(Continued)

C. Claims of Error by the European Communities - Appellant

1. Relationship Between Article XIX of the GATT 1994 and the Agreement
on Safeguards

38. The European Communities appeals and requests the Appellate Body to reverse the Panel's conclusion that safeguard measures imposed after the entry into force of the WTO agreements which meet the requirements of the new Agreement on Safeguards also thereby satisfy the requirements of Article XIX of the GATT 1994, as well as the Panel's consequent refusal to rule on the European Communities' Article XIX claim. The European Communities further requests the Appellate Body to reverse the legal interpretations and findings made in support of this conclusion, notably the Panel's erroneous reference to the "express omission of the criterion of unforeseen developments" in the Agreement on Safeguards. The European Communities requests the Appellate Body to complete the Panel's reasoning and find, on the basis of the uncontested facts, that Argentina did not comply with the requirement contained in Article XIX:1(a) of the GATT 1994 to take safeguard measures only where the alleged increase in imports is "as a result of unforeseen developments".

39. The European Communities asserts that the requirement that increased imports result from "unforeseen developments" is a fundamental characteristic of safeguard measures, and lies at the beginning of the "logical continuum" of events justifying the invocation of the safeguard mechanism. This starts with a WTO Member incurring an obligation under the GATT 1994. After this obligation is implemented, an unforeseen development occurs, resulting in increased imports, which occur under conditions such that serious injury (or a threat thereof) is caused. In the view of the European Communities, if this chain of events has occurred, then a WTO Member may take a safeguard measure.

40. The European Communities is convinced that the WTO agreements are a "single undertaking" which constitutes an "integrated system". The requirement that increased imports must result from "unforeseen developments" and the other fundamental characteristics of safeguard measures were not expressly repeated in the Agreement on Safeguards because they did not need to be clarified, added to or modified.

41. The European Communities submits that there are four possible relationships between a provision of the GATT 1994 and an Agreement in Annex 1A of the Marrakesh Agreement Establishing the World Trade Organization (the "WTO Agreement"), namely: a conflict between provisions of the two texts; an overlap of provisions of the two texts³⁷; an express derogation in an Agreement in Annex 1A of the WTO Agreement that allows for a violation of the GATT 1994; and provisions that are complementary. The European Communities argues that the fourth option, i.e, complementary provisions, describes the relationship between Article XIX:1(a) and Article 2.1 of the Agreement on Safeguards, and should have formed the basis for the Panel's reasoning. The Appellate Body has confirmed in Brazil - Desiccated Coconut³⁸ and Guatemala - Antidumping Investigation Regarding Grey Portland Cement from Mexico ("Guatemala - Cement")³⁹ that provisions of the GATT 1994 and the relevant Agreement in Annex 1A of the WTO Agreement represent a package of rights and disciplines that must be considered in conjunction. Applying this to the present case, the European Communities argues that the Agreement on Safeguards does not supersede or replace the GATT 1994, and that it is possible to apply the conditions in the GATT 1994 and the Agreement on Safeguards together, because there is no formal conflict between them.

42. The European Communities argues that the ordinary meaning of the term "as a result of unforeseen developments" is "as a consequence of a sudden change in a course of action or events or in conditions that has not been foreseen".⁴⁰ The European Communities agrees that the opening phrase of Article XIX:1(a) of the GATT 1994 is relevant context for the "as a result of unforeseen developments" requirement, but comes to a conclusion opposite to that reached by the Panel. This phrase makes clear that there are two pre-conditions which need to be present before a safeguard action can be taken. Imports should increase as a result of unforeseen developments, and also as a result of the effect of tariff concessions or any other obligations under the GATT 1994.

43. The European Communities rejects the reasoning of the Panel on the object and purpose of the Agreement on Safeguards. In the view of the European Communities, the object and purpose of the Agreement on Safeguards is inherently linked with Article XIX of the GATT 1994, entitled "Emergency Action on Imports of Particular Products". (emphasis added) Therefore, safeguard measures are by definition a mechanism based on "emergencies": the very nature of a safeguard measure is to tackle an urgent situation which was not expected.

