WORLD TRADE
ORGANIZATIONWT/DS166/R
31 July 2000
(00-3012)
Original:  English
UNITED STATES – DEFINITIVE SAFEGUARD MEASURES
ON IMPORTS OF WHEAT GLUTEN FROM THE
EUROPEAN COMMUNITIES
Report of the Panel
The report of the Panel on United States - Definitive Safeguard Measures on Imports of Wheat Gluten
from the European Communities is being circulated to  all Members, pursuant to the DSU.  The report
is being circulated as an unrestricted document from 31 July 2000 pursuant to the Procedures for the
Circulation and Derestriction of WTO Documents (WT/L/160/Rev.1).  Members are reminded that in
accordance with the DSU only parties to the dispute may appeal a panel report.  An appeal shall be
limited to issues of law covered in the Panel report and legal interpretations developed by the Panel.
There shall be no ex parte  communications with the Panel or Appellate Body concerning matters
under consideration by the Panel or Appellate Body.
Note by the Secretariat:  This Panel Report shall be adopted by the Dispute Settlement Body (DSB) within 60 days after the
date of its circulation unless a party to the dispute decides to appeal or the DSB decides by consensus not to adopt the report .
If the Panel Report is appealed to the Appellate Body, it sha ll not be considered for adoption by the DSB until after the
completion of the appeal.  Information on the current status of the Panel Report is available from the WTO Secretariat.WT/DS166/R
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TABLE OF CONTENTS
Page
I. INTRODUCTION................................................................................................................. .......................1
II. FACTUAL ASPECTS ............................................................................................................. ....................2
III. PROCEDURES ADOPTED BY THE PANEL CONCERNING PRIVATE CONFIDENTIAL
INFORMATION .................................................................................................................... ..............................4
IV. PARTIES' REQUESTS FOR FI NDINGS AND RECO MMENDATIONS........................................4
A. EUROPEAN COMMUNITY .............................................................................................................................4
B. UNITED STATES ............................................................................................................................... ............4
V. ARGUMENTS OF THE PARTIES ..................................................................................................... ......4
VI. ARGUMENTS OF THE THIRD PARTIES .........................................................................................5
VII. INTERIM REVIEW............................................................................................................. ...................5
A. COMMENTS BY THE EUROPEAN COMMUNITY .............................................................................................5
B. COMMENTS BY THE UNITED STATES ............................................................................................................6
VIII. FINDI NGS .................................................................................................................. .............................6
A. STANDARD OF REVIEW ............................................................................................................................... .6
1. Arguments of the parties ..................................................................................................... ..................6
(a) European Community.......................................................................................................... ..............................6
(b) United States............................................................................................................... .......................................7
2. Evaluation by the Panel ...................................................................................................... ..................7
B. PANEL REQUEST FOR CERTAIN CONFIDENTIAL INFORMATION REDACTED FROM THE PUBLISHED USITC
REPORT ............................................................................................................................... ................................8
C. EVALUATION OF CLAIMS ...........................................................................................................................11
1. Claims under Articles 2.1 and 4 SA and Article XIX of  the GATT 1994.............................................11
(a) Redaction of Certain Confidential Information from the Published USITC Report ........................................11
(i) Arguments of the parties.................................................................................................... .........................11
European Community............................................................................................................. .........................11
United States.................................................................................................................. ..................................11
(ii) Evaluation by the Panel .................................................................................................... ..........................12
(b) "increased quantities" of imports ........................................................................................... ..........................14
(i) Arguments of the parties.................................................................................................... .........................14
European Community............................................................................................................. .........................14
United States.................................................................................................................. ..................................15
(ii) Evaluation by the Panel .................................................................................................... ..........................15
(c) Serious Injury .............................................................................................................. ....................................16
(i) Arguments of the parties.................................................................................................... .........................16
European Community............................................................................................................. .........................16
United States.................................................................................................................. ..................................16
(ii) Evaluation by the Panel .................................................................................................... ..........................17
Did the USITC evaluate all relevant factors?................................................................................... ................17
Factors listed in Article 4.2(a) ............................................................................................... .....................18
     Factors not listed in Article 4.2(a) ...................................................................................... ........................22
Arguments by the parties ....................................................................................................... .....................23
Evaluation by the Panel ........................................................................................................ ......................23
Is the USITC overall serious injury determination consistent with Article 4.2(a)?..........................................25
Arguments of the parties....................................................................................................... ......................25
Evaluation by the Panel ........................................................................................................ ......................25WT/DS166/R
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(d) Causation................................................................................................................... ......................................28
(i) whether upward trend in imports coincides with negative trends in injury factors .....................................28
Arguments of the parties....................................................................................................... ...........................28
European Community............................................................................................................. ....................28
United States.................................................................................................................. .............................30
Evaluation by the Panel ........................................................................................................ ...........................30
(ii) "under such conditions" - conditions of competition ........................................................................ ..........31
Arguments by the parties ....................................................................................................... ..........................32
European Community............................................................................................................. ....................32
United States.................................................................................................................. .............................32
Evaluation by the Panel ........................................................................................................ ...........................32
(iii) other factors and attribution............................................................................................. ...........................35
Did the USITC investigate other relevant factors in the context of causation?................................................35
Arguments of the parties....................................................................................................... ......................35
Evaluation by the Panel ........................................................................................................ ......................36
Did the USITC's examination ensure the non-attribution to imports of injury caused by other factors? .........38
Arguments of the parties....................................................................................................... ......................38
Evaluation by the Panel ........................................................................................................ ......................39
(iv) summary with respect to causation .......................................................................................... ...................44
(e) Exclusion of certain imports from the appli cation of the measure on the basis of origin ................................44
(i) Arguments of the parties.................................................................................................... .........................44
European Community............................................................................................................. .........................44
United States.................................................................................................................. ..................................45
(ii) Evaluation by the Panel .................................................................................................... ..........................46
2. Claims under Ar ticles 8 and 12 SA ............................................................................................ .........53
(a) Type and timing of notifications............................................................................................ ..........................53
(i) Arguments of the parties.................................................................................................... .........................53
European Community............................................................................................................. .........................53
United States.................................................................................................................. ..................................54
(ii) Evaluation by the Panel .................................................................................................... ..........................54
Compliance with Article 12.1 SA: the requirement of immediacy .............................................................55Requirement to make notification under Article 12.1(c) SA before implementation of the measure..........57
Summary........................................................................................................................ .............................60
(b) Adequacy of consultations................................................................................................... ............................60
(i) Arguments of the parties.................................................................................................... .........................60
European Community............................................................................................................. .........................60
United States.................................................................................................................. ..................................60
(ii) Evaluation by the Panel .................................................................................................... ..........................62
3. Claims under Article XIX of the GATT 1994 ("unfor eseen developments"); Article 5 SA and Article I
of the GATT 1994............................................................................................................... ..........................63
4. Claim under Article 4.2 of th e Agreement on Agriculture ..................................................................63
IX. CONCLUSIONS A ND RECOMMENDATION.................................................................................64WT/DS166/R
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ATTACHMENTS 1:  EUROPEAN COMMUNITY SUBMISSIONS ............................................65
1-1 FIRST WRITTEN SUBMISSION OF  THE EUROPEAN COMMUNITY................65
1-2 ORAL STATEMENT OF TH E EUROPEAN CO MMUNITY .................................110
1-3 EUROPEAN COMMUNITY REPLIES TO QUESTIONS FROM THE PANEL ...132
1-4 SECOND WRITTEN SUBMISSION OF THE
EUROPEAN CO MMUNITY ....................................................................................153
1-5 COMMUNICATION OF THE EUROPEAN COMMUNITY
CONCERNING PROPOSED PROCEDURES REGARDING
PRIVATE CONFIDENTIAL  INFORMATION........................................................181
1-6 EUROPEAN COMMUNITY ORAL STAT EMENT, SECOND MEETING ...........182
1-7 EUROPEAN COMMUNITY COMMENT S (ON US EXHIBIT 13) .......................200
1-8 RESPONSES OF THE EUROPEAN COMMUNITY TO THE ADDITIONAL
QUESTIONS FROM THE PANEL...........................................................................202
1-9 LETTER FROM THE EUROPEAN COMMUNITY CONCERNING
THE UNITED STATES RESPONSE TO THE PANEL'S REQUEST FOR
INFORMAT ION........................................................................................................209
1-10 COMMENTS OF THE EUROPEAN COMMUNITY ON THE
UNITED STATES RESPONSE TO THE PANEL'S REQUEST FOR
INFORMAT ION........................................................................................................211
1-11 FINAL COMMENTS OF THE EUROPEAN COMMUNITY ON
THE UNITED STATES' LETTER TO THE PANEL OF22 FEBRUAR Y 2000.................................................................................................213
1-12 COMMUNICATION OF THE EUROPEAN COMMUNITY
CONCERNING NEWLY PROPOSED PROCEDURES GOVERNING
PRIVATE CONFIDENTIAL  INFORMATION........................................................214
1-13 COMMUNICATION OF THE EUROPEAN COMMUNITY ON THE
UNITED STATES COMMUNICATION CONCERNING NEWLY PROPOSED
PROCEDURES GOVERNING PRIVATE CONFIDENTIAL INFORMATION ....216
1-14 ORAL STATEMENT OF THE EUROPEAN COMMUNITY AT THE
ADDITIONAL MEETING OF THE P ANEL WITH THE PARTIES ......................217
1-15 ANSWER OF THE EUROPEAN COMMUNITY TO THE ADDITIONAL
QUESTION FROM THE PANEL.............................................................................227
ATTACHMENTS 2:  UNITED STATES SUBMISSIONS ............................................................230
2-1 FIRST WRITTEN SUBMISSION OF  THE UNITED  STATES ..............................230
2-2 UNITED STATES OR AL STATEMENT.................................................................277
2-3 UNITED STATES CLOSI NG ORAL STAT EMENT ..............................................281
2-4 UNITED STATES REPL IES TO QUE STIONS .......................................................284
2-5 SECOND WRITTEN SUBMISSION OF  THE UNITED  STATES .........................311
2-6 COMMUNICATION OF THE UNITED STATES CONCERNING
PROPOSED PROCEDURES GOVERNING PRIVATE CONFIDENTIAL
INFORMAT ION........................................................................................................333
2-7 UNITED STATES ORAL STAT EMENT, SECOND MEETING............................334WT/DS166/R
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2-8 UNITED STATES RESPONSES TO QUESTIONS FROM THE
PANEL AT THE SECOND MEET ING OF THE PANEL .......................................345
2-9 LETTER OF THE UNITED STATES RESPONDING TO THE
PANEL'S REQUEST FO R INFORMATION ...........................................................351
2-10 COMMENTS OF THE UNITED STATES ON THE PANEL'S
PROCEDURES GOVERNING PRIVATE CONFIDENTIAL INFORMATION ....353
2-11 RESPONSE OF THE UNITED STATES TO THE
EUROPEAN COMMUNITY LETTER  OF 11 FEBR UARY 2000 ..........................360
2-12 COMMUNICATION OF THE UNITED STATES CONCERNING NEWLY
PROPOSED PROCEDURES GOVERNING PRIVATE CONFIDENTIALINFORMAT ION........................................................................................................362
2-13 FINAL COMMENTS OF THE UNITED STATES CONCERNING NEWLY
PROPOSED PROCEDURES GOVERNING PRIVATE CONFIDENTIAL
INFORMAT ION........................................................................................................363
2-14 ORAL STATEMENT OF THE UNITED STATES AT THE ADDITIONAL
MEETING OF THE PANEL WITH THE PARTIES................................................365
2-15 RESPONSES OF THE UNITED STATES TO THE ADDITIONAL
QUESTIONS FROM THE PANEL...........................................................................373
ATTACHMENTS 3:  THIRD PARTY SUBMISSIONS ................................................................376
3-1-1 SUBMISSION OF AUSTRALIA..............................................................................376
3-1-2 ORAL  STATEMENT OF AUSTRALIA...................................................................381
3-2-1 SUBMISSION OF  CANADA ....................................................................................383
3-2-2 ORAL STATEMEN T OF C ANADA ........................................................................390
3-2-3 REPLIES OF CANADA TO QUESTIONS FROM THE PANEL
AND THE EUROPEAN COMMUNITY ..................................................................393
3-3-1 SUBMISSION OF NE W ZEALAND........................................................................396
3-3-2 ORAL STATEMENT OF  NEW ZEALAND ............................................................400
ATTACHMENT 4:  PROCEDURES GOVERNING PRIVATE CONFIDENTIAL
INFORMATION ............................................................................................................................... .403WT/DS166/R
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I. INTRODUCTION
1.1 On 17 March 1999, the European Community requested consultations with the United States
pursuant to Article 4 of the Understanding on Rules and Procedures Governing the Settlement of
Disputes (the "DSU"), Article XXII:1 of the General Agreement on Tariffs and Trade ("GATT
1994"), Article 14 of the Agreement on Safeguards ("SA") and Article 19 of the Agreement onAgriculture with regard to the definitive safeguard measures imposed by the United States on
imports of wheat gluten (WTO document WT/DS166/1).
1.2 On 1 April 1999, pursuant to paragraph 11 of Article 4 of the DSU, Australia notified its desire
to be joined in the consultations under Article XXII:1 of GATT 1994 (WTO document
WT/DS166/2).
1.3 The European Community and the United States held consultations on 3 May 1999 in Geneva,
but failed to reach a mutually satisfactory solution.
1.4 On 3 June 1999, the European Community requested the establishment of a panel pursuant to
Article XXIII of the GATT 1994, Articles 4 and 6 of the DSU, Article 19 of the Agreement on
Agriculture and Article 14 SA, with regard to the definitive safeguard measures imposed by theUnited States on imports of wheat gluten (WTO document WT/DS166/3).
1.5 At its meeting on 26 July 1999, the Dispute Settlement Body (the "DSB") established a Panel in
accordance with the request made by the Eu ropean Community in document WT/DS166/3.
1.6 At that meeting, the parties to the dispute also agreed that the Panel should have standard terms
of reference.  The terms of reference were, therefore, the following:
"To examine, in the light of the relevant provisions of the covered agreements cited
by the European Community in document WT/DS166/3, the matter referred to theDSB by the European Community in document WT/DS166/3, and to make such
findings as will assist the DSB in making the recommendations or in giving the
rulings provided for in those agreem ents". (WTO document WT/DS166/4)
1.7 On 11 October 1999, the parties to the dispute agreed on the following composition of the Panel:
Chairman: Mr. Wieslaw Karsz
Members: Ms. Usha Dwarka-Canabady
Mr. Alvaro Espinoza
1.8 Australia, Canada and New Zealand reserved their rights to participate in the panel proceedings
as third parties.
1.9 The Panel met with the parties on 20-21 December 1999 and 1-2 February 2000. It met with the
third parties on 21 December 1999.
1.10 Following the resignation on 11 April 2000 of Mr. Wieslaw Karsz as Chairman of the panel
originally constituted to consider this matter, the parties agreed, on 20 April 2000, that Mr.Maamoun Abdel-Fattah would serve as Chairman  of the Panel (WTO Document WT/DS166/6).WT/DS166/R
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1.11 Accordingly, the composition of the Panel was as follows:
Chairman: Mr. Maamoun Abdel-Fattah
Members: Ms. Usha Dwarka-Canabady
Mr. Alvaro Espinoza
1.12 The Panel in its new composition held one additional meeting with the parties on
18 May 2000.  At this m eeting, each party was invited to make an oral statement summarizing its case
on the basis of evidence already on the Panel reco rd, including correspondence between the Panel and
the parties.
1.13 The Panel issued  its interim report to the parties on 19 June 2000.  On 28 June 2000, the
European Community and the United States each submitted written requests for review by the Panel
of precise aspects of the interim report.  On 5 July 2000, the parties submitted written comments onone another's requests for interim review.  Section VII, infra , describes the interim review requests
and comments received, and the changes made to the report in response to those comments.
II. FACTUAL ASPECTS
2.1 This dispute concerns the imposition by the United States of a definitive safeguard measure, in
the form of a quantitative restriction, on certain imports of wheat gluten (HS headings 1109.00.10
and 1109.00.90).
2.2 The United States imposed the measure following an investigation initiated by the United States
International Trade Commission (the "USITC")  on 1 October 1997 (USITC Investigation No. TA–
201–67).  The USITC initiated the investigation on the basis of a petition filed by the Wheat Gluten
Industry Council of the United States, which consists of two of the four US producers of wheat
gluten, Midwest Grain Products, Inc. ("Midwest") and Manildra Milling Corporation ("Manildra").
2.3 In a communication dated 17 October 1997, the United States notified the WTO Committee on
Safeguards, pursuant to Article 12.1(a) SA, of the initiation of the safeguards investigation.  The
notification was circulated as a WTO document on 21 October 1997.
1
2.4 On 15 January 1998, the USITC determined that wheat gluten was being imported into the
United States in such increased quantities as to be a substantial cause of serious injury to the
domestic wheat gluten industry. The United States notified the WTO Committee on Safeguardspursuant to Article 12.1(b) SA of these findings in a communication dated 11 February 1998.
2
2.5 The USITC forwarded its injury findings and re medy recommendations to the President of the
United States on 18 March 1998. In a communication dated 24 March 1998, the United States
notified to the WTO Committee on Safeguards, pursuant to Article 12.1(b) SA, a finding of serious
injury caused by increased imports of wheat gluten.3  A copy of the USITC Report4, containing the
USITC's analysis and a summary of the information collected during the investigation and excluding
information identified as confidential information5, was provided with the United States notification.
                                                     
