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

AB-2001-3
 

Report of the Appellate Body

(continuation)

VI. Attribution of Serious Damage

106. Pakistan claimed before the Panel that the United States acted inconsistently with the requirements of Article 6.4 of the ATC because it "attributed serious damage to imports from Pakistan without making a comparative assessment of the imports from Pakistan and Mexico and their respective effects."⁷⁶ 

107. The Panel stated:

This does not mean, however, that a Member imposing a safeguard restraint can then pick and choose for which Member(s) it will make an attribution analysis. The attribution cannot be made only to some of the Members causing damage, it must be made to all such Members. (emphasis added) 
…
This explicit linking back to the serious damage determination, in our view, requires that all the Members causing the serious damage must have it so attributed.⁷⁷ (emphasis in the original)

In consequence, the Panel found that:

Inconsistently with its obligations under Article 6.4, the United States did not examine the effect of imports from Mexico (and possibly other appropriate Members) individually.⁷⁸ (footnote omitted) 

108. On appeal, the United States requests the Appellate Body to reverse (i) the Panel's finding that the United States acted inconsistently with Article 6.4 by failing to consider the effect of imports from Mexico and possibly other Members, and (ii) the Panel's interpretation that Article 6.4 requires attribution to all Members whose exports cause serious damage or actual threat thereof.⁷⁹ 

109. Before addressing these issues, we have to distinguish three different, but interrelated, elements under Article 6: first, causation of serious damage or actual threat thereof by increased imports;⁸⁰ second, attribution of that serious damage to the Member(s) the imports from whom contributed to that damage; and third, application of transitional safeguard measures to such Member(s).⁸¹ 

110. We note that the claims made by Pakistan before the Panel⁸² related to the question of attribution of serious damage or actual threat thereof to the Members the imports from whom contributed to that damage or threat. However, these claims did not relate to the question of application of safeguard measures. The Panel did not make a ruling on application per se, although, in the course of its reasoning on the question of attribution of serious damage, it interpreted the phrase "shall be applied on a Member-by-Member basis" in the first sentence of Article 6.4,⁸³ an interpretation that has not been appealed. The Panel also found that "Pakistan did not establish that the US determinations of serious damage and causation thereof were not justified based upon an inappropriately chosen period of investigation and period of incidence of serious damage and causation thereof " ⁸⁴, and this finding has not been appealed either. Hence, the issues raised by the United States in this appeal concern only the attribution of serious damage or actual threat thereof to Member(s) imports from whom contributed to that damage.

111. The question of attribution is addressed in the following sentence of Article 6.4:

The Member or Members to whom serious damage, or actual threat thereof, referred to in paragraphs 2 and 3, is attributed, shall be determined on the basis of a sharp and substantial increase in imports, actual or imminent, from such a Member or Members individually, and on the basis of the level of imports as compared with imports from other sources, market share, and import and domestic prices at a comparable stage of commercial transaction; none of these factors, either alone or combined with other factors, can necessarily give decisive guidance. (footnote omitted)

112. Attribution is preceded by three analytical steps which are set forth in Article 6.2: (i) an assessment of whether the domestic industry is suffering serious damage (or actual threat thereof) according to Articles 6.2 and 6.3; (ii) an examination of whether there is a surge in imports as envisaged by Article 6.2; and, (iii) an establishment of a causal link between the surge in imports and the serious damage (or actual threat thereof); according to the last sentence of Article 6.2, "[s]erious damage … must demonstrably be caused by such increased quantities in total imports of that product and not by … other factors". (emphasis added)

113. Article 6.4 governs the attribution of serious damage to individual Members. This attribution must conform to the two requirements stipulated in Article 6.4, second sentence. 

114. The first requirement is that the attribution be confined to only those Members from whom imports have shown a sharp and substantial increase. Such Members will be identified on an individual basis by virtue of the wording in Article 6.4, second sentence, "on the basis of a sharp and substantial increase in imports, actual or imminent, from such a Member or Members individually". (footnote omitted). The Panel interpreted the term "sharp" to refer to the rate of the import increase, and the term "substantial" to the amount of that increase.⁸⁵ These interpretations of the Panel have not been appealed and are, therefore, not before us.

