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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)


B. FIRST WRITTEN SUBMISSION OF THE UNITED STATES

4.50 The following is the United States' own executive summary of its first written submission:

1. Factual Background

4.51 The ITC determined that line pipe was being imported into the United States in such increased quantities as to be a substantial cause of serious injury or the threat of serious injury. Three of the ITC's six Commissioners found that the domestic industry was seriously injured, and two found that the domestic industry was threatened with serious injury. The votes of these five Commissioners constituted the determination of the ITC, which is the "competent authority" of the United States for purposes of the WTO Agreement on Safeguards. One Commissioner dissented from the determination. Under US law, that dissent does not form part of the determination of the ITC or the explanation of the basis of the determination.

4.52 Contrary to Korea's assertions, the ITC's determination is fully consistent with Articles 3 and 4. Korea has presented no grounds for the Panel to conclude that confidential information is necessary to its review of the ITC's findings and conclusions. Furthermore, the fact that the ITC Commissioners were not unanimous in their affirmative injury findings does not render that determination inconsistent with Articles 3.1 or 4.2(c). Articles 3 and 4 impose requirements on the "competent authorities of a Member." The Safeguards Agreement does not address the question of how the "competent authorities of a Member" reach their decisions. This is a matter left to the Member.

2. Substantive Argument

(a) Burdens of Proof

4.53 The United States complied with all its obligations under the Marrakesh Agreement Establishing the World Trade Organization ("WTO Agreement") when it applied the safeguard measure on line pipe. That measure is presumed to be consistent with the WTO Agreement unless Korea, as the complainant, meets its burden of proof to demonstrate otherwise. It has failed in this task, as its claims are based primarily on unfounded assertions without supporting evidence or legal grounding. Korea attempts to excuse these shortcomings by claiming that it needs large volumes of "confidential information" to advance its claims. However, most of the data underlying the ITC finding of serious injury appear in the ITC Report.5 Therefore, the deletion of confidential information from the published version of the report does not impair the Panel's ability to examine Korea's claims. Since Korea has failed to present a prima facie case on any of its claims, the Panel has no basis to request the United States to provide the confidential information.

(b) The Proper Application of the Standard of Review: Objective Assessment of Action by the Competent Authorities and Action by Members in Applying a Safeguard Measure

4.54 The Understanding on Rules and Procedures Governing the Settlement of Disputes ("DSU") and past interpretations of the DSU establish that a panel must make an objective assessment of the facts of the case and of the applicability and conformity with the relevant covered agreements. With regard to fact-finding, "the applicable standard is neither de novo review as such, nor 'total deference.' "6 This inquiry may differ depending on the obligation under examination.

4.55 With regard to the ITC's findings, which address US obligations under Articles 2, 3, and 4 of the Safeguards Agreement, the Panel's review is limited to an objective assessment

of whether the domestic authority has considered all relevant facts, including an examination of each factor listed in Article 4.2(a), of whether the published report on the investigation contains adequate explanation of how the facts support the determination made, and consequently of whether the determination made is consistent with ... the Safeguards Agreement.7

4.56 In contrast, a panel's analysis of the Member's application of a safeguard measure is not confined to evidence gathered in the investigation or findings made in the report of the competent authorities. The panel may also consider a Member's ex post explanation of why the measure was permissible at the time of application. As the Appellate Body recognized in Korea - Dairy Safeguard, the recommendations or determinations in a safeguard proceeding need not justify the type or extent of the safeguard measure applied by the Member, except in the limited circumstance of a quantitative restriction that reduces the quantity of imports below the average of imports in the last three representative years.8

(c) Korea Has Not Established Any Basis for the Panel to Conclude That the ITC's Determination of Increased Imports Is Inconsistent With Article 2

4.57 Article 2.1 requires increased imports on either an absolute basis or relative to domestic production. In this case there was a recent, sudden, sharp, and significant increase in imports in the recent past, on both an absolute basis and relative to domestic consumption.

4.58 In analyzing the import data, the ITC paid particular attention to the most recent part of the period of investigation, the full year 1998 and interim 1999. As the ITC found, after declining between 1994 and 1995, imports on an absolute basis increased each year thereafter, and rose sharply in 1998, the most recent calendar year of the period investigated. Imports rose from about 222,000 tons in 1997 to about 331,000 tons in 1998. Although absolute import levels in interim 1999 were slightly lower than those for interim 1998, they remained very high. Imports in interim 1999 exceeded in just six months the levels of full year 1995 and 1996 imports. Imports relative to domestic production rose each year after 1995. The ratio of imports to domestic production nearly doubled in 1998, and reached its highest level in interim 1999.

