UNITED STATES - TRANSITIONAL SAFEGUARD MEASURE ON
COMBED COTTON YARN FROM PAKISTAN

AB-2001-3
 

Report of the Appellate Body

(continuation)

 

3. Attribution of Serious Damage

25. The United States requests that the Appellate Body reverse the Panel's findings concerning the attribution of serious damage under Article 6.4 of the ATC. The Panel incorrectly interpreted Article 6.4 to require attribution to all Members causing serious damage or actual threat thereof. The Panel, therefore, erred in concluding that the United States' attribution of serious damage and actual threat thereof to Pakistan was inconsistent with Article 6.4 of the ATC because it did not examine the effect of imports from Mexico and possibly other Members individually. Article 6 does not require identification of, and attribution to, the individual Members from whom imports cause serious damage or actual threat thereof. Causation is determined under Article 6.2 of the ATC on the basis of total imports and not on the basis of individual imports. Article 6.4 does not deal with "causation", but establishes the methodology for determining to which Member(s) to assign the serious damage and actual threat thereof and, in turn, to apply the transitional safeguard measure to such Member(s). The United States claims the Panel misunderstood the two distinct concepts of causation and attribution. 

26. The United States points out that the transitional safeguard mechanism envisaged under Article 6 is a non-most-favoured-nation safeguard mechanism and that the plain language of 
Article 6.4 requires the application of a transitional safeguard measure on a Member-by-Member basis. This precludes the requirement that (i) an importing Member attribute serious damage individually to all exporting Members that individually cause or contribute to the serious damage, or (ii) an importing Member attribute serious damage individually to all exporting Members that meet the criteria of Article 6.4. The United States adds that the negotiating history indicates that the drafters of the ATC rejected such an approach. Article 6.4 of the draft agreement in the Chairman's Text of the Negotiating Group on Textiles and Clothing, which had provided that the Member invoking a safeguard measure "shall determine the party or parties contributing to the serious damage … through a sharp and substantial increase in imports",²¹ was not retained. 

27. The United States further submits that its interpretation of Article 6.4 is consistent with the context of that provision. For example, Article 6.6 requires the importing Member to account for and provide special treatment to certain Members in applying a transitional safeguard measure. 
Article 6.1 exhorts importing Members to apply transitional safeguard measures "as sparingly as possible". The United States argues that under the Panel's interpretation, Members would be bound to contravene these requirements by applying the transitional safeguard to all those Members meeting the criteria of Article 6.4. 

28. According to the United States, the Panel's interpretation of Article 6.4 is inconsistent with the object and purpose of the ATC, which is to provide for a safeguard mechanism during the transition period for the integration of the textiles and clothing sector into the GATT 1994. The requirement to attribute serious damage and actual threat thereof to all Members whose imports cause serious damage would increase the burden imposed on importing Members and would undermine the responsiveness and value of the transitional safeguard mechanism. The United States adds that the Panel overlooked how Article 6.4 relates to the carefully negotiated balance of rights and obligations set out in the ATC.

29. The United States also argues that the Panel erred in relying primarily on non-transitional WTO agreements in making its findings under Article 6.4 of the ATC. Under customary rules of treaty interpretation, the Panel should have first and foremost interpreted the ordinary meaning of the terms of Article 6.4 in the light of their context and the object and purpose of the ATC. Appellate Body jurisprudence underscores this requirement²² as well as the need to remain within the "four corners" of the ATC.²³ In contrast, the Panel attempted to impute to the ATC words and concepts from the Agreement on Safeguards in the guise of "context" and thereby disregarded the unique, non-most-favoured-nation transitional safeguard mechanism under Article 6 of the ATC. The Panel conducted its analysis as if the textiles and clothing sector was already integrated into the GATT 1994 and as if the GATT 1994 rules already applied to it. The ATC intentionally created a mechanism different from Article XIX of the GATT 1994 and the Agreement on Safeguards for products not yet integrated into the GATT 1994. In addition, the Agreement on Safeguards, pursuant to its Article 11.1(c), does not apply to transitional safeguard measures taken under Article 6 of the ATC. 

30. In conclusion, the United States claims that Article 6.4 of the ATC requires only a consideration of the factors enumerated therein as it relates to the Member or Members to whom the importing Member attributes serious damage and actual threat thereof. In the present case, the United States attributed serious damage and actual threat thereof to Pakistan based on each of the relevant requirements of Article 6.4. To require more ¾ such as an individual assessment of each exporting Member meeting the criteria of Article 6.4 ¾ would, in the United States' view, impute words and concepts into the ATC that are not there. 

