7.60 Although we do not consider that the United States provided a direct answer to our question, there would appear to be at least a theoretical limit on the total amount of imports permitted at the lower tariff rate under the line pipe measure (i.e., the number of customs territories multiplied by 9,000 short tons). However, we do not believe that any such theoretical limit is sufficient to meet the requirement of Article XIII:2(a). Under that provision, Members are required to "fix[]", wherever practicable, the total amount of imports permitted at the lower tariff rate, and to give notice of that amount in accordance with paragraph 3(b). We note that "fix" is defined as "decide, settle, specify" ⁷¹ In our view, the fact that there is a theoretical limit on the total amount of imports permitted at the lower tariff rate does not provide the degree of certainty required by the term "fix[]", particularly in the sense of "specify". An amount cannot be "fixed", or "specified", if it has not even been expressly mentioned.⁷²

7.61 The United States asserts that it was not "practicable" to fix the overall quantity of imports eligible for the exemption from the 19 per cent supplemental duty because, "[w]ith every Member subject to the exemption, and an indeterminate number of countries capable of exporting line pipe to the United States, there was no way to determine the total volume eligible for exemption".⁷³ First, we note that the United States has failed to demonstrate that it determined, at the time of application of the line pipe measure, that it would not be "practicable" to fix the total amount of imports permitted at the lower tariff rate. Second, we find the United States' argument circular and therefore unconvincing. The United States' argument is premised on the fact that it was not practicable to fix the total amount of imports permitted at the lower tariff rate because of the nature of the line pipe measure. However, this does not explain why the United States could not have chosen another type of measure, in respect of which it would have been practicable to fix the total amount of imports permitted at the lower tariff rate.⁷⁴

7.62 For these reasons, we find that the line pipe measure is inconsistent with Article XIII:2(a).

(iii) Article XIII:2(d) and 3(b)

7.63 Korea also raises claims under Articles XIII:2(d) and XIII:3(b). Having found that the United States violated Article XIII:2(a) by failing to "fix" the total amount of imports permitted at the lower tariff rate, we see no need to examine Korea's claims under Articles XIII:2(d) and XIII:3(b).⁷⁵

3. Claims under Articles 5 and 7 of the Safeguards Agreement and Article XIX of GATT 1994

7.64 Korea claims that the line pipe measure is inconsistent with the requirements in the first two sentences of the first paragraph of Article 5, with Article 5.2(a) and Article 7.1. We shall first address Korea's claims regarding the second sentence of Article 5.1, and Article 5.2(a). We shall then address Korea's claim under the first sentence of Article 5.1 and Article 7.1.

7.65 Article 5 of the Safeguards Agreement provides:

Article 5

Application of Safeguard Measures

1. A Member shall apply safeguard measures only to the extent necessary to prevent or remedy serious injury and to facilitate adjustment. If a quantitative restriction is used, such a measure shall not reduce the quantity of imports below the level of a recent period which shall be the average of imports in the last three representative years for which statistics are available, unless clear justification is given that a different level is necessary to prevent or remedy serious injury. Members should choose measures most suitable for the achievement of these objectives.

2. (a) In cases in which a quota is allocated among supplying countries, the Member applying the restrictions may seek agreement with respect to the allocation of shares in the quota with all other Members having a substantial interest in supplying the product concerned. In cases in which this method is not reasonably practicable, the Member concerned shall allot to Members having a substantial interest in supplying the product shares based upon the proportions, supplied by such Members during a previous representative period, of the total quantity or value of imports of the product, due account being taken of any special factors which may have affected or may be affecting the trade in the product.

(b) A Member may depart from the provisions in subparagraph (a) provided that consultations under paragraph 3 of Article 12 are conducted under the auspices of the Committee on Safeguards provided for in paragraph 1 of Article 13 and that clear demonstration is provided to the Committee that (i) imports from certain Members have increased in disproportionate per centage in relation to the total increase of imports of the product concerned in the representative period, (ii) the reasons for the departure from the provisions in subparagraph (a) are justified, and (iii) the conditions of such departure are equitable to all suppliers of the product concerned. The duration of any such measure shall not be extended beyond the initial period under paragraph 1 of Article 7. The departure referred to above shall not be permitted in the case of threat of serious injury.

