UNITED STATES - SAFEGUARD MEASURES ON
IMPORTS OF FRESH, CHILLED OR FROZEN
LAMB MEAT FROM NEW ZEALAND AND AUSTRALIA

AB-2001-1

Report of the Appellate Body

(Continued)

C. Arguments of New Zealand - Appellee

1. Unforeseen Developments

31. New Zealand considers that the Panel correctly found that the United States acted inconsistently with Article XIX:1(a) of the GATT 1994. The United States seems to criticize the Panel for interpreting Article XIX in light of the provisions of the Agreement on Safeguards , despite the fact that the Agreement on Safeguards itself, as well as previous decisions of the Appellate Body, clearly establish that the Agreement on Safeguards and Article XIX must be read together. Article 11.1(a) of the Agreement on Safeguards requires that Article XIX be applied in conformity with the provisions of the Agreement on Safeguards . Article 3.1 of the Agreement on Safeguards clearly requires "reasoned conclusions" on "all pertinent issues of fact or law". The Appellate Body has found that "unforeseen developments" are "circumstances that must be demonstrated as a matter of fact in order for a safeguard measure to be applied". Thus, New Zealand reasons, the failure of the USITC to provide a "conclusion" on unforeseen developments is a clear breach of Article XIX:1(a) of the GATT 1994.

32. New Zealand does not agree with the United States that the Panel's approach effectively transformed a circumstance requiring demonstration as a fact into an independent condition for the application of a safeguard measure. The Panel explicitly recognized the distinction between such circumstances and conditions and, in pointing out that it was not essential for the competent authorities, in their conclusions, to use the precise terminology of "unforeseen developments", revealed its awareness that it was the factual demonstration, rather than the fulfilment of some condition, that was specifically required. New Zealand also contests the United States' argument that "unforeseen developments" could be assumed from a determination of threat of serious injury. Such an approach would render ineffective the requirement to demonstrate unforeseen developments. New Zealand adds that the USITC did not demonstrate the existence of unforeseen developments as a matter of fact. It is clear from the USITC Report that the USITC never even considered, much less demonstrated, the existence of unforeseen developments. The United States is effectively attempting to rewrite the USITC Report to reflect what it should have said, but did not. In any event, New Zealand suggests, the descriptive statements contained in the USITC Report, that the United States relies upon, relate to circumstances that were entirely foreseeable and foreseen.

2. Domestic Industry

33. New Zealand contends that the Panel correctly found that the USITC's definition of the domestic industry producing lamb meat was inconsistent with Article 4.1(c) and Article 2.1 of the Agreement on Safeguards . The ordinary meaning of Article 4.1(c) is clear and unambiguous. The "producers" of the "like product" constitute the "domestic industry" for the purposes of a safeguard investigation. As there was no dispute that the "like product" in this case was lamb meat, the function of the USITC was to determine the domestic industry based on who produced lamb meat. As the USITC did not do this, the Panel correctly held that the United States acted inconsistently with the Agreement on Safeguards. New Zealand adds that the term "as a whole" in Article 4.1(c) relates to a quantitative requirement for the application of a safeguard measure and does not justify extending the scope of the domestic industry beyond those who produce the like product.

34. New Zealand further observes that : (i) the degree of vertical integration in the present case remains highly contested and, in any event, as the Panel pointed out, a safeguard measure that assists producers of a finished product will also benefit upstream producers; (ii) the United States is unable to counter the Panel's concern with the open-endedness of the USITC's approach, and, moreover, the historical evidence of how the USITC has applied its principles is irrelevant to the question of consistency with the Agreement on Safeguards; and (iii) contrary to the United States' claims, the GATT cases discussed by the Panel provide strong support for the approach of the Panel.

3. Threat of Serious Injury

35. New Zealand requests that the Appellate Body uphold the finding of the Panel that the data used as a basis for the USITC's determination was not sufficiently representative within the meaning of Article 4.1(c) of the Agreement on Safeguards, and that, therefore, the United States breached Article 2.1 of that Agreement. Contrary to the United States' suggestion, the Panel did not find that United States' data collection was inconsistent with Article 4.1(c). Rather, the Panel found that the data relied upon by the USITC in making its determination of threat of serious injury was not sufficiently representative of "those producers whose collective output ... constitutes a major proportion of the total domestic production of those products" within the meaning of Article 4.1(c), and, thus, that the USITC's threat of serious injury finding was inconsistent with Article 2.1 of the Agreement on Safeguards .

