WORLD TRADE G/SG/N/10/KOR/1/Suppl.1
1April 1997
ORGANIZATION(97-1296)
Original: English Committee onSafeguards
NOTIFICATION PURSUANT TOARTICLE 12.1(C)
OFTHE AGREEMENT ONSAFEGUARDS
Supplement
Thefollowing communication, dated 24March 1997, hasbeenreceived fromthePermanent
Mission ofKorea.
_______________
Further tomyletter of21January 1997, Iwishtoinform youthattheKorean Government
hastaken afinaldecision ontheapplication ofasafeguard measure oncertain dairy products. This
decision wastaken, andwentintoeffect on7March 1997.
Youwillrecall thatinmyaforementioned letter, Ireserved therightoftheKorean Government
toprovide further relevant information asnecessary. Inthisline,attached herewith isafurther
notification regarding thismatter, which Irequest becirculated asanaddendum toourprevious
notification under Article 12.1(c) oftheAgreement onSafeguards (G/SG/N/10/KOR/1 of
27January 1997).G/SG/N/10/KOR/1/Suppl.1
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ADDENDUM TONOTIFICATION UNDER ARTICLE 12.1(C) OF
THE AGREEMENT ONSAFEGUARDS
(G/SG/N/10/KOR/1 of27January 1997)
With respect tothesafeguard measure oncertain dairy products asnotified totheSafeguard
Committee through G/SG/N/10/KOR/1 on27January 1997, theGovernment oftheRepublic ofKorea
hereby notifies thecontents ofthesafeguard measure upon thetaking ofafinal decision on
7March 1997. Thefinaldecision wastaken afterhaving comprehensively reviewed theopinions of
countries which participated inthebilateral consultations (theEU,Australia andNewZealand on4and
5February 1997) andthespecial meeting oftheCommittee onSafeguards heldon21February 1997.
Thisisanaddendum tonotification G/SG/N/10/KOR/1 of27January 1997, which shallcontinue to
apply unless otherwise modified bythisAddendum.
1. Items subject tothesafeguard measure
Theproducts subject tothesafeguard measure fallunder fourcategories1oftheHarmonized
System ofKorea (HSK) :0404.10.2190, 0404.10.2900, 0404.90.0000 and1901.90.2000.
Among theabove products, milkmineral (calcium) concentrated product (limited touseas
anadditive fortheproduction ofmineral fortified food), whey protein concentrated product, milkprotein
concentrated product (limited touseasanadditive fortheproduction ofprotein fortified food), Chilean
special products andrawmaterial forproduction ofCerelac ofNestlé which arenot"mixtures ofmilk
powder" shallbeexempted from thesafeguard measure.
2. Date ofimplementation, duration andquota
Thesafeguard measure willgointoeffect asof7March 1997. Quotas during theperiod subject
tothemeasure areasfollows:
Mar.7 ’97-Feb. 98 Mar.’98-Feb. ’99 Mar.’99-Feb.2000 Mar.2000-Feb.2001
Quota
(tons)20,521 21,691 22,927 24,234
1Subheading numbers 0404.10.2190, 0404.10.2900 and0404.90.0000 were classified intooneitem
(0404.90.0000) when theKTC carried outtheinvestigation.
1. 0404.10.2190 (Modified whey/whey from which allorpartofthelactose, protein orminerals
havebeenremoved/otherthanLactoseremoved,demineralizedandwheyproteinconcentrates.)
2. 0404.10.2900 (Modified whey/other thanwhey from which allorpartofthelactose, protein
orminerals have been removed.)
3. 0404.90.0000 (Other thanwhey andmodified whey.)
4. 1901.90.2000 (Food preparations forgoods ofheadings 0401 to0404 except goods containing
more than10% cocoa powder.)G/SG/N/10/KOR/1/Suppl.1
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3. Method ofquota allocation
Quotas shallbecommonly allocated irrespective ofcountry oforigin andproduct. Thiscontent
wasannounced pursuant tolegalprocedures setforth intheForeign Trade Control Regulation.
Endusers ofimitation milkpowder suchasmilkprocessing companies, confectionery, bakery
companies, andfoodmanufacturing companies areentitled toimport imitation milkpowder. Thequota
forthefirstyearshallbeallocated onaproratabasistoendusers based onthequantity theyimported
inthepastwhile those forthefollowing years shallbedistributed priortothebeginning ofeachterm,
based ontheratioofimports recorded intheprevious year. However, aquantity notexceeding 10%
ofwhole quota shallbereserved fornewparticipants. Thefinalsubquota ofeachendusershallbe
fixed afterthequota fornewparticipants isadjusted totheextent thatitshallnotexceed theminimum
quantity tobeallocated toexisting endusers.
4. Consideration fordeveloping countries
Pursuant toArticle 9.1oftheAgreement onSafeguards, thissafeguard measure shallnotbe
applied against anyproduct originating inadeveloping country Member aslongasitsshare ofimports
oftheproduct concerned intheRepublic ofKorea doesnotexceed 3%,provided thatdeveloping country
Members withlessthan3%import share collectively account forlessthan9%oftotalimports ofthe
product concerned.
5. Others
Withaviewtohelping Member countries understand Korea 'snotification (G/SG/N/10/KOR/1)
of27January 1997inconnection withthissafeguard measure, thefollowing Attachment isprovided.G/SG/N/10/KOR/1/Suppl.1
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ATTACHMENT
Based ontheinjury review oftherelevant domestic industry, theKorea Trade Commission
(the"KTC") recommended thatasafeguard measure betaken against imported imitation milkpowder
togrant relief tothedomestic industry suffering serious injury. TheKTC made therecommendation
toimpose asafeguard measure forfouryears, toallow relief fromserious injury tothedomestic raw
milkandmilkpowder industry triggered bydrastically increased imports ofimitation milkpowder.