(a) Article 5.1 (second sentence) and Article 5.2(a)

7.66 In substance, Korea's claims under the second sentence of Article 5.1, and Article 5.2(a), are broadly similar to its claims under Article XIII. Before addressing those claims, however, we must first address the threshold issue of whether or not the provisions relied on by Korea apply to tariff quota safeguard measures.

7.67 Korea asserts that tariff quotas are "quantitative restriction[s]" within the meaning of Article 5.1, second sentence. Korea also asserts that tariff quotas are a form of "quota" within the meaning of Article 5.2(a).

7.68 The United States contends that tariff quotas are neither "quantitative restrictions" nor "quotas". According to the United States, tariff quotas are ordinary customs duties.

7.69 We do not consider that tariff quotas are "quantitative restriction[s]" within the meaning of Article 5. We note that the second sentence of Article 5.1 refers to quantitative restrictions in the sense of measures that "reduce the quantity of imports below [a certain] level". Tariff quotas do not necessarily reduce the volume of imports below any predetermined level, since they do not impose any limit on the total amount of permitted imports (whether globally or from a specific country). Tariff quotas merely provide that imports in excess of a certain level shall be subject to a higher rate of duty. Thus, it would appear that tariff quotas are not the sort of measure envisaged by the reference in the second sentence of Article 5.1 to "quantitative restriction[s] [that] reduce the quantity of imports below [a certain] level".

7.70 Furthermore, there would appear to be little sense in applying the second sentence of Article 5.1 to tariff quotas. First, a tariff quota imposes a limit on in-quota imports, but not on out-of-quota imports. The limit on in-quota imports is therefore of less significance relative to the overall limit on imports provided for in a "quantitative restriction" covered by Article 5.1, second sentence. For this reason, there is no need for the second sentence of Article 5.1 to apply in respect of tariff quotas. Furthermore, the application of Article 5.1, second sentence, to tariff quotas could undermine the distinction between tariff quotas and quantitative restrictions. If the in-quota amount of a tariff quota had to be fixed on the same basis, and therefore at the same level, as the overall limit on imports provided for in quantitative restrictions, there would be little incentive for Members to use tariff quotas. This would be most unfortunate, as tariff quotas (applied in a manner consistent with Article XIII) are generally considered to be less restrictive of imports than quantitative restrictions.

7.71 Second, we note that Article 5.1, second sentence, does not appear to impose any disciplines regarding the imposition of safeguard measures taking the form of simple tariff surcharges (with the exception of Article 5.1, first sentence). In other words, if a simple tariff surcharge of 50 per cent were implemented, there would be no obligation (under Article 5.1, second sentence) to ensure that such tariff surcharge would not reduce the quantity of imports below the average of imports in the last three representative years. If Article 5.1, second sentence, were applied to tariff quotas, however, the imposition of an in-quota limit of zero, and a 50 per cent duty on out-of-quota imports, would violate Article 5.1, second sentence, (assuming the annual average of imports in the last three years is not zero), even though there is no substantive difference between the measures. We cannot imagine that the negotiators of the Safeguards Agreement could have intended such an absurd result.

7.72 In addition, the Appellate Body appears to have distinguished between tariff quotas and quantitative restrictions in Korea - Dairy Safeguard. In that case, the Appellate Body stated that a safeguard measure may "take[] the form of a quantitative restriction, a tariff or a tariff rate quota."⁷⁶ If the Appellate Body had considered that tariff quotas were quantitative restrictions, it would not have stated that safeguard measures may take the form of quantitative restrictions or tariff quotas.

7.73 We also do not consider that tariff quotas are "quota[s]" within the meaning of Article 5.2(a). If they were, Article XIII:5 would be superfluous (because Article XIII applies expressly to quotas). Although one could argue that a tariff quota must be a form of quota, one would then be equally able to argue that a tariff quota must be a form of tariff. Such a result is not tenable, however, as a measure cannot be both a quota and a tariff. In addition, the above extract from the Appellate Body's report in Korea - Dairy Safeguard shows that the Appellate Body does not consider tariff quotas to be tariffs (since it distinguishes between tariffs and tariff quotas). In our view, neither the word "tariff" nor the word "quota" is determinative of the nature of a tariff quota.

