(3) Evaluation by the Panel

7.224 In essence, Korea's claim is based on the fact that company-wide fixed costs were allocated to domestic producers' line pipe and OCTG operations on the basis of turnover. According to Korea, as turnover in OCTG declined more than turnover in line pipe, a disproportionately large amount of fixed costs were allocated to line pipe.

7.225 As a preliminary matter, we see nothing in the Safeguards Agreement that would preclude the allocation of company-wide fixed costs to the specific product under investigation. Nor is there any provision in the Safeguards Agreement that would preclude the allocation of company-wide fixed costs on the basis of turnover.

7.226 Article 4.2(a) requires competent authorities to evaluate all relevant factors "having a bearing on the situation of" the relevant domestic industry. In our view, company-wide fixed costs have a bearing on the situation of the relevant domestic industry because of their impact on the relevant domestic industry's profits and losses. If the relevant domestic industry is defined as producers of a narrow category of product, company-wide fixed costs (such as general overhead) must be allocated to that narrow category of product. Failure to make such an allocation would mean that a relevant factor, namely fixed costs, which necessarily "ha[s] a bearing on the situation of" the relevant domestic industry because of its impact on profitability, would not be evaluated by the competent authorities.

7.227 A failure to evaluate company-wide fixed costs would defy economic reality. Company-wide fixed costs are necessarily incurred in respect of a number of products,¹⁹⁷ and must therefore be absorbed by the totality of those products. If a competent authority were only to take into account costs incurred specifically in respect of the product under investigation, it would not comply with the Article 4.2(a) requirement to evaluate all relevant factors "having a bearing on the situation of" the relevant domestic industry.

7.228 We note that investigating authorities commonly allocate company-wide fixed costs between specific product categories on the basis of turnover. Since there must be some form of allocation of company-wide fixed costs, we would only consider condemning the United States' resort to turnover allocation if Korea were able to propose an allocation methodology that removed the alleged distortion resulting from allocation on the basis of turnover, while still providing for full absorption of all company-wide fixed costs. Korea has failed to do so. By challenging the ITC's use of a turnover allocation, but by failing to propose any suitable alternative form of allocation, Korea effectively argues that company-wide fixed costs should not have been allocated to domestic producers' line pipe operations at all. As noted above, however, failure to take into account company-wide fixed costs would constitute a violation of Article 4.2(a).

7.229 The above analysis is based on a mandatory requirement set forth in Article 4.2(a). Korea's claim is based on Articles 4.1(c), and 4.2(a), (b) and (c) read together. Since we have found that Korea's Article 4.2(a) claim must fail, the remaining provisions relied on by Korea clearly cannot be read so as to result in a finding inconsistent with the mandatory requirement set forth in Article 4.2(a). Accordingly, we reject Korea's claim that the United States violated Articles 4.1(c), and 4.2 (a), (b) and (c) because the data relied on by the ITC was flawed since it contained data from other industries.

(ii) The profitability of some major producers was affected by factors not related to line pipe production

7.230 Korea claims that the industry's profitability performance, which was considered as part of the ITC's analysis of significant overall impairment, was skewed by the peculiar problems of certain producers, such as Lone Star Steel and Geneva Steel. Korea submits that their problems were unrelated to their line pipe production or line pipe imports.

(1) Geneva Steel

(i) Arguments by Korea

7.231 Korea relies on Commissioner Crawford's finding that:

7.232 Korea asserts that costs incurred by Geneva Steel in (1) closing down one of its blast furnaces between December 1998 and September 1999 and (2) filing for bankruptcy affected its profitability. However, since these costs should have been attributed to the competitive conditions faced by Geneva Steel in its primary markets of hot-rolled sheet and cut-to-length plate, they should not have been attributed to its line pipe operations. Thus, the financial performance of Geneva Steel should not have been taken into account when the ITC analysed the financial health of the US line pipe industry.

(ii) Arguments by the United States

7.233 The United States submits that Commissioner Crawford's dissenting opinion does not form part of the ITC determination, and is therefore irrelevant to the Panel's deliberations. According to the United States, there was ample information on the record that the decline in Geneva Steel's line pipe business played a major role in the decision to shut down one of its blast furnaces, and in the company's bankruptcy. At the injury hearing, an executive from Geneva Steel stated that line pipe "is an essential part of our business from an overall margin perspective", and that Geneva Steel lost half of its volume of line pipe sales between 1997 and 1998.