TheMinistry ofAgriculture &Forestry (the"MAF") reviewed therecommendation ofthe
KTC inaccordance withrelevant domestic lawsandrecognized theneedtointroduce thesafeguard
measure. Consultations wereheldbetween theGovernments oftheRepublic ofKorea, EU,Australia
andNew Zealand on4-5February 1997, inGeneva, andaspecial meeting oftheCommittee on
Safeguards washeldon21February 1997, afteranotification (G/SG/N/10/KOR/1 of27January 1997)
hadbeenmade forpriorconsultation withcountries involved pursuant totheAgreement onSafeguards.
TheMAF hasmade afinaldecision onthesafeguard measure afterhaving reviewed KTC's
findings andrecommendations andvarious issues raised byMembers concerned during thebilateral
consultations andspecial meeting oftheCommittee onSafeguards. Toenable abetter understanding
byMember countries concerned, more detailed information isprovided herein.
I. Procedure
1. Application ofinvestigation
TheNational Livestock Cooperatives Federation (the"NLCF") submitted totheKTC on
2May1996 apetition fortheinvestigation ofinjury tothedomestic industry inaccordance with
Article 32.1oftheForeign Trade ActandtheProvisions ofArticle 65ofitsEnforcement Decree.
Thepetition stated thatincreased imports ofdairy products (HSK 0404.90.0000, 1901.90.2000) from
theNetherlands, Belgium, andSweden caused serious injury tothedomestic dairy andmilkpowder
industries, orathreat thereof, following theimport liberalization ofthesaidproducts inJanuary 1993.
TheNLCF requested relief measures, including anHScodereclassification oftheproducts involved,
anincrease inthetariff rateforaperiod offouryears, andtheimposition ofquantitative restrictions
amounting tolessthan10,000 tons.
2. Decision ofinitiation ofinvestigation
Pursuant torelevant lawandenforcement decree1,theKTCdecided toinitiate aninvestigation
ondairy products on17May19962afterreviewing theapplicant 'spetition. TheNLCF isaproducers '
organization established under theLivestock Cooperatives Act. Ithasstanding torequest aninjury
determination pursuant toprovisions ofArticle 64oftheEnforcement Decree oftheForeign Trade
Actsince itsmembers, livestock cooperatives andfarms, account for43.7% ofdomestic rawmilk
productionand23.8%ofdomesticmilkpowderproduction.Inaddition,thepetitionclaimedthatimports
oftheproducts subject totheinvestigation were found tohaveincreased absolutely from 1993 to
February 1996, andtheinformation provided byNLCF pointed toadomestic industry suffering serious
injury from increased imports.
1Articles 32,33and40oftheForeign Trade Act,Articles 64,65,66and76oftheEnforcement Decree
oftheForeign Trade Act.
2Determination oftheKTC, 96-6 (17May 1996).G/SG/N/10/KOR/1/Suppl.1
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KTC initiated theinvestigation (KTC/Investigation Reference No.:Foreign Trade 32-1-96-1)
anddulypublished itsdecision toinitiate theinvestigation intheOfficial Gazette on28May1996
(KTC/Announcement No.1996-2). Notification oftheinitiation ofinvestigation wascirculated to
theWTO Members (G/SG/6/KOR/2).
3. Investigation ofinjury todomestic industry
TheKTCorganizedaninvestigationteamwhichcirculatedquestionnairestodomesticproducers,
importers andusers on13June1996, analyzed theresults ofthequestionnaires which werecollected
by15July1996, andconducted investigative visits todomestic producers, importers andusers. In
addition, theKTC investigated therelative condition ofthedairy product industries ofmajor dairy
product exporting countries, suchastheNetherlands, Belgium andSweden, through Korea Trade
Investment Promotion Agency (KOTRA). TheKTC alsoconsulted withtheMinistry ofHealth &
Welfare (MOHW) andtheMAF, which aretheagencies responsible fortheproducts involved, to
ascertain therelationship between policies ofdairy anddairy products industries andrelated industries.
4. Public hearing
TheKTC'sinvestigationteammadeitsinvestigationreport(draft)basedoninformationcollected
through theprocedure described above andmade thereport public toallparties concerned on
12August 1996. Based onthedraft oftheinvestigation report, apublic hearing attended bythe
applicant, importers, users, governments ofexporting countries, andrepresentatives ofrelated
associations, washeldon20August 1996.
Most dairy farmers, including those whoselltheirrawmilktomilkprocessing companies,
aremembers oflivestock cooperatives. Thus, theposition ofdairy farmers isidentical tothatofthe
livestock cooperatives. KTCalsoprovided non-NLCF milkpowder producers theopportunity tovoice
theirowns opinions. Atthepublic hearing, theKorea Dairy Industries Association ("KDIA"), an
organization ofmilkpowder producers notaffiliated withNLCF, submitted theopinion thatitwas
necessary torestrict imports ofimitation milkpowder.
On23September 1996, theKTC decided toextend theinvestigation period for30daysfrom
24September to24October 1996inaccordance withapplicable regulations3toreview theissues raised
atthepublic hearing.
5. Decision ofinjury toindustry
Based oninformation submitted bytheOffice ofAdministration andInvestigation oftheKTC
andpursuant totheprovisions ofArticles 33and34oftheForeign Trade ActandArticle 76ofthe
Enforcement Decree oftheForeign Trade Act,theKTCdetermined4thatincreased imports ofproducts
subject totheinvestigation caused serious injury tothedomestic industry producing directly competitive
products. This determination was circulated totheWTO Members through notification
G/SG/N/8/KOR/1.