7.74 In addition, the parties have both argued⁷⁷ that a quota is a form of quantitative restriction. We see no reason to disagree. Since we have already found that a tariff quota is not a "quantitative restriction" (a broader category including quota) within the meaning of Article 5.1, it cannot constitute a "quota" (a narrower category of quantitative restriction) within the meaning of Article 5.2(a).⁷⁸

7.75 For these reasons, we find that the line pipe measure, as a tariff quota, is not subject to the Article 5 disciplines on quantitative restrictions (Article 5.1, second sentence) or quotas (Article 5.2(a)).⁷⁹ We therefore reject Korea's claims concerning these provisions.

(b) Article 5.1, first sentence

7.76 Korea asserts that the first sentence of Article 5.1 imposes a specific obligation on a Member applying a safeguard measure to ensure that the measure applied is commensurate with the goals of preventing or remedying serious injury and of facilitating adjustment. Korea claims that the United States failed to respect this obligation because it failed to demonstrate the necessity of the line pipe measure at the time of its imposition. Korea asserts that Article 5.1 "requires that 'a measure shall not reduce the quantity of imports below the level of � the last three years � unless clear justification is given that a different level is necessary to prevent or remedy serious injury'". In support, Korea relies on the finding by the Appellate Body in Korea - Dairy Safeguard that "this 'clear justification' has to be given by a Member applying a safeguard measure at the time of the decision, in its recommendations or determinations on the application of the safeguard measure"⁸⁰ (emphasis in original). Korea claims that the line pipe measure exceeded what was "necessary to prevent or remedy serious injury and to facilitate adjustment".

7.77 The United States relies on the Appellate Body's findings in Korea - Dairy Safeguard to argue that "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".⁸¹ According to the United States, "a panel's analysis of the Member's application of a safeguard measure is not confined to the investigation or the report, but may include a Member's ex post justification of why the measure was permissible at the time of application".⁸² Furthermore, the United States asserts that "[a]s the complainant, Korea bears the burden of demonstrating that the US measure went beyond the extent necessary or, stated differently, as not 'commensurate' with the goals of Article 5.1 - to remedy serious injury and facilitate adjustment".⁸³

(i) The obligation of Article 5.1, first sentence

7.78 Before addressing the specific arguments raised by Korea, we note that in Korea - Dairy Safeguard the Appellate Body agreed:

96. � with the Panel that the wording of [Article 5.1, first sentence] leaves no room for doubt that it imposes an obligation on a Member applying a safeguard measure to ensure that the measure applied is commensurate with the goals of preventing or remedying serious injury and of facilitating adjustment. We also agree that this obligation applies regardless of the particular form that a safeguard measure might take. Whether it takes the form of a quantitative restriction, a tariff or a tariff rate quota, the measure in question must be applied "only to the extent necessary" to achieve the goals set forth in the first sentence of Article 5.1.⁸⁴ (footnotes omitted)

7.79 Article 5.1, first sentence, therefore obliges a Member applying a safeguard measure to ensure that the measure applied is commensurate with the goals of preventing or remedying serious injury and of facilitating adjustment.

(ii) Basis for review of compliance with the obligation of Article 5.1, first sentence

7.80 Korea asserts that we would only be able to find that the United States complied with its Article 5.1, first sentence, obligation if it had made a determination regarding the necessity of the line pipe measure at the time of imposition. We note that this issue was addressed by the Appellate Body in Korea - Dairy Safeguard. In that case, the Appellate Body began its analysis of the issue by referring to:

97. � paragraph 7.109 of [the Panel's] Report, [where] the Panel stated:

Members are required, in their recommendations or determinations on the application of a safeguard measure, to explain how they considered the facts before them and why they concluded, at the time of the decision, that the measure to be applied was necessary to remedy the serious injury and facilitate the adjustment of the industry. It is such reasoning and explanation concerning the measure adopted, essential to evaluate Korea's compliance with Article 5.1, which we cannot discern in Korea's determination to apply a safeguard measure in the present case. (emphasis added)

98. The second sentence of Article 5.1 provides:

If a quantitative restriction is used, such a measure shall not reduce the quantity of imports below the level of a recent period which shall be the average of imports in the last three representative years for which statistics are available, unless clear justification is given that a different level is necessary to prevent or remedy serious injury.

This sentence requires a "clear justification" if a Member takes a safeguard measure in the form of a quantitative restriction which reduces the quantity of imports below the average of imports in the last three representative years for which statistics are available. We agree with the Panel that this "clear justification" has to be given by a Member applying a safeguard measure at the time of the decision, in its recommendations or determinations on the application of the safeguard measure.