1 G/SG/N/6/USA/4, 21 October 1997.
2 G/SG/N/8/USA/2, 12 February 1998.
3 G/SG/N/8/USA/2/Rev.1, 27 March 1998.
4 USITC Publication 3088, March 1998.
5 A note on page iv of the USITC Report states: "Information that would reveal confidential
operations of individual concerns may not be published and therefore has been deleted from this report.  Suchdeletions are indicated by asterisks."WT/DS166/R
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2.6 On 3 April 1998, the United States Trade Representative (the "USTR") requested that the
USITC provide additional information on the degree to which the domestic industry's adjustment
plan would improve its competitiveness in the mid- and long-term. The additional information was
requested to assist the inter-agency group that was considering what action to recommend that the
United States President take. On 8 April 1998, the United States notified the WTO Committee onSafeguards, pursuant to Article 12.1(b) SA, of this request for additional information and informed
the Committee that the United States President would make his determination not later than
31 May 1998.
6
2.7 Under the "Proclamation 7103 of 30 May 1998 – To Facilitate Positive Adjustment to
Competition From Imports of Wheat Gluten"7 and the "Memorandum of 30 May 1998 - Action
Under Section 203 of the Trade Act of 1974 Concerning Wheat Gluten"8 by the United States
President, the United States imposed definitive safeguard measures on imports of wheat gluten
effective as of 1 June 1998.  In a communication dated 4 June 1998, the United States notified the
WTO Committee on Safeguards, pursuant to Article 12.1(c) and Article 9, footnote 2, SA,
concerning the taking of a decision to apply a safeguard measure and the non-application of the
safeguard measure to developing countries.9
2.8 The definitive safeguard measure consists of a quantitative restriction on certain imports of
wheat gluten to the United States imposed for a period of three years plus 1 day, with annual
increases in such quota limits of six per cent in the second year and the third year. The quantitative
restriction is set at 57,521,000 kg for the first year, an amount which represents the total average
imports in the crop years ending 30 June 1993 through 30 June 1995. Products from Canada10 and
certain other countries were excluded from the application of the safeguard measure.  Within theoverall quantitative restriction, the quota is allocated based on average import shares in the period
covered by the crop years ending 30 June 1993 through 30 June 1995.  The shares of countries
excluded from the quota are assigned on a pro rata  basis to countries subject to the quota.
2.9 Wheat gluten is produced from wheat flour.  About 80 per cent of wheat gluten consumed in the
US serves as input to the milling and baking i ndustry with year-to-year variations depending upon
the quality and protein content of the wheat crop. Wheat gluten must be used in the production of
high-fibre and multi-grain breads. Non-bakery uses, including the pet food industry, account for the
remaining 15-20 per cent of consumption. The process of manufacturing wheat gluten always results
in two products: one part of gluten and approximately five parts of starch. Effluents can be sent to a
distillery – which may be part of the wheat gluten company itself – for utilization in the productionof ethanol or food grade alcohol.  It is also possible to use certain parts of the effluents as animal
feed stock, and others as wheat feed.
                                                     
6 G/SG/N/8/USA/2/Rev.1/Suppl.1, 9 April 1998.
7 Exhibit US-2.  "Proclamation 7103 of May 30 1998 - To Facilitate Positive Adjustment to
Competition from Imports of Wheat Gluten", Federal Register, Vol. 63, No. 106, Wednesday 3 June 1998,"Presidential Documents", pp. 30359-30361.
8  Exhibit US-3.  "Memorandum of May 30 1998 - Action under Section 203 of the Trade Act of 1974
Concerning Wheat Gluten", Federal Register, Vol. 63, No. 106, Wednesday 3 June 1998, "Presidential
Documents", pp. 30363-30364.
9 G/SG/N/10/USA/2 and G/SG/N/11/USA/2, 8 June 1998.
10 In the "Memorandum of 30 May 1998 - Action Under Section 203 of the Trade Act of 1974
Concerning Wheat Gluten", supra  note 8, the United States President states: "I agree with the USITC's
findings under section 311 (a) of the NAFTA Implementation Act, and therefore determine, pursuant to section312(a) of the NAFTA Implementation Act, that imports of wheat gluten produced in Canada do not contribute
importantly to the serious injury caused by imports and that imports of wheat gluten produced in Mexico do
not account for a substantial share of total imports of such wheat gluten. Therefore pursuant to section 312(b)
of the NAFTA Implementation Act, the quantitative limitation will not apply to imports of wheat gluten fromCanada or Mexico."WT/DS166/R
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2.10 There are four US producers of wheat gluten: Manildra11, Midwest, Archer Daniels Midland
("ADM") and Heartland Wheat Growers ("Heartland" ). The latter began production in June 1996.
Heartland, Manildra and Midwest accounted for th e substantial majority of domestic production of
wheat gluten during the period of investigation.  Each of the companies produces wheat gluten and
wheat starch in a joint production process. He artland, Manildra and Midwest all produce other by-
products or derived products.  Midwest, in partic ular, further processes wheat starch into alcohol.
III. PROCEDURES ADOPTED BY THE PANEL CONCERNING PRIVATE
CONFIDENTIAL INFORMATION
3.1 In order to facilitate the Panel's obtention of information that had been deleted from the
public version of the USITC Report of March 1998, the Panel adopted "Procedures GoverningPrivate Confidential Information" as part of its working procedures on 1 February 2000.  Pursuant to
these procedures, only "approved persons" – i.e. a Panel member, a representative, or a Secretariat
employee -  whose selection or authorization has been notified to the Chairman of the Panel were
permitted to view or hear information designated by a party as private confidential information in the
course of the Panel proceedings.  Such approved persons were under an obligation not to disclosethat information, or allow it to be disclosed, to any other person other than another approved person,
except in accordance with the Procedures.  The Panel was under an obligation not to disclose private
confidential information in its interim and final reports, but could make statements of conclusion
drawn from such information.  These Procedures are set forth in Attachment 4.
3.2 The Panel proposed a further procedure to the parties on 24 February 2000.
12  However, in
light of communications received from the parties in respect of this proposed procedure, the Panel
did not adopt this procedure.
IV. PARTIES' REQUESTS FOR FINDINGS AND RECOMMENDATIONS
A. EUROPEAN COMMUNITY
4.1 In its submissions made before the Panel, the European Community requests the Panel to
find that the United States, by imposing the definitive safeguard measures on wheat gluten, has
breached Articles I and XIX of the GATT 1994 and Articles 2.1, 4, 5, 8 and 12 of the Agreement onSafeguards.
13
B. UNITED STATES
4.2 The United States submits that its definitive safeguard measure on wheat gluten satisfies the
United States' obligations under the Agreement on Safeguards and the GATT 1994.
V. ARGUMENTS OF THE PARTIES
5.1 The arguments of the parties are set out in their submissions to the Panel. The parties'
submissions as well as their communications and comments in respect of the request by the Panel for
certain information that had been identified as confidential information and deleted from the public
                                                     