36. New Zealand recalls that, before the Panel, it claimed that the safeguard measure imposed by the United States breached Article 2.1 of the Agreement on Safeguards because of flaws in the safeguard investigation conducted by the USITC, including the inadequacy of the data relied upon by the USITC in making its determination of threat of serious injury. The information provided by New Zealand in its first submission to the Panel clearly established a prima facie case in this regard.

37. New Zealand considers that, in its arguments on this issue, the United States ignores the fact that Article 4.1(c) of the Agreement on Safeguards refers to the number of producers that must be included in an investigation: either "producers as a whole" or "those whose collective output ... constitutes a major proportion of domestic production". The Panel focused on this quantitative aspect in making its findings on the representativeness of the data and correctly interpreted Article 4.1(c) of the Agreement on Safeguards . With respect to the United States' arguments that the sufficiency of data is only relevant under Articles 4.2(a) and 4.2(b) of the Agreement on Safeguards , New Zealand contends that the reliance by the USITC on questionnaire data in the present case was also inconsistent with those provisions. Article 4.2(a) requires an examination of factors as they affect the "domestic industry". The USITC's failure to consider sufficiently representative data means, at the outset, that the state of the "domestic industry" has not properly been evaluated. Furthermore, the terms "objective" and "quantifiable" in Article 4.2(a) of the Agreement on Safeguards themselves imply a threshold regarding the representativeness of data relied upon by competent authorities in evaluating relevant factors and making determinations under the Agreement on Safeguards which, in the view of New Zealand, the United States did not meet.

4. Causation

38. New Zealand requests that the Appellate Body uphold the Panel's finding that the USITC's causation analysis failed to comply with Article 4.2(b) of the Agreement on Safeguards , and that, by virtue of failing to comply with Article 4 of the Agreement on Safeguards , the United States also acted inconsistently with Article 2.1 of the Agreement on Safeguards . The approach of the Panel to causation was consistent with the Appellate Body's approach in United States - Wheat Gluten Safeguard. New Zealand argues that, in any event, application of the test enunciated by the Appellate Body in United States - Wheat Gluten Safeguard must lead to a conclusion that the United States acted inconsistently with Article 4.2(b) of the Agreement on Safeguards because the United States has failed to demonstrate that the USITC complied with any of the three steps of the process for determining causation mentioned by the Appellate Body in that case.

39. New Zealand argues, first, that the USITC failed to distinguish properly the injurious effects caused by increased imports from the injurious effects caused by other factors. Despite the attempt of the United States to portray the USITC Report as making such a distinction, the USITC's analysis contains no overall assessment of the effects of the other factors causing serious injury, which would have allowed them to be distinguished from the effects of increased imports. Second, although it acknowledged that a number of factors were also causing a threat of serious injury, the USITC failed to attribute injury to increased imports on the one hand, and to all other relevant factors on the other hand. The non-attribution requirement of the Agreement on Safeguards is not met where the competent authorities merely identify different effects of other factors in the market. Rather, having found that a number of factors other than imports were contributing in a significant way to serious injury, the USITC was required to demonstrate that the injury caused by those other factors was not attributed to increased imports. Finally, the USITC failed to address the question whether there was a genuine and substantial relationship of cause and effect between increased imports and serious injury. A finding on the existence of a "genuine and substantial" relationship is clearly different from a finding that increased imports are "an important cause and one that is no less important than any other cause". New Zealand adds that, since the USITC failed to show that it had not attributed to increased imports injury caused by other factors, it was not in a position to make any finding of a "genuine and substantial" relationship.

40. Were the Appellate Body to conclude that the Panel's reasoning on causation was incorrect, New Zealand requests the Appellate Body to complete the analysis, and to conclude that the United States failed to meet its obligations under Article 4.2(b) of the Agreement on Safeguards . New Zealand submits that, contrary to the assertions of the United States, the Panel's factual findings and the factual evidence on the record provide an ample basis for the Appellate Body to do so.