99. However, we do not see anything in Article 5.1 that establishes such an obligation for a safeguard measure other than a quantitative restriction which reduces the quantity of imports below the average of imports in the last three representative years. In particular, a Member is not obliged to justify in its recommendations or determinations a measure in the form of a quantitative restriction which is consistent with "the average of imports in the last three representative years for which statistics are available".

100. For these reasons, we do not agree with the Panel's broad finding in paragraph 7.109 that:

Members are required, in their recommendations or determinations on the application of a safeguard measure, to explain how they considered the facts before them and why they concluded, at the time of the decision, that the measure to be applied was necessary to remedy serious injury and facilitate the adjustment of the industry.

(�)

103. For these reasons, we uphold the Panel's finding, in paragraph 7.101 of its Report, that the first sentence of Article 5.1 imposes an obligation on a Member applying a safeguard measure to ensure that the measure applied is not more restrictive than necessary to prevent or remedy serious injury and to facilitate adjustment. However, we reverse the Panel's broad finding, in paragraph 7.109 of its Report, that Article 5.1 requires a Member to explain, at the time it makes its recommendations and determinations concerning the application of a safeguard measure, that its measure is necessary to remedy serious injury and to facilitate adjustment, even where the particular safeguard measure applied is not a quantitative restriction which reduces the quantity of imports below the average of imports in the last three representative years. As to the question whether Korea's safeguard measure is consistent with the second sentence of Article 5.1, we are unable to come to a conclusion in the absence of relevant factual findings in the Panel Report or undisputed facts in the Panel record.

7.81 According to the Appellate Body, therefore, it would appear that Article 5.1 does not require Members to explain, in their recommendations or determinations on the application of a safeguard measure, how they considered the facts before them and why they concluded, at the time of the decision, that the measure to be applied was necessary to remedy serious injury and to facilitate the adjustment of the industry. According to the Appellate Body, it would appear that such an obligation only arises if a Member imposes a safeguard measure in the form of a quantitative restriction that reduces the volume of imports below the average of imports in the last three representative years.⁸⁵ The line pipe measure is not a quantitative restriction that reduces the volume of imports below the average of imports in the last three representative years. On the basis of the findings of the Appellate Body in Korea - Dairy Safeguard, therefore, we find that the United States was not required to demonstrate, at the time of imposition, that the line pipe measure was "necessary to prevent or remedy serious injury and to facilitate adjustment".^{86 87}

7.82 For these reasons, our review of whether or not the United States complied with its Article 5.1, first sentence, obligation is not confined to any determination on the necessity of the line pipe measure that the United States may have made at the time of imposition.

(iii) Substantive requirements of Article 5.1, first sentence

(1) Arguments by Korea

7.83 Korea claims that the line pipe measure exceeded what was "necessary to prevent or remedy serious injury and to facilitate adjustment" because the measure "was significantly more restrictive than the ITC's recommendation or even the Petitioners' proposal"⁸⁸. Korea asserts that the NAFTA exemption had a much more negative impact on other suppliers under the line pipe measure than it did under the measure recommended by the ITC.

7.84 In addition, Korea submits that the line pipe measure exceeded what was "necessary" on the basis of the following "inferential evidence of the intended impact"⁸⁹ of the line pipe measure:

(1) Total "in-quota" imports were projected to be approximately 63,000 short tons, based on the fact that the ITC listed only seven significant suppliers other than Canada and Mexico. (Current US import data for March 2000-February 2001, show total "in-quota" imports of 64,067 tons.)

(2) Very limited "out-of-quota" imports could be expected at the 19 per cent tariff level:

(i) The duty imposed was 6 to 10 times the level of the bound rate.

(ii) Each supplying country could supply 9,000 short tons at bound rates. It could be presumed that the market would absorb these imports first (and those of Canada and Mexico) before the imports at the 19 per cent additional duty.

(iii) Two very significant suppliers were not controlled.

(iv) Imported and domestic line pipe were highly substitutable. Moreover, according to testimony before the ITC, consumers preferred domestic products.

(v) The US industry had substantial unused capacity and US capacity exceeded consumption.

