UNITED STATES - TRANSITIONAL SAFEGUARD MEASURE ON
COMBED COTTON YARN FROM PAKISTAN

AB-2001-3

Report of the Appellate Body

Table Of Contents

I. Introduction

II. Arguments of the Participants and Third Participants

A. Claims of Error by the United States - Appellant

1. Standard of Review 
2. Definition of the Domestic Industry 
3. Attribution of Serious Damage 

B. Arguments by Pakistan - Appellee

1. Standard of Review 
2. Definition of the Domestic Industry 
3. Attribution of Serious Damage

C. Arguments of the Third Participants

1. European Communities 
2. India

III. Issues Raised in this Appeal 
IV. Standard of Review 
V. Definition of the Domestic Industry 
VI. Attribution of Serious Damage 
VII. Findings and Conclusions

WORLD TRADE ORGANIZATION
APPELLATE BODY

United States - Transitional Safeguard Measure on Combed Cotton Yarn from Pakistan United States, Appellant Pakistan, Appellee European Communities, Third Participant India, Third Participant

AB-2001-3     Present:     Abi-Saab, Presiding Member    Ehlermann, Member     Ganesan, Member

I. Introduction

1. The United States appeals from certain issues of law and legal interpretations in the Panel Report, United States - Transitional Safeguard Measure on Combed Cotton Yarn from Pakistan (the "Panel Report")¹. The Panel was established on 19 June 2000 to consider a complaint by Pakistan with respect to a transitional safeguard measure imposed by the United States under Article 6.2 of the Agreement on Textiles and Clothing (the "ATC ") on Category 301 imports of combed cotton yarn ("yarn") from Pakistan.

2. On 24 December 1998, the United States filed a request for bilateral consultations with Pakistan, pursuant to Article 6.7 of the ATC, on the proposed safeguard measure. The United States attached to this request its Report of Investigation and Statement of Serious Damage or Actual Threat Thereof: Combed Cotton Yarn for Sale: Category 301 (December 1998) (the "Market Statement"), which formed the basis for the proposed safeguard measure. This Market Statement set out the results of the investigation of the conditions prevailing in the United States' market for yarn. It defined the domestic industry to be investigated and concluded that increased imports had caused serious damage, and actual threat thereof, to the domestic industry, and that this damage and threat were attributable to Pakistan.

3. The United States held bilateral consultations with Pakistan in February 1999, which did not result in a mutually agreed solution. Consequently, the United States imposed the transitional safeguard measure at issue in this dispute in the form of a quantitative restriction on Category 301 imports of  yarn from Pakistan. The safeguard measure was made effective for one year as of 17 March 1999 and was extended twice, each time for one further year, effective 17 March 2000 and 17 March 2001, respectively. 

4. The Textiles Monitoring Body (the "TMB") reviewed the matter, pursuant to Articles 6.10 
and 8.10 of the ATC, in April and in June 1999. The TMB concluded on both occasions that the United States had not demonstrated successfully that yarn was being imported into its territory in such increased quantities as to cause serious damage, or actual threat thereof, to its domestic industry producing like and/or directly competitive products. Accordingly, the TMB recommended that the safeguard measure introduced by the United States on imports of yarn from Pakistan be rescinded.² On 6 August 1999, the United States informed the TMB that it believed its action was justified under the provisions of Article 6 of the ATC and that it would maintain the safeguard measure.³ The United States and Pakistan held a further round of consultations in November 1999 but failed to reach a mutually agreed solution. 

5. On 3 April 2000, Pakistan requested the establishment of a panel, pursuant to Article 8.10 of the ATC, Article XXIII:2 of the General Agreement on Tariffs and Trade 1994 (the "GATT 1994") and Article 6 of the Understanding on Rules and Procedures Governing the Settlement of Disputes (the "DSU"). The factual aspects of this dispute are set out in greater detail in the Panel Report.⁴ The Panel considered Pakistan's claims that, in imposing the transitional safeguard measure, the United States acted inconsistently with Articles 6.2 and 6.4 of the ATC. Pakistan also requested that the Panel suggest, in accordance with the second sentence of Article 19.1 of the DSU, that the most appropriate way to implement the Panel's ruling would be to rescind the safeguard measure.⁵ 

6. In its Report, circulated to Members of the World Trade Organization (the "WTO") on 
31 May 2001, the Panel concluded that the transitional safeguard measure imposed by the United States on imports of yarn from Pakistan was inconsistent with the provisions of 
Article 6 of the ATC. Specifically, the Panel found that:

(a) Inconsistently with its obligations under [Article] 6.2, the United States excluded the production of combed cotton yarn by vertically integrated producers for their own use from the scope of the "domestic industry producing like and/or directly competitive products" with imported combed cotton yarn.