4.59 Korea has failed to meet its burden of making a prima facie case that the increase in imports required by Article 2.1 did not occur. Korea attempts to refute the ITC's finding of increased imports by asking the Panel to focus exclusively on a comparison of the last six months of 1998 and the first six months of 1999, to the exclusion of all other data, including the most recent full-year data for 1998. Even the import data for this 12-month period used by Korea does not support its argument that imports declined steadily over this period. Rather, monthly import data show that imports actually increased toward the end of interim 1999.

4.60 The ITC customarily gathers and evaluates import data on a calendar year basis with additional data on interim periods, and not on the basis of arbitrarily defined snapshots of time. That the ITC followed its long-standing approach in examining increased imports demonstrates neutrality and lack of bias in its analysis. The use of interim-period-to-interim-period comparisons for 1998 and 1999 was consistent with its long-standing practice and, unlike Korea's proposed alternative methodology, not chosen to achieve a particular result.

4.61 Nothing in the Safeguards Agreement compels the use of any particular period, let alone the arbitrarily-defined period advocated by Korea. Under the applicable standard of review pursuant to Article 11 DSU, the Panel should not re-weigh the evidence before the ITC, and should not disturb the ITC's findings so long as they are objective.

(d) The ITC's Determination of Serious Injury Caused by Increased Imports Is Consistent With Article 4

4.62 In determining that the domestic industry was seriously injured, the ITC evaluated all enumerated factors set out in Article 4.2(a) and "other" factors that it found to be relevant, including capacity, shipments, inventories, capital expenditures, research and development expenses, and prices. Virtually all of the factors demonstrated a significant overall impairment in the domestic industry's condition beginning in 1998 and continuing into interim 1999. Korea's submission completely disregards this overwhelming evidence of serious injury.

4.63 The ITC's methods of collecting and evaluating the injury data were reasonable. The ITC recognized that most of the producers of line pipe also made other types of pipe, including oil country tubular goods ("OCTG"). The ITC carefully evaluated company allocation methods in the course of tabulating questionnaire and other data, and it verified the allocations of two of the largest producers. Some allocation issues will always be present in a safeguards investigation involving a product that is made in productive facilities also used to produce other products. The fact that certain allocations are necessary does not mean that a Member has failed to evaluate industry-specific factors "of an objective and quantifiable nature," as required by Article 4.2(a).

4.64 For the large majority of the factors considered by the ITC in its injury analysis, Korea has failed to provide any reason to believe that the production of other pipe products in the US producers' facilities affected the data. The only flaws that Korea alleges go to capacity utilization and profitability.

4.65 The ITC recognized that capacity utilization "may not be as certain a measure of injury in this industry as compared to others, given the ability of domestic producers to shift production among various pipe products." It concluded nevertheless, that "the sharp decline in capacity utilization is consistent with other indicators of poor domestic industry performance in 1998 and interim 1999 and supports an affirmative determination of serious injury."

4.66 The ITC adequately addressed Korea's arguments that declining OCTG sales distorted the profitability data for the line pipe industry because fixed costs were allocated by some domestic producers based on the relative levels of sales of different pipe products. The ITC concluded that increases in such costs, resulting from declines in the production of other pipe products such as OCTG, were not mistakenly or disproportionately attributed to line pipe.

4.67 Korea's argument rests entirely on the faulty premise that OCTG shipments declined much more severely than shipments of line pipe and other pipe products made by the US firms. Based on an examination of the objective evidence in the record, the ITC found that this was not the case. Line pipe shipments declined precipitously, at the same time and virtually to the same degree as OCTG shipments. There is no basis for Korea's argument that a disproportionate share of fixed costs were allocated to line pipe, thereby distorting the financial results of the line pipe industry.

4.68 Furthermore, Korea incorrectly assumes that the largest component of average unit costs consisted of fixed costs. The majority of average unit costs (raw material and direct labour) were, however, variable and therefore could not be directly influenced by changes in production volumes of different pipe products. Thus, even if there had been a disproportionately large decline in OCTG sales - and Korea has produced no record evidence of this - the effect that this could have had on average unit costs for line pipe was nominal.

4.69 Data for the entire US line pipe industry showed that its financial condition deteriorated sharply in 1998 and interim 1999, notwithstanding Korea's arguments concerning events at two firms. Article 4.2(a) requires an examination of the situation of the entire industry, and not of individual firms. Further, with respect to one of the firms singled out by Korea, the evidence of alleged problems presented by Korea rests on a distortion of the statements of the dissenting ITC Commissioner. With respect to the second firm, there was ample evidence in the record that the decline in its line pipe business played a major role in the difficulties that it faced.