44. The European Communities is of the view also that the Panel mis-interpreted the 1951 Hatters' Fur case⁴¹ by stating that it "made it easier" to meet the "unforeseen developments" condition, and that the Panel wrongly gave credit to the view of one legal scholar that this case "essentially read the unforeseen developments condition out of the text of Article XIX:1(a) of GATT 1947".⁴² In fact, the Hatters' Fur Working Party confirmed the validity and relevance of the "as a result of unforeseen developments" requirement. The European Communities adds that further support for the continuing validity of the "as a result of unforeseen developments" requirement is found in recent texts of national legislation notified by WTO Members. Korea, Costa Rica, Norway, Panama and Japan have all incorporated the phrase in their national laws.

D. Arguments by Argentina - Appellee

1. Relationship Between Article XIX of the GATT 1994 and the Agreement on Safeguards

45. Argentina requests the Appellate Body to affirm the Panel's finding that "safeguard measures imposed after the entry into force of the WTO agreements which meet the requirements of the new Safeguards Agreement satisfy the requirements of Article XIX of GATT"⁴³ and to decline to consider the claims of the European Communities under Article XIX separately. Argentina maintains that the "unforeseen developments" requirement in Article XIX has not been included in the Agreement on Safeguards, and that this significant omission can only be attributed to the intention of Members to eliminate that requirement as a condition separate from and independent of the provisions of the Agreement on Safeguards.

46. Argentina finds no legal text or other element that supports the reasoning of the European Communities that there is a "logical continuum of events" that conditions the application of a safeguard measure and that begins with the condition that "unforeseen developments" must occur. To Argentina, it is clear that the Uruguay Round undertook to recast the disciplines governing the application of safeguard measures by clarifying, developing and, where appropriate, modifying some aspects of those disciplines. If the entire content of Article XIX were perfectly consistent with the Agreement on Safeguards, there would have been no need to include in Article 11.1(a) the reference to "provisions of that Article applied in accordance with this Agreement".

47. In Argentina's view, the fact that certain Article XIX provisions are not expressly incorporated in the Agreement on Safeguards does not support the position of the European Communities. For example, the concept of "emergency action" is incorporated by reference in Article 11.1(a), with the clarification that any measure of this kind must be applied in conformity both with the Agreement on Safeguards and with Article XIX, and the provision that safeguard
measures consist of the suspension of the relevant GATT obligation or the withdrawal or modification of the relevant concession appears in Article 8 of the Agreement on Safeguards. Similarly, the concept of "unforeseen developments" is now fully met once the conditions under Article 2 of the Agreement on Safeguards have been satisfied. Consequently, Argentina submits that it is clear that a situation in which a product is being imported "in such increased quantities" and "under such conditions" as to cause or threaten serious injury is now, by definition, an instance of "unforeseen developments" within the meaning of Article XIX and Article 2 of the Agreement on Safeguards.

48. Argentina argues that none of the four possible interpretations put forward by the European Communities constitutes the proper analytical approach based on Brazil - Desiccated Coconut. The panel in Brazil - Desiccated Coconut specifically rejected the notion that the Agreement on Subsidies and Countervailing Measures (the "SCM Agreement") merely imposed additional substantive and procedural obligations⁴⁴ or that a measure imposed under that Agreement and under Article VI of the GATT 1994 would necessarily be consistent with Article VI in isolation.⁴⁵ Argentina interprets this case to mean that Article VI in and of itself can no longer have an independent, separate meaning, and that both agreements must be considered in conjunction.⁴⁶

49. Argentina refers to the negotiating history of the Agreement on Safeguards in support of its position, noting that the June 1989 draft of that Agreement contained the concept of an "unforeseen increase � " in imports.⁴⁷ By mid-1990, though, all references to measures taken as a result of unforeseen or emergency situations had disappeared from the drafts of the Agreement on Safeguards.⁴⁸ Thus, in Argentina's view, the requirement that the increase in imports should result from unforeseen circumstances was expressly considered during the negotiation and intentionally left out of the text.