(iii) Evaluation by the Panel

7.234 This claim raises the issue of whether the negative impact on Geneva Steel's (and therefore the US industry's) profitability of costs associated with the temporary closure and filing for bankruptcy were properly attributed to that company's line pipe activities. In asserting that the costs associated with the temporary closure of the second blast furnace and the filing for bankruptcy were not properly attributed to that company's line pipe activities, Korea relies on Commissioner Crawford's statement that "the negative effects that these actions have had on the company's cost structure and on its employment levels � reflect the competitive conditions faced by Geneva Steel in its primary markets of hot-rolled sheet and cut-to-length plate".¹⁹⁹ In support of this statement, Commissioner Crawford referred to testimony given by a Geneva Steel²⁰⁰ executive at the ITC injury hearing, and to parts of the ITC's confidential and public reports.

US - Wheat Gluten Regarding the testimony of the Geneva Steel executive, we see nothing to suggest that the costs associated with the temporary closure of the second blast furnace and the filing for bankruptcy were not properly attributed to Geneva Steel's line pipe activities. Although the Geneva Steel executive stated that "imports of hot-rolled sheet and cut plate surged in 1998, decimating those markets", he also stated that

"In line pipe, the import surge has been just as dramatic. At Geneva, we have lost half of our volume between 1997 and 1999. We estimate that approximately 75 to 80 per cent of that lost tonnage is directly due to imports with only 20 to 25 per cent being related to demand. The effect is similar with respect to prices and profitability. Profitability suffers because of declining prices, but also from the pernicious effect of declining through put on average unit cost. For an integrated producer, such as Geneva Steel, this is particularly important, in light of the fact that we make our own feed stock for line pipe. The import crisis has forced us to shut down one of our two blast furnaces. � Increased orders of line pipe are vital to maintaining the base load of production we need to run that second blast furnace."²⁰¹

Thus, the testimony of the Geneva Steel executive (in particular the statement that "[t]he import crisis²⁰² has forced us to shut down one of our two blast furnaces") supports the US argument that costs associated with the closure of Geneva Steel's second blast furnace, and its filing for bankruptcy, were related to a decline in its line pipe activities. There is nothing in this testimony to support Korea's argument that such costs should be attributed exclusively to a decline in Geneva Steel's hot-rolled sheet and cut-to-length plate activities.²⁰³

7.236 Regarding Commissioner Crawford's references to the confidential and public reports, we note that the United States has not made a copy of the confidential report available to us. However, the only data concerning Geneva Steel removed from the relevant part of the public report (i.e., II-25) appears to relate to "a question about the company's operations subsequent to bankruptcy" (emphasis supplied). In other words, the deleted information does not appear to relate to the closure of Geneva Steels second blast furnace, or to the time when Geneva Steel filed for bankruptcy. It is possible, therefore, to examine Commissioner Crawford's statement on the basis of the public report. However, we can see nothing in the part of the public report referred to by Commissioner Crawford to suggest that Geneva Steel's closure of its second blast furnace, or its filing for bankruptcy, was caused exclusively by its hot-rolled sheet and cut-to-length plate activities.

7.237 For these reasons, we see no reason to accept Korea's claim that the costs associated with the closure of Geneva Steel's second blast furnace, and with its filing for bankruptcy, should not have been attributed to its line pipe activities. We therefore see no reason why the ITC should have excluded Geneva Steel for the purpose of assessing the financial health of the US line pipe industry.