11 Manildra is a wholly owned subsidiary of a United States company which is, in turn, wholly owned
by an Australian company.
12 See infra , para. 8.10, for a description of this proposed procedure.
13 See European Community first written submission, Attachment 1-1, para. 186; European
Community second written submission, Attachment 1-4, para. 129.  We note that in the request for the
establishment of a Panel (WT/DS 166/3) the European Community also alleged a violation of Article 4.2 ofthe Agreement on Agriculture. The European Community did not submit any arguments in support of thisclaim.  We address this claim infra , para. 8.221 .WT/DS166/R
Page 5
version of the USITC Report are attached. The co mmunications of the parties concerning newly
proposed procedures governing private confidential information are attached as well (see
Attachments 1 and 2).
VI. ARGUMENTS OF THE THIRD PARTIES
6.1 The arguments of the third parties, Australia, Canada and New Zealand, are set out in their
submissions to the Panel (see Attachment 3).
VII. INTERIM REVIEW
7.1 On 28 June 2000, the European Community and the United States each submitted written
requests for review by the Panel of precise aspects of the interim report issued on 19 June 2000.
Neither party requested an additional meeting with the Panel.  On 5 July 2000, the parties submittedwritten comments on one another's requests for interim review.
7.2 We have reviewed the comments presented by the European Community and the United States
and have finalized our report, taking into account those comments by the parties which we
considered justified, and also making certain technical and typographical refinements.
A. 
COMMENTS BY THE EUROPEAN COMMUNITY
7.3 In general, the European Community disagrees with the thrust of paragraphs 8.1 through 8.127
of the Panel's findings.  According to the European Community, the Panel does not draw the
necessary negative inferences from the refusal by the United States and its industry to disclose the
information requested by the Panel14 in spite of the fact that procedures for protecting private
confidential information had been adopted by the Panel after consulting the parties.15  The European
Community asserts that the Panel report does not correctly appreciate that information was
unjustifiably removed from the published version of the USITC Report, whilst it could have been
provided in a manner which did not impinge upon business secrets of individual companies, and
maintains its request that the Panel find that Article 4.2(c) SA is thereby violated.  Moreover, the
European Community does not find any basis in th e covered agreements for the Panel's view that
factors which are not explicitly mentioned in Article 4.2(a) SA only need to be investigated if they
have been raised in a certain manner during the national proceedings.  We have maintained theseparagraphs in our findings, and have added certain clarifying language in paragraph 8.59 pursuant to
the EC comment that the Panel does not draw the necessary conclusions in paragraphs 8.57-8.66
from the fact that the allocation methodology  concerning profits and losses could - and therefore
should - have been explained in detail in the USITC Report itself.
7.4 The European Community submits certain detailed comments and suggested textual
modifications with respect to paragraphs 8.5, 8.6, 8.91, 8.131, 8.151, 8.175 and 8.176.  In addition,
according to the European Community, footnote 156 and paragraphs 8.160, 8.177 and 8.182
incorrectly reflected the imports excluded from the application of the measure.  We have made
certain modifications pursuant to these comments, including in footnote 156.
7.5 With respect to the Panel's exercise of judicial economy in paragraphs 8.184 and 8.220, the
European Community requests that the Panel make at least factual findings with respect to the
claims of the European Community under Article XIX ("unforeseen developments") and Article I of
the GATT 1994 and Article 5 SA.  Having determined that the measure at issue is inconsistent with
Articles 2.1 and 4.2 SA, and exercising the discretion implicit in the principle of judicial economy,
we do not deem it necessary to examine whether the measure is also inconsistent with Article XIX of
                                                     
14 See infra , section  VIII.B.
15 See supra , section III.WT/DS166/R
Page 6
the GATT 1994 ("unforeseen developments"), nor whether the form, level and allocation of the
inconsistent measure are in breach of Article 5 SA or Article I of the GATT 1994.  We have clarified
our language to this effect in the cited paragraphs and have added footnote 201.
B. COMMENTS BY THE UNITED STATES
7.6 The United States suggests certain clarifications to the language in paragraph 8.69 concerning
the evaluation of relevant factors in addition to those listed in Article 4.2(a) SA.  The United States
requests the insertion of certain clarifications of its argument in paragraph 8.134 concerning the
USITC's findings relating to other possible causal factors.  The United States also comments on the
language used by the Panel in paragraph 8.209 concerning the requirement in Article 12.4 to notify
the provisional measure before applying it.  We have made certain modifications pursuant to thesecomments, including the insertion of additional language describing the United States argument in
paragraph 8.134 and the insertion of footnotes 72 and 129-135.
7.7 The United States further asserts that the Panel should delete certain portions of
paragraph 8.151.  We have maintained these portions of this paragraph, and have made certain
clarifications.  With respect to the United States comment concerning the role of footnote 1 SA inthe context of the imposition by free-trade area members of a safeguard measure, we have made
certain additions to paragraph 8.181.
VIII.  FINDINGS
A. 
STANDARD OF REVIEW
1. Arguments of the parties
8.1 The parties each made extensive submissions with respect to the standard of review that the
Panel should apply.  The parties agree that we should not engage in a de novo  review of the USITC
safeguard investigation and determination, and that Article 11 of the DSU articulates the appropriate
general standard of review for WTO panels.
(a) European Community
8.2 The European Community, on the basis of Article 11 of the DSU and the panel reports in
Korea-Definitive Safeguard Measure on Imports of Certain Dairy Products16 ("Korea-Dairy
Safeguard ") and Argentina-Safeguard Measures on Imports of Footwear17 ("Argentina-Footwear
Safeguard "), requests that the Panel make an objective assessment of whether:  i) the domestic
authority has considered all relevant facts as a whole, including specifically each factor listed in
Article 4.2(a) SA;  ii) the published report of the investigation contains adequate explanation of how
the facts support the determination made; and iii) the determination made is consistent with theUnited States’ obligations under the Agreement on Safeguards and the GATT 1994.  According to
the European Community, the role of the Panel is to determine whether the United States
International Trade Commission ("USITC") fully and objectively considered the evidence before it,
including any evidence that detracts from an affirmative determination of increased imports, serious
injury or causation.  The Panel should also verify the adequacy of the USITC’s reasoning byreviewing whether the findings and conclusions made by the USITC are consistent with the
evidence.  The European Community asserts that the Panel cannot be content with a superficial
glance at the issues, taking at face value the text of the USITC Report.  Rather, the European
                                                     
16 WT/DS98/R, paras. 7-26, 7.30-7.31, adopted as modified by the Appellate Body Report,
WT/DS98/AB/R, 12 January 2000 .
17 WT/DS121/R, para. 8.124, adopted as modified by the Appellate Body Report, WT/DS121/AB/R,
12 January 2000.WT/DS166/R
Page 7
Community submits that the Panel must concentrate on the substance of the evidence that actually is
in the Report or should have been in the Report since it was either considered during the
investigation procedure, or should have been considered as pertinent evidence that was publicly
available, or had been submitted to the USITC during the investigation procedure.  The European
Community submits to the Panel Exhibits EC-10, -12, -13 and -14, which are documents notsubmitted to the USITC during its investigation.
(b) United States
8.3 The United States submits that the Panel should apply the standard of review in Article 11 of the
DSU, as articulated by the panel in Argentina – Footwear Safeguard .
18  According to the United
States, the European Community misrepresents the standard of review that the European Communitypurports to espouse by advancing arguments that it claims undermine the USITC conclusions.
According to the United States, the European Community fails to demonstrate why the USITC’s
explanation of its decision was inadequate.  Instead, the European Community attempts to persuade
the Panel to engage in a de novo  investigation of the underlying facts.  The United States asserts that
it is inappropriate for a panel to attempt to conduct  its own assessment of the raw data reviewed by
the competent authority during its investigation.  In addition, with reference to Exhibits EC-10, 12,
13 and 14, the United States submits that the European Community should not be permitted to
submit data to a WTO panel that it could have submitted to the competent authority during the
investigation, but did not.  In the United States  view, this would invite strategic manipulation by
parties of the process before the domestic investigating authority.
2. Evaluation by the Panel
8.4 Article 11 of the DSU articulates the appropriate standard of review for panels examining the
consistency of a safeguard measure with the provisions of the Agreement on Safeguards.
19  Pursuant
to that Article, "a panel should make an objective assessment of the matter before it, including an
objective assessment of the facts of the case and the applicability of and conformity with the relevant
covered agreements...".
8.5 Thus, we agree with the parties that a de novo  review would be inappropriate.  However, we also
consider relevant the view of previous panels that for us to adopt a policy of total deference to the
findings of the national authorities could not ensure an "objective assessment" as foreseen by
Article 11 of the DSU.20  In determining whether the United States complied with its obligations
under the Agreement on Safeguards and the GATT 1994, our review will consist of an objective
assessment, pursuant to Article 11 of the DSU, of: whether the USITC considered all relevant facts,including an evaluation of “all relevant factors of an objective and quantifiable nature having a
bearing on the situation of [the] industry” in Article 4.2(a) SA; whether the USITC demonstrated the
existence of the causal link between increased imports and serious injury and did not attribute to
imports injury caused by other factors; whether the published report on the investigation contains an
adequate, reasoned and reasonable explanation of how the facts in the record before the USITCsupport the determination made with respect to increased imports, serious injury and causation; and,
consequently, of whether the determination made is consistent with the obligations of the United
States under the Agreement on Safeguards and th e GATT 1994.  We note that previous WTO panels
have adopted a similar approach.
21
                                                     