3Provision 3ofArticle 33oftheForeign Trade ActandProvision 1ofArticle 76oftheEnforcement Decree
oftheForeign Trade Act.
4KTC determination (determination 96-20, 23October 1996).G/SG/N/10/KOR/1/Suppl.1
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6. Recommendation forrelief measure
TheKTCrecommendedtotheMAF,whichisthegovernmentauthorityinchargeoftheproducts
involved, thatasafeguard measure beimposed pursuant toArticle 34.1oftheForeign Trade Actand
Articles 71,72and74oftheEnforcement Decree oftheForeign Trade Act.
7. Prior consultation
TheMAF reviewed theKTC'srecommendation inaccordance withrelevant domestic laws
andregulations andjudged thatasafeguard measure wasneeded tograntrelief tothedomestic industry.
Inorder tomake itsfinaldecision onsafeguard measures, thegovernment oftheRepublic ofKorea
("ROK") circulated anotification (G/SG/N/10/KOR/1 of27January 1997) toprovide anopportunity
forconsultations withMember countries concerned inaccordance withtheAgreement onSafeguards.
ROKthenheldbilateralconsultationswiththeEU,AustraliaandNewZealandon4and5February1997
inGeneva, andalsoattended aspecial meeting oftheSafeguards Committee on21February 1997.
8. Implementation ofrelief measure
During theweekbeginning 24February 1997, theROKmade afinaldecision onrelief measures
tobeeffective asof7March 1997, afterreviewing various issues raised during theconsultations with
countries concerned andtherecommendation oftheKTC. Thisfinaldecision wasannounced tothe
public through notification intherevision of"Separated Notice ofExport-Import" andin"Detailed
Principle ofImport License onImitation Milk Powder."
II. Products Subject toInvestigation
1. Definition
Theimported products subject toinvestigation come under HSK5(products consisting ofnatural
milkconstituents, except whey) andHSK1901.90.2000 (food preparations forgoods ofheadings of
0401 to0404). They areskimmed milkpowder (orwhole milkpowder) mixed withwhey powder
ormaltconcentrate (hereinafter referred toas"imported products").
Thestandard name oftheimported product is"milk preparation" (or"skimmed milk
preparation"), though itisalsovariously called "imitation milkpowder," and"milk powder blend."
2. Tariff rate
Korea 'stariff rates ontheimported products foreachyearshall beasfollows:
1997 1998 1999 2000 2001
0404.90.0000
(other thanwhey)40% 40 40 40 39.4
1901.90.2000
(food preparation)38.8 38.4 38.0 37.6 37.2
50404.90.0000. Thisproduct wasseparated into0404.10.2190, 0404.10.2900 and0404.90.0000 dueto
revision ofHSK on1January 1997.G/SG/N/10/KOR/1/Suppl.1
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III. Definition ofDirectly Competitive Products andDomestic Industry
1. Directly competitive products
Inorder todetermine whether increase inimported products caused serious injury, orathreat
thereof, tothedomestic industry, theimported products concerned mustbefound tobe"likeordirectly
competitive products" withtheproducts ofdomestic industry.
Incomparing physical characteristics andquality, theimported products subject toinvestigation
werefound nottobe"like products" withdomestic rawmilkandmilkpowder duetodifferences in
ingredients (physical characteristics).
However, acomparisons offunction andcommercial usage showed thattheimported products
were"directly competitive products" withdomestic rawmilkandmilkpowder because theycanbe,
andareusedasrawmaterials tomanufacture processed milk, fermented milk, icecream, andother
dairy products asevidenced bythefactthatdomestic producers ofthese finaldairy products increased
theirpurchase oftheimported goods while decreasing theirpurchase ofdomestic rawmilkandmilk
powder.
2. Definition ofdomestic industry
Pursuant totherelevant laws6,"domestic industry" isdefined as"entire domestic producers
producing thelikeordirectly competitive products withspecific imported products subject tosafeguard
investigation" or"agroup ofdomestic producers producing amajor proportion oftotaldomestic
production".
However, theapplicable lawsalsostipulate thatinthecaseofadomestic producer which also
imports, onlyitsdomestic production shallbetreated aspartofthedomestic industry, andinthecase
ofadomesticproducerwhichproducesmorethanoneitem,onlytheproductionoftheproductconcerned
shallbetreated aspartofthedomestic industry.
Inthisinvestigation, the"domestic industry" istheindustry thatproduces rawmilkandmilk
powder. These products aredirectly competitive withtheimported products under investigation. Raw
milkproducersconsistofdairyfarminghouseholdsandmilkprocessingcompanieswhichdirectlyoperate
theirowndairyfarms;milkpowderproducersarelivestockcooperativesandmilkprocessingcompanies,
including producers, whocommission processing tothirdparties because oftheabsence offacilities
formanufacturing milkpowder.
Given thatKorean milkpowder producers alsoproduce dairy products other thanmilkpowder,
andimport theproducts under investigation aswell,theportion oftheproduction ofotherdairyproducts
andtheimport oftheproducts concerned wereexcluded fromtheinvestigation, andonlymilkpowder
production wasconsidered asapartofthedomestic industry. Inother words, incases where asingle
producer produced bothmilkpowder anddairy products, onlythemilkpowder portion ofproduction
wastreated aspartofthedomestic industry, while theportion ofmilkprocessing otherthanmilkpowder
processing wasnottreated aspartofthedomestic industry.
