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WORLD TRADE
ORGANIZATION

WT/DS202/R
29 October 2001
(01-5229)
 
  Original: English

UNITED STATES - DEFINITIVE SAFEGUARD MEASURES
 ON IMPORTS OF CIRCULAR WELDED CARBON QUALITY
 LINE PIPE FROM KOREA


Report of the Panel
 

(Continuation)


IV. ARGUMENTS OF THE PARTIES

4.1 The main arguments, presented by the parties in their written submissions and oral statements, are summarized below.

A. FIRST WRITTEN SUBMISSION OF KOREA

4.2 The following is Korea's own executive summary of its first written submission:

1. Factual Background

4.3 Carbon steel line pipe is a tubular product used primarily in the gathering and transmission of oil and gas. The oil and gas industry is typically a "boom-or-bust" industry that experiences wide swings in prices and production. Consequently, demand and pricing for line pipe as well as certain other pipe products such as oil country tubular goods ("OCTG") are also subject to wide cyclical swings.

4.4 After mid-1998, oil prices declined and continued dropping precipitously through early 1999. Natural gas prices followed a similar but less volatile pattern. By April 1999, the number of active oil drilling rigs in the United States was at the lowest level ever recorded since tracking began in 1944. Predictably, the US line pipe industry's performance declined dramatically over the same period. In fact, the performance of the US line pipe industry almost perfectly tracks the performance of the oil and gas industry: both rose through the first half of 1998 (as did import levels) and then both fell dramatically in the second half of 1998 (imports declined with domestic shipments). US line pipe performance declined further still in the first quarter of 1999 as the oil and gas crisis continued. Notably, imports continued to decline.

4.5 Significantly, US line pipe industry performance began its recovery in the second quarter of 1999 (prior to the ITC's determination in this case) as oil and gas prices as well as drilling activity rose. Imports, however, continued to fall in the first half of 1999, a decline that had commenced in July of 1998.

4.6 At the time of the ITC's determination in October of 1999, the industry was well on its way up the cycle. For this reason, the ITC majority recommended a tariff-rate quota of 151,124 short tons at the normal rate of duty, a level that approximates the average import level for the most recent three-year period. Nevertheless, the US President ignored this recommendation and imposed a remedy which dramatically reduced imports below the level recommended by the ITC. Each potential supplier was allocated 9,000 short tons (there were seven principal suppliers other than Mexico and Canada) and a duty level of 19 per cent was imposed for over-quota imports with a phase-down only of the tariff level over the three-years-and-one-day period for the measure. The 19 per cent duty level has acted as a virtual ceiling on out-of-quota imports. Import levels dropped to 63,932 short tons in the period of March to December 2000, from 165,652 short tons in 1999 for the same period (based on US Census data).

4.7 Traditional trade patterns also were disrupted: Mexico and Canada were excluded from the safeguard measure and all other suppliers were given an identical quota of line pipe regardless of their historical trade to the US market.

2. Preliminary Legal Issues

(a) Confidential Information

4.8 While Korea takes note of the indexed data provided by the United States in its letter of 16 February 2001, which contains absolute import trends, the US response was deficient under Article 13.1 of the DSU. Korea is of the view that it did not include information regarding the relative trends of imports and domestic production. The Panel's need for this confidential data on relative import trends is confirmed by the indexed data provided for the absolute trends in imports; the 12 month decline at the end of the period in absolute import volumes is not shown in the public data.

4.9 Korea submits that the Panel should seek additional confidential information in order to conduct its Article 11 (DSU) review, including:

(1) generally, the full confidential record on which the ITC actually based its determination. The burden should be on the United States to demonstrate why the full deliberative record of the ITC should not be reviewed by the Panel; and

(2) specifically, information regarding pricing data (since declines in prices were a key element of the ITC majority's causation determination); and information regarding certain producers whose financial data negatively affected industry profitability for reasons not related to line pipe; and

(3) the ITC's Economic Analysis and Report to the President on the recommended remedy as well as any relevant deliberative documents by the Office of the President which bear directly on Korea's claims regarding the WTO inconsistency of the safeguard measure under Articles XIII and XIX and Article 5.

