of disputes ... applied under Articles XXII and XXIII of GATT 1947, and the rules and procedures as further elaborated and modified herein." Article XVI:1 of the Agreement Establishing the WTO also provided that "[e]xcept otherwise provided under this Agreement or the Multilateral Trade Agreements, the WTO shall be guided by the decisions, procedures and customary practices followed by the CONTRACTING PARTIES to GATT 1947 and the bodies established in the framework of GATT 1947".

5.13 The United States also noted that Article 3.2 of the DSU provided, in part, that:

"The Members recognize that [the dispute settlement system of the WTO] serves to preserve the rights and obligations of Members under the covered agreements, and to clarify the existing provisions of those agreements in accordance with customary rules of interpretation of public international law. Recommendations and rules of the DSB cannot add to or diminish the rights and obligations provided in the covered agreements."

It was, therefore, clear under Article 3.2 of the DSU that while WTO dispute settlement also served to clarify provisions of covered agreements, the process could not add to or diminish the rights and obligations provided in those agreements.

5.14 The United States further pointed out that Article 11 of the DSU provided, in part, that:

"... 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".

Article 11 of the DSU incorporated paragraph 16 of the 1979 GATT Understanding Regarding Notification, Consultation, Dispute Settlement and Surveillance.⁸ The drafters of the DSU had sought to make the DSU a comprehensive text incorporating all prior codification efforts on dispute settlement. The CONTRACTING PARTIES to GATT 1947 had intended the 1979 Understanding and its annex to reflect customary practice and improvements in practice, including the standard of review enunciated in the 1951 GATT working party report concerning the withdrawal by the United States under Article XIX of a tariff concession on women's fur felt hat and hat bodies (Fur Felt Hat case).⁹

5.15 The United States argued that, in sum, an objective assessment by the Panel, in accordance with Article 11 of the DSU, required examining whether the United States had acted consistently with the requirements of the ATC and in good faith and whether the determination was reasonable in light of the data before the investigating authority.

The Fur Felt Hat Case

5.16 The United States argued that the Fur Felt Hat case provided authoritative guidance from GATT 1947 practice and procedures concerning the standard of review to apply in this case. The standard of review enunciated in that case was also consistent with principles of international law concerning the good faith application of treaties. The Fur Felt Hat case suggested that this Panel must determine whether the United States had applied the provisions of Article 6 of the ATC in good faith and had made a reasonable or good faith assessment of the facts to make the determinations required of it under Article 6 of the ATC. Article 6 stated that "[s]afeguard action may be taken ... when, on the basis of a determination by a Member, it is demonstrated...". Clearly the focus of the ATC was on a determination made by the importing Member based on data available. While the Fur Felt Hat Working Party had examined action taken under Article XIX:1 of GATT 1947, the determination required in that case in GATT 1947 practice was similar to the determination required under Article 6.2 of the ATC.¹⁰

5.17 In that case the Czechoslovak Government had sought a determination that the United States invocation of Article XIX had been improper and had asserted that the United States had not met certain conditions under Article XIX to take action, seeking revocation of the measure. The Working Party had rejected the Czechoslovak argument and stated:

"... it may be observed that the Working Party naturally could not have the facilities available to the United States authorities for examining interested parties and independent witnesses from the United States hat-making areas, and for forming judgements on the basis of such examination. ...Moreover, the United States is not called upon to prove conclusively that the degree of injury caused or threatened in this case must be regarded as serious; since the question under consideration is whether or not they are in breach of Article XIX, they are entitled to the benefit of any reasonable doubt."¹¹

5.18 The United States argued that, just as in this case, the information examined by the Fur Felt Hat Working Party as a basis for its conclusions, although strong, was not perfect; for instance the US authorities had failed to separate figures on production of men's and women's hat bodies. However, the Working Party decided that "the available data support[ed] the view that increased imports caused or threatened some adverse effect on United States producers."¹² The Working Party further determined that the United States' authorities in that case had investigated the matter thoroughly "on the basis of the data available to them at the time of their enquiry and had reached in good faith the conclusion that the proposed action fell within the terms of Article XIX ...".¹³ The reasoning of the Fur Felt Hat Working Party applied to the standard of review the Panel must follow in the present case.