(3) Total imports, excluding Canada and Mexico, equalled 78,671 tons from March 2000-February 2001. Of that total, only 14,604 tons entered at the 19 per cent duty rate. In-quota imports totaled 64,067 tons.

(4) The only economic analysis done for the purpose of meeting obligations under Article 5.1 were the Economic Memoranda. From those analyses, the ITC Majority concluded that 151,124 tons at bound rates would reduce imports to a "sufficient" level. These appear to be the only economic basis for the level of restriction recommended by the ITC. The ITC recommendation - which appeared to be more in line with WTO rules - was rejected in favor of a remedy that did not.

7.85 Korea also submits that the line pipe measure was not confined to only addressing the injurious effects of imports. Korea asserts that the Panel should assume that the line pipe measure was also intended to address the injurious effects of the crisis in the oil and gas industry.

7.86 Korea notes the United States' argument that if a 19 per cent tariff were fully translated into increases in the average unit price of line pipe, the impact on operating profits would be an increase that was close to but not equal to operating profit levels before the import surge. According to Korea, one of the conspicuous flaws in the analysis is that the ex post explanation ignores the fact that demand was improving rapidly. It also assumes that the tariff will translate directly into operating profits but downplays the positive effects of the increase in sales volume which would result from the withdrawal of imports from the market. Thus, the analysis ignores the combined improvements on the company's operating leverage of both price and volume increases.⁹⁰ According to Korea, the United States also ignores the fact that virtually no (14,000 tons) imports entered at the 19 per cent tariff in the first year of the tariff quota. To obtain an increase in operating profit of $15-$17 and an operating ratio of 3-4 per cent, the United States simply added $62-$64 to the average unit price of $412/ton in Table 10 of the ITC Report and the same amount to the negative operating profit of $47/ton. Thus, with a new unit price of $474-$476 and operating profit of $15-$17/ton, the United States obtains an operating profit of between 3.2-3.6 per cent. The United States then compares this operating profit level and states that it represents a level closer to, but not equal to, the industry's profitable years before the import surge. However, it must be assumed that one of the purposes of the safeguard measures is to increase the US industry's sales volume as higher priced imports lose market share. If the United States wants to use a reference year for determining the appropriateness of the safeguard measures, then its analysis in reference to Table 10 must be more realistic. For example, the United States should have assumed that operating leverage will result in a decline in various unit costs as volume increases.⁹¹ Moreover, as suggested above, the US reasoning totally ignores the improving market situation, as discerned in the ITC record. According to the ITC, "natural gas and oil prices have increased since early 1999, leading to increased drilling and production activity and hence increased demand for line pipe."⁹² The US ex post reasoning is at variance with the recommendations found in the ITC Majority and the separate views, which took full account of the improving market situation in their recommendations.⁹³ For example, the United States does not explain why the ITC Commissioners finding threat of serious injury conclude that only a 12.5 per cent tariff is necessary to return the industry to profitability based on an actual analytical analysis⁹⁴ which concluded that such a tariff increase would result in a "modest" price increase "as well as substantially increased revenues . . . due to increased shipment levels."⁹⁵

(2) Arguments by the United States

7.87 The United States asserts that the Article 5.1 benchmark for the application of a safeguard measure is the condition of the domestic industry. Furthermore, the United States submits that the consistency with Article 5.1 can only be analyzed with reference to the application of the measure as a whole, and not the separate components thereof. The United States submits that Korea's arguments are simply non-responsive to the relevant standard. It does not even attempt to address the line pipe safeguard in light of serious injury and the facilitation of adjustment. Instead, it compares the line pipe safeguard chosen by the United States with a tariff quota that three USITC Commissioners found "will address the serious injury found to exist and be most effective in facilitating the efforts of the domestic industry to make a positive adjustment to import competition."⁹⁶ Korea characterizes the line pipe safeguard as "more restrictive" than the measure recommended by the three Commissioners and extrapolates that the line pipe safeguard must accordingly be "excessive." According to the United States, the fact that one potential safeguard measure falls within the Article 5.1 limit does not mean that changing the type, level, or duration of the measure would push it beyond the limit.