D. Claims of Error by Australia - Appellant

1. Unforeseen Developments

41. If the Appellate Body reverses the Panel's ultimate conclusion on Article XIX:1(a) of the GATT 1994, then Australia appeals the Panel's finding that a change in the product mix and/or cut size of imported lamb meat could qualify as "unforeseen developments" within the meaning of that provision. The Panel's finding was based on an erroneous interpretation of the Working Party report in Hatters' Fur. That report provides no support for the conclusion that a simple change in the structure of imports, in and of itself, can constitute an "unforeseen development". As the changes in the product mix and/or the cut size of imported lamb meat are the only factors which the United States argues constitute "unforeseen developments", Australia requests the Appellate Body to find that the United States failed to demonstrate as a matter of fact the existence of unforeseen developments, as required by Article XIX:1(a) of the GATT 1994.

2. Threat of Serious Injury

(a) Standard of Review

42. Australia appeals the Panel's interpretation and application of the standard of review. Australia claims that the Panel erred in its interpretation and application of Article 11 of the DSU, and showed inappropriate deference to the USITC. Australia submits that, in interpreting its standard of review, the Panel wrongly believed that it was sufficient that the necessary findings and conclusions could be discerned from the totality of the USITC Report examined in light of the arguments made by the United States to the Panel. Australia adds that, because the Panel indicated that it would proceed by "taking at face value, arguendo, the data and reasoning contained in the USITC's report"²¹, a number of assertions made by the United States about the evidence and the conclusions drawn from it were not tested through the process of "objective assessment" that panels are required to undertake pursuant to Article 11 of the DSU. Australia believes that this led the Panel to draw favourable inferences from gaps in the data on the basis of assertions made by the United States, whereas the Panel should have assessed objectively whether the USITC Report contained an adequate explanation of how the facts supported its determination of "threat of serious injury". Australia argues that the standard of review articulated by the Panel in paragraph 7.141 would allow competent authorities to avoid their obligation to evaluate all relevant factors under Article 4.1(a) of the Agreement on Safeguards simply by stating that it would be difficult to obtain relevant data. Finally, as set forth in further detail below, Australia appeals the Panel's application of the standard of review to the USITC's determination of the existence of a threat of serious injury.

(b) Evaluation of Relevant Factors

43. Australia claims that the Panel made a number of errors in its interpretation and application of the relevant legal standard for determining "threat of serious injury". First, the Panel erred in its application of the legal standard in determining that a "significant overall impairment" was "clearly imminent". The Panel adopted a lower standard than that required in the Agreement on Safeguards and showed inappropriate deference to the USITC. Second, although the Panel correctly stated that a threat analysis should examine whether serious injury would occur unless safeguard action was taken, the Panel ignored the fact that the USITC never undertook such an examination. Third, the Panel erred in finding, based on certain explanations given by the United States to the Panel, that the USITC had satisfied the requirement of making a "prospective analysis", when in fact the only prospective analysis undertaken by the USITC was that imports would increase. Fourth, the Panel wrongly deferred to the USITC's determination that serious injury was "imminent" even though the USITC did not make any finding or express any opinion on what was meant by "imminent". Fifth, the Panel wrongly accepted the fact that the USITC relied on data only from the recent past. However, in order to assess whether serious injury is clearly imminent, it is necessary to measure the alleged "significant overall impairment" against the base position of the domestic industry, and therefore, a threat determination may need to take into account the longer term state of that industry. In this case, the USITC wrongly focused only on declines following a spike in prices that occurred in the latter part of the period of investigation. Sixth, the data relied on by the USITC was insufficient for its determination of a threat of serious injury.

44. Australia also maintains that the Panel erred in finding that the USITC had evaluated all relevant factors listed in Article 4.2(a) of the Agreement on Safeguards. In particular, according to Australia, the USITC did not evaluate capacity utilization, employment, productivity or profits and losses.

3. Conditional Appeals

45. Australia requests the Appellate Body, in the event that it reverses any of the conclusions reached by the Panel based on the arguments made by the United States, to complete the analysis for which the Panel exercised judicial economy; specifically, this relates to Australia's claims under Articles 2.2, 3.1, 5.1, 8.1, 11.1(a), and 12.3 of the Agreement on Safeguards .