5.19 In the view of the United States, the regime now governing textile and clothing trade in the WTO was a safeguards regime, just as Article XIX of GATT 1994 and the Agreement on Safeguards was a safeguards regime. Both regimes permitted a Member to restrict trade in fairly traded goods on the basis of a determination made by a Member, subject to certain limitations. The textile regime diverged from Article XIX of GATT 1994 but many of its basic concepts depended on the fundamental concepts behind Article XIX. Where the negotiators had indicated their desire that the two regimes differ, the difference in rights and obligations provided in the negotiated text must be respected. However, the Fur Felt Hat case, an accepted precedent which predated the divergence between the two regimes, was persuasive in interpreting the provisions in both, or either, of these regimes concerning the initial decision to take a safeguard action. Guidance from that case did not involve wholesale incorporation of Article XIX of GATT 1994 or Agreement on Safeguards principles or the issue of compensation and non-discriminatory treatment as India would argue.

5.20 The United States noted that, in its first submission, India had argued that the standard for the Panel's review should not include any examination of the reasonableness of the determination, but should instead focus on whether the authorities had carried out their obligations "in good faith", as did the Working Party in the Fur Felt Hat case. Although the US disagreed with India's position with regard to the role of reasonableness, it did agree that good faith application of the ATC's provision was a relevant yardstick for Panel review. "Good faith" had been defined as "in accordance with standards of honesty, trust, sincerity etc. ...".¹⁴ For the Panel to determine whether the authorities had carried out their obligations "in good faith", it did not need to ascertain whether the Panel would have reached the same determination as the authorities. Instead, the Panel would examine the basis for the authorities' conclusions, including an examination of the data upon which the authorities had relied, in order to determine whether the determination reflected a good faith application of the ATC standards. In this case the US authorities had exercised their discretion and followed the relevant ATC provisions in complete good faith.

5.21 The United States argued, therefore, that the reasoning of the Fur Felt Hat case applied equally to the case presented to the Panel. Since the key question was whether the determination by the US Committee on the Implementation of Textile Agreements (CITA) was consistent with the requirements of Article 6.2 and 6.3 of the ATC, the relevant question to be considered was not whether serious damage or threat of serious damage currently existed, but whether CITA had determined reasonably and in good faith that it existed at the time of the CITA determination in April 1995. The CITA determination could, therefore, only be evaluated on the basis of data existing at that time. The data presented later to the TMB in fact had corroborated the analysis done in April 1995.

5.22 India pointed out that no GATT 1947 panel had followed the approach of the Fur Felt Hat Working Party. In fact, the panels on New Zealand - Imports of Electrical Transformers from Finland and Canadian Countervailing Duties on Grain Corn from the United States had fully reviewed the importing countries' actions without applying a standard of review and had imposed on the importing countries the duty to establish all the facts on which they had based their actions. The disciplines applied by those GATT 1947 panels in the cases of actions against dumped and subsidized trade should, as a minimum, be applied in the case of discriminatory actions against exports of textiles and clothing that were neither dumped nor subsidized. India further argued that to transpose the criteria applied in the Fur Felt Hat case to action under the ATC would be legally incorrect.

5.23 The United States rejected India's comment, above, that the Fur Felt Hat case was legally incorrect in these proceedings. That case involved review of safeguard action at a time when the review would have been similar in the textile context. Certainly dumping cases with a standard of review different from Article 17.6 of the Anti-Dumping Agreement were no longer applicable in dumping cases, and it was questioned why India's use of New Zealand Transformers or the principles it wished to interpose in this case, a textiles safeguard case, should be any better. In essence, while the standard in the Fur Felt Hat case might be modified by the specific provisions of the Agreement on Safeguards, principles not relevant to actions taken under that Agreement were useful here. Instead, India had resurrected the standard pre­Article 17.6 of the Anti-Dumping Agreement, in a case close to first impression, involving a special safeguard for textiles and clothing.