B. Arguments by Pakistan - Appellee

1. Standard of Review

31. Pakistan submits that the United States' claims and arguments are largely based on a mischaracterization of the Panel's rulings. There is nothing in the Panel's findings to suggest that a panel may conduct a de novo review of the determination of the competent authority. On the contrary, the Panel specifically stated that the competent authority's determination under 
Article 6.2 may not be reviewed in the light of subsequent events or developments. 

32. According to Pakistan, the Panel ruled that it may, consistently with Article 11 of the DSU, examine evidence not available or submitted to the competent authority at the time of the investigation for the sole purpose of determining whether the substantive conditions for safeguard action were satisfied at that time. Pakistan points out that, in its ruling, the Panel further considered such evidence to be relevant under Article 6 of the ATC only if it related to crucial or decisive facts that were in existence at the time of the investigation. 

33. In Pakistan's view, is not entirely clear whether the United States uses the term "evidence" in a general sense (any fact capable of furnishing a proof) or in a legal sense (statement or document submitted as a means of ascertaining the truth). The United States also does not distinguish clearly between facts that did not exist at the time of the investigation (subsequent developments) and facts that could not be demonstrated at the time of the investigation (for which evidence subsequently emerged). Therefore, when the United States requests the Appellate Body to rule that panels should not consider evidence that was not in existence at the time of the determination of the competent authority, one does not know to which category of facts the United States refers. According to Pakistan, the United States' argument implies that a safeguard measure imposed in error need not be brought into conformity with the ATC, and may be maintained.

34. Pakistan contends that the United States confuses the question of which evidence a panel must consider pursuant to Article 11 of the DSU with the question of whether the evidence submitted by the complainant supports a finding of inconsistency of a transitional safeguard measure with Article 6 of the ATC. The United States also confuses the question of a panel's de novo review of the competent authority's appreciation of the facts with the question of a panel's assessment of whether the facts invoked to justify a safeguard measure ever existed. According to Article 3.2 of the DSU, the dispute settlement system of the WTO "serves to preserve the rights and obligations under the covered agreements". Pakistan, therefore, points out that the ruling the United States is seeking from the Appellate Body would diminish the rights of Members under Article 6 of the ATC by curtailing the competence of panels under Article 11 of the DSU. 

35. To illustrate its argument, Pakistan submits the following hypothetical example: the United States determined, on the basis of data provided by the American Yarn Spinners Association ("AYSA") (the complainant before the competent authority), that the domestic production of yarn has declined by 50 percent. The United States Bureau of Census data, published subsequent to the determination of the competent authority, show that AYSA had provided incorrect data and that the domestic production had in fact increased by 50 percent. These newly available data leave no doubt that imports of yarn did not cause serious damage to the domestic yarn industry. Pakistan submits that, according to the contention of the United States, if the United States nevertheless maintains the safeguard measure and Pakistan brings a complaint under the DSU, the panel examining this complaint would be barred from considering the new Census data.

36. In Pakistan's view, the United States' arguments imply that a Member may impose a safeguard measure whenever a competent authority could legitimately conclude, on the basis of the facts before it, that the conditions for taking a safeguard action under Article 6 are met. However, Article 6.2 states that such an action may be taken "when, on the basis of a determination by a Member, it is demonstrated " (emphasis added) that increased imports cause serious damage or actual threat thereof. A determination that was based on completely false data does not provide the required demonstration. The role of a panel is not merely to make an objective assessment of the competent authority's investigation. The basic issue is whether the Member invoking Article 6 had the right to take the safeguard action. Therefore, in Pakistan's view, the challenge to an Article 6 safeguard measure does not necessarily call into question the integrity of the original investigation conducted by the competent authority. 

37. Finally, Pakistan points out that, in contrast to other WTO agreements providing for safeguards or contingency protection, the ATC does not establish any specific requirements for public notice and comment during the investigation. In the case of many safeguard measures under Article 6, there will be evidence that only the exporting Member can furnish (for instance, its own statistics on recent exports) and that is, therefore, not "available" to the competent authority, under the procedures it is permitted to follow under the ATC. There will also be evidence that only the exporting Member has an interest in generating (such as precise data on plant closures) and which was, therefore, not "in existence" at the time of the investigation. If the United States' contentions were accepted, such evidence could be submitted, neither before the competent authority, nor before a panel, even though such evidence may be crucial or decisive in determining the conformity of a safeguard measure with the substantive requirements of Article 6.

2. Definition of the Domestic Industry

38. Pakistan submits that the Panel correctly interpreted the phrase "like and/or directly competitive products". According to the ordinary meaning of these words, the domestic industry to be examined includes all domestic manufacturers that produce: (i) a product "like" the imported product; (ii) a product directly competitive with the imported product; or (iii) both a product that is "like", and a product that is directly competitive, with the imported product. Pakistan contends that with such an interpretation, the term "and" is given meaning and effect and is, contrary to the assertions of the United States, not reduced to inutility. 