6Article 2-1oftheRegulation fortheRelief ofInjury totheDomestic Industry caused byImports.G/SG/N/10/KOR/1/Suppl.1
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IV. Serious Injury
1. Method ofuseofdata
Asrawmilkishighly perishable anditscollection cannot beadjusted tomeettemporary changes
indemand, allremaining rawmilkaftertheproduction ofmarket milk, fermented milkandother food
preparations isprocessed intomilkpowder. Some ofthismilkpowder isconsumed, while therest
isstored asinventory.
Rawmilk, milkpowder andimported products canbeusedfortheproduction ofprocessed
marketmilk,fermentedmilkandicecream.Theincreasedimportoftheproductssubjecttoinvestigation
hadadirect influence ondomestic inventories andtheprice ofmilkpowder. Increase inimported
products caused areduction intheconsumption ofdomestic rawmilkandmilkpowder, andthisthen
required theconversion ofsurplus rawmilkintomilkpowder.
Inthestatistics related todomestic industry during theinvestigation, theproduction quantity
ofrawmilkincluded production ofdomestic milkpowder. Likewise, theconsumption quantity of
rawmilkincluded consumption ofdomestic milkpowder since rawmilkanddomestic milkpowder
areclosely related.
Themost recent dataavailable wasutilized inthisinvestigation.
2. Increase inthequantity ofimports
Theincreaseofimportedquantityisdefinedasoccurringwhenimportshaveincreasedabsolutely
orrelativelyincomparisonwithdomesticproductionduringacertainperiod7.Ananalysiswasconducted
todetermine whether imported products wasincreased andwhether itwasanabsolute increase and/or
arelative increase compared withproduction ofdomestic products.
Imports ofproducts subject toinvestigation increased 384% from 3,217 tonsin1993 to
15,561 tonsin1994, 80.0% to28,007 tonsin1995, and16.9% during thefirst8months overthe
sameperiod oftheprevious year. Accordingly, imports oftheproducts concerned increased absolutely
from 1993 toAugust of1996.
Production ofdomestic rawmilkincreased by3.2% in1994 over1993 andby4.2% in1995
over1994, while imports increased by384% andby80.0% respectively. Forthefirsthalfof1996,
domestic rawmilkproduction roseby4.4% while theimports grewby16.9% overthecorresponding
period oftheprevious year. Thus, imports oftheproducts concerned alsoincreased relatively.
Although imports ofsubheading 1901.90.2000 products declined during theperiod under
investigation, thedifference between subheadings 0404.90.0000 and1901.90.2000 issimply thestarch
content. Items imported under thetwosubheadings areregarded asidentical since theyshow almost
nodifference interms ofusage. Therefore, thetotalimport ofsubheadings 0404.90.0000 and
1901.90.2000 combined increased bothabsolutely andrelatively.
7Article 2-3oftheRegulation fortheRelief ofInjury totheDomestic Industry caused byImports.G/SG/N/10/KOR/1/Suppl.1
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3. Condition ofdomestic industry
3.1 Production ofdomestic rawmilkandmilkpowder
Theproduction amount ofdomestic rawmilkandmilkpowder was1,857,873 tonsin1993,
1,917,398 tonsin1994, 1,998,445 tonsin1995, and1,069,224 tonsduring thefirsthalfof1996.
These figures represent annual increase ratesof3.2% in1994 and4.2% in1995, and4.4% during
thefirsthalfof1996 overthesame period oftheprevious year.
Theabove-mentioned increase indomestic rawmilkproduction wastaken intoconsideration
indetermining serious injury. Suchanincrease, however, wasfound nottobetheresult offavourable
market conditions, butrather ofcharacteristics oftheindustry which require allrawmilkproduced
tobecollected bylivestock cooperatives. Rawmilkwhich arenotsoldbydairy farmers andlivestock
cooperatives become inventory intheform ofmilkpowder because freshness ofrawmilkcannot be
maintained. Increase intheproduction amount ofrawmilkcannot, inthepresent case, beregarded
asanindicator ofpositive market conditions.
Theproduction ofrawmilkcannot betemporarily reduced without resorting totheslaughter
ofdairy cows. Rather thanreducing thesizeoftheirherds -theaverage sizeofwhich isquite small
-Korean dairy farmers continue normal levels ofrawmilkproduction evenduring periods ofweak
demand,sinceexcessrawmilkissuppliedtothelivestockcooperativesforconversionintomilkpowder.
Milkprocessing companies decreased theirpurchases ofrawmilkfromdairy farmers, while
increasing theirpurchase ofcheaper imported products. Asmilkprocessing companies curtailed their
purchases ofdomestic rawmilk, Korean dairy farmers wereforced toturntothelivestock cooperatives,
which wereobliged tocollect theunsold rawmilkproduced bytheirmember dairy farmers. Inshort,
theabsolute increase oftheimported products ledtoadrastic increase inthesurplus ofrawmilk, all
ofwhich wasthenconverted intomilkpowder.
3.2 Productivity andrateofcapacity utilization
Thereviewofproductionlevelincludedproductivityandcapacityutilization.Capacityutilization
wasalways 100% intherawmilkindustry since rawmilkisproduced bydairy cows, which cannot
beleftidlelikesome other form ofproduction.
Because theproduction ofmilkpowder isgreatly affected bythesupply anddemand ofraw
milk, andasproduction facilities cannot accommodate drastic changes intheshort term, areview
productivity canbereplaced byareview oftheproduction level.
Itisdifficult tocalculate theexact levelofrawmilkproductivity. However, theinvestigation
revealed thatdomestic rawmilkproduction increased slightly despite areduction inthenumber of
dairy farming households anddairy cows. Thisindirect indication ofincreased productivity isfound
tobetheresult ofadvances intechnology, notofchanges inthemarket condition. Thefactthatthe
domestic industry stagnated inspiteofincreased productivity, indicates thattheinjury tothedomestic
industry wascaused notbyitsinternal factors butbyexternal factors, i.e.,increased imports.