7.88 The United States asserts that the line pipe safeguard has two main elements - a supplemental duty of 19 per cent (falling to 15 and then 11 per cent in subsequent years) on subject imports and a 9000 ton exemption. Regarding the effect of the tariff, the United States notes that the average unit value of subject imports in interim 1999 was $330-337 per short ton. The application of a 19 per cent tariff would be expected to cause the average unit values for imports to increase by $62-64 per short ton, to $393-401 per short ton.⁹⁷ The 9000 short ton exemption would tend to lessen the increase in average unit values because imports of up to 9000 short tons from each supplying country could enter the United States without additional duties. Thus, one would expect that application of the tariff would, on average, result in price increases somewhat less than 19 per cent and $62-64 per short ton. Any price effect of the measure would also decline over the course of the measure as the tariff decreased to 15 per cent in the second year and 11 per cent in the third year. According to the United States, the effect of increased import prices on US producers would depend on their reaction. On the one hand, they could choose to increase their prices in a manner similar to increases in import prices, which would result in higher prices. In that case, the relative difference between the prices of subject imports and domestic line pipe would stay roughly the same. Customers would be unlikely to change their purchasing patterns, and the market shares of subject imports and domestic line pipe would be unlikely to change to a significant degree. On the other hand, US producers could raise prices by less than the full amount of the import price increase. In that case, the relative price difference between subject imports and domestic line pipe would decrease, which would likely cause some customers to switch to domestic product. As a result, domestic producers' market share would increase.

7.89 If the domestic producers were able to increase their own prices by the entirety of the expected $62-64 average increase in average unit value for subject imports caused by the 19 per cent tariff, their operating profit margin would increase to $15 to 17 per short ton on average, for an operating income ratio of 3 to 4 per cent.⁹⁸ That would represent between 3 and 4 per cent of total revenues, a level closer, but not equal to, the industry's profitable years before the import surge.⁹⁹ However, as noted above, increasing prices to match the increase in import prices would likely leave domestic producers' market share - an important aspect of serious injury - unchanged. Moreover, as noted above, it is questionable whether the US producers could increase their prices by such an amount. Thus, it cannot be said that the United States applied the line pipe safeguard beyond the extent necessary as it would not alone be likely to reverse the volume and price effects of increased imports. This becomes more clear in light of the 9000 ton exemption from the tariff. Since 9000 tons from each source would not pay the tariff, the average increase in prices would be less than the amount expected if the tariff were applied without exemption. Thus, the 9000 ton exemption establishes beyond question that the United States applied the line pipe safeguard less than the extent necessary.

7.90 According to the United States, Korea's argument that the remedy improperly addresses the injurious effects of factors other than imports is rife with conceptual and factual errors. Korea provides no basis for the Panel to conclude that the Safeguards Agreement requires that a safeguard measure be "confined" to the injurious effect of imports. Korea has not cited any provision of the WTO Agreement that requires that a safeguard measure be "confined" to the effects of increased imports. Thus, it has failed to make a prima facie case of an inconsistency with the Agreement. According to the United States, Korea's argument is also factually deficient. Korea asserts that the ITC recommended remedy was "intended to address the effects of both" increased imports and the oil and gas crisis.¹⁰⁰ The United States explains that: first, the ITC recommended remedy is irrelevant to the Panel's analysis, especially since the President did not adopt that remedy.¹⁰¹ Second, the ITC report does not support Korea's view as to the ITC's intention. Korea cites three portions of the ITC report. The first (p. I-28) merely indicates the ITC majority's finding that a decline in oil and gas drilling reduced demand for line pipe, which contributed to serious injury. The second (p. I-76) recognizes this factor as a condition of demand for line pipe. The third (pp. I-85 - I-86) reflects the finding that the remedy "will address the serious injury" and "does not exceed the amount necessary to remedy serious injury." The United States does not consider that this finding suggests that the ITC recommended remedy attempted to address the effects of declining demand for line pipe. In addition, the text cited by Korea (pp. I-85 - I-86) also reports the majority's expectation that demand for line pipe would "improve." Thus, the ITC majority assumed that demand for line pipe would be a positive force in the condition of the industry in the near term. A remedy based on this proposition can scarcely be characterized as remedying injury associated with declining demand for line pipe. According to the United States, Korea's calculations assume that the US producers increase their prices by the full amount possible and obtain an increase in the sales volume. That is economically impossible. In addition, Korea ignored the fact that the 9000 ton exemption would reduce the average price increase of imports, which would further constrain the US producers' ability to increase prices. Another Korean calculation assumes that imposition of a safeguard measure would return the US industry to the conditions of 1997. The US explanation of compliance with Article 5.1 makes no such assumption.