39. Pakistan also submits that vertically integrated producers manufacturing yarn for internal consumption, rather than for sale on the merchant market, cannot be excluded from the domestic industry. The interpretation of the term "to produce", suggested by the United States, implying that vertically integrated fabric producers are part of the fabric ¾ not yarn ¾ industry, cannot be reconciled with the purpose of Article 6.2 of the ATC. An establishment producing yarn for processing into fabric can suffer damage both as a result of rising yarn imports and as a result of rising fabric imports. Article 6.2 is meant to permit safeguard action in both situations. However, no safeguard measure could be imposed to protect vertically integrated establishments if the yarn they manufacture for internal consumption were not "produced" in the sense of Article 6.2 as contended by the United States. Pakistan adds that the United States' interpretation of the term "producing" would, in effect, as the Panel correctly found, equate "producing" with "selling". ²⁴

40. In support of its argument that the Panel correctly interpreted Article 6 of the ATC in the context of the WTO Agreement in its entirety, notably Article III of the GATT 1994, Pakistan submits that the Panel noted the differences in the terms and facts at issue in Korea - Alcoholic Beverages and the present case, and based its conclusions only on the common features. The examination of the ATC, in the light of other WTO agreements, is called for under customary rules of treaty interpretation and is also required by the terms of the ATC itself. In the view of Pakistan, the Panel correctly concluded that captively produced yarn and imported yarn are "directly competitive", even if they are not actually competing with each other for any given sale. In Korea - Alcoholic Beverages, the Appellate Body noted that the dictionary meaning of the term "competitive" is "characterised by competition", and concluded there from that products are competitive if they are interchangeable on the market. In examining whether a product is competitive, both latent and extant demand must, therefore, be considered. ²⁵

41. Pakistan further submits that the Panel correctly rejected the contention of the United States that fabric producers which manufacture the yarn they consume are hermetically segregated from the merchant market for yarn. Fabric processed from captively produced yarn is sold on the same market as fabric processed from yarn purchased on the merchant market. A company that owns both a yarn plant and a fabric plant, therefore, cannot ignore the opportunity costs of manufacturing yarn. According to Pakistan, the yarn produced internally and the yarn available on the merchant market are thus, actually, in a competitive relationship. 

42. In Pakistan's view, the United States' interpretation of the term "and/or" fails to give meaning and effect to all the terms of the ATC. The United States' interpretation would give Members the right to define the domestic industry, inter alia, as the producers of "like but not directly competitive products". Pakistan submits that the drafters of the ATC would not have provided for such a meaningless alternative under which the requirement of causation could never be met, given the lack of competitive relationship to the surging "like" imports. ²⁶

43. Pakistan also argues that if Members were permitted to exclude captive yarn producers from the domestic industry within the definition of the domestic industry under Article 6.2 of the ATC, the result would be a domestic industry whose size and output would vary according to changes in the ownership and commercial practices of yarn plants. Specifically, the integration of yarn manufacturers, which formerly sold their production on the merchant market, would reduce output of the identified domestic industry and facilitate a finding of serious damage. Pakistan submits that such changes, unrelated to the definition of the domestic industry, should not support a finding of serious damage and permit a Member to impose a transitional safeguard measure on imports. ²⁷

44. Pakistan argues that the very purpose of the obligation to demonstrate the causation of serious damage to the domestic industry in its entirety is to ensure that the domestic industry is not divided into segments supplying different markets. If such segmentation were permitted, Members could focus exclusively on the segment supplying the market in which imports are sold and thereby exclude the producers less exposed to import competition and less likely to suffer serious damage. Pakistan submits that this would create a bias in favour of affirmative determinations of serious damage. 

45. Finally, Pakistan points out that vertical integration is one way to adjust to import competition. As the integration of the textiles and clothing sector into the framework of the 
GATT 1994 proceeds, the discrepancy between the number of producers examined, and the number of producers benefiting from the safeguard measure, would increase, in contradiction to the object and purpose of the ATC. Pakistan also argues that if the United States were permitted to define the domestic industry as the manufacturers of yarn for sale, it would have been required to impose its restraint only on imports of yarn for sale and not, as it has done, on all imports.

3. Attribution of Serious Damage

46. Pakistan requests the Appellate Body to uphold the Panel's finding that Article 6.4 of the ATC obliges Members to examine the effect of imports from different Members individually. The terms "Member-by-Member" and "attribute" in Article 6.4 do not give the importing Member the right to arbitrarily "pick and choose" the Members included in the attribution analysis. According to its dictionary definition, the term "by" appearing between two nouns indicates a succession of groups, quantities or individuals of the same class, such as in two-by-two or man-by-man.²⁸ The requirement that the safeguard "shall be applied on a Member-by-Member basis" means, therefore, that the restrictions shall be imposed on a Member-specific basis. "Member-by-Member" does not mean "any Member", and hence does not suggest that certain exporting Members may be arbitrarily excluded from the attribution of the serious damage. Pakistan adds that the requirement to apply restrictions on a Member-by-Member basis is intended to permit exporting Members to administer the restrictions in accordance with Article 4.2 of the ATC and to capture the quota rents. It also permits the importing Member to determine the level of the restrictions individually, in accordance with the criteria set out in the second sentence of Article 6.4. 