(2) Lone Star

(i) Arguments by Korea

7.238 Korea asserts that certain costs were allocated to Lone Star's line pipe operations for the purpose of calculating the industry-wide operating income for 1998, even though such costs were not related to the production or sale of line pipe. In this regard, Korea relies on the following statement by Commissioner Crawford:

I note that the 1998 operating income on the record may be somewhat misleading. In 1998, Lone Star allocated *** of charges for *** (primarily a reduction in operating its *** in favor of ***). The results of this decision appear to have been felt most keenly in the second half of 1998. This decision had a marked impact on SG&A for the company and for the industry as a whole, reducing the industry's level of operating income to $10.8 million in 1998.²⁰⁴

(ii) Arguments by the United States

7.239 The United States submits that Commissioner Crawford's opinion does not form part of the ITC determination, and is therefore irrelevant for the Panel's deliberations. The United States also notes that the remaining Commissioners found that domestic producers had allocated increases in overhead and SGA on the basis of acceptable allocation methodologies. Furthermore, the United States asserts that the severe deterioration in the domestic industry's financial condition was not the result of any accounting decision by Lone Star Steel. In 1998, five of the 14 domestic producers operated at a loss in their line pipe operations, and five additional firms had reduced operating incomes. In interim 1999, 10 of the 14 firms operated at a loss, and all had reduced operating incomes, compared with interim 1998.

(iii) Evaluation by the Panel

7.240 We are not convinced that Commissioner Crawford's statement²⁰⁵ alone constitutes a prima facie case that the ITC allocated certain non-line pipe costs to Lone Star's line pipe activities. Her statement must be weighed against the remaining Commissioners explicitly finding that "[i]ncreases in per-unit overhead and SG&A were allocated by the domestic producers in proportion to their sales of end products or based on other acceptable allocation methodologies".²⁰⁶

7.241 Furthermore, we note that in response to a question from the Panel, the United States "assure[d] the Panel that adding the Lone Star charge would not increase the industry's 1998 aggregate operating income of $ 10.8 million by more than 20 per cent, or increase the ratio of operating income to net sales for 1998 of 2.9 per cent by more than one per centage point".²⁰⁷ Thus, even adding the charge, the domestic industry's 1998 aggregate operating income would still not have exceeded $12.96 million, compared to $34.662 million in 1997. In addition, operating income for interim 1999 - minus $12.786 million - was not affected by the 1998 Lone Star charge. According to the United States, adding the Lone Star charge would not increase the 1998 ratio of operating income to net sales to more than 3.9 per cent (from the 2.9 per cent presently reported). Korea argues that a ratio of 3.9 per cent is close to the 1995 ratio of 4.3 per cent, and that the ITC found the financial situation of the domestic to be "healthy" at that time.²⁰⁸ However, the fact that a ratio of 4.3 per cent may be "healthy" does not necessarily mean that a ratio of 3.9 per cent (i.e., 9.3 per cent less) is equally "healthy", or inconsistent with a finding of serious injury. Indeed, a 1998 ratio of 3.9 per cent would still have to be measured against a 1997 ratio of 8.1 per cent. In addition, the Lone Star charge did not affect interim 1999, when the ratio was minus 11.4 per cent. Finally, we note that the ITC did not rely only on the operating income ratio in its assessment of the industry's financial performance; it also relied on absolute declines in revenue, and noted that in 1998 ten of the 14 US producers reported reduced operating income or increased losses.²⁰⁹ Thus, even if the Lone Star charge had not been deducted from its operating income, we do not consider that this would have invalidated the ITC's finding of serious injury.

7.242 In light of the above, we see no basis for concluding that the injury data on which the ITC relied was flawed because it contained data from other industries.

(b) The downturn in the industry's condition was temporary and the condition of the industry was improving at the end of the period of investigation

(i) Arguments by Korea

7.243 Korea claims that the ITC erred in finding "serious injury", because the downturn in the state of the domestic industry was merely temporary, and the condition of the industry was improving at the end of the period of investigation.

7.244 According to Korea, the 1998 / interim 1999 downturn should have been viewed in the context of record industry performance in 1997. Korea asserts that a temporary downturn from a peak performance period does not constitute "significant overall impairment", especially in an industry that traditionally experiences wide swings in demand and profitability. Korea argues that even the US industry itself recognised that it was only in a temporary downturn, as evidenced by substantial investment in new / modernised production facilities. Thus, investments by the industry doubled in 1997, and doubled again in 1998. Capital expenditures increased another 30 per cent in the first half of 1999. Furthermore, one new producer began operations in 1998, and another in 1999. Nine US producers made capital expenditures in excess of $1 million in at least one fiscal year.