5.24 Also with respect to the Fur Felt Hat case, India considered that its findings had been overtaken by the Agreement on Safeguards, which declared in its Article 4 that injury determinations for the purpose of Article XIX action may only be made if an investigation by the importing Member demonstrated, on the basis of objective evidence, that a rise in imports had caused serious injury. The legal situation in which the Fur Felt Hat criteria were developed were, therefore, not analogous to the situation arising under Article 6 of the ATC and not even analogous to the situation arising under Article XIX as interpreted by the Agreement on Safeguards. The analogy the United States wished the Panel to draw was, for these reasons, misplaced. The criteria set out in the Fur Felt Hat case were, therefore, no longer part of the law of the WTO. Moreover, the findings of that Working Party related to a safeguard mechanism under which the WTO Members adversely affected by the safeguard action may take compensatory action; the ATC's safeguard mechanism, however, did not authorize textile exporting Members to take compensatory action. It would, for this reason alone, be inappropriate to accord to Members invoking the ATC safeguards provisions, under which no compensation was due, the latitudes they had under Article XIX of GATT 1994. India also considered that it had demonstrated that it would be legally incorrect and illogical if the Panel were to infer, just because both the Fur Felt Hat case and the case before it concerned safeguard actions, that the standard of review applied in the Fur Felt Hat case must also be applied in the present case.

5.25 In response to these views, the United States argued that this case was close to a case of first impression and it had cited and sought guidance from a GATT 1947 safeguard case that was most comparable to the situation faced in making safeguard determinations under the ATC. It was incorrect for India to state that no GATT 1947 panel had followed the approach of the Fur Felt Hat Working Party and that it was no longer part of the law of the WTO. GATT precedent interpreting Article XIX:1 (for instance, as recorded in the chapter on Article XIX in the GATT Analytical Index) consisted almost entirely of the findings and recommendations of this Working Party. Under Article XVI:1 of the Agreement Establishing the WTO, the WTO and its Members were to be guided by the decisions, procedures and customary practices of the GATT 1947 system. Article 3.1 of the DSU stated the same. The Fur Felt Hat decision had continuing relevance even after negotiation of the new Agreement on Safeguards.

5.26 The United States further argued that the standards for safeguard action provided in the Agreement on Safeguards reflected a shift in focus incorporating the jurisprudence of the Fur Felt Hat case. These standards were not phrased in terms of facts that the importing Member must prove, if necessary, to a panel. Rather, they were phrased explicitly in terms of the investigation to be undertaken by the competent authorities in the importing Member. Thus, a panel's evaluation of measures taken pursuant to the Agreement on Safeguards should follow the approach taken in the Fur Felt Hat case.

5.27 The United States also referred to India's point regarding compensation in respect of a safeguard action and noted that pursuant to Article 8.2 of the Safeguards Agreement, there was no right to compensation for a period of three years. It was no coincidence that this was the maximum duration of a restraint pursuant to Article 6 of the ATC. There was no significant loss of "GATT rights" in this respect. India's arguments regarding the need for multilateral approval if a Member wished to take a safeguard action without payment of compensation were simply incorrect. The situation was also the same in respect of dispute settlement. Under both the ATC and the Safeguards Agreement parties had recourse to Article XXIII dispute settlement. Moreover, before the Safeguards Agreement and the ATC, the MFA had permitted recourse to Article XXIII dispute settlement. The US drew the Panel's attention to Article 11.10 of the MFA. Therefore, the legal situation for safeguards under Article XIX of GATT 1994, for purposes of the discreet discussion of standard of review, was no more analogous than any other case law.

D. Article 6 of the ATC

The ATC Safeguard Mechanism

5.28 India argued that the transitional safeguard mechanism established under the ATC was an exception to the basic principles of the General Agreement and the general safeguard provisions of Article XIX of GATT 1994 and it must be interpreted accordingly. Article XI of GATT 1994 provided for a general prohibition of quantitative restrictions; one of the exceptions to this general prohibition was Article XIX of GATT 1994, which permitted safeguard actions in the form of quantitative restrictions. However, such restrictions must be imposed consistently with Article XIII of GATT 1994, that is, non-discriminatorily. The textiles and clothing sector had, however, remained outside the GATT system for a long time and the ATC set out provisions to be applied by Members for the integration of the textiles and clothing sector into GATT 1994 during a transitional period. The scheme of the ATC was that all quantitative restrictions maintained under the provisions of the MFA and in effect on the day before the entry into force of the WTO Agreement would be governed by the provisions of the ATC (Article 2.1) and that no new restrictions would be introduced except under the provisions of the ATC or GATT 1994 (Article 2.4). The ATC envisaged, in respect of safeguard action, that Article XIX of GATT 1994 would apply in respect of products already integrated into GATT 1994, while Article 6 of the ATC would apply in respect of products yet to be integrated into GATT 1994. Article 6 of the ATC established a transitional safeguard mechanism that permitted WTO Members not only to impose quantitative restrictions inconsistently with Article XI of GATT 1994 but also to do so on a "Member-by-Member" basis, which were the terms used in Article 6.4 of the ATC to describe discriminatory actions inconsistent with Article XIII of GATT 1994.