3.3 Consumption ofdomestic rawmilk(including milkpowder)
Theconsumption ofdomestic rawmilk(including milkpowder) was1,844,463 tonsin1993,
1,947,128tonsin1994,1,947,965tonsin1995,and984,934tonsduringthefirsthalfof1996,reflecting
adistinct decreasing trend from5.6% in1994to0.0% in1995and-2.0% during thefirsthalfof1996.G/SG/N/10/KOR/1/Suppl.1
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3.4 Share ofdomestic products
Ofthetotalmarket share, defined asincluding domestic rawmilkandmilkpowder, imported
milkpowder andimported products subject toinvestigation, portion occupied bydomestic rawmilk
andmilkpowder declined from 91.1% in1993 to87.8% in1994, 84.6% 1995 andthenincreased
slightly to85.4% during thefirsthalfof1996.
Theslight increase intheshare ofdomestic rawmilkduring thefirsthalfof1996, following
continued decreases since 1993, wasfound tobeatemporary phenomenon triggered bysalesofmilk
powder below manufacturing costinorder toreduce inventories which wasincurring storage costs
andexpenses.
3.5 Inventories ofdomestic milkpowder
Inventories ofdomestic milkpowder totalled 4,509 tonsattheendof1993, 1,517 tonsin1994,
6,565 tonsin1995 and14,994 tonsattheendofJuneof1996, reflecting inventory ratios of2.4%
in1993, 0.8% in1994, 3.3% in1995, and13.0% during thefirsthalfof1996vis-a-vis thetotaldemand.
Thetotal value ofinventories ofmilk powder attheendofJune 1996 wasestimated at
92,633 million Won(about US$122 million).
3.6 Employment
Thenumber ofdairyfarmers inKorea hasseenasteady decrease from28,219 in1993to25,617
in1994, 23,519 in1995, and22,725 attheendofJuneof1996.
Theemployment levelinthemilkpowder industry wasreviewed. However, noexact figure
couldbequantifiedbecausethoseworkersproducingprocessedmilkproductswouldperformthefunction
ofmanufacturing milkpowder aswell. Depending ontheneed, producers ofprocessed milkproducts
would alsowork inthecapacity ofmilkpowder producers.
3.7 Price
Theprice ofmilkpowder issubject tochange according tothemarket forces ofsupply and
demand, although thatofrawmilkismaintained atastable level fixed bythegovernment. The
government increased therawmilkprice twice during theperiod under investigation. Thesalesprice
ofmilkpowder bythelivestock cooperatives (periodic average price) fellfrom5,354 Won/kg in1993
to5,294 Won/kg in1994, increased slightly to5,388 Won/kg in1995, anddecreased sharply to
4,994 Won/kg during thefirstfourmonths of1996. There wasnocorrelation between suchchange
andseasonal factors.
Although thesalesprice ofimported products roseby381Won/kg during theperiod under
investigation, thesalesprice ofdomestic milkpowder dropped by360Won/kg.G/SG/N/10/KOR/1/Suppl.1
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Price comparison between imported anddomestic products
(Unit :Won/kg, Won)
1993 1994 1995 Jan-Apr.1996
Imported Products Import price (CIF) 1,750 1,689 1,709 2,008
Saleprice inKorea (A) 2,590 2,500 2,530 2,971
Domestic
ProductsSaleprice (B) 5,354 5,296 5,388 4,994
Manufacturing cost© 5,158 5,426 5,860 6,178
Difference (B-C) 196 _130 _472 _1,184
Price Difference B-A 2,714 2,796 2,858 2,023
3.8 Manufacturing cost
TheIncreased manufacturing costofmilkpowder wasinevitable given theincreased production
costofrawmilk(increase offeedcost,etc.). Manufacturing costperunitincreased from5,158 Won/kg
in1993 to5,426 Won/kg in1994, 5,860 Won/kg in1995, and6,178 Won/kg during thefirstfour
months of1996.
3.9 Loss perunit
Thedifference between salesprice andproduction costperunit(periodic average price) was
196Wonin1993, -130Wonin1994, -472Wonin1995, and-1,184 Wonduring thefirstfourmonths
of1996. Selling below manufacturing cost,which hascontinued since 1994, hadanoverall adverse
effect ongross profit, operating income andordinary income (LEBEIIT: Loss/Earning Before Extra
Items &Income Taxes, hereinafter referred toas"ordinary income") ofthelivestock cooperatives.
3.10 Financial analysis
3.10.a Profit (loss) oflivestock cooperatives
Itisimpossible toascertain estimate theoperating income ofKorean dairy farmers astheir
totalnumber exceeds 23,000 households andtheir operations are,forthemost part, small and
unsystematic.
However, profitability oflivestock cooperatives canbeusedtomeasure thefinancial condition
ofrawmilkproducers since these cooperatives areowned byindividual dairy farmers andtheprofits
aredistributed tothem.
Thefinancial balance sheets ofmilk processing operations ofthefollowing 14livestock
cooperatives werereviewed: Seoul Dairy Cooperative, Kangwon Dairy Cooperative, Chuncheon Dairy
Cooperative, Taeback Dairy Cooperative, Chungju Dairy Cooperative, Daejeon-Chungnam Dairy
Cooperative, Seohae Dairy Cooperative, Chunju Dairy Cooperative, Imsil Dairy Cooperative,
Kwangju-Cheonnam Dairy Cooperative, Taegu-Kyungbuk Dairy Cooperative, Pusan-Kyungnam Dairy
Cooperative, Kyungnam Dairy Cooperative andCheju Dairy Cooperative.