(b) Inconsistently with its obligations under Article 6.4, the United States did not examine the effect of imports from Mexico (and possibly other appropriate Members) individually.

(c) Inconsistently with its obligations under Articles 6.2 and 6.4, the United States did not demonstrate that the subject imports caused an "actual threat" of serious damage to the domestic industry.⁶ (footnote omitted)

7. The Panel further concluded that:

(a) Pakistan did not establish that the US determination of serious damage was not justified based on the data used by the US investigating authority.

(b) Pakistan did not establish that the US determination of serious damage was not justified regarding the evaluation by the US investigating authority of establishments that ceased producing combed cotton yarn.

(c) Pakistan did not establish that the US determinations of serious damage and causation thereof were not justified based upon an inappropriately chosen period of investigation and period of incidence of serious damage and causation thereof.⁷ 

8. The Panel concluded that the United States' safeguard measure had nullified and impaired the benefits accruing to Pakistan under the Marrakesh Agreement Establishing the World Trade Organization (the "WTO Agreement "), and in particular, under the ATC⁸. Finally, the Panel recommended that the Dispute Settlement Body (the "DSB") request the United States to bring its safeguard measure into conformity with its obligations under the ATC, and suggested this could best be achieved by the prompt removal of the safeguard measure.⁹ 

9. On 9 July 2001, the United States notified the DSB of its intention to appeal certain issues 
of law covered in the Panel Report and certain legal interpretations developed by the Panel, 
pursuant to paragraph 4 of Article 16 of the DSU, and filed a Notice of Appeal, pursuant to Rule 20  of the Working Procedures for Appellate Review (the "Working Procedures"). On 19 July 2001, the United States filed its appellant's submission.¹⁰ On 3 August 2001, Pakistan filed its appellee's submission.¹¹ On the same day, the European Communities and India each filed a third participant's submission.¹² 

10. The oral hearing in the appeal was held on 16 August 2001. The participants and third participants presented oral arguments and responded to questions put to them by the Members of the Division hearing the appeal.

II. Arguments of the Participants and Third Participants

A. Claims of Error by the United States - Appellant

1. Standard of Review

11. The United States claims that the Panel erred and exceeded the mandate of WTO dispute settlement panels set forth in Article 11 of the DSU by finding that, in assessing the conformity of a transitional safeguard measure with Article 6 of the ATC, it could consider evidence that was not in existence at the time of the competent authority's determination.

12. In the United States' view, the Panel misinterpreted the standard of review applicable to its assessment of the conformity of the transitional safeguard measure at issue with Article 6 of the ATC. In challenges to a transitional safeguard measure, the question before a panel is whether the determination, at the time it was made, was consistent with the requirements of Article 6 of the ATC. Such an assessment can be made only on the basis of facts in existence at that time. Examining a Member's determination on the basis of evidence that did not exist at that time would permit panels to strike down the determination of the competent authority for failing to anticipate facts that could emerge in the future. The United States argues that such a review would not be an "objective assessment" of the matter at issue, but would instead constitute a de novo review. 

13. The United States submits that WTO jurisprudence strongly supports limiting a panel's consideration of evidence to that in existence at the time the competent authority made its determination. For instance, the panel in United States - Measure Affecting Imports of Woven Wool Shirts and Blouses from India ("United States - Shirts and Blouses "), an ATC dispute, found that an objective assessment must be based on facts in existence at the time of the determination.¹³ The panels that reviewed the consistency of safeguard measures under the Agreement on Safeguards in Korea - Definitive Safeguard Measure on Imports of Certain Dairy Products ("Korea - Dairy Safeguard ") and United States - Definitive Safeguard Measures on Imports of Wheat Gluten from the European Communities ("United States - Wheat Gluten Safeguard ")¹⁴ reached a similar conclusion.