50. Argentina highlights the fact that the European Communities eliminated the "unforeseen developments" requirements from its domestic legislation on safeguards.⁴⁹ Argentina considers this to be proof that the European Communities did not itself consider that the requirement existed in the context of the new rights and obligations defined and interpreted in the Agreement on Safeguards.

51. Argentina requests that if the Appellate Body does not accept the Panel's interpretation, then, in the alternative, the Appellate Body should find that there is a "conflict" between the Agreement on Safeguards and Article XIX, and confirm that the Agreement on Safeguards takes precedence over Article XIX in accordance with the General Interpretative Note to Annex 1A. Finally, in the event that the Appellate Body finds that there is a separate obligation to verify the existence of unforeseen developments, Argentina requests, in the further alternative, that the Appellate Body find that Argentina did verify such unforeseen developments in its investigation. Argentina stated in its decision that "the pressure of imports was unforeseen on account of its rapid pace of increase at a time when the national economy was facing macroeconomic problems".⁵⁰

E. Arguments by the Third Participants

1. Indonesia

52. Indonesia agrees with the European Communities that Argentina's safeguard measure was "fatally flawed" because it was not imposed in response to "unforeseen developments" as required by Article XIX of the GATT 1994. Indonesia also joins the European Communities in its request that the Appellate Body complete the Panel's analysis and hold that Argentina acted in violation of Article XIX. In Indonesia's view, the Panel's treatment of Article XIX and the Agreement on Safeguards is in direct conflict with the construction of the relationship between the GATT 1994 and the Annex 1A Agreements by previous panels and by the Appellate Body. Referring to the panel report in European Communities - Bananas,⁵¹ as well as to the Appellate Body reports in Brazil - Desiccated Coconut⁵² and Guatemala - Cement,⁵³ Indonesia submits that the Panel erred in law when it refused to apply Article XIX and the Agreement on Safeguards together, giving meaning to all terms in both agreements. Indonesia adds that, by reading the "unforeseen developments" requirement out of the WTO system altogether, the Panel removed an important protection against abuse of the safeguard mechanism.

53. Indonesia submits that Argentina's interpretation of footnote 1 to Article 2.1 of the Agreement on Safeguards is incorrect. Footnote 1 relates to the imposition of a safeguard measure
by a customs union. Here, however, no action was taken by a customs union. Rather, Argentina independently investigated and imposed the safeguard measure on its own behalf. Footnote 1 says nothing about the obligations of, or any conditions affecting, a member of a customs union acting individually. For the same reason, even assuming arguendo that Argentina's interpretation of the negotiating history of footnote 1 is correct, it does not support Argentina's argument, because the language on which the parties allegedly could not reach agreement would not have applied to Argentina's actions in this case, i.e., to where a safeguard measure is applied by a state acting independently. Indonesia also questions whether Article XXIV is applicable to MERCOSUR, as the members of MERCOSUR did not notify the customs union under Article XXIV of either the GATT 1947 or the GATT 1994.

54. Indonesia adds that even if footnote 1 were somehow applicable to Argentina's action by virtue of its MERCOSUR membership, that footnote would only permit a derogation from the obligations contained in Article 2.1 of the Agreement on Safeguards. However, Argentina's independent imposition of a safeguard against only non-MERCOSUR countries violates Article 2.2, which obliges Members to apply safeguard measures in a nondiscriminatory fashion.

55. Indonesia maintains that the Panel's analysis of the "parallelism requirement" is best understood, not as an interpretation of the terms of the Agreement on Safeguards as such, but as an explanation of how - in practical terms - a Member can reconcile its WTO obligations under the Agreement with commitments that it may have made separately to members of its customs union. Argentina agreed with its fellow MERCOSUR members to refrain from applying safeguard measures against one another. That "extra-WTO" agreement, however, cannot exempt Argentina from its obligations vis-�-vis all other WTO Members under the Agreement on Safeguards.