115. The second requirement of Article 6.4, second sentence, is a comparative analysis, in the event that there is more than one Member from whom imports have shown a sharp and substantial increase in its imports.⁸⁶ The conduct of the comparative analysis is governed by the latter part of the second sentence of Article 6.4, which requires the analysis to address certain specific factors, namely: (i) the level of imports as compared with imports from other sources; (ii) market share; and (iii) import and domestic prices at a comparable stage of commercial transaction. Article 6.4 further specifies that none of these factors, either alone or combined with other factors, can necessarily give decisive guidance.

116. The United States argues that Article 6.4, second sentence, permits a comparative analysis of the effect of imports from a particular Member, without conducting a similar kind of analysis for the other Members from whom imports have also increased sharply and substantially.⁸⁷ Pakistan contends that such a comparative analysis requires an assessment of the effect of imports from other such Members taken individually.

117. We note that the wording of Article 6.4, second sentence, does not state expressly how to conduct a comparative analysis of the effects of imports from a particular Member. However, in order to be able to answer this question we have first to address the question why a comparative analysis is required. 

118. Article 6.4 provides, in relevant part, that "[t]he Member or Members to whom serious damage … is attributed, shall be determined on the basis of a sharp and substantial increase in imports … from such a Member or Members". (emphasis added) The clear inference from this phrase is that the sharp and substantial increase of imports from such a Member determines not only the basis, but also the scope of attribution of serious damage to that Member.

119. In consequence, where imports from more than one Member contribute to serious damage, it is only that part of the total damage which is actually caused by imports from such a Member that can be attributed to that Member under Article 6.4, second sentence. Damage that is actually caused to the domestic industry by imports from one Member cannot, in our view, be attributed to a different Member imports from whom were not the cause of that part of the damage. This would amount to a "mis-attribution" of damage and would be inconsistent with the interpretation in good faith of the terms of Article 6.4.⁸⁸ Therefore, the part of the total serious damage attributed to an exporting Member must be proportionate to the damage caused by the imports from that Member. Contrary to the view of the United States, we believe that Article 6.4, second sentence, does not permit the attribution of the totality of serious damage to one Member⁸⁹ , unless the imports from that Member alone have caused all the serious damage. 

120. Our view is supported further by the rules of general international law on state responsibility, which require that countermeasures in response to breaches by states of their international obligations be commensurate with the injury suffered.⁹⁰ In the same vein, we note that Article 22.4 of the DSU⁹¹ stipulates that the suspension of concessions shall be equivalent to the level of nullification or impairment. This provision of the DSU has been interpreted consistently as not justifying punitive damages.⁹² These two examples illustrate the consequences of breaches by states of their international obligations, whereas a safeguard action is merely a remedy to WTO-consistent "fair trade" activity.⁹³ It would be absurd if the breach of an international obligation were sanctioned by proportionate countermeasures, while, in the absence of such breach, a WTO Member would be subject to a disproportionate and, hence, "punitive", attribution of serious damage not wholly caused by its exports. In our view, such an exorbitant derogation from the principle of proportionality in respect of the attribution of serious damage could be justified only if the drafters of the ATC had expressly provided for it, which is not the case.

121. Finally, and most significantly, if the totality of serious damage could be attributed to only one of those Members the imports from whom have contributed to it, there would be no need to undertake a comparative analysis of the effects of imports from that one Member, once the imports from that Member have been found to have increased sharply and substantially; such an interpretation would reduce a whole segment of Article 6.4 to inutility.

122. We now turn to the question of how to conduct the comparative analysis required by Article 6.4. This analysis is to be seen in the light of the principle of proportionality as the means of determining the scope or assessing the part of the total serious damage that can be attributed to an exporting Member. We recall that Article 6.4 enjoins the importing Member to conduct this comparative analysis on a multi-factor basis including "levels of imports", "market share" and "prices", while specifying that none of these factors alone or in combination with other factors can necessarily give decisive guidance. The comparison is to take place between the effects of imports from the Member in question, on the one hand, and those of imports from other sources, on the other. The comparison must thus be based on a variety of factors, each of which has a different significance and weight, and is to be measured on a different scale.