4.10 Such information can be protected within the Panel process in accordance with Articles 13.1 and 18.2 as well as Appendices 3.3 and 3.11 of the DSU. If the United States refuses to provide the data, the refusal would constitute a violation of the US obligation under Article 13.1 of the DSU and the Panel should use adverse inferences and/or should find that the United States has not met its burden of proof on the claims at issue.

(b) The Panel Should Avoid False Judicial Economy

4.11 Korea requests that the Panel reach both of the independent claims against the United States - the inconsistency of the ITC's investigation and the inconsistency of the US President's safeguard measure. The exercise of judicial economy in this case would not lead to dispute resolution but rather dispute prolongation since Korea otherwise would be required to bring successive Panels to reach both independent claims.

4.12 US law supports the conclusion that these are independent claims because the United States can implement an adverse Panel decision with respect to the investigation and still maintain the safeguard measure. Since the resolution of the WTO inconsistency of the investigation does not resolve the errors in the safeguard measure, full implementation by the United States of the Panel ruling can only be assured if both independent claims are addressed.

4.13 Korea requests that, regardless of the Panel's decision concerning the conformity of the ITC investigation with the WTO, the Panel should review the legal errors alleged with respect to the measure. An illegal measure should not be allowed to continue through the implementation process with the cost of the time and delay falling on Korea, the prevailing party.

3. The Safeguard Measure Is Inconsistent With the WTO

(a) Introduction

4.14 Korea argues that the United States is in violation of the interrelated obligations imposed by Articles XIII and XIX and Articles 5 and 7, which cumulatively require that all measures be limited to the extent "necessary" and that quantitative restraints in the form of tariff-rate quotas be established in a manner to assure that traditional trade patterns are preserved, that overall quotas are fixed, and that historical shares of principal suppliers are respected. Korea states that the United States also violated the provisions of Articles I, XIII and XIX and Article 2 by discriminatorily excluding Mexico and Canada from the safeguard measure.

(b) The safeguard measure does not comply with Articles XIII or XIX nor does it comply with the requirements of Article 5

(i) The safeguard measure is a quantitative restraint in the form of a tariff-rate quota

4.15 The plain meaning of a tariff-rate quota is that it consists of two elements - a quota and a tariff. The remedy ultimately imposed by the US President contained those two elements - a certain tariff-rate was imposed on in-quota imports of 9,000 short tons, and a higher tariff rate was imposed on out-quota imports above this in-quota amount. Thus, the Presidential measure is a quantitative restraint in the form of a tariff-rate quota.

4.16 Quantitative restraints in the form of tariff-rate quotas must comply with the cumulative requirements of Articles XIII and XIX as well as Article 5.

(ii) The United States failed to set an overall quota in violation of Article XIII and Article 5.1

4.17 As the first step to the proper administration of a tariff-rate quota, Article XIII:2(a) and Article 5.1 requires that the overall quota amounts be fixed. The establishment of this overall quota amount permits traditional suppliers to determine whether the imposing country has abided by the terms of Article XIII:2(d) and Article 5.2 regarding the proper country allocations of the overall quota. Since the United States did not fix an overall quota and no reliable basis exists to determine the overall quota, the measure is in violation of these provisions and the SA.

(iii) The United States did not base the total tariff-rate quota on a previous three year representative period

4.18 The tariff-rate quota imposed by the President, unlike the tariff-rate quota recommended by the ITC, was not limited to the level of the "last three representative years". (While the ITC base period is confidential, it can be inferred from the public data and the ITC's determination.) Therefore, the measure violated Article 5.1 because the baseline of the last three years was not applied and the "clear justification" required by Article 5.1 in cases of deviation from the baseline was not provided.

(iv) The United States failed to allocate the quotas among its Members on the basis of their proportional historical share in violation of Article XIII and Article XIX 1994, and Article 5.2

4.19 In violation of the cumulative requirements of Articles XIII:2 and XIX and Article 5.2, the President did not negotiate the quotas with all Members having a substantial interest in line pipe trade and did not allocate the quotas based on the suppliers' proportional market share during a representative period ("historical share").

4.20 Korea constituted 55 per cent of the total imports (excluding Mexico and Canada and based on the public data) during the period of 1996-98, which was the apparent base period of the ITC recommended measure. Nevertheless, the President's measure reduced Korea's imports to the same 9,000 short ton quota level as the smallest or even non-existent suppliers. This failure to respect historical suppliers is precisely the situation prohibited by Articles XIII:2 and XIX and Article 5.2.