18 Ibid , para. 8.124.
19 We find support for our view in Appellate Body Report, Argentina – Footwear , supra , note 17,
para. 120.
20 Panel Report, Korea – Dairy Safeguard , supra , note 16, paras. 7.26, 7.30-7.31.
21 Panel Report, Argentina – Footwear Safeguard, supra, note 17, para. 8.124; Panel Report, Korea-
Dairy Safeguard , supra , note 16, paras. 7.26, 7.30-7.31.WT/DS166/R
Page 8
8.6 We do not see our review as a substitute for the investigation conducted by the USITC.  Our role
is limited to a review of the consistency of the United States measure with the Agreement on
Safeguards and Articles I and XIX of the GATT 1994.  Within the framework established by the
Agreement on Safeguards, it is for the USITC to determine how to collect and evaluate data and how
to assess and weigh the relevant factors in making determinations of serious injury and causation.  Itis not our role to collect new data, nor to consider evidence which could have been presented to the
USITC by interested parties in the investigation, but was not.  We refer in this regard to Exhibits
EC-10, -12, -13 and -14.  However, we do not consider it necessary here to make a specific finding
with respect to the admissibility of the United States government (Department of Agriculture)
statistics pertaining to monthly pricing data which the European Community submitted as part of itsExhibits EC-10 and EC-12 in conjunction with its first written submission.  These statistics were not
part of the record before the USITC, but the European Community argued that, as they were United
States government statistics, the USITC could and should have taken them into account.  The
submission by the United States of  Exhibit US-10 provided quarterly pricing data that were in the
USITC record but had previously been redacted from the public version of the USITC Report.  Asboth parties subsequently referred to, and relied on, the quarterly pricing data in Exhibit US-10 in the
course of these proceedings, we also referred to and relied on these data, which we deemed relevant
and sufficient for reaching our determination.  It was therefore not necessary for us to consider
whether or not to refer to pricing data outside the USITC record in reaching our determination.
22
B. PANEL REQUEST FOR CERTAIN CONFIDENTIAL INFORMATION REDACTED FROM THE PUBLISHED
USITC REPORT
8.7 The Panel considered that having access to certain information that had been redacted from the
public version of the USITC Report would facilitate its objective assessment of the facts of the case.
The Panel also considered that the adoption of certain procedures governing confidential information
would facilitate its obtention of such inform ation.  Accordingly, on 24 January 2000 the Panel
indicated to the parties that it proposed to adop t procedures governing the treatment of confidential
information, and sent a draft of the proposed procedures to the parties for their comments.  Aftergiving the parties an opportunity to comment on the draft procedures and considering the
communications received from the European Commun ity and the United States in this regard, the
Panel adopted the "Procedures Governing Private Confidential Information".
23  On 1 February 2000,
the Panel transmitted to the parties the following communication, containing a request by the Panel
to the United States for certain confidential information that had been redacted from the publicversion of the USITC Report:
"The Panel requests the United States to submit the following information furnished by
the domestic industry (or derived from information furnished by the domestic industry)
that was deleted from the public version of the ITC Report of March 1998:
-data on p. II-18, including table showing "individual industry costs on a per-
pound basis";
-Table 10 on p. II-19;
-data on p. II-20, including table showing "individual industry costs as a
percentage of the cost of goods sold" and information on cost allocation
methodology (but not including Table 11);
                                                     
22 The European Community submitted Exhibits EC-10 and EC-12 in conjunction with its first written
submission (Attachment 1-1), and referred to the statistics in EC Exhibit-12 in its first oral statement
(Attachment 1-2, paras. 15-16).  However, in its second written submission, Attachment 1-4, paras. 34-35, theEuropean Community referred to the USITC quarterly pricing data in Exhibit US-10.
23 Attachment 4.WT/DS166/R
Page 9
-Table 12 on p. II-21;
-Table 8 on p. II-16;
-Table C-1 (p. C-4); Table C-2 ( p. C-6); and Table C-3 (p. C-8).
Having given the parties an opportunity to comment on its "Proposed Procedures
Governing Business Confidential Information" and having considered the
communications received from the European Communities and the United States in thisregard, the Panel has adopted the attached "Procedures Governing Private Confidential
Information".  These Procedures supplement the working procedures already adopted by
the Panel.  In accordance with these Procedures, and in anticipation of the submission by
the United States of the requested information, the Panel requests that the European
Community notify the Chairman of the Panel and the United States of its representativeswho are "approved persons".
The Panel is aware of the provisions of Article 3.2 of the Safeguards Agreement.  The
Panel believes that the procedures in effect in this case are adequate to protect the
confidentiality of information submitted to it.  The Panel notes the recent statement by the
Appellate Body in  Canada – Measures Affecting the Export of Civilian Aircraft
(WT/DS70/AB/R, adopted 20 August 1999, para. 204) that "a refusal to provideinformation requested by the panel may lead to inferences being drawn about the
inculpatory character of the information withheld."
8.8 The United States did not submit the requested information to the Panel.  The response by the
United States to this request for information, as well as the subsequent related communications ofthe parties are attached.
24
8.9 On 24 February 2000, the Panel proposed further procedures to the parties for viewing the
requested information.  The communications of the parties with respect to these proposed procedures
are attached.25
8.10 On 1 March 2000, the Panel communicated the following ruling to the parties with respect to
the information requested by the Panel:
"In its communication to the Panel of 8 February 2000, the United States indicated that
the various domestic producers would grant permission for release of all the information
the Panel had requested if the Panel amended its Procedures Governing Private
Confidential Information as follows:
"… the procedures should be amended to make clear that:  1) the
Panel will review the CBI exclusively in camera ; and 2) any Panel
member, or WTO employee, who views or hears such information
shall be under an obligation not to disclose the information, or allow itto be disclosed, to any person.  For the reasons set out in the WGIC
letter, the companies concerned are not prepared to grant permission
for the CBI to be divulged to EC representatives."
                                                     
24 European Community -- Attachments 1-5,1-9 to 1-11; United States --Attachments 2-6, 2-9 to 2-11.
25 European Community -- Attachments 1-12, 1-13; United States --Attachments 2-12, 2-13.WT/DS166/R
Page 10
In its communication to the Panel of 11 February 2000, the European Community stated,
inter alia :
"The course of action suggested by the United States … would
irreparably damage the fairness of this dispute settlementprocedure, since the Panellists and the officials of the WTO
Secretariat assisting the Panel would have access to ex parte
communications, in flagrant breach of Article 18.1 of the DSU and
of the Rules of Conduct on the appointment of Panellists."
Article 18.1 of the DSU states:
"There shall be no ex parte  communications with the panel or
Appellate Body concerning matters under consideration by the
panel or Appellate Body."
The Panel considered that, in light of Article 18.1 of the DSU and the position expressed
by the European Community in this case, it should not view the requested information
under the conditions outlined by the United States.
On 24 February 2000, the Panel proposed further procedures to the parties for viewing the
requested information, as follows:
"No more than two representatives of the United States would bring
the requested information to a designated location at the premises of
the WTO in Geneva on Thursday 2 March 2000.  The Panel, two
professional staff of the WTO Secretariat, and no more than tworepresentatives of the European Communities would review the
information exclusively in camera .  These individuals would be under
an obligation not to disclose the information, or to allow it to be
disclosed, to any person.  No photocopies of the information would be
permitted.  The Panel, the two professional staff of the WTOSecretariat, and the representatives of the European Communities may
take written summary notes of the information for the sole purpose of
the Panel process.  Any such notes would be destroyed at the
conclusion of the Panel.  While the Panel would be under an obligation
not to disclose the information in its report, it could make statementsof conclusion drawn from such information."
In light of the communications received from the parties concerning these proposed
procedures, the Panel has decided not to adopt the proposed procedures.
Accordingly, the Panel has decided to proceed with its examination on the basis of the
record as it currently stands."
8.11 In our view, the protracted exchange of communications between the parties about the
circumstances under which the Panel should view the requested information demonstrates the
existence of a serious systemic issue as to the relationship between, on the one hand, the
confidentiality obligations under Article 3.2 SA of a Member’s investigating authorities with respectto confidential information obtained in the course  of a domestic safeguards investigation and, on the
other hand, the duties of Members when faced with a panel request for such confidential information
under Article 13 DSU.  The Panel’s efforts to develop a consensual approach to the conditions under
which the Panel might view the requested information were ultimately unsuccessful.WT/DS166/R
Page 11
8.12 We remain of the view that having access to the requested information would have
facilitated our objective assessment of the facts of this case, and of the matter before us.  We recall
the view expressed by a previous panel and the Appellate Body that the WTO dispute settlement
system cannot function optimally if relevant information is withheld from a panel.26  While the
submission of the requested information would certainly have furnished a more extensive basis forour examination, we consider that the Panel record  in this case -- including the USITC Report and
the oral and written submissions of the parties and third parties -- provides sufficient  basis for us to
conduct the objective assessment of the matter required by Article 11 of the DSU .
27
C. EVALUATION OF CLAIMS
1. Claims under Articles 2.1 and 4 SA and Article XIX of the GATT 1994
(a) Redaction of Certain Confidential Information from the Published USITC Report
(i) Arguments of the parties
European Community
8.13 The European Community argues that the United States violated Articles 2.1 and 4 SA, as
much of the data on which the USITC findings are based have been omitted from the public versionof the USITC Report.  According to the European Community, the USITC’s findings based on secret
data are unverifiable and unreviewable.  The European Community argues that Article 4.2(c) SA
presupposes that the detailed analysis and the demonstration of the relevance of factors are
published, unless confidentiality is really an issue.  The European Community does not contest that
under certain specific circumstances, the protection of certain information regarding individual
companies may be justified.  However, in the EC vi ew, confidentiality is not an issue in the context
of whether or not data in summary form, such as  aggregate data, is provided. According to the
European Community, the USITC could have disclosed the relevant elements of confidential
information while keeping it confidential, by providing aggregate data, or by describing the
developments in performance of an individual co mpany by using percentages or by showing trends
in indexed form.
United States8.14 According to the United States, the EC argument that a determination may be found
inadequately explained under the Agreement on Safeguards due to failure to disclose confidential
information flies in the face of the Agreement’s plain terms:  Article 3.2 SA prohibits domestic
authorities from disclosing confidential information.  Article 4.2(c) SA makes clear that the
requirement to publish a “detailed analysis of the case under investigation” and “demonstration ofthe relevance of the factors examined” cannot entail the publication of information treated as
confidential under Article 3.2 SA, as such publication shall be “in accordance with the provisions of
                                                     
26  In Canada – Measures Affecting th e Export of Civilian Aircraft , the Appellate Body observed that
the "continued viability of [the dispute settlement] system depends, in substantial measure, on the willingness
of panels to take all steps open to them to induce the parties to the dispute to comply with their duty to provide
information deemed necessary for dispute settlement " (WT/DS70/AB/R, adopted 20  August 1999, para. 204).
See also Panel Report, Chile – Taxes on Alcoholic Beverages , WT/DS87/R, WT/DS110/R, note 390, adopted
with Appellate Body Report, WT/DS87/AB/R, WT/DS110/AB/R, 12 January 2000.
27 We note that the United States deemed that the published USITC Report "provides sufficient
information for the Panel to conduct the analysis required by Article 11 of the DSU."  See United States
Response to Panel Question 3, Attachment 2-4, para. 7.  For its part, the European Community asserted that
"…it cannot be admissible for a party to contrive that a Panel is unable to carry out its tasks under Article 11 ofthe DSU simply by withholding self-proclaimed "confidential information"."  See European CommunityResponse to Panel Question 3, Attachment 1-3.WT/DS166/R
Page 12
Article 3.”  The United States submits that the use of percentages and indexes, as suggested by the
European Community, would not be adequate to al leviate the disclosure problems in this case.
According to the United States, when the universe of reporting companies is small, the USITC faces
the same problem in reporting data in percentage and index form as it faces in reporting the actual
aggregate data – i.e. the disclosure of confidential data.
(ii) Evaluation by the Panel
8.15 The issue before us relates to th e nature of the obligations that  Articles 2.1 and 4 SA, and
specifically Article 4.2(c) SA, imposes upon Members concerning the contents of the published
report of the safeguards investigation and their interaction with the obligations imposed upon
Members by Article 3.2 SA in respect of the treatment of "confidential" information in a domesticsafeguards investigation.
8.16 Several provisions of the Agreement are relevant to our consideration of this issue.  Article
4.2(c) SA provides:
"The competent authorities shall publish promptly, in accordance with the provisions of
Article 3, a detailed analysis of the case under investigation as well as a demonstrationof the relevance of the factors examined."
8.17 Article 3 SA is entitled "Investigation".  Article 3.1 SA provides, in relevant part:
"The competent authorities shall publish a report setting forth their findings and
reasoned conclusions reached on all pertinent issues of fact and law."
8.18 Article 3.2 SA deals specifically with the tr eatment of "confidential" information by the
investigating authorities in the course of the investigation.  It reads:
"Any information which is by nature confidential or which is provided on a
confidential basis shall, upon cause being shown, be treated as such by the competent
authorities.  Such information shall not be disclosed without permission of the party
submitting it.  Parties providing confidential information may be requested to furnish
non-confidential summaries thereof or, if such  parties indicate that such information
cannot be summarized, the reasons why a summary cannot be provided.  However, if
the competent authorities find that a request for confidentiality is not warranted and if
the party concerned is either unwilling to make the information public or to authorize
its disclosure in generalized or summary form, the authorities may disregard such
information unless it can be demonstrated to their satisfaction from appropriate sourcesthat the information is correct."
8.19 Thus, Article 4.2(c) SA, including by cross-reference Article 3 SA
28, requires written
presentation of a detailed analysis of the case, including the findings and reasoned conclusions
reached on all pertinent issues of fact and law and a demonstration of the relevance of the factors
examined, while maintaining the confidentiality of certain information.  Article 3.2 SA places an
obligation upon domestic investigating authorities not to disclose -- including in their published
report setting forth their findings and reasoned conclusions reached on all pertinent issues of fact and
                                                     