4.70 Korea's argument that the industry was not seriously injured because capital expenditures increased is likewise unpersuasive. Virtually all other factors bearing on the state of the industry pointed decisively to serious injury. Also, there was evidence in the record that 1998 capital spending reflected analyses and decisions that preceded the surge in imports in 1998, and that some capital spending had been postponed or cancelled in 1998. Finally, the ITC noted that capital investment projects in the steel industry generally involve long lead times, suggesting that capital expenditure levels may not be a timely and accurate measure of industry conditions.

4.71 Korea's arguments that the domestic industry was not suffering serious injury because of an improvement at the end of the investigated period are also unpersuasive. Contrary to Korea's assertion, imports had actually begun to increase again at the very end of interim 1999. Moreover, Korea relies on announcements of price increases that mostly occurred well after the ITC's investigation was over.

4.72 In assessing causation, the ITC first ascertained the effects of the increased imports to determine whether they were causing serious injury or threat thereof. It separately identified and evaluated the effects of the other factors which could be having an injurious effect. In determining the effects of both increased imports on the one hand and other factors, the ITC properly distinguished the effects of imports from the effects of other factors. The ITC thereby ensured that the effects of other factors were not attributed to the imports, and it established that there was a genuine and substantial relationship of cause and effect between the increased imports and the serious injury to the domestic industry. The ITC's application of the causation standard was consistent with the requirements of the SA as explained by the Appellate Body in United States - Wheat Gluten.9

4.73 The ITC found that increased imports of line pipe were "an important cause of serious injury." Imports had increased substantially every year since 1996, with the bulk of this increase occurring in 1997 and 1998. Imports' market share rose significantly, especially during 1998 and interim 1999, at the same time that the domestic industry's condition deteriorated. Based on its evaluation of the import levels and industry indicators, the ITC found that the surge in imports and consequent shift in market share from the domestic industry to imports occurred at the same time that the domestic industry went from healthy performance to a very poor performance.

4.74 The ITC properly evaluated "relevant factors having a bearing on the situation of the domestic industry" and concluded that the sharp increase in imports in 1998 and interim 1999 led to losses in all key industry indicators. Through this analysis, the ITC found that increased imports were an important cause of serious injury and properly established the existence of the causal link between the increased imports and the serious injury, as required by Article 4.2(b).

4.75 Contrary to Korea's assertion, there is a coincidence of trends between imports and the performance of the domestic industry. The "negative correlation between import trends and the difficulties of the industry," which is the basis for so much of Korea's argument on causation, simply does not exist.

4.76 The ITC considered Korea's argument that import levels were overstated because of dual stencilling of line pipe, but concluded that there was no evidence to support Korea's claim that a substantial portion of Korean imports were dual-stencilled but actually sold as standard pipe.

4.77 Korea's assertion that the ITC failed properly to consider whether declining line pipe prices were caused by imports does not withstand scrutiny. The ITC relied on three different types of evidence in analyzing whether imports depressed domestic prices: average unit values of imports, pricing data that it had collected, and questionnaire responses from a wide range of industry participants. Declining average unit values of imports indicated price depression by imports. The pricing data that the ITC collected showed that underselling by imports was pervasive. Finally, most of the questionnaire responses from industry participants identified import competition as an important cause of price declines and injury to the domestic industry.

4.78 The ITC examined six factors other than increased imports as possible other causes of serious injury. Korea focuses on two of these: a crisis in oil and gas exploration and development in 1998 and 1999, and competition within the domestic industry.

4.79 The ITC distinguished any injurious effects caused by increased imports from the effects of declining demand due to the oil and gas crisis by finding that the decline in demand for line pipe could not explain: (i) the level of financial losses experienced by the domestic industry; (ii) the domestic producers' loss of market share; or (iii) the across-the-board price declines affecting line pipe products not used in oil and gas gathering applications. The ITC also noted the consensus among industry participants that imports had played a major role in the decline of line pipe prices in 1998 and interim 1999. Therefore, the ITC did not improperly attribute to imports injury caused by the decline in oil and gas demand, and its findings demonstrated that the causal link between the increased imports and serious injury was undisturbed by any contribution to injury resulting from reduced oil and gas drilling and production activities.

4.80 Korea's argument with respect to the effects of reduced activity in the oil and gas industry rests in large part on its assertion that there was a coincidence in trends between declining demand due to the oil and gas crisis and the deteriorating condition of the domestic industry, and that there was no coincidence in trends between imports and the condition of the domestic industry. Korea is incorrect. Increased imports did coincide with the deteriorating condition of the domestic industry. Moreover, the ITC's analysis of the conditions of competition confirmed the causal link between imports and the injured condition of the domestic industry. The fact that the oil and gas crisis also coincided with the worsening condition of the domestic industry does not prove that the ITC attributed the effects of the oil and gas crisis to imports. The ITC clearly and extensively distinguished the effects of increased imports from those of the oil and gas crisis.