14. The United States argues that, contrary to the Panel's reasoning, the finding of the panel in Argentina - Safeguard Measures on Imports of Footwear ("Argentina - Footwear Safeguard ") that a panel may have to consider the raw information from which the data to be scrutinized were compiled, does not support the Panel's conclusion.¹⁵ The Panel sought to distinguish between relying on post-determination evidence to (i) reinvestigate the market situation and (ii) evaluate the "thoroughness and sufficiency" of the "investigation" of the competent authority. Such a distinction might at most, and in limited circumstances, justify consideration of the underlying data used to support a determination.¹⁶

15. The United States also submits that the Panel implied that "subsequent developments" could be treated differently from post-determination evidence and, unlike post-determination evidence, "subsequent developments" could not be taken into account by a panel. There is, however, no meaningful distinction between those two categories, as information concerning neither would have been available to the competent authority at the time it made its determination.

16. The United States claims that the Panel further erred in relying on what it perceived to be certain deficiencies in the ATC, notably the absence of a right of exporting Members to participate in the national investigation prior to the determination, to justify its consideration of post-determination evidence. Under Article 11 of the DSU, the extent of a panel's review is circumscribed by the text of the agreement it is reviewing. Articles 6.7 and 6.10 of the ATC provide exporting Members ample opportunity to contest the fact-finding and determination of the importing Member on a bilateral and multilateral basis.

17. The United States further argues that under the ATC, evidence that came into existence after the competent authority's determination may be considered by the TMB pursuant to Article 6.10 of the ATC. WTO dispute settlement panels have a more limited mandate than the TMB, as confirmed by the panel in United States - Shirts and Blouses. ¹⁷

18. In conclusion, the United States claims that if WTO dispute settlement panels were allowed to review a competent authority's determination on the basis of newly available evidence, competent authorities would be held responsible for facts unknown or unknowable at the time of their determinations. Under such circumstances, the United States submits, it would be impossible for a Member to make a determination that would withstand a panel review and respond in a timely manner to the damaging effects of an import surge, thus seriously impairing the transitional safeguard mechanism guaranteed by Article 6 of the ATC.

2. Definition of the Domestic Industry

19. The United States claims that the Panel erred in concluding that the United States breached Article 6.2 of the ATC by not including in its definition of the domestic industry yarn manufactured and consumed by vertically integrated fabric producers of the United States. According to the United States, the ATC permits the importing Member to define the domestic industry as the industry producing a product that was both like and directly competitive with the imported product. Vertically integrated fabric producers manufactured yarn that was like, but that was not directly competitive with the imported yarn, because the yarn produced by them was for their own consumption and was not destined "for sale" in the merchant market. Therefore, the United States' identification of the domestic industry, in this case, as the producers of yarn "for sale" in the merchant market, was consistent with the ATC. 

20. The United States submits that the Panel, in rejecting its domestic industry definition, disregarded the ordinary meaning of the connector "and/or" expressly used in Article 6.2 of the ATC and, contrary to customary rules of treaty interpretation, reduced the meaning of the term "and" to inutility. The Panel found that the phrase "like and/or directly competitive products" means: (i) every like product; (ii) every directly competitive product; and (iii) any overlap between the two. The Panel interpreted Article 6.2 as if it read "like or directly competitive", completely writing out the word "and" from the Article. The United States contends that the combination of the connectors "and/or" generally means "either together or as an alternative", and allows a range of industry identifications, including the one that it chose in this case. 

21. The United States also submits that the Panel ignored customary rules of treaty interpretation by referring first to other WTO agreements rather than to the ATC itself in analyzing the context of Article 6.2 of the ATC. In accordance with Appellate Body jurisprudence, the Panel should have focused on the particular provision to be interpreted¹⁸ and should have begun its interpretation within the "four corners" of the ATC¹⁹. Specifically, the Panel erroneously relied on jurisprudence pertaining to Article III of the GATT 1994, namely, the panel and Appellate Body reports in Korea - Taxes on Alcoholic Beverages ("Korea - Alcoholic Beverages").²⁰ That dispute involved the interpretation of a different phrase ("directly competitive or substitutable") of a different provision of a different agreement (Article III:2 of the GATT 1994). Therefore, the Panel erred in relying on the Appellate Body statement in Korea - Alcoholic Beverages that " 'like products' are, by definition, directly competitive and a subset of 'directly competitive or substitutable products' ". Unlike the present case, Korea - Alcoholic Beverages dealt exclusively with products competing in the marketplace, and not with products consumed within a vertically integrated company. When actually in the marketplace, all like products may also be directly competitive. Products consumed captively within vertically integrated companies never reach the marketplace and, therefore, they cannot be regarded as "directly competitive" with like products that are actually in the marketplace. 