Gross profit, operating income andordinary income werereviewed asindicators forcalculating
theprofit orlossofthelivestock cooperatives. However, gross profit could notbeconsidered asanG/SG/N/10/KOR/1/Suppl.1
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adequate indicator ofprofit orlosssince itwascalculated bysimply deducting thecostofgoods sold
from salesrevenue.
Operating income wasnotanadequate indicator ofprofit orlosssincelosses otherthanoperating
loss(inparticular, losses fromaccumulated inventories) wasnotreflected. Therefore, ordinary income,
which reflected suchfactors, wasregarded astheappropriate indicator indetermining profit orloss.
Furthermore, ordinary income wastheprofit indicator forlivestock cooperatives which showed
changes ofvalue ofassets invested bymember dairy farmers.
Ordinary income (loss) oflivestock cooperatives
Theaggregate ordinary profit ofall14livestock cooperative was6,720 million Wonin1993,
4,721 million Wonin1994, 209million Wonin1995 and-17,546 million Wonduring thefirsthalf
of1996, while theratioofordinary income (loss) tosales(expenditure) was1.4%, 0.8%, 0.0% and
-5.3%, respectively.
Debt-to-capital ratio oflivestock cooperatives
Attheendofthefirsthalfof1996, seven ofthe14livestock cooperatives haddebt-to-capital
ratios (ordinary liabilities over capital) exceeding 1,000%. They were: Chuncheon Livestock
Cooperative, Chunju Livestock Cooperative, Imsil Dairy Cooperative, Kwangju-Cheonnam Dairy
Cooperative, Taegu-Kyungbuk Dairy Cooperative, Kyungnam Dairy Cooperative andCheju Dairy
Cooperative.
Capital lossoflivestock cooperatives
According topreliminary accounts settlement dataonlivestock cooperatives during thefirst
halfof1996, those cooperatives suffering anetlosstotalled 11,while those having depleted their
paid-in-capital numbered six.
3.10.b Loss ofmajor producers ofmilkpowder
TheSeoulDairyCooperativeandthePusan-KyungnamDairyCooperativeproducedacombined
totalof97.9% ofmilkpowder produced byallofthelivestock cooperatives in1995. Maeil Dairy
Co.,Haitai Dairy Co.,Vilac Co.,andLotte Ham&MilkCo.aremilkprocessing companies, which
produced 52.4% oftotalmilkpowder produced bymilkprocessing companies in1995. Seoul Dairy
Cooperative, Pusan-Kyungnam Dairy Cooperative, Maeil Dairy Co.,Haitai Dairy Co.,Vilac Co.and
Lotte Ham&MilkCo.combined accounted for63.7% oftotaldomestic production ofmilkpowder
in1995. Theoperating income ofSeoul Dairy cooperative, Pusan-Kyungnam Dairy Cooperative, Haitai
Dairy Co.,Vilac Co.,andLotte Ham &Milk Co.were reviewed8.
3.10.b.i Turnover
Netturnover frommilkpowder operations ofSeoul Dairy Cooperative andPusan-Kyungnam
Dairy Cooperative revealed adecreasing trend from11,937 million Wonin1993, 9,533 million Won
in1994, 11,589 million Wonin1995, andto2,310 million Wonduring thefirstfourmonths of1996.
Turnover frommilkpowder operations ofthemilkprocessing companies (Haitai Dairy Co.,
Maeil Dairy Co.,Vilac Co.,Lotte Ham &Milk Co.)decreased from 21,010 million Won in1994
to19,750 million Wonin1995.G/SG/N/10/KOR/1/Suppl.1
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3.10.b.ii Operating loss
Operating losses from milkpowder operations ofthelivestock cooperatives (Seoul Dairy
Cooperative andPusan-Kyungnam Dairy Cooperative) increased from-755million Wonin1993, -622
million Wonin1994, -1,244 million Wonin1995, and-681million Wonduring thefirstfourmonths
of1996.
Thecorresponding operating losses sustained bymilkprocessing companies (Haitai Dairy Co.,
MaeilDairyCo.,VilacCo.,LotteHam&MilkCo.)rosefrom-680millionWonin1994to-1,330Won
in1995.
4. Determination ofserious injury
Itwasdetermined thatthedomestic industry wassuffering serious injury based on,interalia,
thefollowing facts: themarket share ofdomestic rawmilkdecreased between 1993 andJune1996:
inventory ofdomestic milkpowders grew from4,509 tonsin1993to14,994 tonsinJune1996; sales
price witnessed adropwhile manufacturing costs increased; livestock cooperatives 'ordinary income
steadily decreased andregistered ahuge lossinthefirsthalfof1996; seven livestock cooperatives
hadadebttoequity ratioexceeding 1,000% while sixcooperatives depleted theirpaid-in-capital; and
employment decreased.
V. Causal Link
Inordertodeterminethecausalrelationshipbetweenincreasedquantitiesoftheimportedproducts
andserious injury tothedomestic industry, theKTCconducted extensive investigation intothemarket
share oftheimported products, price comparisons between imported anddomestic milkpowder, the
effect oftheimported products onsalesofdomestic rawmilkandmilkpowder, andtheinfluence of
factors other thanincreased imports onthedomestic industry.