E. Claims of Error by New Zealand - Appellant

1. Threat of Serious Injury

(a) Standard of Review

46. New Zealand claims that the Panel erred in its interpretation and application of Article 11 of the DSU, and adopted an approach of inappropriate deference to the USITC. The Panel wrongly interpreted the appropriate standard of review by limiting its consideration to evidence and arguments contained in the published report of the USITC. The Panel considered that alternative explanations for the declines in the United States industry's performance put forward by New Zealand and Australia were relevant "only to the extent that they were raised in the investigation".²² New Zealand submits, however, that in order to make an "objective assessment" as required by Article 11 of the DSU, a panel must examine evidence and arguments that will allow it to determine whether the actions of a Member are in conformity with the covered agreements, and this may require the panel to go beyond the confines of a published report and the evidence collected by the competent authorities. The Panel also wrongly applied the standard of review. Despite the evidence on prices, in particular the high price levels in 1996 and early 1997, the improvement in prices in 1998, and the projection of increased domestic prices in 1999, there was no reasoned or adequate explanation of how these facts supported the USITC's determination of a threat of serious injury. Therefore, New Zealand submits, the Panel erred in finding that the USITC's analysis provided a reasoned or adequate explanation of how the facts supported its determination that increased imports threatened to cause serious injury.

(b) Evaluation of Relevant Factors

47. New Zealand claims that the Panel erred in its interpretation and application of the relevant legal standard for determining a "threat of serious injury", and, as a result, erroneously concluded that the USITC's analytical approach to the determination of threat of serious injury and to the evaluation of all relevant factors was not inconsistent with the Agreement on Safeguards . New Zealand requests the Appellate Body to reverse the Panel's conclusions on these issues.

48. New Zealand submits that the Panel erred, first, in relying solely on data from the recent past. In order reliably to predict what will happen in the future, data from the recent past, while important, cannot be examined in isolation, particularly when information from an earlier period forms part of the investigation by the competent authorities and is relevant to the determination of whether increased imports have threatened to cause serious injury. By allowing the USITC to ignore data from the beginning of the period of investigation, the Panel excluded evidence which may have had a bearing on the situation of the domestic industry, contrary to Article 4.2(a) of the Agreement on Safeguards. Furthermore, New Zealand submits, by simply assuming, without further analysis, that the future will mirror the recent past, the Panel allowed the USITC to base its threat determination on "conjecture", contrary to Article 4.1(b) of the Agreement on Safeguards .

49. New Zealand argues that the Panel further erred in finding that the USITC's determination was based on "fact-based projections concerning developments in the industry's condition". The USITC looked only at projections concerning imports. However, in order to determine what is soon to happen, projections of "all relevant factors" that have a bearing on the situation of the industry must be considered. In New Zealand's view, by looking at projections of imports alone, the USITC and the Panel failed to take account of "all relevant factors" as required under Article 4.2(a) of the Agreement on Safeguards .

50. New Zealand contends that the Panel applied the wrong legal standard in assessing the USITC's determination that increased imports threatened to cause serious injury and, in effect, lowered the threshold for making such a determination. New Zealand refers to the Panel's statement that a continuation of imports at an already increased level "may suffice"²³ to threaten serious injury, and to its statement that serious injury may be threatened "even if the majority of firms within the relevant industry is not facing declining profitability".²⁴ These statements demonstrate that the Panel was too lax in its application of the standard for assessing threatened significant overall impairment. New Zealand also challenges the Panel's assessment of the requirement that serious injury be "clearly imminent", since the Panel, like the USITC, did not require a demonstration of urgent need for a safeguard measure.

2. Judicial Economy

51. New Zealand appeals the Panel's application of judicial economy to its claim under Article 5.1 of the Agreement on Safeguards . The Panel's rulings relate solely to the safeguard investigation, not to the safeguard measure. A further ruling on the safeguard measure itself is needed to ensure a positive solution to this dispute. New Zealand recalls that the measure applied by the United States differed from the measure recommended by the USITC, and argues that the measure applied is inconsistent with Article 5.1 of the Agreement on Safeguards because it is more trade restrictive than the alternative proposed by the USITC, and because it is not necessary to facilitate adjustment in the United States' lamb meat industry.