(c) Regardless of the Type of the Safeguard Measure, the Measure Violates Article XIX:1 and Articles 5.1 and 7.1 Because the Measure Was Not Limited to the Extent and the Time Necessary to Remedy the Injury and Allow Adjustment

4.21 The US President, without any public explanation or justification, disregarded the safeguard remedy recommendation of the ITC and imposed a remedy which was far more severe than "necessary". While there is no way of determining exactly what overall import level is targeted by the President's country allocations of 9,000 short tons, any reasonable calculation results in a total quota of significantly less than that recommended by the ITC - 151,124 short tons.

4.22 Furthermore, the ITC's economic analysis specifically rejected as "excessive" a limit of 105,000 short tons and that limit significantly exceeds the President's measure. Since there was no independent analytical basis for the Presidential measure, there was no means or method for the United States to ensure that the measure was limited "only to the extent necessary". The finding by the ITC and the absence of any analytical support for the President's measure constitute prima facie evidence that the measure was not "limited to the extent necessary" and consequently violates Article XIX:1 and Article 5.1.

4.23 In addition, Article 7.1 provides that a measure can only be applied for such a period of time as may be "necessary to prevent or remedy serious injury and to facilitate adjustment". Significant evidence in the ITC record confirmed that the temporary downturn in the line pipe industry produced by the crisis in oil and gas prices had reversed by the time of the ITC's determination in October of 1999. Therefore, no remedy, let alone a measure of three years, could be justified as necessary.

(d) The US Exemption of Mexico and Canada from the Safeguard Measure Violated the MFN Requirements Established in Articles I, XIII:1 and XIX and Article 2

4.24 The MFN requirement is a cornerstone of the GATT/WTO system. It is reflected in all the relevant articles of the GATT, including Articles I and XIX and it is specifically incorporated in Article XIII:1 and Article 2.2. All of these provisions require that the safeguard measure and quantitative restrictions be applied to all suppliers. In this case, the United States did not respect this principle or these provisions because it excluded Mexico and Canada from the safeguard measure.

4.25 The parallelism between Articles 2.1 and 2.2 also requires that the measure be applied to all suppliers since the United States could only conduct a legal safeguard investigation on the basis of all imports. Articles 2 and 4 as well as Article XIX speak only in terms of "imports" and, therefore, there is no legal basis for any exclusion of certain imports. Any other interpretation would not comport with the plain meaning of those provisions and could lead to a selective safeguard regime in which a WTO Member could exclude countries arbitrarily from the serious injury analysis so that they could be excluded from the safeguard measure imposed.

4.26 The exemption of Mexico was particularly egregious in this case since Mexico was the second largest supplier to the US market during the ITC's period of investigation. It was clear that Mexico would take market share from the restricted suppliers. In fact, Mexico and Canada together have significantly replaced historical suppliers such as Korea. Mexico is now the largest supplier to the US market and Canada is the number three supplier. Mexico and Canada's imports almost equal the imports from all other suppliers. Their imports clearly have occurred at the expense of the other historical suppliers who are now discriminatorily restricted from the US market.

(e) The United States Failed to Respect the Rights of Developing Countries to be Excluded from the Safeguard Measure if their Individual Imports Were Less Than 3 per cent and Cumulatively Less Than 9 per cent in Violation of Article 9.1

4.27 Article 9.1 provides a special preference for developing countries to allow them to be exempt from a safeguard measure when their imports are at the specified negligible level. In this case, the United States did not exempt the countries who qualified. The United States therefore failed to respect the developing country preference in Article 9.1.

4. The ITC Investigation Was Not in Compliance With WTO Requirements

(a) The US Measure Is Inconsistent with Article XIX and Article 2 Because Imports Did Not Increase Absolutely or Relative to Domestic Production

4.28 With respect to the issue of increased imports, the ITC methodology was inconsistent with Article XIX and Articles 2 and 4. The ITC applied a legal standard that was rejected by the Appellate Body in Argentina - Footwear (AB) - i.e., "increased imports" requires only a "simple increase" over the most recent five full years. The Appellate Body in Argentina - Footwear (AB) held that imports must have increased during "the recent past" and that the increase had to be "sudden and sharp," in order to meet the requirements of Article XIX and Article 2.1.