28 The European Community's request for establishment of the Panel, WT/DS166/3, which
establishes the Panel's terms of reference under Article 7 DSU, does not contain a claim under Article 3 SA.
Thus, we are not being asked to examine whether or not the United States fulfilled its obligations under
Article 3 SA.  Nevertheless, as the very terms of Article 4.2(c) expressly incorporate the provisions of
Article 3, it is difficult to see how a panel could examine whether a Member had complied with Article 4.2(c)without also referring to Article 3.  See, for example, Appellate Body Report, Argentina – Footwear
Safeguard , supra , note 17, para. 74.WT/DS166/R
Page 13
law and demonstrating the relevance of the fact ors examined -- information which is "by nature
confidential or which is provided on a confidential basis" without permission of the party submitting
it.  Article 3.2 SA does not define the term "confidential" nor does it contain any examples of the
type of information that might qualify as "by nature confidential" or "information that is submitted
on a confidential basis".
8.20 Article 3.2 SA requires that information that is by nature confidential or which is submitted
on a confidential basis shall, upon cause being shown, be treated as such by the competent
authorities.  In the absence of a detailed elaboration or definition of the types of information that
must be treated as confidential, we consider that the investigating authorities enjoy a certain amount
of discretion in determining whether or not information is to be treated as "confidential".  WhileArticle 3.2 does not specifically address the nature of any policies pertaining to the treatment of such
"confidential" information which a Member's investigating authority may or must adopt, that
provision does specify that such "information shall not be disclosed without permission of the party
submitting it".  The provision is specific and mandatory in this regard.  This furnishes an assurance
that the confidentiality of qualifying information will be preserved in the course of a domesticsafeguards investigation, and encourages the fullest possible disclosure of relevant information by
interested parties.
8.21 Given that the very terms of Article 4.2(c) expressly incorporate the provisions of Article 3,
and given the specific and mandatory language of Article 3.2 dealing with the required treatment of
information that is by nature confidential or is submitted on a confidential basis, the requirement in
Article 4.2(c) to publish a “detailed analysis of the case under investigation” and “demonstration of
the relevance of the factors examined” cannot entail the publication of "information which is bynature confidential or which is provided on a confidential basis" within the meaning of Article 3.2
SA.
8.22 The European Community asserts that aggregate data cannot be considered "confidential" in
this sense and that, even if it is "confidential", it could be presented in percentages or indexed form
so as to protect its confidentiality.
29  In response, the United States explains its confidentiality
policy30 and appends a copy of a memorandum relating to this policy.31  The USITC Report contains
the following text: "Note – Information that would reveal confidential operations of individual
concerns may not be published and therefore has been deleted from this report.  Such deletions are
indicated by asterisks".32
8.23 While the United States has described the USITC’s efforts to characterize as much
confidential information as possible in its Report without compromising the confidential nature of
that information, the USITC might ideally have been more creative in trying to provide the essence
of the confidential information in its findings in the published USITC Report.  We draw attention to
                                                     
29  We observe that the types of information redacted from the published version of the USITC Report
are generally the types of information that might be treated as confidential, relating inter alia  to profitability
data, input costs, value of assets, capital expenditures and R&D expenses, importers inventories and producers'imports.  We do not understand the European Community to argue that this type of information would never
merit confidential treatment.  Rather, we understand the EC to contest the redaction of such information in this
case because of the EC's view that it was "aggregate data" which could have been provided in summary form.
30 United States first written submission, Attachment 2-1, para. 156.  The United States submits that
its applicable domestic rules "assure that the publication of aggregate information does not disclose tocompetitors the confidential information of any firm.  Under that policy, when confidential business data comefrom one or two firms, the published report does not disclose the data.  Moreover, to assure that aggregationsdo not disclose a particular firm’s information, aggr egate summaries are not provided when the information
comes from three or more firms, but one firm accounts for 75 per cent of the total or two firms account for 90
per cent."
31 Exhibit US-9.
32 USITC Report, p. iv.WT/DS166/R
Page 14
the provision in Article 3.2 SA that parties providing confidential information in a domestic
safeguard investigation "may be requested to furnish non-confidential summaries thereof or, if such
parties indicate that such information cannot be summarized, the reasons why a summary cannot be
provided…"  The language of this provision is hortatory.33  However, this is one vehicle envisaged
by the Agreement on Safeguards that may provide a greater degree of transparency while respectingthe confidentiality of qualifying information.
8.24 Nevertheless, given the small number of firms comprising the United States domestic
industry (and the non-US producers and exporters) in this case; the fundamental importance of
maintaining the confidentiality of sensitive business information in order to ensure the effectiveness
of domestic safeguards investigations; the discretion implied in Article 3.2 SA for the investigatingauthorities to determine whether or not "cause" has been shown for information to be treated as
"confidential"; and the specific and mandatory prohibition in that provision against disclosure by
them of such information without permission of the party submitting it
34, we cannot find that the
United States has violated its obligations under Articles 2.1 and 4 SA, nor specifically under
Article 4.2(c), by not disclosing, in the published report of the USITC, information qualifying underthe USITC policy as information "which is by nature confidential or which is provided on a
confidential basis", including aggregate data.
35
8.25 While we acknowledge the possibility for a Member to misuse the confidentiality provisions
in the Safeguards Agreement by withholding non-qualifying information, we presume good faith
implementation by Members and we see no basis to conclude that, in this case, the USITC
systematically extended confidential treatment to information that did not merit such treatment.  We
note that the United States supplied in its "corrigendum" (Exhibit US-10) certain information --including quarterly pricing data in Table 18 of the USITC Report – that had originally been
identified by the USITC as requiring confidential treatment.  The European Community considers
that the submission by the United States of its "corrigendum" is an admission of violation of the
obligation to publish certain information "promptly" under Article 4.2(c) SA.
36  We view this rather
as a correction by the USITC of the application of its own confidentiality policy.37
8.26 For these reasons, we find that the United States has not acted inconsistently with
Articles 2.1 and 4 SA, nor specifically with Article 4.2(c) SA, in not disclosing certain
confidential information in the published USITC Report.
(b) "increased quantities" of imports
(i) Arguments of the parties
European Community
                                                     
33 This contrasts with the mandatory nature of the language in Article 6.5 of the Agreement on
Implementation of Article VI of the GATT 1994 ( the Anti-dumping Agreement) and Article 12.4 of theAgreement on Subsidies and Countervailing Measures.
34 United States Response to Panel Question 3, Attachment 2-4.
35 We are addressing here the EC claim under Articles 2.1 and 4, and specifically Article 4.2(c) SA,
concerning the required contents of the published report.  We are not ruling here on the impact of
Article 3.2 SA on a Member's disclosure of confidential information to a WTO panel.
36 See European Community Response to Panel Question 14, Attachment 1-3.
37 We note in any event the United States perm its interested governments access to confidential
information under certain circumstances and subject to certain conditions (see United States Response to Panel
Question 4, Attachment 2-4) and that although the European Community filed a notice of appearance early inthe USITC investigation, the European Community did no t avail itself of the opportunity to have access to the
confidential information through an administrative protective order.WT/DS166/R
Page 15
8.27 The European Community argues that, while Article 2.1 SA refers to imports "in such
increased quantities, absolute or relative to domestic production…", the analysis in the USITC
Report was limited to a comparison of absolute data, often selectively chosen, and focusing on end-
to-end comparison of data.38  We understand that this particular EC allegation pertains to the USITC
finding of "increased imports" at p. I-10 of the USITC Report and is limited to Article XIX GATT1994 and Article 2.1 SA.
United States
8.28 The United States submits that the USITC concluded that the criterion of "increased
imports" was satisfied based on the absolute increase in imports from 128 million pounds in 1993 to
177 million pounds in 1997, as well as the relative increase compared to domestic production.  TheUnited States submits that the USITC also analyzed the trends in imports, noting that virtually all of
the increase in imports occurred in the last two years of the period, during which imports increased
from 128 million pounds in 1995 to 156 million pounds in 1996 to 177 million pounds in 1997.  The
United States further submits that during the investigation, EU producers conceded that imports had
increased.
(ii) Evaluation by the Panel
8.29 Article XIX:1(a) GATT 1994 states, in pertinent part:
"If … any product is being imported  into the territory of that Member in such increased
quantities  and under such conditions as to cause or threaten serious injury to domestic
producers in that territory of like or directly competitive products…" (emphasis added)
8.30 Article 2.1 SA states:
A Member may apply a safeguard measure to a product only if that Member has
determined, pursuant to the provisions set out below, that such product is being imported
into its territory  in such increased quantities, absolute or relative to domestic production ,
and under such conditions as to cause or threaten to cause serious injury to the domestic
industry that produces like or directly competitive products. (emphasis added, footnoteomitted)
8.31 It is clear to us that Article XIX:1(a) of the GATT 1994 and Article 2.1 SA contain the
initial threshold requirement that there be an incr ease in imports.  In the absence of an increase in
imports, there would certainly be no need to perform any quantitative or qualitative analysisconcerning the trends in imports and other factors relating to serious injury or causation under the
Agreement on Safeguards.  However, we note that Article XIX:1(a) of the GATT 1994 and
Article 2.1 SA do not speak only of an "increase" in imports.  Rather, they contain specific
requirements with respect to the quantitative and qualitative nature of the "increase" in imports of
the product concerned.  Both Article XIX:1(a) of the GATT 1994 and Article 2.1 SA require that a
product is being imported into the territory of the Member concerned in such increased quantities
(absolute or relative to domestic production) as to cause or threaten serious injury.  Thus, not just
any increase in imports will suffice.  Rather, we agree with the Appellate Body's finding in
Argentina-Footwear Safeguard  that the increase must be sufficiently recent, sudden, sharp and
significant, both quantitatively and qualitatively, to cause or threaten to cause serious injury.
39
                                                     