5.29 India further argued that to impose burdens on particular exporters not because they engaged in dumping or benefitted from subsidies but merely because they were more efficient than others was contrary to the basic purpose of the multilateral trading order. There was, therefore, no other provision in the whole of the WTO legal system that permitted the imposition of restraints on imports from a particular WTO Member merely because it caused, or threatened to cause, damage to a domestic industry. The drafters of the ATC had explicitly recognized the exceptional character of the transitional safeguard in Article 6.1 of the ATC, according to which that safeguard "should be applied as sparingly as possible".

5.30 The United States argued that, in the present case, it had faithfully applied the procedures of, and its action was fully consistent with, Article 6 of the ATC. Article 6 should be interpreted in accordance with the ordinary meaning of its terms, in their context and in light of the ATC's object and purpose. Article 31.1 of the Vienna Convention provided that: "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." Applying these principles, the ordinary meaning of the actual terms of Article 6.2 of the ATC was simply that a safeguard action may be taken based on a Member's determination that demonstrated that the requisite conditions of serious damage or actual threat thereof caused by increased import quantities existed and that the serious damage or actual threat thereof was properly attributable to the Member against which the measure had been applied. There was no basis in the text of Article 6 to assume that it must be interpreted narrowly or as an exceptional provision.

5.31 In the view of India, the highly exceptional character of the transitional safeguard in Article 6 of the ATC must be taken into account in interpreting that provision. GATT 1947 panels had repeatedly recognized that exceptions must be interpreted narrowly (see for instance BISD 30S/140 and 36S/345). This principle must be particularly strictly applied in the case of a provision which constituted not only an exception to the principles set out in Article XI of GATT 1994 but also to those set out in its Article XIII. This implied, inter alia, that it would be legally incorrect to weaken the disciplines established under Article 6 of the ATC by extending to the transitional safeguard mechanism, by analogy, legal principles developed under other safeguard provisions of the WTO legal system.

5.32 The United States argued that the safeguard mechanism in Article 6 of the ATC must be viewed as an integral part of the ATC and not as a "highly exceptional" provision. The Uruguay Round negotiators had designed the ATC to balance the interests of predominantly exporting Members and predominantly importing Members until the 10-year transitional period was over. Exporting Members were guaranteed that by 1 January 2005, all textile and clothing products would be subject to normal GATT rules. In addition, they were guaranteed that, where applicable, during the transition, products under quota would enjoy accelerated growth in access. Exporting Members were also guaranteed that specified percentages of products listed in the Annex to the ATC would be integrated into GATT 1994 in three stages. Once such products were integrated, quotas could not be maintained or placed on them except pursuant to Article XIX of GATT 1994. Importing Members, for their part, were provided with a special mechanism for safeguard actions that could be used during the 10-year transitional period if they were faced with serious damage or an actual threat thereof to their producers as a result of sharply increased imports. This balance of interests between accelerated quota growth and specified integration for the exporting Members and a special safeguard mechanism for the importing Members had enabled all sides to agree to the ATC.

5.33 India disagreed with the US view that importing Members had obtained the right to take safeguard action in exchange for accelerated quota growth and specified integration for the exporting Members. This argument overlooked the fact that the restraints applied under the MFA were inconsistent with the obligations of importing countries under GATT 1947. The removal of quotas provided for under the ATC in the textiles and clothing sector was not trade liberalization. Furthermore, India did not accept that the safeguard mechanism must be viewed as an integral part of the ATC and not as a "highly exceptional" provision; rather, India, while accepting that the safeguard provision was an integral part of the ATC, considered that it was also an exception to the basic principles of the GATT and the general safeguard provisions of Article XIX of the GATT and must be interpreted accordingly by the Panel.