7.245 Korea asserts that the industry was not in a state of "significant overall impairment" at the time the ITC made its serious injury determination. Korea quotes from the US - Wheat Gluten panel, which "consider[ed] it essential that current serious injury be found to exist, up to and including the very end of the period of investigation".²¹⁰ Korea asserts that the "very end of the period" demonstrated a continuing decline in imports and an improving market for the US producers. Thus, the volume of US mill shipments stabilized in 1999 and began recovering strongly beginning in April 1999, and US producers had already announced significant price increases. Demand was also increasing. Increased domestic demand for line pipe and increased domestic shipments were due to an improvement in oil and gas prices that began in April 1999.

(ii) Arguments by the United States

7.246 The United States submits that Korea's argument that a one-year downturn from a historical high in an industry should not be viewed as a "significant overall impairment" of the industry²¹¹ has no basis in the Safeguards Agreement. Article 4.1(a) defines "serious injury" as "a significant overall impairment in the position of the domestic industry." As Korea itself explains, the word "impair" is defined as "to weaken or make worse, to lessen in power," "overall" indicates that such impairment must be widespread and comprehensive, and "position of the domestic industry denotes its overall health."²¹² The downturn experienced by the US industry was sufficient to satisfy the Safeguards Agreement's requirements of serious injury or threat of serious injury caused by increased imports. The record before the ITC contained extensive evidence to satisfy fully each of these components of the definition of serious injury. The condition of the domestic line pipe industry deteriorated greatly in 1998, and in interim 1999 as compared with interim 1998. This deterioration was observable in virtually every factor examined by the ITC and broadly affected industry participants. There is no basis for arguing that this did not amount to an "impairment" of the domestic industry, or that this impairment was not widespread and comprehensive.

7.247 The United States denies that domestic shipments of line pipe began recovering strongly in April 1999. Although shipments did increase in the months following the first quarter of 1999, average monthly shipments in the period April through August 1999 remained lower than in any prior year of the period investigated except 1994. With regard to capital expenditures by the domestic industry, the United States capital investment projects in the steel industry generally involve long lead times, and there was evidence in the record that 1998 capital spending reflected analysis and decisions that preceded the 1998 surge in imports.

7.248 Furthermore, the United States denies that the Safeguards Agreement requires a finding of current serious injury at the time of the competent authority's serious injury determination. There is no requirement that competent authorities collect information up to the day of their determination. Furthermore, the United States disagrees that the US line pipe industry was improving at the end of the period of investigation. The United States asserts that imports were actually increasing in May and June of 1999. With regard to the price increases referred to by Korea, the United States notes that in fact only the price increase announcements were made on 15 September 1999, and that the announced increases were to take effect in late 1999 and early 2000. The price increase announcements on which Korea relies do not prove that the industry was no longer in a state of significant overall impairment, for several reasons. First, there is no evidence in the record that these attempts at price increases were actually successful. As the two Commissioners finding threat of serious injury indicated in their views,²¹³ mere announcements of future price increases have little probative value, as it is always unclear whether these will actually "stick" in the market. Second, the evidence indicates price increase announcements by only three firms (Maverick Tube Corporation, Lone Star Steel Company, and Newport Steel) out of the 14 producers in the industry. Third, one of those companies (Lone Star) explained the price increase as being "necessary to offset increases in raw material costs," and another (Newport Steel) stated that the price hike was "[d]ue to an increase in overall costs to manufacture tubular goods."²¹⁴ Furthermore, the price increase announcements made in August 1999 coincided with the imposition of antidumping duties and the entry into effect of suspension agreements, affecting hot-rolled steel, the principal raw material used in the production of line pipe. Thus, the price increase announcements reflected rising raw material costs rather than an improvement in the condition of the industry as Korea contends.

(iii) Evaluation by the Panel

7.249 Korea claims that a finding of serious injury is precluded if there is only a temporary, one-year downturn in the condition of the industry, following an historical high, and if the condition of the industry is improving at the end of the period of investigation. In examining this claim, we shall first consider Korea's argument that there was only a temporary downturn in the condition of the industry. We shall then consider Korea's argument that the condition of the industry was improving at the end of the period of investigation.