4.81 The ITC also considered competition among domestic producers but found that, since competition among domestic producers had always been a factor in the market, such competition did not explain the sudden and sharp declines in domestic prices and shipments in 1998 and interim 1999. The ITC found the modest increase in domestic capacity over the period investigated (which was indicative of intra-industry competition) was considerably less than the growth in line pipe consumption. Thus, contrary to Korea's assertion, the ITC did not improperly attribute to increased imports injury caused by competition among domestic producers.

4.82 In sum, the ITC properly distinguished the effects of other factors under Article 4.2(b), and properly established the causal link between increased imports and serious injury to the domestic industry, without attributing to imports injury caused by other factors.

(e) Korea Has Not Provided Any Basis for the Panel to Conclude That Chairman Bragg and Commissioners Askey's Findings Are Inconsistent With Articles 2 and 4

4.83 Contrary to Korea's assertion, the two ITC Commissioners who determined that increased imports threatened serious injury found both an increase in imports that had already occurred, and that subject imports were likely to increase in the future. Both of these findings are supported by the evidence before the ITC. These Commissioners supported their findings regarding likely increased imports in the future with the evidence regarding available capacity in foreign facilities. They also properly relied on objective evidence to find that increased imports contributed to the decline in US producers' prices for line pipe.

4.84 Noting the relatively high substitutability between imported line pipe and the domestic product, as well as the importance of maximizing production in a capital-intensive industry, these Commissioners concluded that domestic line pipe producers were constrained to lower prices in response to the availability of lower-priced imports. They found that domestic prices for line pipe had declined to the point where the domestic industry was clearly threatened with serious injury, and if the low pricing was sustained, would quickly result in serious injury. The two Commissioners made appropriate findings regarding threat of serious injury based on facts and not mere allegation, conjecture or remote possibility.

(f) Korea Has Not Established Any Basis for the Panel to Conclude That the Safeguard Measure Applied by the United States Was Inconsistent With the Safeguards Agreement or GATT 1994

(i) Korea has not met its burden to establish that the line pipe safeguard was applied beyond the extent necessary to prevent or remedy serious injury and to facilitate adjustment

4.85 Article 5.1, first sentence, requires that a safeguard measure be "commensurate" with the goals of remedying serious injury and facilitating adjustment.10 Thus, the relevant inquiry involves a comparison of the safeguard measure with the serious injury and the need for adjustment. Korea does not even address this question. Instead, it compares the US safeguard measure, as applied, with the ITC recommendation.

4.86 In addition to being irrelevant, this comparison does not support Korea's claim that the ITC recommended measure would have restricted imports or assisted the domestic producers less that the measure that the United States actually applied. Korea simply ignores that the line pipe safeguard's three-year duration is a full year less than the ITC recommended. It provides no basis for contending that the 19 per cent duty under the line pipe safeguard would have "a similar effect" to the 30 per cent over-quota duty under the ITC's recommended tariff-rate quota ("TRQ"). But most importantly, Korea's analysis of the separate elements of the safeguard measure fails again to address the relevant question - whether the measure (and not its parts) is commensurate with the goals of Article 5.1, first sentence.

(ii) Korea has not met its burden of showing that Article 5.1, Second Sentence, Article 5.2(a), or Article XIII are applicable to the type of safeguard imposed on line pipe

4.87 The United States and Korea differ over whether to characterize the line pipe safeguard as a supplemental duty or a TRQ. This disagreement is, however, of little consequence, since the measure complies with the relevant WTO obligations in either case.

4.88 If the measure is labelled a supplemental duty, Korea's arguments become irrelevant. The quota rules under Article 5 and Article XIII, which form the basis for Korea's arguments, plainly do not apply to a duty increase.

4.89 If the measure is labelled a TRQ, the analysis takes longer, but leads to the same result. First, Korea claims that the Article 5 prohibitions on the use of quotas and quantitative restrictions apply to the line pipe safeguard because a TRQ is a quota. It provides little support for this view other than to note that the "Q" in "TRQ" stands for "quota." However, panel reports under both GATT 1947 and the WTO Agreement confirm that a TRQ is not a "quota" or "quantitative restriction" for purposes of GATT 1947 and GATT 1994.11 The text supports this view. Article XIII establishes rules on quotas and quantitative restrictions, which it follows with a statement stating that the rules also apply to TRQs. The addition of this clarification shows that the drafters did not understand TRQs to be "quotas" by their nature. Therefore, Korea fails to present a prima facie case that the line pipe safeguard was inconsistent with Article 5.