38 See European Community first written submission, Attachment 1-1, para. 55.
39 The Appellate Body in Argentina-Footwear Safeguard  stated: "And this language in both
Article 2.1 of the Agreement on Safeguards and Article XIX:1 (a) of the GATT 1994, we believe, requires thatthe increase in imports must have been recent enough, sudden enough, sharp enough and significant enough,WT/DS166/R
Page 16
8.32 Turning to examine the USITC determination of "increased imports", we note that the
USITC determined that there was an absolute increase in imports, as well as an increase in imports
relative to domestic production, during the period of investigation ("POI").40  In support of that
determination, the USITC Report referred to data41, which indicate that imports dropped from 128
million pounds in 1993 to 124 million pounds in 1994 and then rose to 128 million pounds in 1995,156 million pounds in 1996 and 177 million pounds in 1997.  The USITC observed that the volume
of imports increased by 38 per cent over the POI
42, and found that "virtually all" of the increase
occurred in 1996 and 1997.43  The USITC also referred to data pertaining to the ratio of imports to
production that indicate a drop from 100.6 per cent in 1993 to 88.2 per cent in 1994 and then an
increase to 89.7 per cent in 1995, 139 per cent in 1996 and 145.4 per cent in 1997.44
8.33 While these data indicate a decrease in imports -- both absolute and relative to domestic
production -- early in the POI, they subsequently indicate a sharp and substantial rise through to the
end of the POI.  We view this increase in imports reflected in the data before the USITC -- both
absolute and relative to domestic production -- as recent, sudden, sharp and significant.
8.34 For these reasons, we find that the USITC Report provides an adequate, reasoned and
reasonable explanation of how the facts support the determination made with respect to
"increased imports" and that the USITC’s determination that wheat gluten was being
imported in “increased quantities” was not inconsistent with the threshold requirement of
Article XIX:1(a) and Article 2.1 SA of  imports in "increased quantities" .
8.35 It remains for us to examine whether these imports were in such increased quantities as to
cause serious injury .  This finding must, therefore, be read in  light of our findings below with respect
to serious injury and causation.45
(c) Serious Injury
(i) Arguments of the parties
European Community
8.36 The European Community argues that, under Article 4.2 SA, a Member must evaluate all
factors having a bearing on the situation of the industry and must demonstrate that serious injury hastaken place.  With respect to the USITC’s serious injury finding, the European Community alleges
that:  (i) the USITC failed to evaluate all relevant factors having a bearing on the situation of the
industry under Article 4.2(a) SA; and (ii) the findings and conclusions of the USITC with regard to
those factors which it did investigate were not supported by the evidence.
United States8.37 The United States counters that the USITC’s determination was based on the whole record,
including an examination of all relevant factors in Article 4.2(a).  The United States asserts that the
European Community's factor-by-factor review of the evidence largely obscures the USITC’s actual
reasoning on injury and causation.  According to the United States, the European Community takes
                                                                                                                                                                  
both quantitatively and qualitatively, to cause or threaten to cause 'serious injury'." Appellate Body Report,
Argentina-Footwear Safeguard , supra , note 17, para. 131.
40 USITC Report, p. I-10.  The period of investigation was 1993-1997.
41 USITC Report, pp. II-12.
42 USITC Report, p. II-9.
43 USTIC Report, p. I-10.
44 USITC Report, p. II-15.
45 See, in particular, infra , para. 8.98.WT/DS166/R
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exception to the weight the USITC gave to each factor and the conclusions the USITC drew from the
available evidence.  However, the relative weight accorded each factor is within the discretion of the
competent authorities, so long as they reach a reasoned conclusion.  Moreover, the United States
asserts, in its report the USITC noted that “virtually all”, but not all, factors pertaining to the serious
injury analysis were negative.
(ii) Evaluation by the Panel
8.38 Article 4.2(a) SA reads:
"In the investigation to determine whether increased imports have caused or are
threatening to cause serious injury to a domestic industry under the terms of this
Agreement, the competent authorities shall evaluate all relevant factors of an objectiveand quantifiable nature having a bearing on the situation of that industry, in particular, the
rate and amount of the increase in imports of the product concerned in absolute and
relative terms, the share of the domestic market taken by increased imports, changes in the
level of sales, production, productivity, capacity utilization, profits and losses, and
employment."
8.39 Article 4.2(a) SA requires that the competent authorities evaluate “all relevant factors of an
objective and quantifiable nature having a bearing on the situation of that industry, in particular,…”
the factors listed in that provision.  We note that the language in this provision is mandatory
("shall…").  Furthermore, this list is preceded by the term "in particular…".  On the basis of the text
of the provision, we therefore concur with the shared view of the parties
46 that all of the factors listed
in Article 4.2(a) must be evaluated.47  Of course, an examination of any one of those factors in a
given case may lead the investigating authority to co nclude that a particular factor is not probative in
the circumstances of a particular industry or a particular case, and therefore is not relevant to the
actual determination.  Likewise, factors not enumerated in Article 4.2(a) that are "relevant" must be
examined, although examination may lead the inves tigating authority to conclude that a particular
factor is not probative in a particular case.
8.40 In examining the USITC's serious injury dete rmination we examine, first, whether the
USITC evaluated "all relevant factors of an objective and quantifiable nature having a bearing on the
situation of [the] industry", in particular, the factor s listed in Article 4.2(a) SA, as well as other such
factors.  Second, we examine whether the USITC Report provides an adequate, reasoned and
reasonable explanation of how the facts as a whole support the USITC's serious injury
determination, and consequently whether the determination made is consistent with the United
States' obligations under the Agreement on Safeguards.
Did the USITC evaluate all relevant factors?
8.41 The USITC Report indicates that the USITC considered all the factors expressly enumerated
in Article 4.2(a) SA48, in particular, the rate and amount of the increase in imports of the product
concerned in absolute and relative terms and the share of the domestic market taken by increased
imports, changes in the level of sales, production, productivity, capacity utilization, profits and
                                                     
46 European Community Response to Panel Questions 6 and 7, Attachment 1-3; United States
Response to Panel Question 7, Attachment 2-4, para. 24.
47 We find support for our view in the Appellate Body Report in Argentina – Footwear Safeguard,
supra , note 17.  There, the Appellate Body stated:  "We agree with the Panel's interpretation that Article 4.2(a)
of the Agreement on Safeguards  requires a demonstration that the competent authorities evaluated, at a
minimum, each of the factors listed in Article 4.2(a) …".  Appellate Body Report, Argentina-Footwear , supra ,
note 17, para. 136;  Panel Report, Argentina-Footwear , supra , note 17, para. 8.123.
48 USITC Report, pp. I-10, I-12 to I-14, II-16; pp. II-9-II-21, II-25.WT/DS166/R
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losses and employment.  The parties also do not dispute that the USITC considered wages49,
inventories50 and price.51
Factors listed in Article 4.2(a)
8.42 The European Community alleges that the USITC has violated Article 4.2(a) SA in its
collection and treatment of the data with respect to two of the factors explicitly listed inArticle 4.2(a):  (i) productivity; and (ii) profits and losses.  We turn to examine the EC arguments
concerning these factors.
(i) productivity
8.43 With respect to productivity, the European Community argues that the USITC's treatment of
this factor is inconsistent with Article 4.2(a), as it embraces only "worker productivity" rather than
overall industry productivity.  The United States responds that the European Community does notsuggest why an analysis of worker productivity does not satisfy the requirement of Article 4.2(a) to
consider "productivity" and that, in any event, th e USITC did not fail to take into account capital
investment, especially capital projects adding production capacity and their effect on capacity
utilization rates.
8.44 We note that the Agreement on Safeguards provides no precise definition of the term
"productivity" that appears in Article 4.2(a) SA.
52  The context of this term includes the rest of the
text of Article 4.2(a) – and in particular, the phrase "all relevant factors of an objective and
quantifiable nature having a bearing on the situation of that  industry "(emphasis added).  We consider
that this term, read in its context, may refer to the overall productivity of the industry .
8.45 It is apparent to us from the USITC Report that the USITC gathered and analyzed data on
capital investment in the industry53 as well as data pertaining to worker productivity.  In these Panel
proceedings, the United States asserts that "it is simple mathematics that if production declines (as itdid in 1996-1997 from 1995 levels), while the amount of capital in the industry increases (as it did
from the capital projects adding capacity), the productivity of capital will correspondingly decline."
54
We would have preferred a more integrated examination in the USITC Report of "productivity" thatexplicitly encompassed overall  industry productivity -- particularly in light of the acknowledgement
by the USITC that "production of wheat gluten is extremely capital intensive and requires very fewproduction workers"
55.  Nevertheless, we consider that the data and statements pertaining to worker
productivity, in conjunction with those on capital investments, in the overall context of the USITC
Report, indicate that the USITC considered industry productivity as required by Article 4.2(a).
8.46 For these reasons, we find that the United States did not act inconsistently with
Article 4.2(a) SA in the treatment of "productivity" in the USITC Report.
                                                     
49 USITC Report, p. I-14; pp. II-16, II-17.
50 USITC Report, p. I-13; pp. II-14, II-16.
51 USITC Report, pp. I-13, I-14; pp. II-27 to II-37.
52 In its response to Panel Question 6, Attachment 2-4, para. 23, the United States observed that the
EU producers had not raised before the USITC any argument regarding the productivity of capital investment.In response to Panel Question 7, Attachment 2-4, para. 24, the United States states "…there is no doubt that acompetent authority should undertake an inquiry as to these specifically enumerated factors [in Article 4.2 SA]
regardless of whether they are raised by the parties."   We consider "productivity", and the capital componentthereof, to constitute a factor that is sp ecifically enumerated in Article 4.2(a) SA.
53 See p. II-21 and Table 12 of the USITC Report.  Data in Table 12 are redacted from the USITC
Report as confidential information.
54 United States first written submission, Attachment 2-1, para. 97.
55 USITC Report, pp. I-13, II-17.WT/DS166/R
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(ii) profits and losses
8.47 With respect to profits and losses, the European Community alleges that the USITC does not
provide an adequate explanation for the determination made, in violation of Article 4.2 SA.  The
European Community's allegations concerning the financial data obtained by the USITC pertain to
the coverage of the data and to the unreviewable nature of the data.
8.48 The United States argues that the European Community does not claim that the USITC's
findings may not support an injury determination, but faults the USITC’s collection of information
on this issue without alleging any basis for finding that the USITC’s investigation or determination
are in violation of the Agreement.
8.49 We turn to an examination of the specif ic allegations of the European Community
concerning the financial data collected and analyzed by the USITC, as reflected in the USITCReport.
data coverage
8.50 Concerning the data coverage of the financial information, the European Community
submits that data relating to the whole period of investigation were available for only two of the
firms in the industry.  The European Community notes that the USITC received usable financial dataonly from three of the four domestic producers of wheat gluten, and not from ADM.
56  The European
Community submits that there was no explanation why ADM could not provide separate data on its
United States operations, nor does the report detail any USITC efforts to obtain such separate data.
The European Community further observes that one of the four firms entered the market in 1996,
and new entrants in a market are almost always unprofitable in the first year of their operations.
8.51 The United States asserts that the USITC received usable financial data from three of the
four domestic producers of wheat gluten.  The fact that it did not obtain information from oneproducer for a period before it became a producer is not an inadequacy of the USITC investigation.
In the view of the United States, the Agreement does not assume that an investigation will obtain
perfect data coverage.
8.52 According to the USITC Report, the USITC "received usable financial data on wheat gluten
operations from three of the four domestic producers of wheat gluten, Midland [ sic], Manildra and
Heartland.  These three firms accounted for the substantial majority of domestic production of wheat
gluten."
57  The fourth firm, ADM, provided data on its combined US and Canadian wheat gluten and
wheat starch operations.58
8.53 Article 4.1(c) SA states that,
                                                     