7.250 According to Korea, the temporary nature of the downturn in the US line pipe industry was evidenced by the capital investments made by that industry during the downturn. However, there is evidence in the ITC report to the effect that "1998 investment expenditures reflect pre-import surge analysis and decisions".²¹⁵ The ITC noted that "capital investment projects in the steel industry generally require long lead times in order to afford sufficient time for project approval, securing of financing, installation, and start-up operations".²¹⁶ In addition, the ITC found that "there is evidence that the decline in profitability since the middle of 1998 has caused the postponement or elimination of discretionary capital spending".²¹⁷ In light of these considerations, we find no basis for concluding that capital investments made in 1998 and 1999 indicate the temporary nature of the downturn experienced by the US line pipe industry.²¹⁸

7.251 In support of its argument that the condition of the domestic industry was improving at the end of the period of investigation, Korea refers to increasing demand, increasing domestic shipments, and domestic producer price increases.

7.252 There would appear to be little doubt that demand was increasing at the end of the period of investigation. However, increasing demand at the end of the period of investigation is not necessarily indicative of an absence of serious injury at the end of the period of investigation. Article 4.2(a) enumerates a number of factors ("changes in the level of sales, production, productivity, capacity utilization, profits and losses, and employment") which must²¹⁹ be evaluated by Members in making a determination of serious injury. Although there may be circumstances in which demand is relevant to the question of serious injury, the fact that demand is not included as an Article 4.2(a) factor clearly indicates that this will not always be the case. Thus, changes in demand at the end of the period of investigation need not necessarily be taken into account by competent authorities for the purpose of making a finding on serious injury. A competent authority would only need to evaluate demand for the purpose of determining the existence of serious injury if it were shown in a given case that demand was a "relevant factor[] � having a bearing on the situation of that industry". Korea has not established that this was the case in the line pipe investigation. Indeed, increased demand at the end of the period of investigation may be of extremely limited relevance to the state of the domestic industry, since there is no guarantee that the increased demand will be met by domestic shipments rather than by imports. For these reasons, we do not consider that increased demand at the end of the period of investigation necessarily means that the condition of the domestic industry was improving at the end of the period of investigation, or that a finding of serious injury is precluded.

7.253 With regard to Korea's argument that shipments began recovering strongly in April 1999, we note the US argument that average monthly shipments for April - August 1999 were lower than average monthly shipments for any prior year other than 1994. Korea has not disputed this argument. We further note that shipments declined from June to July 1999, and from July to August 1999. Shipments in August 1999 were only five per cent higher than shipments in April 1999. For these reasons, we see no basis to accept Korea's argument that shipments began recovering strongly in April 1999. In any event, we consider that an upturn in respect of one Article 4.2(a) serious injury factor, such as shipments / sales, towards the end of the period of investigation does not necessarily indicate that the domestic industry is recovering, especially if all, or the majority, of the remaining serious injury factors demonstrate negative trends over the entirety of the period of investigation.²²⁰

7.254 With regard to price increases, announcements were made by three domestic producers in September 1999. The announced price increases were to take effect in late 1999 and early 2000. We are not convinced that the announced price increases indicate that the condition of the domestic industry was improving at the end of the period of investigation. This is because, according to one witness at the ITC's injury hearing, the price increases "are sticking, but � the mills � will verify that their raw material costs pretty much are offsetting that".²²¹ Another witness stated that "[t]he prices are up. We did announce a price increase, but it was not market-driven so much as it was cost-driven � Those costs have gone up for us more than the price increase we announced, so we are still under water significantly".²²² Since it therefore appears that the announced price increases were driven by cost increases, it is far from certain that the announced price increases would have improved the state of the domestic industry (rather, they may simply have prevented the state of the domestic industry from deteriorating further). Furthermore, since the price increases were made by only three (out of 14) domestic producers, it is far from certain (1) that they would have had any significant impact on the overall state of the industry (especially as the prices of one of the largest producers, California Steel, were unaffected by these increases), and (2) that they would have been followed by the remaining domestic producers.

7.255 We recall that the onus is on Korea, as the complaining party, to assert and prove its case.²²³ For the above reasons, we find that Korea has failed to assert and prove that the ITC erred in finding serious injury because the downturn in the state of the domestic industry was merely temporary, and the condition of the industry was improving at the end of the period of investigation. We reject Korea's claims accordingly.

(c) Adequate explanation and justification: the requirements of Articles 3.1 and 4.2(c) of the Safeguards Agreement