56. Indonesia submits that the Panel properly refrained from conducting a de novo review of the determinations by Argentine authorities. In Indonesia's view, it was well within the scope of the Panel's authority to assess whether those determinations were reasonably supported by the results of the investigation. Moreover, Indonesia believes that, because Argentina failed to demonstrate "increased imports", failed to demonstrate "serious injury", and failed to demonstrate causation, the Panel correctly concluded that Argentina violated Articles 2 and 4 of the Agreement on Safeguards.

57. With respect to "increased imports", Indonesia characterizes Argentina's principal complaint as a belief that the Panel imposed new obligations on Members to use specific methodologies. In Indonesia's view, however, the Panel Report merely points out analytical flaws in Argentina's analysis; it is not fairly read as imposing specific requirements. Indonesia contends that Argentina ignored the "tense" of Article 2 of the Agreement on Safeguards - its focus on present and future rather than past events. In this respect, Indonesia points out that Argentina's failure to consult 1996 data did not itself constitute a violation of Article 2 and also that the Panel did not characterize it as such. The Panel simply found fault with Argentina's failure to weigh all the available data, particularly where the missing data would tend to contradict Argentina's finding of an "increase."

58. With respect to "serious injury", Indonesia underlines that Argentina failed to consider two factors that it was specifically required to evaluate under Article 4.2(a) - productivity and capacity utilization. Indonesia rejects Argentina's claim that it may pick and choose a priori the factors that it wishes to examine, and explain the relevance of those selected factors after the fact. Indonesia is also of the view that the Panel correctly held that Argentina relied on inadequate evidence even for those "serious injury" factors that it did choose to consider.

59. Indonesia submits that the Panel's conclusion that Argentina had not identified evidence or analysis on which it could reasonably base a determination of causation should also be upheld. Argentina failed to separate out the effects of other economic factors - such as the "tequila effect" - from the effects of footwear imports on the domestic industry. Indonesia agrees with the Panel that it is not enough simply to juxtapose the imports and the injury, and then to assert that there must be a link between them. If Argentina did not or cannot explain how the alleged increase in imports caused the alleged harm to its domestic manufacturers, then, Indonesia submits, the mere correspondence of these events in time will not support the imposition of a safeguard measure.

2. United States

60. The United States submits that the Panel correctly found that safeguard investigations conducted and safeguard measures imposed since the entry into force of the WTO agreements which meet the requirements of the Agreement on Safeguards also thereby satisfy the requirements of Article XIX of the GATT 1994. The United States requests the Appellate Body to uphold this ruling, as well as the Panel's consequent decision to decline to rule on the Article XIX claim by the European Communities.

61. The United States notes that while the Agreement on Safeguards defines "safeguard measures" as "those measures provided for in Article XIX", a number of the provisions of the Agreement, including Articles 2, 3, 4, 5, 7, 8.3, 9 and 10, either limit the rights provided in Article XIX or provide rights ruled out by Article XIX. In addition, the United States observes that the preamble of the Agreement refers to a "comprehensive agreement, applicable to all Members", and notes the need to re-establish control over safeguards measures and to eliminate grey-area measures. These objectives were achieved through an agreement that imposed new procedural requirements, enhanced transparency and consultation requirements, but loosened in some respects the strict requirements of Article XIX, while explicitly prohibiting grey-area measures. If it were possible for Members to pick and choose between the rights and obligations in the original package of Article XIX, and the rights and obligations in the Agreement on Safeguards, then the entire project represented by that Agreement would be revised post hoc, and the negotiated balance would be fundamentally upset.

62. The United States argues that the rebalancing of Article XIX was a fundamental premise of the negotiations on safeguards. Because of the problem of grey-area measures, the agreement had to be comprehensive and had to apply to all contracting parties. That rebalancing included the removal of the "unforeseen developments" condition for safeguard measures. Therefore, the text of Article XIX now cannot be read outside the context of the Agreement on Safeguards, and that Agreement now completely occupies the field of regulation of safeguard measures in the WTO system. The United States concludes that the omission of "unforeseen developments" from the Agreement was intentional, and that this express omission must be given meaning.