47. Pakistan points out that "to attribute" means to ascribe an effect to its cause. In the context of Article 6.4, it means to ascribe the effect of the overall increase in imports to the imports from particular Members. The attribution thus requires a causation analysis limited to imports from individual Members. The difference in meaning of "cause" and of "attribute" does not, therefore, support the United States' interpretation of Article 6.4 of the ATC. This provision requires that the attribution of serious damage to individual Members be made, among other things, on the basis of "the level of imports compared with imports from other sources, market share and import and domestic prices". (emphasis added) As the panel in United States - Underwear concluded, Article 6.4 requires Members to assess comparatively the imports from different sources and their respective effects.²⁹ In Pakistan's view, the terms "individually" and "compared" found in Article 6.4, leave no doubt that the importing Member must asses all potential sources of serious damage and cannot limit its attribution analysis arbitrarily to one Member.

48. Pakistan further argues that Articles 6.1 and 6.6 of the ATC do not support the "pick-and-choose" approach advocated by the United States. Article 6.1 exhorts importing Members to apply safeguards as sparingly as possible, not to attribute the damage to as few importing Members as possible. Pakistan stresses that Article 6.6 does not deal with the attribution of damage to Members, but with "the application of the transitional safeguard". (emphasis added) It is intended to create benefits for certain Members, not to shift burdens from some Members to others.

49. Pakistan also submits that the Panel correctly analyzed Article 6 of the ATC in the context of the entire WTO Agreement. Even if one were to regard the GATT 1994 and the Agreement on Safeguards as treaties separate from the ATC, rather than as elements of a single treaty, they would nevertheless form part of the context of the ATC pursuant to Article 31.2(a) of the Vienna Convention on the Law of Treaties.³⁰ In addition, the preamble of the ATC specifically states as its purpose the integration of the textiles and clothing sector into the framework of the GATT 1994. Pakistan submits that in the light of this purpose, a panel must consider the basic principles of the GATT 1994, including those reflected in the Agreement on Safeguards, when interpreting the terms of the ATC. 

50. Pakistan further points out that, according to Article 1.6 of the ATC, the rights and obligations of Members under the other multilateral trade agreements are not affected "unless otherwise provided in this Agreement ". (emphasis added) The rules of the GATT 1994 and the Agreement on Safeguards, therefore, apply, unless the ATC contains a different rule. This does not mean that the ATC provisions should be interpreted narrowly as an exception, or that the principles of the GATT 1994 should be imputed to the ATC. However, the ATC provisions must be understood as temporary departures from the principles of the GATT 1994. If the provisions of the ATC are silent on a particular point, the drafters of the ATC intended the principles of the GATT 1994 to apply. Given that under the GATT 1994 the most-favoured-nation principle applies, Pakistan asserts that the Panel had to determine to what extent Article 6.4 provides otherwise. 

51. In conclusion, Pakistan submits that Article 6.4 of the ATC does not allow importing Members to attribute damage to one Member only, because that Member would then suffer a disproportionate share of the effect of the safeguard measure. An appropriate attribution analysis must result in a restraint that is distributed appropriately to all Members whose exports have caused the serious damage. According to Pakistan, the Panel correctly found that an ability to "pick and choose" would be the least consistent with a most-favoured-nation approach and thus the least conducive to the progressive integration of the textiles and clothing sector into the GATT 1994. 

21. MTN.GNG/NG4/W/68, 19 November 1990.

22. Appellate Body Report, United States - Shrimp, supra, footnote 18, para. 114.

23. Appellate Body Report, United States - Underwear, supra, footnote 19, at 20.

24. Panel Report, footnote 203 to para. 7.40.

25. Appellate Body Report, supra, footnote 20, paras. 114-116.

26. Panel Report, para. 7.87.

27. Ibid., para. 7.65.

28. The New Shorter Oxford English Dictionary, L. Brown (ed.), (Clarendon Press, 1993), Vol. I, p. 310.

29.Panel Report, WT/DS24/R, adopted 25 February 1997, as modified by the Appellate Body Report, supra, footnote 19, DSR 1997:I, 31, para. 7.49.

30. Done at Vienna, 23 May 1969, 1155 U.N.T.S. 331; 8 International Legal Materials 679.