123. It is of course possible to compare the level of imports of one Member with the level of imports from other sources taken together. Likewise, it is possible to establish the market share of one Member in comparison with all other imports and the output of the domestic industry. However, the full effects of the level of imports from, and the market share of, one Member can only be assessed if this level and this share are compared individually with the level of imports from, and the market share of, the other Members from whom imports have also increased sharply and substantially. This conclusion is even more obvious for the comparison of import and domestic prices. The price of imports from one Member can be compared with the average price of imports from other sources and with domestic prices. However, prices of imports from the other Members may vary widely from one another. A fair assessment of the effects of the price of imports from one Member will therefore require a comparison with the price of imports from other Members taken individually. Moreover, these different factors interact in different ways, producing different effects, under different circumstances, not to mention the possible existence of other relevant factors (and their effects) that must be taken into account in the comparison according to the proviso at the end of Article 6.4, second sentence.

124. An assessment of the share of total serious damage, which is proportionate to the damage actually caused by imports from a particular Member, requires, therefore, a comparison according to the factors envisaged in Article 6.4 with all other Members (from whom imports have also increased sharply and substantially) taken individually.

125. In the appeal before us, Pakistan is not the only Member from whom imports have increased sharply and substantially. It is not in dispute that Mexico also falls into this category.⁹⁴ We, therefore, consider that the share of the serious damage attributable to imports from Pakistan can be properly assessed only in the light of the effects of the imports from Mexico.

126. Accordingly, albeit for reasons partly different from those given by the Panel, we uphold the finding in paragraph 8.1(b) of the Panel Report that the United States acted inconsistently with Article 6.4 by not examining the effect of imports from Mexico (and possibly other appropriate Members) individually when attributing serious damage to Pakistan.

127. We finally turn to the United States' appeal against the Panel's interpretation that Article 6.4 requires attribution to all Members the imports from whom cause serious damage or actual threat thereof. In this respect, we note that the scope of this dispute is defined by Pakistan's claims before the Panel. Pakistan claimed that the United States acted inconsistently with Article 6.4 because it "attributed serious damage to imports from Pakistan without making a comparative assessment of the imports from Pakistan and Mexico and their respective effects"⁹⁵. The Panel considered it necessary, in its reasoning, to rule on the broader interpretative question of whether Article 6.4 requires attribution to all Members the imports from whom cause serious damage or actual threat thereof.⁹⁶ The United States also appeals the Panel's interpretation on this broader question. However, our findings⁹⁷ resolve the dispute as defined by Pakistan's claims before the Panel. We, therefore, do not rule on the issue of whether Article 6.4 requires attribution to all Members the imports from whom cause serious damage or actual threat thereof. In these circumstances, the Panel's interpretation on this question is of no legal effect.

VII. Findings and Conclusions

128. For the reasons set out in this Report, the Appellate Body:

(a) concludes that the Panel exceeded its mandate under Article 11 of the DSU by considering United States Census data for the calendar year 1998;

(b) upholds the Panel's finding, in paragraph 8.1(a) of its Report, that the United States acted inconsistently with Article 6.2 of the ATC, by excluding from the scope of the domestic industry the production of combed cotton yarn by vertically integrated producers for their own internal use; 

(c) upholds the Panel's finding, in paragraph 8.1(b) of its Report, that the United States acted inconsistently with Article 6.4 of the ATC, by not examining the effect of imports from Mexico (and possibly other appropriate Members) individually when attributing serious damage to Pakistan; and

(d) declines to rule on the issue of whether Article 6.4 of the ATC requires attribution to all Members the imports from whom cause serious damage or actual threat thereof and concludes that the Panel's interpretation on this issue is of no legal effect.

129. The Appellate Body recommends that the DSB request the United States to bring its measure, found in this Report and in the Panel Report as modified by this Report to be inconsistent with the Agreement on Textiles and Clothing, into conformity with its obligations under that Agreement.