7.91 The United States submits that the record does not support Korea's claim that demand was improving rapidly. The ITC majority noted that 1997 and 1998 were years of unusually high demand, and that demand had by 1999 returned to earlier levels. (ITC report, p. I-28) Other evidence indicated that demand in the largest segment of line pipe consumption was tied to general economic growth, which was forecast to grow at 3-4 per cent annually. US producers projected 4-5 per cent growth.¹⁰² These facts indicate that any future increase in demand was likely to be quite moderate.
 

64 In our view, the chapeau of Article XIII:2 contains a general rule, and not merely a statement of principle. This is confirmed by the Note Ad Article XIII:2, which refers to "the general rule laid down in the opening sentence of paragraph 2".

65 Korea's first written submission para. 124.

66 Korea's first written submission, para. 155.

67 Korea's first written submission, para. 127.

68 The obligation cannot extend to fixing the total amount of permitted imports at the higher tariff rate, because that would effectively undermine the distinction between tariff quotas and quantitative restrictions.

69 United States first written submission, para. 184.

70 Question 2 from the Panel at the first substantive meeting (see Annex B-2).

71 The Compact Edition of the Oxford English Dictionary, Volume 1 (Oxford University Press, 1971).

72 The Compact Edition of the Oxford English Dictionary, Volume 1 (Oxford University Press, 1971) defines the term " specify" as "name or mention expressly".

73 United States first written submission, para. 211.

74 In particular, we see no reason why the United States could not have chosen another type of measure consistent with the general rule set forth in the chapeau of Article XIII:2.

75 However, once a Member fixes the total amount of imports permitted at the lower rate, these provisions clearly apply.

76 Korea - Dairy Safeguard (AB) at para. 96. Under GATT 1947, the Contracting Parties characterized tariff quotas imposed pursuant to Article XIX as a subset of "tariff type measure," rather than quantitative restrictions. Modalities of Application of Article XIX, L/4679, paras. 37-39 (5 July 1978).

77 Korea's response to Question 7 from the Panel (9 in Korean submission) (see Annex B-1); US response to Question 4 from the Panel (see Annex B-2).

78 We are fully aware of the asymmetry between the coverage of Article XIII and Article 5 in respect of tariff quota safeguard measures. However, it is important to note that we have not applied Article XIII:2 to the line pipe tariff quota on the basis of the express wording of that provision. We have done so as a result of Article XIII:5 ("[t]he provisions of this Article shall apply to any tariff quota instituted or maintained by any [Member]"). There is of course no equivalent to Article XIII:5 in the Safeguards Agreement. Thus, any asymmetry in the coverage of Article XIII and Article 5 in respect of tariff quota safeguard measures is a direct result of the express wording of those provisions.

79 We are fully aware that our finding would mean that Article 5.2(b) "quota modulation" is not available for tariff quotas. We do not consider that this result is contrary to the principle of effective treaty interpretation, as Article 5.2(b) remains fully applicable, and therefore effective, in respect of safeguard measures falling within the scope of Article 5.2(a).

80 Korea - Dairy Safeguards (AB) at para. 98.

81 US first written submission, para. 44.

82 US first written submission, para. 45.

83 US first written submission, para. 172.

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

85 We considered carefully whether or not the Appellate Body meant to limit its findings to the application of Article 5.1 in respect of quantitative restrictions (since Korea - Dairy Safeguard involved the application of a quantitative restriction). In other words, we considered carefully whether the Appellate Body meant that a Member does not need to demonstrate that its safeguard measure is commensurate with the goals of preventing or remedying serious injury and of facilitating adjustment if the measure is a quantitative restriction that does not reduce the level of imports below "the average of imports in the last three representative years for which statistics are available". The Appellate Body's findings would then leave open the question of whether a Member must demonstrate that its safeguard measure is commensurate with the goals of preventing or remedying serious injury and of facilitating adjustment if that safeguard measure is not a quantitative restriction. Although such an approach may have some merit, on balance it does not reflect a fair reading of the Appellate Body's findings.