63. The United States notes that legal scholars agree that under the Agreement on Safeguards, "unforeseen developments" are no longer a prerequisite for a safeguard action,⁵⁴ and that state practice has also treated the question of "unforeseen developments" as "marginal, legally nonbinding or subsumed by other aspects of the safeguards process".⁵⁵ The United States underlines that the great majority of safeguards legislation notified to the WTO (including that of the European Communities) does not even refer to "unforeseen developments". With respect to the Hatters' Fur case of 1951⁵⁶, the United States considers that, while this case cannot contradict the substantive rebalancing that took place in the Uruguay Round, it does help to clarify the legal interpretation of "unforeseen developments" under the GATT 1947, the reasons why negotiators were willing to omit this concept from the Uruguay Round results, and how a determination which fully satisfies the requirements of Article 2.1 may also satisfy the "unforeseen developments" requirement.

64. With respect to the Panel's interpretation of footnote 1 to Article 2.1 of the Agreement on Safeguards, the United States refers to its view of the negotiating history of the footnote, as set out in extenso in paragraph 6.32 of the Panel Report and in footnote 396 to that paragraph. The United States emphasizes the reason why this footnote follows the word "Member": due to the unique status of the European Communities in the GATT, and to the fact that the European Communities did take safeguards measures, a special provision was needed to deal with the application of safeguards by the European Communities.

65. The United States also notes that Argentina and the Panel have wrongly referred to Article XXIV of the GATT 1994. In the view of the United States, MERCOSUR has never been notified under Article XXIV. The parties to MERCOSUR have chosen to notify it instead exclusively under the Decision on Differential and More Favourable Treatment, Reciprocity and Fuller Participation of Developing Countries⁵⁷(the "Enabling Clause"). The United States contends that, having made this legal choice, Argentina is now precluded from basing its arguments on the assumption that MERCOSUR is an Article XXIV agreement, and that, therefore, the fourth sentence of footnote 1 to Article 2.1 of the Agreement on Safeguards is legally irrelevant in this case.

66. The United States submits that the Panel identified and applied the proper standard of review. A fair reading of the Panel Report demonstrates that the Panel did not, as Argentina alleges, engage in de novo review or construct alternate methodologies that it then concluded Argentina had failed to satisfy. Rather, the Panel properly examined whether Argentina had evaluated the relevant evidence, reached conclusions that were reasonably supported by the evidence, and adequately explained the reasoning set forth in its findings and conclusions. On this basis, and in keeping with the applicable standard of review, the Panel properly concluded that Argentina's actions were inconsistent with Articles 2 and 4 of the Agreement on Safeguards.

67. With respect to "increased imports", the United States emphasizes that the Panel did not re-evaluate the facts or impose a specific methodology for collecting or evaluating the evidence. The Panel did not conclude that an end point analysis is per se inconsistent with the Agreement on Safeguards. Rather, the United States believes, the contrary evidence on interim periods was so significant that, in the absence of an explanation in Argentina's determination concerning how it had evaluated that contrary evidence, the Panel could not conclude that Argentina's determination that imports had increased constituted an objective evaluation of the record as a whole.

68. The United States argues also that the Panel properly found that Argentina's conclusions with respect to "serious injury" were not adequately supported by the evidence. The Panel's determination that, under Article 4.2(a), a Member must evaluate all relevant factors is consistent with past panel practice, including United States - Underwear and United States - Shirts and Blouses.⁵⁸ The United States also rejects as without merit Argentina's attacks on the Panel's determination that Argentina's findings and conclusions were not adequately explained and supported by the evidence.

69. On the question of causation, the United States notes that Argentina alleges inter alia that the Panel articulated a series of "new standards" that Argentina had to satisfy, rather than analyzing the adequacy of Argentina's actual decision. However, the United States asserts that the Panel's determination makes clear that what is at issue is Argentina's failure to provide sufficient evidence to justify its decision. The United States concludes that the Panel correctly found that Argentina's measure cannot be sustained where the underlying decision does not demonstrate that Argentina considered the relevant evidence and provided a reasoned explanation of its conclusions.