1. Influence byincreased imports
1.1 Increase ofshare ofimported products anddisplacement ofdomestic production
Themarket share oftheimported products subject toinvestigation outoftotaldomestic
consumption(domesticrawmilk(includingmilkpowder),importedmilkpowder,andimportedproducts
concerned) continued torisefrom 1.6% in1993 to7%in1994, 12.2% in1995, and14.1% during
thefirsthalfof1996. Inparticular, theirshare intheconsumption ofmilkpowder andthelike(domestic
milkpowder, imported milkpowder, andtheimported products concerned) increased rapidly from
10.7% in1993, 38.4% in1994, 60.6% in1995, to69.4% forthefirsthalfof1996.
1.2 Increased imports triggered adecline inthesaleprice ofdomestic milkpowder
Theaverage import priceperunitinKorea was1,750 Won/kg in1993, 1,689 Won/kg in1994,
1,709 Won/kg in1995, and2,008 Won/kg forthefirstfourmonths of1996. Theaverage salesprice
oftheimported products inKorea was2,590 Wonin1993, 2,500 Wonin1994, 2,530 Wonin1995,
and2,971 Wonforthefirstfourmonths of1996. Theaverage salesprice ofdomestic milkpowder
dropped from 5,354 Won/kg in1993 to5,296 Won/kg in1994, 5,388 Won/kg in1995, and
4,994 Won/kg forthefirstfourmonths of1996.
Thepricedifference(periodicaverage)betweentheimportedproductsanddomesticmilkpowder
fluctuated from 2,764 Wonin1993 to2,796 wonin1994, 2,858 Wonin1995, and2,023 WonforG/SG/N/10/KOR/1/Suppl.1
Page14
thefirstfourmonths of1996. Thiswideprice gaphasforced Korean producers tolower theprice
ofdomestic milkpowder, eventually making salesbelow manufacturing costinevitable.
Analysis showed thatastheshare ofimported products intotalconsumption increased, the
salesprice ofdomestic milkpowder dropped from 5,354 Won/kg in1993 to4,994 Won/kg forthe
fourmonths of1996. Thus, increased imports oftheproducts subject toinvestigation caused theprice
ofdomestic milkpowder todrop.
Asimports oftheproducts under investigation increased, thegapbetween thesalesprices and
manufacturing costs ofdomestic milkpowder widened from196Wonin1993 to-130Wonin1994,
-472Wonin1995, and-1,184 Wonforthefirstfourmonths of1996.
1.3 Increased share oflivestock cooperatives incollecting rawmilkandshrinkage of
white market milksector
Theshare oflivestock cooperatives 'rawmilkcollection inKorea increased from40.56% in
1990 to41.14% in1991, 40.19% in1992, 41.36% in1993, 42.80% in1994, 44.30% in1995, and
45.30% forthefirstfourmonths of1996because milkprocessing companies either stopped purchasing
orreduced thepurchase amount ofdomestic rawmilk. Instead, themilkprocessing companies would
purchase thecheaper imported products inmanufacturing processed milkandother dairy products to
maximize profit. Theeffect wastheshare ofwhite market milk, which canonlyusedomestic raw
milk, decreased from 92.9% in1990 to92.4% in1991, 92.4% in1992, 91.3% in1993, 88.6% in
1994, 83.8% in1995, and82.1% forthefirsthalfof1996. Inconclusion, increased imports ofthe
products subject toinvestigation hadanadverse effect onthewhite market milksector.
1.4 Increased imports caused injury todomestic industry
Given theabove, itisapparent thatimported products increasingly replaced domestic products
interms ofover-all market share, andmarket share inthemilkpowder andwhite milkmarket during
theperiod under investigation. Thepricedifference between theimported anddomestic products forced
domestic producers todecrease theirprice tothepoint ofsalesbelow cost, andtostockpile excess
inventory ofunsold milkpowder. Faced withincreasing competition from imported products, the
number ofdairy farmers decreased aswell. Therefore, increased imports oftheproducts under
investigation were found tobethecause ofserious injury tothedomestic industry.
2. Other factors
2.1 Theinfluence ofcontroversy overmilkquality
TheKorea Food Industries Association (the"KFIA") andmilkproducts-exporting countries
presented theiropinion thatthecontroversy overmilkquality wasamajor cause ofserious injury to
thedomestic industry. After examining thefactsrelated tothecontroversy which occurred fromOctober
toNovember 1995, itwasacknowledged thatthisincident didreduce thedemand formarket milk,
though onlytemporarily. Itwasdetermined thatthecontroversy ceased tobeacause ofreduced market
milkdemand inJanuary 1996. Thequality dispute affected onlythree months ofconsumption out
ofaninvestigation period totalling 42months. Noevidence wassubmitted byanyoftheparties
concerned which demonstrated thattheinjury caused bythequality dispute wasasserious orpersistent
asthatcaused byincreased imports.G/SG/N/10/KOR/1/Suppl.1
Page15
2.1.a Reason whyKTC rejected analysis presented bytheKFIA
KFIA claimed that, oftheincreased inventories ofdomestic milk powder, 81.17% was
attributable toreduced consumption ofmarket milkcaused bythemilkquality controversy, 8.03%
toincreased production ofrawmilk, and4.80% toincreased imports ofmilkpowder.
Theanalysis andconclusion presented bytheKFIA wasrejected forseveral reasons. First,
themethodology employed bytheKFIA wasflawed. Toderive atthefindings, theKFIA tookthe
increase ofproduction rateofmarket milkandrawmilkfromNovember 1994toJune1995andsimply
multiplied theratebytheactual production forthesame period toforecast theNovember 1995 to
June1996 production amount ofmarket milkandrawmilk. KFIA assumes these projections are
appropriate production levels fortheperiod covering November 1995toJune1996. Theactual amount
ofproduction ofmarket milkandrawmilkfortheperiod covering November 1995toJune1996was
lessthantheforecasted amount. KFIA attributed thedifferential between theforecasted amount and
theactual production amount toquality dispute. KTC determined thatitwasinappropriate takeone
yearfromNovember 1994toJune1995asbeing representative todetermine theproduction levelfor
November 1995 toJune1996. Second, incalculating theincreased inventories ofmilkpowder and
increased imports ofproducts under investigation, theKFIA useddifferent periods forcomparison.