5.34 On this aspect, the United States considered the context, object, and purpose of Article 6 of the ATC to be important. The ability to respond to import surges through the application of a transitional safeguard action was a key concession made in the Uruguay Round negotiations to predominantly importing Members. It counterbalanced the substantial - and irreversible - trade liberalization that was set out elsewhere in the ATC. For this reason, Article 6 of the ATC occupied a central position in the operation of the ATC during the 10-year transitional period. It would not be consistent with the circumstances of the negotiations to unduly circumscribe the manner in which Article 6 was interpreted. The reference in Article 6.1 of the ATC to the fact that the transitional safeguard "should be applied as sparingly as possible" did not alter this result. The phrase did not speak to how Article 6 should be interpreted with regard to a specific instance of serious damage, or actual threat thereof. The term "sparing" comes directly from Article 3.2 of the MFA. Under the MFA and now under the ATC, "sparing" did not and does not amount to abstaining from taking safeguard action when the requirements in Article 6 of the ATC were fulfilled.

5.35 The United States also pointed out that imports of woven wool shirts and blouses from India had increased 414 per cent from the year ending January 1994 to year ending January 1995. There was a definite decline in US domestic production concurrent with this surge in imports which compelled a finding of serious damage or actual threat thereof to the domestic industry. In making that determination, the US had followed all of the necessary procedures in the ATC in good faith - taking into account some of the relevant factors listed in Article 6.3 of the ATC for which published information was available as well as information from contacts with producers on other factors for which published information was not available. The reasonableness of this determination was further illustrated by the fact that the TMB, comprised of members from exporting and importing Members, had reached a consensus supporting the application of a safeguard action by the United States.

Legal Analyses of Serious Damage or Actual Threat Thereof Suggested by the Parties

5.36 India argued that the onus of demonstrating serious damage or its actual threat was on the importing Member which had to choose at the beginning of the process whether it would claim the existence of serious damage or of actual threat. These were not interchangeable because the data requirements would vary with the chosen situation. Actual threat could only be established by the necessary data on imminent measurable imports, without which, the demonstration of actual threat was likely to be based on conjecture and not on concrete facts.

5.37 The United States argued in response that Article 6 of the ATC did not require it to choose between serious damage or actual threat thereof and there were no criteria, definitions or otherwise that separated the phrase "serious damage, or actual threat thereof". Nor had any such criteria existed under the MFA from which this phrase and the criteria in the ATC came. The tests suggested by India which supplied criteria for serious damage and threat separately did not exist in the ATC. In particular, no separate test for actual threat was negotiated into the text of the ATC. Since the TMB must examine "serious damage, or actual threat thereof.", it was not constrained to make a finding based on whether a Member alleged both or not and the ATC did not require the TMB and the investigating authorities to choose between serious damage or actual threat. The ATC also did not require the TMB to make a finding based on the entire phrase.

5.38 India insisted that the ATC did delineate between serious damage and actual threat thereof. This delineation was reflected in the routine practice of the TMB to distinguish between serious damage and actual threat thereof in its recommendations. Therefore, if the TMB had actually come to the conclusion that a situation of "serious damage" existed, it would have said so in it findings. Since the TMB had not said in its finding that a situation of "serious damage" had been demonstrated, it was obvious that they did not consider that a situation of "serious damage" had been demonstrated. By comparing the manner in which the TMB had given its findings in respect of a number of other cases, it became clear that if the TMB had come to the conclusion that "serious damage" had been demonstrated, it would not have give the finding that "actual threat of serious damage" had been demonstrated.