86 In its second written submission, Korea also asserts that "[t]he obligation of the United States to provide an explicit justification independently arose in this case because the President took harsher measures than justified by the ITC decision or the underlying economic analysis. In such a case, where the competent authorities have made explicit findings that certain levels of relief are 'sufficient' and others 'excessive,' the member has an affirmative obligation to explain why a very distinct measure is 'necessary'. An issue existed which had to be affirmatively addressed." We see nothing in the Safeguards Agreement that requires a Member to explain why its safeguard measure is necessary simply because it chooses to adopt a measure that differs from one recommended to it under domestic procedures.

87 In its oral statement at the second substantive meeting, Korea asserts that the decision of the Appellate Body in US - Lamb Meat (AB) "confirms that � an explanation [of why the line pipe measure is not more excessive than "necessary"] should have been made prior to the imposition of the measure". However, we are not persuaded that the Appellate Body in US - Lamb Meat (AB) would have deliberately reversed its findings in Korea - Dairy Safeguard (AB). In US - Lamb Meat (AB), the Appellate Body found that "the existence of unforeseen developments is a prerequisite that must be demonstrated 'in order for a safeguard measure to be applied'" consistently with Article XIX of the GATT 1994, [and] it follows that this demonstration must be made before the safeguard measure is applied" (para. 72). In our view, the obligation to ensure that a safeguard measure does not exceed what is "necessary to prevent or remedy serious injury and to facilitate adjustment" (Article 5.1, first sentence) is not a "prerequisite" that must be demonstrated "in order for a safeguard measure to be applied". Rather, it is an obligation that must be respected concerning the extent and nature of a safeguard measure, once the decision to apply a safeguard measure has been taken. Thus, we are not convinced that the Appellate Body's findings in US - Lamb Meat (AB) regarding unforeseen developments have any bearing on the issue before us.

88 Korea's first written submission para. 144.

89 Korea's second written submission para. 39.

90 According to Korea, the US analysis also fails to take into account the substitutability of imported and domestic products, or the elasticities of demand or the fact that Mexico and Canada were excluded from the measure.

91 According to Korea, if the US industry's volume of sales returns to 1997 levels and the per unit costs from 1997 for direct labor, other factory costs and SG&A expenses are substituted for the per unit costs for interim 1999. Per unit direct labor costs would decline by $8, per unit other factory costs would decline by $19 and per unit SG&A expenses would decline by $7, for a total decline of $34. A $34 per unit cost savings is added to the $15-$17 operating profit increase (calculated by the United States as a result of the 19-per cent tariff), the U.S. industry's operating profit increases $49-$51, or equal to an operating profit of 10.3-10.7 per cent (using the increased price resulting from the full impact of the 19-per cent tariff). This is far above the 8.1 per cent achieved in the peak year of 1997. See ITC Report, at Table 9, II-27).

92 ITC Report, Views on Remedy of the Commission ("Majority Views on Remedy") at I-76-77.

93 See ITC Report, Majority Views on Remedy at I-76-77.

94 See ITC Report, Views on Remedy of Chairman Lynn M. Bragg and Commissioner Thelma J. Askey ("Bragg and Askey Views on Remedy") at I-87 and I-92. We note that the United States specifically argues that there is no distinction between a threat or present injury finding for purposes of determining the appropriate remedy. See US Response to Questions at the first substantive meeting at para. 6.

95 See ITC Report, Bragg and Askey Views on Remedy at I-92 (citing to Commission Remedy Memorandum EC-W-071 (Dec. 1, 1999) with Additional Commission Remedy Memorandum EC-W-074 (7 Dec. 1999)).

96 ITC report p. I-5.

97 Average Unit Value Table, Exhibit USA-21. The calculations in the referenced table are based on the data in Table 3, on page II-15 of the ITC Report, with line pipe from Canada and Mexico excluded. The Average Unit Value Table provides public figures for total imports from subject sources including Japan and a subtotal for subject import sources excluding Japan. Since all nonsubject imports were from Japan, the actual values for any statistic will fall somewhere between the subtotal and total. The United States recognizes that average unit values can be affected by changes in product mix. Line pipe is, however, a fairly standardized product, and this lessens the concern over any such distortions.

98 ITC report, p. II-28, Table 10.

99 ITC report, p. II-27, Table 9.

100 Oral Statement of the Republic of Korea, para. 80.

101 US first written submission, paras. 173-174.

102 Petitioners' Posthearing Brief on Remedy, p. 44 (17 November 1999).

Continuation: (3) Evaluation by the Panel

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