Third, therewasinsufficient evidence toestimate thevolume ofinventory reduction inthenon-livestock
cooperative sector.
2.1.b Review onmaterial submitted byother Parties concerned
Parties concerned other thantheKFIA could notprovide evidence thatthecontroversy over
milkquality wasasubstantial cause ofinjury totheindustry.
2.2 Influence ofreduced imports ofmilkpowder
Ithasbeennoted thattheincrease inimports oftheproducts under investigation contributed
toareduction inimports ofmilkpowder from14,843 tonsin1993, 11,581 tonsin1994, 7,576 tons
in1995, to583tonsinthefirsthalfof1996. However, ithasalsobeennoted thatthereisanimportant
difference between theimports oftheproducts under investigation andthose ofmilkpowder. The
milkpowder imported byROK in1993-1994 wastosupplement theshortage ofdomestic rawmilk
andmilkpowder, andwasallocated tousers atreasonable prices.
Duringtheperiodof1993-1995theimportsofproductsunderinvestigationgrewby24,790tons,
while those ofmilkpowder fellby7,267 tons. Therefore, thedecreased imports ofmilkpowder had
averyslight, albeit positive, impact ontheinjury tothedomestic industry compared withtheincreased
imports oftheproducts under investigation.
2.3 Review ofdemand
2.3.1. Review oftheOverall Consumption
Thetotalconsumption ofrawmilk(including milkpowder) was2,025,063 tonsin1993,
2,218,738 tonsin1994, 2,303,795 tonsin1995 and1,153,964 tonsinthefirsthalfof1996. Given
thisoverall increase inconsumption, theinjury tothedomestic industry isnotattributable toadecrease
inconsumption.G/SG/N/10/KOR/1/Suppl.1
Page16
2.3.2 Explanation ofdecrease ofwhite market milkandincrease ofprocessed milksales
andconsideration ofchanges inconsumer preference
Thesalesratioofprocessed milktowhite market milkremained stable during theperiod of
1990-1992 butprocessed milkoccupied alarger proportions asof1993. Thisshiftwasfound tobe
attributable tomilkprocessors seeking tochange theproduction structure inorder tomaximize their
profits through theuseofcheaper imported products, asopposed tochanges inconsumer preference.
2.3.3 Consumption offinal dairy products
Theconsumption quantity ofmarket milkandfermented milk(forwhich statistics arenot
available) wasmeasured byproduction quantity ofthesame products because theirshelf-life isshort
andtheproducers could quickly adjust theirproduction inaccordance withthemarket situation. Dairy
products consumption ismeasured inthisway-which could affect therawmaterial usage ofimported
products subject toinvestigation aswellasdomestic rawmilk, domestic milkpowder andimported
milkpowder -increased during theperiod of1993¡June 1996. Therefore, itwasnotregarded asa
cause ofinjury tothedomestic industry.
2.3.4 Review ofprice trend ofmilkproducts
Increases inmarket milkprices inearly 1993 andinApril-May 1996 wasfollowed bya
temporary decline inconsumption. However, theprice increases came onlyatthebeginning andthe
endofinvestigation period, andthuscould nothavebeenasubstantial cause ofinjury tothedomestic
industry.
2.3.5 Review ofseasonal influence
Seasonal factors canalsohaveaneffect onthesupply anddemand ofdairy products. While
production israrely influenced greatly byseasonal factors, consumption often is.TheKTC reviewed
theeffect ofseasonal changes using monthly dataandforecasts, butfound noevidence thatfactor was
related totheinjury tothedomestic industry.
2.3.6 Review oftheeffect ofother dairy products oninjury
TheROKanalyzed thepotential effect ofthesituation inother dairy products sectors, including
thewhite market milk, milkpowder preparation, evaporated milk, butter andcheese which doesnot
useimported imitation milkpowder. Theproduction andconsumption ofthesedairyproducts increased
during theperiod ofthesurvey. Accordingly, theconsumption ofrawmilkanddomestic milkpowder,
which aretherawmaterials ofthese dairy products, increased. Nevertheless, therawmilkandmilk
powder industry suffered serious injury. Therefore, noconnection could beestablished between the
effect onthese dairy products andinjury todomestic industry. Imports andconsumption ofcheese
rosecontinuously. However, given thedynamics ofKorean cheese industry9,thisconsumption increase
hadlittleornoeffect ontheconsumption ofdomestic rawmilkormilkpowder.
2.4 Review ofprice decision bythegovernment
Thepriceofrawmilkisdetermined bythegovernment bytaking intoaccount production costs,
influence ondomestic commodity prices, domestic supply anddemand, etc.Theprice setbythe
government isnotanobligatory price butrather abaseprice forcontracts between dairy farmers and
milkprocessing firms. Therefore, thisdidnotaffect thedomestic industry adversely. Ifthegovernment
hadnotsetabaseprice andthelivestock cooperatives hadrefused tocollect rawmilk, dairy farmers
would havebeendirectly injured.G/SG/N/10/KOR/1/Suppl.1
Page17
3. Conclusion oncausal link
Inlightoftheabove causation analysis, itistheconclusion oftheKTC thattheserious injury
tothedomestic industry wascaused bythesharp increase ofimported products.