5.39 India referred to the specific safeguard action on which the United States and India had held consultations in June 1995 and noted that it was an action based on a determination of serious damage while the TMB had endorsed, in August 1995, an action based on alleged actual threat of serious damage. India considered that the United States must have had doubts as to the legal justification of its determination of serious damage and the adequacy of its data because, when the US measure was reviewed by the TMB, it made the claim that imports from India had also presented an actual threat of injury and the United States had presented entirely new data. The TMB endorsed that new claim but not the one on which India and the United States had held consultations. The Diplomatic Note of the United States conveying its request for consultations had included a "Statement of Serious Damage" but it had not included any statement claiming an actual threat of serious damage. The safeguard action on which the United States had held consultations was thus an action allegedly designed to remedy the serious damage to the domestic industry which had already been caused by imports from India. The limited amount of data that had been made available during the consultations all related to the actual state of the industry and the imports that had already taken place. Besides, the Public Notice of CITA, dated 17 May 1995 (published in the US Federal Register on 23 May 1995), only mentioned "serious damage to the US industry producing woven wool shirts and blouses". Under these circumstances, the request by the United States could only be understood by India as a request concerning serious damage and India, therefore, examined the request only from that angle. Not having obtained the TMB's endorsement of the determination on which it had held consultations with India, the United States should have immediately withdrawn its safeguard action.

5.40 India also claimed that since the safeguard action endorsed by the TMB was an action on which the United States had never held any consultations with India, it therefore, never had any opportunity to challenge such action. India was of the view that the TMB had committed a serious error in failing to recognize that a situation of serious damage and a situation of actual threat of serious damage were two entirely different matters. A claim of serious damage must be accompanied by a demonstration that serious damage had already occurred and consequently substantiated according to Article 6.7 of the ATC by "specific and relevant factual information" related to that claim. In the case of serious damage, a retrospective analysis was required and the issue was: what damage had already been caused by imports? A claim of actual threat of serious damage must be accompanied by a demonstration that the domestic industry had reached a vulnerable stage and was on the brink of serious damage, so that any further sharp and substantial increase in imports would push the industry into a state of serious damage. In the case of actual threat, a prospective analysis must be performed and the issue was: which imports were imminent and what damage were they likely to cause? Different facts had to be demonstrated for each case and a consultation on serious damage could, therefore, not be deemed to comprise a consultation on threat of serious damage.

5.41 Furthermore, in the view of India, the footnote to Article 6.4 of the ATC clarified that the imminent increase in imports shall be measurable and shall not be determined to exist on the basis of allegation, conjecture or mere possibility. There were two elements in this type of situation: "imminence" in terms of time and "measurable" in terms of quantity. Imminent and measurable imports could be deduced from circumstances such as: goods were already on the high seas and due to arrive in the immediate future or when measurable quantities of goods had been delivered at the dockside for shipment or when the goods had been firmly contracted and were awaiting shipment, etc. The measurable quantities should be large enough to satisfy the stipulation of "sharp and substantial increase in imports".

5.42 The United States accepted that the Market Statement had referenced only "serious damage." However, the use of this shorthand phrase in the initial document was of no substantive consequence and was quickly corrected. The United States had expressly informed India in its diplomatic note that the case was based on the existence of "serious damage, or actual threat thereof" and during consultations the United States had explained to India all of the factors for its determination. India had also complained that the US had not expressly examined each and every factor listed in Article 6.3 of the ATC, but had failed to show why the US was required to do so. Article 6.3 referred to "such relevant economic variables as" those listed and that "none of [these factors] either alone or combined with other factors, can necessarily give decisive guidance". The United States clearly had examined factors "such as" the listed factors. The issue was not whether the US had discussed a particular set of factors in its entirety (even where data on some factors might not have been available), but whether the United States' examination was sufficiently meaningful so as to reasonably support the finding and to constitute a good faith application of the Article 6 standard.

5.43 In a response to the Panel, the United States pointed out that at no time before the TMB proceeding had India taken issue with the reference in the US diplomatic note requesting consultations on the basis of serious damage or actual threat thereof or that the shorthand had been used in the text of the Market Statement. India also had not asked the United States to clarify whether it had chosen between serious damage or threat in light of the apparent different reference in the Diplomatic Note and the April Market Statement. India had only asserted this point during the TMB proceeding. The United States Diplomatic Note to India was the official request for consultations. The reference to serious damage or actual threat thereof was always in the Diplomatic Note, therefore, no "correction" was necessary. In response to a question from India, the United States also explained that, in its view, India was aware that the entire phrase was the basis for the call, especially since neither the ATC nor the MFA, which had used the same phrase as a definition of "market disruption," separated the two or provided different criteria for each.