4.90 Second, Korea claims that Article XIII applies to the line pipe safeguard. However, the object and purpose of the Safeguards Agreement is to "clarify and reinforce the disciplines of GATT 1994, and specifically those of its Article XIX" by creating "a comprehensive agreement, applicable to all Members and based on the basic principles of GATT 1994."12 One vital aspect of this clarification was the integration of Article XIII principles into the comprehensive framework of the Safeguards Agreement. Some principles were strengthened, some remained the same, and some were removed. The application to a safeguard measure of Article XIII rules that the drafters of the Safeguards Agreement omitted would do violence to their stated objective that the agreement be "comprehensive."

4.91 Moreover, it does not make sense to apply Article XIII rules to the line pipe safeguard. For example, if Article XIII:2(d) applied to safeguard measures, the identical language included in Article 5.2(a) would become superfluous, a result inconsistent with basic rules of treaty interpretation. The notice requirements under Article XIII:2(a) and XIII:3(b) are redundant of the notification requirements under the Safeguards Agreement. In any event, the Article XIII:2(a) requirement to establish an overall quota amount applies only were "practicable." As Korea itself notes, with an indeterminate number of parties subject to the 9000 ton exemption from the 19 per cent duty, it was not practicable to set an overall quantity of eligible imports.

(iii) Articles I and XIII:1 and Article 2 do not prohibit a member from excluding its free trade agreement partners from a safeguard measure

4.92 Article XXIV creates an exception to the MFN principle for Members of a free trade agreement. Footnote 1 of the Safeguards Agreement establishes that no provision of the Safeguards Agreement will nullify the effect of Article XXIV on the interpretation of Article XIX. Therefore, Articles I and XIII:1 and Article 2 do not prohibit the United States from excluding Canada and Mexico, its partners in the North American Free Trade Agreement ("NAFTA"), from a safeguard measure. It is noteworthy that the list of measures that Article XXIV:8 specifically authorizes FTA parties to maintain against each other does not include safeguards measures applied under Article XIX. By implication then, safeguard measures either may or must be made part of the general elimination of "restrictive regulations of commerce" under any FTA.

(g) Miscellaneous Arguments Raised by Korea

4.93 Korea's first written submission contains several short arguments. All are invalid. (1) Korea's claims against the ITC's determination and the measure itself are plainly not independent of each other, which leaves the Panel the option of exercising judicial economy with respect to one if it finds the other to be inconsistent with the WTO Agreement. (2) The record establishes the existence of unforeseen developments, as required under Article XIX. (3) Article 11 does not impose a separate requirement to establish the existence of an "emergency situation." (4) The United States complied with Article 12.3 by giving Korea notice of the proposed safeguard measure and providing an adequate opportunity to consult.
 


5 Circular Welded Carbon Quality Line Pipe, Inv. No. TA-201-70, ITC Pub. 3261 (December 1999) p. I-3, ("ITC Report").

6 European Communities - Measures Concerning Meat and Meat Products, report of the Appellate Body, WT/DS26/AB/R, para. 117, adopted 13 February 1998 ("EC- Hormones (AB)").

7 Argentina - Safeguard Measures on Imports of Footwear Safeguard, WT/DS121/R, para. 8.124, adopted 25 June 1999 ("Argentina - Footwear Safeguard"); Korea - Definitive Safeguard Measure on Imports of Certain Dairy Products, WT/DS98/R, para. 7.30, adopted 21 June 1999 ("Korea - Dairy Safeguard").

8 Korea - Definitive Measure on Imports of Certain Dairy Safeguard Products, Report of the Appellate Body, WT/DS98/AB/R, paras. 99 and 103, adopted 14 December 1999 ("Korea - Dairy Safeguard (AB)").

9 United States - Definitive Safeguard Measures on Imports of Wheat Gluten from the European Communities, Report of the Appellate Body, WT/DS166/AB/R, para. 160, adopted 22 December 2000 ("US - Wheat Gluten (AB)").

10 Korea - Dairy Safeguard (AB) at para. 96.

11 European Communities - Regime for the Importation, Sale and Distribution of Bananas, WT/DS27/R/USA, para. 7.68, adopted 22 May 1997, ("EC - Bananas III"); EEC - Import Regime for Bananas, DS38/R, adopted 11 February 1994.

12 Safeguards Agreement, preamble.


Continuation: 3. Procedural Arguments Return to Index of WT/DS202/R