III. Issues Raised In This Appeal

70. This appeal raises the following issues:

(a) whether the Panel exceeded its terms of reference in its consideration of Article 3 of the Agreement on Safeguards;

(b) whether the Panel erred: in concluding that "safeguard investigations conducted and safeguard measures imposed after the entry into force of the WTO agreements which meet the requirements of the new Safeguards Agreement satisfy the requirements of Article XIX of GATT"; in its consequent refusal to consider the EC's claims under Article XIX of the GATT 1994; and in its conclusion that the phrase "as a result of unforeseen developments" in Article XIX:1(a) of the GATT 1994 was "expressly omitted" from the Agreement on Safeguards and, therefore, has no relevance for a safeguard measure imposed under the Agreement on Safeguards;

(c) whether the Panel erred in its interpretation and application of Article 2 of the Agreement on Safeguards and Article XXIV of the GATT 1994 as these provisions relate to the application of the safeguard measure at issue in this case;

(d) whether the Panel: enunciated and applied the correct standard of review in this case; erred in its interpretation and application of the conditions for imposing a safeguard measure set forth in Articles 2 and 4 of the Agreement on Safeguards, in particular, increased imports, serious injury and causation; and set out a "basic rationale" for its findings as required by Article 12.7 of the DSU.

IV. Terms of Reference

71. Argentina argues, on appeal, that the Panel violated Article 7.2 of the DSU and exceeded its terms of reference, because the Panel not only considered, but also relied on, alleged violations of Article 3 of the Agreement on Safeguards even though the request for the establishment of a Panel submitted by the European Communities only alleged violations of Articles 2 and 4 of the Agreement on Safeguards. Argentina maintains, in particular, that the Panel's references to Article 3 contained in paragraphs 8.205, 8.207, 8.218 and 8.238 of the Panel Report⁵⁹ demonstrate that the Panel relied on obligations contained in Article 3 in reaching its conclusion that Argentina did not act in compliance with its obligations under Article 4.2(c) of the Agreement on Safeguards.

72. Article 4.2(c) of the Agreement on Safeguards provides as follows:

The competent authorities shall publish promptly, in accordance with the provisions of Article 3, a detailed analysis of the case under investigation as well as a demonstration of the relevance of the factors examined. (emphasis added)

Article 3 provides, in relevant part:

1. � The competent authorities shall publish a report setting forth their findings and reasoned conclusions reached on all pertinent issues of fact and law.

73. We have examined the specific paragraphs in the Panel Report cited by Argentina, and we see no finding by the Panel that Argentina acted inconsistently with Article 3 of the Agreement on Safeguards. In one instance⁶⁰, the Panel referred to Article 3 parenthetically in support of its reasoning on Article 4.2(a) of the Agreement on Safeguards. Every other reference to Article 3 cited by Argentina was made by the Panel in conjunction with the Panel's reasoning and findings relating to Article 4.2(c) of the Agreement on Safeguards. None of these references constitutes a legal finding or conclusion by the Panel regarding Article 3 itself.

74. We note that the very terms of Article 4.2(c) of the Agreement on Safeguards expressly incorporate the provisions of Article 3. Thus, we find it difficult to see how a panel could examine whether a Member had complied with Article 4.2(c) without also referring to the provisions of Article 3 of the Agreement on Safeguards. More particularly, given the express language of Article 4.2(c), we do not see how a panel could ignore the publication requirement set out in Article 3.1 when examining the publication requirement in Article 4.2(c) of the Agreement on Safeguards. And, generally, we fail to see how the Panel could have interpreted the requirements of Article 4.2(c) without taking into account in some way the provisions of Article 3. What is more, we fail to see how any panel could be expected to make an "objective assessment of the matter", as required by Article 11 of the DSU, if it could only refer in its reasoning to the specific provisions cited by the parties in their claims.

75. Consequently, we conclude that the Panel did not exceed its terms of reference by referring in its reasoning to the provisions of Article 3 of the Agreement on Safeguards. On the contrary, we find that the Panel was obliged by the terms of Article 4.2(c) to take the provisions of Article 3 into account. Thus, we do not believe that the Panel erred in its reasoning relating to the provisions of Article 3 of the Agreement on Safeguards in making its findings under Article 4.2(c) of that Agreement.