4.29 While the public data indicates that imports increased up until the end of 1998, the confidential data shows that, in fact, imports of subject merchandise began to decline in the second half of 1998 and continued to decline for the 12 months immediately preceding the ITC's determination. Moreover, imports did not increase relative to production but rather declined during the first six months of 1999. The ITC's determination does not address either of these fundamental facts because an erroneous legal standard was applied.

4.30 The correct legal finding, as enunciated by the Appellate Body in Argentina - Footwear (AB) is that "not just any increased quantities of imports will suffice ... [t]he increase in imports must have been recent enough, sudden enough, sharp enough, and significant enough, both quantitatively and qualitatively, to cause or threaten to cause 'serious injury'". Clearly, the ITC did not apply this standard, and just as clearly, the declining subject imports did not meet it.

4.31 The US line pipe industry was not suffering serious injury within the meaning of Article XIX and Articles 2.1 and 4 nor did the ITC satisfy the requirements of Articles 3.1 and 4.2(c) regarding the required findings of fact and conclusions of law

4.32 The case for serious injury was far from compelling - as half the Commissioners recognized. Only three out of the six ITC Commissioners determined that the industry was seriously injured. Two Commissioners determined that the industry had not been seriously injured, but it was threatened with serious injury. Finally, one Commissioner determined that the industry was neither seriously injured nor threatened with serious injury by imports.

4.33 The ITC could not agree that the requirement for safeguard relief had been met and there was no attempt at a reconciliation of the divergent opinions. Therefore, the ITC's findings and conclusions of fact and law fell short of the requirements of Articles 3.1 and 4.2(c), which require that the authorities set out in sufficient detail their findings and conclusions of law.

4.34 Moreover, in this case, the Panel's review of Korea's Article 3.1 and 4.2(c) claims is hampered by the fact that the Panel does not have access to the actual factual record on which these divergent conclusions were reached. The adequacy and reasonableness of the conclusions reached depend upon the facts.

4.35 These fundamental legal disagreements among Commissioners also make it clear that this is not a case of extraordinary circumstances which can justify emergency relief.

4.36 The ITC record confirms that the US line pipe industry was not "significantly impaired". Industry indicators had declined temporarily for 12 months (between July 1998 and June 1999) and that decline followed a peak performance sustained over the preceding 18 months. In fact, the industry had recorded its best performance ever in 1997 and the first half of 1998. Moreover, even during the brief period of the downturn, capital expenditures by the US industry continued to increase at substantial levels and two new producers began operations.

4.37 Even the declines in profitability in late 1998 and early 1999 were overstated because the ITC failed to isolate the effects on the line pipe industry caused by the collapse of the OCTG market. Although the problems with the industry data went beyond just certain producers, the profitability data was particularly affected by the circumstances of Lone Star Steel and Geneva Steel. Their problems were clearly due to causes other than imports of line pipe.

4.38 The ITC also improperly ignored the fact that no present serious injury existed at the time of the ITC's vote, if it ever had. The ITC explicitly noted that both domestic shipments and prices had recovered substantially at the end of the period when the ITC's determination was made. Those facts should have resulted in a "no serious injury" finding.

(b) No Causal Nexus Existed Between Increased Imports and Serious Injury as Required by Article XIX and Article 4

4.39 Article XIX and Article 4.2(b) mandates that an affirmative injury determination shall not be made, unless objective evidence demonstrates a "causal link between increased imports of the product concerned and serious injury". The Panel in Argentina - Footwear (Panel) (subsequently affirmed by the Appellate Body), enunciated an analytical framework for a causal analysis: (i) the coincidence of trends between imports and the performance of the domestic industry; (ii) the conditions of competition between imports and the domestic industry; and (iii) whether other factors were the cause of any injury.