5.44 With respect to the above, India considered that no correction to the terminology in the Market Statement was possible since the Diplomatic Note which preceded the Market Statement transmitted a determination that had already been made and that determination related to serious damage only. The nature of that determination could not be changed through the Diplomatic Note transmitting it. India had to conclude, therefore, that an alleged situation of serious damage and not actual threat thereof, was the basis for the United States' request for consultations and for the substantive discussions during those consultations. The distinction between serious damage and actual threat thereof only became an issue in this case at the time of the TMB review.

5.45 The United States insisted that it had followed all procedures required under Article 6.2 and 6.3 of the ATC. The safeguard standard was "serious damage, or actual threat thereof."¹⁵ Article 6.2 of the ATC provided, in part, that:

"...safeguard action may be taken under this Article when, on the basis of a determination by a Member, [footnote omitted] 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 factors as technological changes or changes in consumer preferences".

5.46 The United States further submitted that Article 6 of the ATC provided no separate definition or separate factors applying to actual threat of serious damage as distinguished from serious damage. The phrase "serious damage, or actual threat thereof" was derived from the definition of market disruption in Article 3 of Annex A of the MFA. There, too, no separate factors for the two elements had been provided and the MFA's TSB had never supplied any. Article 6.3 of the ATC set out various factors for determining serious damage or actual threat thereof, resulting from increased quantities in total imports. That Article provided that:

"[i]n 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".

5.47 In the view of the United States, the statement prepared by CITA had included sufficient information to justify its finding. Concerning serious damage or actual threat thereof caused by total imports, Article 6.2 and 6.3 of the ATC, the facts were, as provided in the Market Statement, that when CITA made its determination: (i) there was a surge in total imports of 94 per cent for the year ending January 1995 compared to the year ending January 1994; (ii) there was serious damage or actual threat thereof to US production of woven wool shirts and blouses as a result of that massive increase in total imports; (iii) the products involved were "like" and/or "directly competitive" woven wool shirts and blouses; US manufacturers competed with imports from India and other suppliers and were sold to the same stores; and (iv) there were adverse effects on investments, market share, employment (about 6 per cent of the workers in the woven wool shirt industry lost their jobs from 1994 to 1995 as a result of imports), in this small and volatile US industry. More specifically, the US found that imports of category 440 had surged from 44,363 dozen in 1992 to 141,569 dozen in 1994. At the same time data showed that production, after slightly rising in 1993, had suffered a decline of 8.4 per cent in 1994. Production continued to decline in 1995, 5.3 per cent below the year ending June 1994 level. Market share of domestic manufacturers declined, employment declined, investment, profits and capacity were adversely impacted by imports of category 440.

TO CONTINUE WITH USA - MEASURE AFFECTING IMPORTS OF WOVEN WOOL SHIRTS AND BLOUSES FROM INDIA

⁵ Agreement on Implementation of Article VI of the General Agreement on Tariffs and Trade 1994.

⁶ Article 3:2 of the DSU.

⁷ See Article 26 of the Vienna Convention on the Law of Treaties.

⁸ L/4907, adopted 28 November 1979.

⁹ GATT/CP/106, report adopted on 22 October 1951, Sales No. GATT/1951-3.

¹⁰ In fact, fur felt hats and hat bodies are listed as products covered under the ATC in the ATC Annex. Such products would have, for the United States, been subject to the ATC Article 6 safeguard mechanism, but the United States has integrated the product into GATT 1994 in accordance with Article 2 of the ATC. Article XIX now applies again to those products for the United States.

¹¹ Fur Felt Hat at paragraph 30.

¹² Id.

¹³ Id. at paragraph 48.

¹⁴ Webster's Encyclopedic Unabridged Dictionary of the English Language (1989).

¹⁵ Article 3 of the MFA provided that action could be taken to limit exports "causing market disruption as defined in Annex A..." Annex A of the MFA set forth a test for "market disruption," which was based on the existence of "serious damage to domestic producers or actual threat thereof". Annex A also sets forth factors for a determination similar to those found in Articles 6.3 and 6.4 of the ATC.