3. Conditional Appeals

52. If the Appellate Body were to find against New Zealand on matters relating to the USITC's safeguard investigation, then New Zealand requests that the Appellate Body complete the analysis in relation to its claims under Articles 2.2, 3.1 and 5.1 of the Agreement on Safeguards , and Articles I and II of the GATT 1994, which the Panel did not consider for reasons of judicial economy.

F. Arguments of the United States - Appellee

1. Unforeseen Developments

53. The United States requests the Appellate Body to dismiss Australia's appeal on "unforeseen developments". In its appeal, Australia appears to view the Working Party report in Hatters' Fur as establishing as a matter of law that a change in the structure of imports can never constitute an unforeseen development. However, there is no basis for reading such a limitation into the text of Article XIX:1(a) of the GATT 1994. The United States also contests Australia's argument that the United States failed to demonstrate the existence of unforeseen developments as a matter of fact. As the complainant, Australia had the burden of demonstrating that the developments in the marketplace that the USITC identified in its report were not "unforeseen" developments, and it had failed to do so. The United States maintains that, to the extent that the factual record in the instant case is clear and uncontested, it demonstrates the existence of unforeseen developments as a matter of fact.

2. Threat of Serious Injury

(a) Standard of Review

54. The United States requests the Appellate Body to dismiss the appeal of Australia and New Zealand under Article 11 of the DSU regarding the standard of review. The Appellate Body has made it clear that an appellant seeking to rely on Article 11 must overcome a high hurdle.²⁵ The challenge by Australia and New Zealand to the Panel's interpretation and application of the standard of review does not provide any basis whatsoever for finding a violation of Article 11 of the DSU. On the contrary, the Panel properly interpreted the standard of review as precluding it from conducting a de novo examination of the USITC's determination. The Panel objectively assessed the matter before it by evaluating the USITC's investigation and published report, and judging whether the USITC had examined all the relevant facts and had provided a reasoned explanation of how the facts supported its determination. Thus, the United States concludes, the Panel Report demonstrates that the Panel approached its task in good faith, and that it took into account the arguments of Australia and New Zealand in reaching its determination.

(b) Evaluation of Relevant Factors

55. The United States urges the Appellate Body to dismiss the appeal of Australia and New Zealand that the Panel erred in interpreting and applying the legal standard for determining "threat of serious injury". The Panel properly interpreted and applied the legal standards for assessing "significant overall impairment in the position of the industry" and "clearly imminent". The examples of error cited by New Zealand are anecdotal and ignore the fact that the USITC and the Panel both recognized that what is critical in a "threat" case is that the overall economic condition of the domestic industry is likely to be seriously injured as a result of increased imports. The USITC and the Panel conducted their analysis accordingly. As for the "clearly imminent" standard, the United States submits that the Agreement on Safeguards does not require competent authorities to make a "finding" on the meaning of that phrase, that the Panel properly identified and applied the definition of "clearly imminent", and that, in this case, there was, in fact, an urgent need for a safeguard measure.

56. The United States contests the argument by Australia and New Zealand that the Panel erred in upholding the USITC's heavy reliance on data covering the latter part of the period of investigation. In fact, neither the Panel nor the USITC relied "solely" on post-1996 data. The USITC collected and examined data on imports and the condition of the domestic industry for a five year period, but focused on data from January 1997 through September 1998, which it found to be the most probative in determining the threat of serious injury. The United States considers this approach to be consistent with the Appellate Body's reasoning in Argentina - Footwear Safeguard.

57. The United States asserts that the Panel also correctly found that the USITC had conducted a valid prospective analysis. Contrary to the claims of Australia and New Zealand, the USITC did not base its analysis solely on projections of increased imports. Rather, the USITC made projections for factors other than imports and assessed the relevant factors as a whole in determining that serious injury was imminent. The United States adds that the appeals on this issue appear to invite the Appellate Body to revisit factual questions, and, thereby, to exceed the scope of appellate review.