56 The United States asserts that the EC allegation that the United States violated Article 4.2(a)
because of the nature of the financial records of ADM (in response to Panel Question 18 seeking clarification
of a statement in the EC first written submission) is outside our terms of reference as it was not included in the
EC panel request.  See United States second oral statem ent, Attachment 2-7, para. 20.  The EC panel request,
WT/DS166/3, alleges that: "…the United States are in breach of the United States obligations under
Articles 2.1 and 4 of the Agreement on Safeguards, since the United States disregarded in the investigationfundamental requirements under these provisions".  We consider that the EC panel request, which calls into
question the USITC investigation and the obligations under Articles 2.1 and 4 SA, is adequately broad to
encompass this issue, particularly in light of the fact that "profits and losses" is a factor explicitly listed in
Article 4.2(a) SA.
57 USITC Report, p. I-13.
58 USITC Report, p. I-13, note 56, citing USITC Report, p. II-17, note 45.WT/DS166/R
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"in determining injury or threat thereof, a "domestic industry" shall be understood to
mean the producers as a whole of the like or directly competitive products operating
within the territory of a Member, or those whose collective output of the like or directly
competitive products constitutes a major proportion of the total domestic production of
those products."
8.54 Therefore, the Agreement expressly envisages that, in certain circumstances, the "domestic
industry" may consist of those domestic producers "whose collective output of the like or directly
competitive products constitutes a major proportion of the total domestic production of those
products".  This implies that complete data coverage may not always be possible and is not required.
While the fullest possible data coverage is requ ired in order to maximize the accuracy of the
investigation, there may be circumstances in a particular case which do not allow an investigating
authority to obtain such coverage.  In this case, the fact that the USITC record included full period
data for only two domestic producers was partially a result of the fact that Heartland became part of
the domestic industry only in 1996.  Furthermore, the profitability data provided by ADM did not
pertain specifically to the domestic industry under investigation and was therefore excluded.
8.55 Moreover, the USITC found that "[p]rofitability reflected the trends in average unit value
prices, which initially rose and then fell."59  The USITC had before it data pertaining to unit value
from all producers, including ADM.  The concurrence in trends between these two factors supports
the view that the profitability data used by the USITC was representative of the domestic industry's
situation.
8.56 On the basis of the information contained, or referred to, in the sections of the USITC
Report relating to profits and losses and the statement by the USITC that the three domestic
producers that provided usable financial data on wheat gluten "accounted for the substantial
majority of domestic production of wheat gluten"60, we find that the United States did not act
inconsistently with Article 4.2(a) in terms of the coverage of the "profits and losses" data.
allocation methodologies
8.57 The European Community submits that the USITC finding that profitability had gone down
was based on allocation of profits by United States domestic producers between the co-products of
wheat gluten and wheat starch, and derived products.  According to the European Community,
because the wheat gluten/wheat starch industry relies by necessity on a single raw material input
(wheat or wheat flour) and utilizes a single production line that results in wheat gluten, wheat starch
and effluents suitable for producing e.g. alcohol, any allocation of profitability among the outputproducts is arbitrary.  In addition, data provided by United States producers to argue that the
profitability of their wheat gluten sales had gone down are unverifiable. For the European
Community, the USITC Report does not contain an adequate explanation of how the facts support
the determination made with respect to "profits and losses".
8.58 The United States asserts that an authority's determination cannot be found in violation of
the Agreement because it does not disclose information that is by nature confidential.  The United
States submits that the USITC specifically addressed the allocation issue in its report, and took care
to ensure the accuracy and probative worth of the information provided to it.  According to the
United States, the USITC provided specific instruct ions to domestic producers with respect to the
submission of financial data. The firms that did not maintain separate internal profit-and-loss andcost of production data for wheat gluten operations were directed to allocate costs between wheat
gluten and wheat starch, to explain their allocation methodology and to provide worksheets with
their calculations . Furthermore, the United States submits, the USITC took additional steps to verify
                                                     
59 USITC Report, p. I-13.
60 USITC Report, p. I-13.WT/DS166/R
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the accuracy and reasonableness of the data, including an on-site verification by a USITC auditor at
Midwest, the largest producer.
8.59 The USITC Report indicates to us that the USITC gathered and analyzed data and
information pertaining to the profits and losses of the domestic industry.  The lion's share of this
information, including not only the profitability da ta but also the allocation methodologies for the
profitability data, is not included in the Report, as the USITC identified the information as
confidential and thus redacted it.  We recall our finding above that the United States did not act
inconsistently with its obligations under the Safeguards Agreement by redacting confidential
information  from the published USITC Report.61  However, we do not consider that the non-
disclosure of confidential information under Article 3.2 SA excuses a Member from providing anadequate, reasoned and reasonable explanation of how the facts support the determination made.  We
therefore turn to consider whether the USITC Report provides such an explanation.  Concerning the
cost allocation methodologies used by the relevant United States domestic producers, the USITC
found:
"[e]ach of the companies [Midwest, Manildra and Heartland] produces wheat gluten and
wheat starch in a joint production process.  Each of the companies also produces by-
products or related products, especially alcohol.  We carefully considered the arguments
made by the respondents with respect to the allocations made by domestic producers in
providing financial data on their wheat gluten operations.  Based on a careful review of
the allocation methodologies used by domestic wheat gluten producers in responding to
the Commission's questionnaire, we find those allocations to be appropriate."
62
8.60 The above passage demonstrates to us that the USITC considered the arguments made by the
EU respondents in the course of the investigation concerning the allocations made by domestic
producers in providing financial data on their wheat gluten operations.  It also demonstrates that the
USITC reviewed the allocation methodologies used and decided that those allocations were
"appropriate".
8.61 The Panel asked the United States to clarify the nature of the "careful review" the USITC
had performed and to clarify and elaborate upon the "allocation methodologies" referred to.63  The
United States responded that the majority of the responding firms maintained separate internal
profit-and-loss and cost of production data for wheat gluten on a regular basis and furnished this data
to the USITC. The responding firm that did not maintain separate data made allocations, andprovided the USITC with an explanation of the basis for those allocations. The USITC reviewed the
accounting methodologies used by all the producers and did an on-site verification of Midwest, the
largest producer.
64  According to the United States, while virtually all of the information in the
auditor's report, which formed part of the USITC record, is confidential information, the United
States was able to submit before us that:
"To derive the wheat gluten financial data from the overall corporate financial data, the
USITC auditor at the verification conducted a reconciliation which entailed a detailed
evaluation of the firm’s operations and the accounting system.  The USITC auditor
reconciled Midwest Grain’s questionnaire data on wheat gluten for each period with the
product income and loss statements which were derived from the audited financialstatements.  This was possible as Midwest Grain prepares separate income and loss
statements on a monthly basis for each of its divisions, one of which is the wheat gluten
division.  The USITC auditor reviewed the financial statements for each division and any
                                                     
61 Supra , para. 8.26.
62 USITC Report, p. I-13.
63 Panel Question 26, Attachments 1-3 and 2-4.
64 US response to Panel Question 26, Attachment 2-4.WT/DS166/R
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allocations that might have been used, and tested their reasonableness with alternative
allocation methods.
In addition, the USITC auditor confirmed that the allocation methods used by Midwest to
measure the financial performance of each division, to the extent allocations were
necessary, had been in use for a number of years and were not changed for purposes of theUSITC wheat gluten investigation….."
65
8.62 In response to an additional question put by the Panel66, the United States explained that
"[t]he USITC's staff report reflects its resolution of issues that arose in its careful review of
producers' cost allocations, a review that included extensive input from respondents and includedscrutiny not discussed in the Report".  The United States also indicated that the allocation
methodologies had been the subject of questioning by the USITC to the domestic producers, on
which the EU producers had an opportunity to comment in the course of the investigation.
67
8.63 We recognize the fundamental importance of assuring that data gathered in the course of a
safeguards investigation is accurate and that any allocation of costs and revenues reflects, to thegreatest extent possible, the realities of the domestic industry concerned.  However, we note that the
Agreement on Safeguards does not set out precise rules on the collection and analysis of data, nor
does it require the use of any particular allocation methodology with respect to financial data
gathered by the investigating authoritie s in the course of the investigation.
8.64 We note that the USITC paid attention to the allocation methodologies used by all  domestic
producers and in the questionnaire requested firms that did not maintain separate records for wheat
gluten to make allocations and explain the methodology used.
68 We also note that the USITC
conducted certain procedures, including internal analysis by its staff as well as an on-site verification
by a USITC auditor, in order to verify the accuracy and the adequacy of the financial information
provided.  We believe that, in support of the USITC statement concerning the "careful review" and
the finding that the methodologies were "appropriate", the USITC Report could have included a
description of such procedures and a more detailed explanation as to how and why the USITCconsidered the allocations to be "appropriate", in addition to a characterization of the redacted
confidential information.
8.65 Nevertheless, in light of the indications pertaining to the data actually collected and analyzed
by the USITC
69, the findings contained in the USITC Report based upon this data and the
clarifications given by the United States in these Panel proceedings pertaining to certain elementsappearing on the face of the USITC Report, we consider that there is no reason to doubt the veracity
of the USITC findings pertaining to the allocation methodologies, nor to call into question the
thoroughness of the scrutiny given by the USITC in reviewing the allocation methodologies and in
ensuring that the financial data used in the USITC serious injury analysis pertained to the domestic
industry subject to the investigation.
8.66 For these reasons, we find that the USITC Report provides an adequate, reasoned and
reasonable explanation with respect to "profits and losses" and that the United States did not
act inconsistently with Article 4.2(a) of th e Agreement on Safeguards in this regard.
Factors not listed in Article 4.2(a)
                                                     
65 US response to Panel Question 26, Attachment 2-4, paras. 74-75.
66 Panel Question 2, Attachment 2-15.
67 United States Response to Panel Question 2, Attachment 2-15, para. 5.
68 Exhibit US-1.
69 USITC Report, pp. II-18 to II-20.WT/DS166/R
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Arguments by the parties
European Community
8.67 The European Community submits that the United States violated its obligations under
Article 4.2 SA by not investigating appropriately "all relevant factors" in reaching its determination
of serious injury.  For the European Community, such "relevant factors" include: (i) newentries/expansion during the investigation period ; (ii) developments as to co-products; and
(iii) "imports as "positive business strategy" of certain US producers".
70  According to the European
Community, all of these factors were raised by the EU producers respondents before the USITC.
United States
8.68 According to the United States, the European Community complains that the USITC failed
to address factors that are not enumerated in the Agreement on Safeguards.  In the view of the
United States, while Article 4.2(c) SA requires the competent authorities to publish an analysis of
the case that demonstrates the relevance  of the factors examined, there is no obligation to explain
why it found some factors irrelevant and thus did not rely on them.
Evaluation by the Panel8.69 We have already stated that Article 4.2(a) SA requires a demonstration that the competent
authorities evaluated “all relevant factors” enumerated in Article 4.2(a) as well as other relevant
factors.
71  We read this requirement in Article 4.2(a) SA as mandating that the investigating
authorities evaluate those "factors" enumerated in Article 4.2(a) SA as well as any other relevant
"factors" -- in the sense of factors that are clearly  raised before them as relevant by the interested
parties in the domestic investigation.  Article 3.1 SA provides that a safeguards investigation shall
include "public hearings or other appropriate means in which importers, exporters and otherinterested parties could present evidence and thei r views, including the opportunity to respond to the
presentations of other parties…"  This embraces an opportunity for interested parties to bring to the
attention of the investigating authorities factors whic h these interested parties consider to be relevant
as having a bearing on the situation of the domestic industry.
72  In addition, the requirement in
Article 4.2(b) SA that “the determination in subparagraph (a) [of Article 4.2] shall not be made ”
(emphasis added) unless a causal link is established between increased imports and serious injury
constitutes an explicit textual linkage between Articles 4.2(a) and (b) that acknowledges the
intertwined nature of the serious injury and causation analysis.  An investigating authority must
evaluate all relevant factors, but the Agreement leaves a certain amount of discretion as to the
manner in which the investigating authority may evaluate a given factor.  With this in mind, we turnto an examination of the factors the European Comm unity alleges that the USITC failed to take into
account in its serious injury analysis.
(i) New entrants/expansion
8.70 We first address the EC argument concerning the alleged failure of the USITC to evaluate
new entrants and expansion of domestic industry.
73
8.71 In the course of the USITC investigation, the EU producers submitted, in the context of their
argument that the United States statutory test for serious injury was not met, that decisions to invest
                                                     