4.40 Assuming arguendo, that serious injury existed, the evidence in this case demonstrates that there was no coincidence of trends between imports and the performance of the domestic industry. In fact, the decline in industry performance coincided with a decline in imports, not an increase. The evidence also established that the conditions of competition between imports and the domestic industry, specifically price effects, were the result primarily of a decline in line pipe demand; there was no demonstration that imports led or caused the decline in US prices. Therefore, the ITC majority should have concluded that no causal relationship existed between increased imports and any serious injury suffered by the industry. At a minimum, the ITC majority had to explain how a causal nexus could still exist in spite of the lack of coincidence in trends between increased imports and serious injury.

4.41 The ITC's subsequent analysis of the other factors of serious injury - principally declines in demand for line pipe from the oil and gas industry - was also WTO inconsistent since the evidence established that "but for" the oil and gas crisis, the industry would not have been in a state of serious injury. The ITC's evaluation of the additional "other factors," including low capacity utilization and significant domestic competition among US producers, also failed to meet the standard set out by the Appellate Body in US - Wheat Gluten (AB). The United States failed to establish that it did not "attribute the injury caused by these other factors to increased imports" since the ITC only weighed each individual other factor against increased imports. The required "examination" and "distinguishing" of the other factors was not performed. Thus, the ITC did not establish that the increase in imports had a "genuine and substantial" linkage with serious injury.

4.42 Finally, the US safeguard measure was designed to remedy, in part, serious injury from declining demand when the measure should only have addressed the serious injury caused by imports.

(c) There Was No Threat of Serious Injury from Imports in Accordance With The Requirements Of Article XIX nor Articles 2 and 4

4.43 Two Commissioners determined that although the industry had not been seriously injured, it was threatened with serious injury from increased imports. These Commissioners failed to reconcile their finding of threat with the fact that subject imports had declined over the most recent 12-month period (there was only a "threat" of increased imports), and that decline had actually accelerated considerably over the final six months of the period. Finally, both domestic pricing and shipments had shown considerable improvement by mid-1999 with the recovery of the oil and gas sector. When the improvement in the industry is combined with the fact that imports continued to decline, it is clear that the affirmative threat determinations were based merely on "conjecture or remote probability," and not on injury that was clearly "imminent". Thus, the ITC's threat of injury determination violated Article XIX and Articles 2 and 4.

(d) No Unforeseen Developments Led to Increased Imports

4.44 Pursuant to the Appellate Body's Interpretation of Article XIX in Korea - Dairy Safeguard (AB) and Argentina - Footwear (AB), there must be unforeseen circumstances that led to the increase in imports that cause serious injury. No such unforeseen circumstances were identified by the United States nor do any such circumstances exist in the record of this case.

(e) The US Decision Did Not Satisfy the Requirements of Emergency Action As Specified by Article 11 or Article XIX

4.45 The US decision did not meet the fundamental conditions of safeguard relief. As the Appellate Body in Argentina - Footwear (AB) recognized, safeguard measures were intended to be measures "out of the ordinary, to be matters of urgency, to be, in short, 'emergency actions'".

4.46 Such an emergency situation did not exist here - a four-quarter decline in imports is hardly an "emergency" situation requiring "immediate relief". This is especially true when the decline in domestic industry performance coincides with a decline in imports and the industry is in the midst of an upswing when the ITC's determination was made. Thus, the US determination on serious injury and causation cannot support this or any other safeguard measure because the strict standards of the SA have not been met.

5. Procedural Legal Arguments

(a) The United States Violated Article 12.3

4.47 The United States did not disclose to Korea the measure the President intended to propose prior to or during the consultations as required under Article 12.3. Therefore, Korea was deprived of any meaningful consultations regarding the measure in violation of Article 12.3.

(b) The United States Violated the Compensation Provisions of Article 8.1

4.48 Article 8.1 provides that a Member imposing a measure shall endeavour to maintain a substantially equivalent level of concessions including trade compensation. Articles 8.1 and 12.3 are explicitly linked and require that there be an opportunity for prior consultation with full knowledge of the proposed measure. As the United States did not disclose the measure to Korea prior to the consultations, those consultations could not meet the objectives set out in Article 8.1.

6. Conclusion

4.49 The US safeguard measure as well as the ITC's safeguard investigation were not in conformity with the WTO. Korea respectfully requests that the Panel find that the US safeguard measure should be lifted immediately and the ITC safeguard investigation on line pipe terminated.


Continuation: B. First Written Submission of the United States Return to Index of WT/DS202/R