58. Finally, in response to Australia's claim that the Panel erred in upholding the USITC's reliance on the available data to make factual findings and draw reasonable inferences about the "relevant factors", the United States argues that the Panel correctly found that the USITC properly considered the evidence, explained why it could not collect certain data or did not find such data to be probative, and evaluated the "relevant factors", in accordance with the requirements of Article 4.2(a) of the Agreement on Safeguards .

3. Judicial Economy

59. The United States urges the Appellate Body to dismiss New Zealand's appeal of the Panel's decision to exercise judicial economy with respect to New Zealand's Article 5.1 claim. This case cannot be distinguished from other cases where the Appellate Body concluded that panels had exercised judicial economy properly. Furthermore, the factual record is insufficient to support a finding that New Zealand has satisfied its burden of proof under Article 5.1. The United States adds that New Zealand's appeal is based on a misinterpretation of the Agreement on Safeguards , since Article 5.1 does not require a Member to identify and apply the measure that is the "least trade restrictive".

4. Conditional Appeals

60. Should the Appellate Body reach this issue, the United States argues that it should reject all of the conditional appeals made by Australia and New Zealand. The United States argues that, as demonstrated in its arguments before the Panel, the United States complied with its obligations under Articles 2.2, 3.1, 8, 11 and 12 of the Agreement on Safeguards , and under Articles I and II of the GATT 1994.

G. Arguments of the European Communities - Third Participant

1. Unforeseen Developments

61. The European Communities considers that the Panel correctly found that the United States acted inconsistently with Article XIX:1(a) of the GATT 1994 since the USITC Report did not contain any ascertainable and conclusive demonstration of the existence of unforeseen developments. While the Panel correctly stated that the demonstration of "unforeseen developments" does not require the precise terminology of "unforeseen developments" to be used, it is nevertheless necessary that the circumstances referred to in Article XIX:1(a) of the GATT 1994 are in substance identified as such, namely: (i) circumstances which constitute developments leading to an injurious import surge; and (ii) circumstances which show that such developments were unforeseen. Such a demonstration cannot be made ex post facto. In this regard, the European Communities agrees with the Panel's use of Article 3.1 of the Agreement on Safeguards as relevant context. Article 3.1 refers broadly to "all pertinent issues of fact" and, therefore, its scope is not limited to issues arising under the Agreement on Safeguards . If an issue is pertinent, by virtue of Article XIX:1(a) of the GATT 1994, it must also be "pertinent" in the context of Article 3.1 of the Agreement on Safeguards . The European Communities reasons that any other reading would effectively read the provisions of Article XIX out of the "inseparable package of rights and disciplines" that govern safeguard measures.²⁶

2. Causation

62. The European Communities requests the Appellate Body to uphold the Panel's articulation of the standard of causation. The European Communities cautions that the interpretation of the causation standard suggested by the United States is inconsistent with the object and purpose of the Agreement on Safeguards , would allow the imposition of trade restrictions against imports to remedy difficulties of the domestic industry which are not related to imports, and would result in a lower injury standard being applied in safeguard actions than in anti-dumping and countervailing duty actions.

63. The European Communities stresses that the legal structure governing safeguard measures in WTO law emphasizes an exclusive link between the import surge and the serious injury to the domestic industry, as shown in Article 2.1 of the Agreement on Safeguards and the first sentence of Article 4.2(b). In the view of the European Communities, the second sentence of Article 4.2(b) means that the process of assessing "serious injury" as a legally defined standard does not end with the assessment of the "relevant factors" listed in Article 4.2(a) of the Agreement on Safeguards , but further requires that the "non-attribution" process be completed. No determination under Article 4.2(a) of the Agreement on Safeguards can be made unless and until the effects of factors other than imports have been disregarded. While it is correct to say that imports will not be alone in contributing to the situation of the domestic industry, and that the Agreement on Safeguards does not require that only imports should have contributed to the state of the domestic industry, a "serious injury" finding under Article 4 of the Agreement on Safeguards must be based on the sole impact of imports. The European Communities concludes that this is precisely what the Panel meant by referring to imports as the "necessary and sufficient" cause of serious injury.²⁷

To continue with III. Issues Raised in this Appeal

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21 Panel Report, para. 7.138.