22. In the United States' view, the Panel failed to properly account for the context provided by Article 6 of the ATC. The United States believes that its identification of the domestic industry was consistent with the Preamble and Article 6.1 of the ATC. Moreover, the United States does not consider that its definition creates an overly broad authority for an importing Member to take transitional safeguard measures. In this context, the United States points out that the definition of the domestic industry was only a starting-point and that a WTO Member could take safeguard measures only after fulfilling all the additional conditions set forth in Articles 6.2, 6.3 and 6.4 of the ATC. 

23. The United States asserts that its identification of the domestic industry is also consistent with the object and purpose of the ATC, which carefully balances the interests of exporting and importing Members. In the United States' view, the ATC definition of the domestic industry affords Members a certain degree of flexibility to use the transitional safeguard mechanism to address the issue of damaging surges in imports, thereby facilitating any necessary adjustment pending full integration of the textiles and clothing sector into the framework of the GATT 1994. 

24. Finally, the United States contends that the Panel's finding that yarn manufactured and consumed by vertically integrated fabric producers is directly competitive with imported yarn, is factually incorrect. The Panel "presumed" that imported yarn was actually competing with yarn produced by vertically integrated fabric producers for their internal consumption. However, this is not the case. According to the United States, the consistent de minimis nature of yarn purchases and sales of vertically integrated fabric producers over the years is further evidence of the fact that there is no direct competitive relationship between the yarn produced by them and the imported yarn. 

2. G/TMB/18, 29 April 1999, para. 32; G/TMB/19, 29 June 1999, para. 36.

3. G/TMB/R/57, 28 October 1999, para. 5; G/TMB/N/346, 24 September 1999.

4. Panel Report, paras. 2.1-2.10.

5. Ibid., para. 3.1.

6. Panel Report, para. 8.1.

7. Ibid., para. 8.2(a), (b) and (c).

8. Ibid., para. 8.3.

9. Ibid., para. 8.5. 

10. Pursuant to Rule 21 of the Working Procedures.

11. Pursuant to Rule 22 of the Working Procedures.

12. Pursuant to Rule 24 of the Working Procedure

13. Panel Report, WT/DS33/R, adopted 23 May 1997, as upheld by the Appellate Body Report, WT/DS33/AB/R and Corr.1, DSR 1997:I, 343, para. 7.21. 

14. Panel Report, Korea - Dairy Safeguard, WT/DS98/R and Corr.1, adopted 12 January 2000, as modified by the Appellate Body Report, WT/DS98/AB/R, para. 7.30; Panel Report, United States - Wheat Gluten Safeguard, WT/DS166/R, adopted 19 January 2001, as modified by the Appellate Body Report, WT/DS166/AB/R, para. 8.6.

15. Panel Report, WT/DS121/R, adopted 12 January 2000, as modified by the Appellate Body Report, WT/DS121/AB/R, para. 8.126.

16. United States' appellant's submission, para. 18.

17. Panel Report, supra, footnote 13, para. 7.21.

18. Appellate Body Report, United States - Import Prohibition of Certain Shrimp and Shrimp Products ("United States - Shrimp "), WT/DS58/AB/R, adopted 6 November 1998, para. 114.

19. Appellate Body Report, United States - Restrictions on Imports of Cotton and Man-made Fibre Underwear ("United States - Underwear "), WT/DS24/AB/R, adopted 25 February 1997, DSR 1997:I, 11, at 20.

20. Panel Report, WT/DS75/R, WT/DS84/R, adopted 17 February 1999, as modified by the Appellate Body Report, WT/DS75/AB/R, WT/DS84/AB/R; Appellate Body Report, WT/DS75/AB/R, WT/DS84/AB/R, adopted 17 February 1999.