Signed in the original at Geneva this 27th day of September 2001 by:

76. Panel Report, paras. 3.1 and 7.2(a).

77. Panel Report, paras. 7.126-7.127, in relevant part.

78. Ibid., para. 8.1(b).

79. See, United States' appellant's submission, paras. 4 and 85, and executive summary, para. 2.

80. The element of causation of serious damage is referred to in paragraph 2 of Article 6 of the ATC. The second sentence of paragraph 2 provides that serious damage "must demonstrably be caused by such increased quantities in total imports of that product" and not by "other factors" such as technological changes or changes in consumer preferences. 

81. The element of application of transitional safeguard measures to exporting Member(s) is dealt with in the first and the last sentences of paragraph 4 of Article 6 of the ATC. It is also dealt with in various places in paragraphs 6 through 16 of that Article. The first sentence of Article 6.4 provides that transitional safeguard measures "shall be applied on a Member-by-Member basis".

82. In its request for the establishment of a panel, Pakistan claimed, inter alia, that the United States failed to comply with Article 6.4 because it attributed the alleged damage, or actual threat thereof, solely to imports from Pakistan to the exclusion of imports from other sources, including unrestrained sources. (WT/DS192/1, para. 6, in relevant part)

83. Panel Report, paras. 7.124, 7.129 and 7.131.

84. Ibid., para. 8.2(c).

85. Panel Report, para. 7.130. 

86. We note that the panel in United States - Underwear stressed that such a comparative analysis of the effects of imports is indispensable in attributing serious damage to a Member. The panel noted that, while there had been a significant increase in imports of underwear from Costa Rica, the position of Costa Rica was not significantly different from that of the other five exporting Members considered in the United States' determination. Nonetheless, the determination failed to undertake a comparative assessment of the effects of imports from Costa Rica with those five exporting Members. The panel further reasoned that the United States could not enter into agreements permitting an overall increase of imports of 478 percent over the current import levels from those five Members and, at the same time, claim that an import increase of 22 percent from Costa Rica contributed to serious damage. (Panel Report, supra, footnote 29, paras 7.49 and 7.51) The issue of attribution was not appealed in that case.

87. We note that the United States compared imports from Pakistan only with "total world imports", which included those from Pakistan. See, United States' Market Statement, para. 8.9.

88. See, supra, footnote 53.

89. This position was clearly stated by the United States in its response to questioning at the oral hearing.

90. Article 51 of the International Law Commission's draft articles on Responsibility of States reads:

Proportionality

Countermeasures must be commensurate with the injury suffered, taking into account the gravity of the internationally wrongful act and the rights in question. 

(International Law Commission, State Responsibility: Titles and texts of the draft articles on Responsibility of States for internationally wrongful acts adopted by the Drafting Committee on second reading, A/CN.4/L.602/Rev.1, 26 July 2001)

91. Article 22.4 of the DSU reads:

The level of the suspension of concessions or other obligations authorized by the DSB shall be equivalent to the level of the nullification or impairment

92. The Arbitrators in European Communities - Regime for the Importation, Sale and Distribution of Bananas - Recourse to Arbitration by the European Communities under Article 22.6 of the DSU stated that "there is nothing in Article 22.1 of the DSU, let alone in paragraphs 4 and 7 of Article 22, that could be read as a justification for counter-measures of a punitive nature." (Decision by the Arbitrators, WT/DS27/ARB, 9 April 1999, para. 6.3) See also, Decision by the Arbitrators, Brazil - Export Financing Programme for Aircraft - Recourse to Arbitration by Brazil under Article 22.6 of the DSU and Article 4.11 of the SCM Agreement, WT/DS46/ARB, 20 August 2000, para. 3.55.

93. Appellate Body Report, Argentina - Footwear Safeguard, supra, footnote 41, para. 94.

94. See, Panel Report, para. 7.132.

95. Ibid., paras. 3.1 and 7.2(a).

96. Ibid., paras. 7.126-7.127.

97. See, supra, paras. 119 and 125-126.