70 We address EC allegations concerning the USITC' s approach to "productivity" in Article 4.2(a)
supra. , paras. 8.43-8.46.
71 Supra , para. 8.39.
72 Also see our related discussion infra , para. 8.121.
73 European Community first written submission, Attachment 1-1, paras. 74-75.WT/DS166/R
Page 24
and expand capacity were a reflection of industry health that argued against a finding of serious
injury.74  This particular statement is not reflected in the summary of the arguments in the USITC
Report relating to "serious injury", nor is it expl icitly referred to in the findings in the USITC
Report.  However, in the context of a consideration of the decrease in the level of capacity utilization
over the POI, the USITC Report states:
"Some of this decrease in capacity utilization is explained by the fact that domestic
capacity to produce wheat gluten increased during the period of investigation in
anticipation of significant increases in domestic consumption.  Most of this increase in
capacity was in place by June 1995, that is, before the surge in imports that occurred in
crop years 1996 and 1997.  Had there been no increase in imports from 1993 levels, theindustry likely could have operated at 61 percent of capacity in 1997.  Also, one plant in
the industry, opened by ADM in 1994, closed  in July 1995 as a result of low-priced
imports."
75 (footnotes omitted)
8.72 Moreover, the USITC addresses "increased capacity" as a possible other causal factor in its
causation analysis.76
8.73 We consider that the USITC findings on serious injury could have expressly indicated that
the USITC had considered the relevance of the increase in capacity in its finding of serious injury in
the precise manner that the issue was raised before it by the EU producers.  However, in light of the
statement by the USITC that we have cited pertaining to capacity utilization and the fact that
attention is paid to this factor in the USITC causation analysis , we find that the USITC did not fail
to consider this factor in its serious in jury and causation analysis under Article 4.2 SA .
(ii) Developments as to co-products
8.74 With respect to the EC allegation that the US ITC failed to investigate the effect of co-
products on profitability data77, we observe that, in the course of the USITC investigation, EU
producers submitted that the USITC should give no or little weight to the reported profitability data
for wheat gluten and wheat starch, that allocation methods based on revenue can affect apparentprofitability trends and that the allocation of wheat gluten costs based on sales revenue distorted the
profitability data.
78  This argument is reflected in the summary of the parties arguments in the
USITC Report.79  We have discussed above80 the treatment given by the USITC to the "profits and
losses" factor in its serious injury analysis, and the reasons for our finding that the USITC's
consideration and explanation of this factor was ad equate for the purposes of Article 4.2(a) SA.  We
note, moreover, that the USITC addresses the issue of co-product markets in its causation analysis.81
In light of the statement by the USITC that we have cited above82 pertaining to the profitability data
before the USITC and the fact that attention is paid to developments in co-product markets in the
USITC causation analysis, we find that the USITC did not fail to investigate developments in co-
product markets -- including how the fact that co-products are necessarily produced in the
course of wheat gluten production influences wheat starch/wheat gluten profitability -- in its
serious injury and causation analysis under Article 4.2 SA .
                                                     
74 Exhibit EC-16, p. 5.
75 USITC Report, p. I-12, including information originally redacted from the published USITC Report
as confidential information that was subsequently submitted in Exhibit US-10.
76 USITC Report, p. I-17.
77 European Community first written submission, Attachment 1-1, para. 76.
78 Exhibit EC-18, pp. 34-36.
79 USITC Report, p. I-12.
80 Supra , paras. 8.59-8.66.
81 USITC Report, pp. I-16-I-17.
82 USITC Report, p. I-13, cited supra , para. 8.59.WT/DS166/R
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(iii) Importation by domestic producers
8.75 We next consider the EC argument that the USITC failed to address the issue of importation
by domestic producers in its serious injury analysis.83
8.76 The EU respondents raised this issue in the co urse of the USITC investigation.  However, it
appears to have been raised predominantly in the context of "causation"84, and the USITC addressed
it in this context.85  The fact that the USITC examined this factor in the context of its causation
analysis, rather than in its serious injury analysis, does not constitute a violation of Article 4.2 SA.
The nature and role of a “relevant factor having a bearing on the situation of the industry” may be
either as indicative of serious injury or as a possible causal factor contributing to, or detracting from,serious injury, or both.
8.77 Therefore, we find that the USITC did not fa il to consider this factor in its serious
injury and causation analysis under Article 4.2 SA.
Is the USITC overall serious injury determination consistent with Article 4.2(a)?
Arguments of the parties
European Community
8.78 The European Community argues that the evidence before the USITC did not support a
finding of serious injury.  The European Community underlines that in order for the imposition of a
safeguard measure to be justified under the Agreement on Safeguards, the domestic industry must be
currently  seriously injured.  The European Community asserts that there were upturns in the trends
of several factors at the end of the period of investigation which show that the situation in the
industry was far from one of serious injury at the end of the period.
United States
8.79 The United States submits that the USITC’s determination was based on the whole record,
including an examination of all relevant factors in Article 4.2(a).  According to the United States, the
relative weight accorded each factor is within the discretion of the competent authorities, so long as
they reach a reasoned conclusion.  The United States argues that a finding of serious injury does notrequire a decline in every factor evaluated.
Evaluation by the Panel
8.80 Article 4.1(a) SA defines “serious injury” to mean “significant overall impairment in the
position of a domestic industry”.  We are of the view that a determination as to the existence of such
"significant overall impairment" can be made only on the basis of an evaluation of the overall
                                                     
83 European Community first written submission, Attachment 1-1, para. 77.
84 In its response to Panel Questions 6 and 7, Attachment 1-3, the European Community indicated that
the issue of importation had been raised before the USITC, and referred to Exhibit EC- 16 (pre-hearing brief ofthe AAC before the USITC), pp. 2 and 24 – 27 and Exhibit EC-18 (post-hearing brief of the AAC before theUSITC), pp. 2, 3-5, 32.  In the pre-hearing brief, Exhibit EC-16, the subsection in which the EU respondents'argument concerning importation by domestic producer s appears ("Domestic producers import […] because it
is more economical than generating co-products where market demand for wheat starch is weak", Section
III.D, p. 24) is entitled "Changes in co-product markets have a substantially larger impact on the U.S. industrythan do imports of wheat gluten" (Section III, pp. 13 ff).
85 USITC Report, p. I-17.WT/DS166/R
Page 26
position of the domestic industry, in light of all the relevant factors having a bearing on the situation
of that industry.86
8.81 We also consider that any determination of serious injury must pertain to the recent  past.
This flows from the wording of the text of Article XIX:1(a) of the GATT 1994 and Article 2.1 SA,
which requires an examination as to whether a product "is being imported" "in such increasedquantities … and under such conditions as to cause  or threaten serious injury…".  The use of the
present tense of the verb in the phrase "is being imported" in that provision indicates that it is
necessary for the competent authorities to examine recent imports.
87  It seems to us logical that if the
increase in imports that the investigating authoritie s must examine must be recent, so also must be
any basis for a determination by the authorities as to the situation of the domestic industry.  Giventhat a safeguard measure will necessarily be based upon a determination of serious injury concerning
a previous period, we consider it essential that current  serious injury be found to exist, up to and
including the very end of the period of investigation.
88
8.82 On this basis, we examine whether the USITC Report provides an adequate, reasoned and
reasonable explanation of how the facts as a whole support the USITC's serious injury
determination, and consequently whether the determination made is consistent with the United
States' obligations under the Agreement on Safeguards.
8.83 The USITC concluded:
"In summary, by the end of the period examined, virtually all of the factors relevant to
industry performance were negative.  Industry capacity utilization has declined
significantly, production and shipments have  declined, end-of-period inventories have
more than doubled; the industry has gone from being profitable to operating at a loss,average unit values have declined and were at their lowest level in 1997 at the same time
that unit costs were rising, hourly wages have been relatively flat, worker productivity has
declined due to the decline in capacity utilization and unit labour costs have almost
doubled.  While there has been minor improvement in several factors during the most
recent year, these improvements are isolated and do not change our conclusion that thedomestic industry is presently seriously injured.  Thus, we find that the domestic wheat
gluten industry is seriously injured."
89
8.84 In reaching its serious injury determination, it is apparent to us that the USITC took into
account trends over the whole 5-year period of investigation, in addition to the specific trends in
1996 and 1997.  The USITC found that several indicators rose from 1996 to 1997, includingcapacity utilization (slightly), production and sales.  USITC weighed the factors before it and, in
light of the entire record, found that such “minor” improvements were “isolated” and did not change
its conclusion that the industry was, and remained, seriously injured in 1997.  Before us, the
European Community focuses on the 1996-1997 period to  argue that the upturns in several injury
factors from 1996 to 1997 demonstrates that there was no current  serious injury to the domestic
industry in 1997.
8.85 The information on which the USITC based its serious injury determination indicates that
there were identifiable improvements in several factors in 1997: capacity utilization, production and
sales were improving, wages were rising and inventories were being depleted, all signs of a positive
                                                     
86 We find support for this view in Appellate Body Report, Argentina – Footwear Safeguard , supra ,
note 17, paras. 138-139.
87 See Appellate Body Report, Argentina-Footwear Safeguard , supra , note 17, para. 130.
88 Except, of course, in a case involving threat of serious injury, where the issue involves future
injury.
89 USITC Report, p. I-14.WT/DS166/R
Page 27
trend in the industry.  We do not consider that a negative trend in every single factor examined is
necessary in order for an industry to be in a position of significant overall impairment.  Rather, it is
the totality of the trends, and their interaction, which must be taken into account in a serious injury
determination.90  Thus, such upturns in a number of factors would not necessarily preclude a
determination of serious injury.  It is for the investigating authorities to assess and weigh theevidence before them, and to give an adequate, reasoned and reasonable explanation of how the facts
support the determination made.
8.86 We consider that the information before the USITC, in its totality, would not preclude a
finding by a domestic authority of current  serious injury, in terms of a continuing “significant
overall impairment” of the domestic industry, in 1997.  Although certain factors were not declining,
the overall picture could nonetheless still demonstrate "significant overall impairment" of the
industry.  The USITC found that "…by the end of the period examined, virtually all of the factors
relevant to industry performance were negative."
91  Capacity utilization remained low in 1997
(44.5%), and its improvement from 1996 to 1997 was slight (2.5 percentage points).  While trends in
production, sales and inventories fluctuated over the course of the investigation period, the absolutelevels were worse in 1997 than in 1993.  Data before the USITC indicated that average unit values
were declining and reached their lowest level of the POI in 1997 while unit costs were rising, and the
industry was still operating at a loss
92 in 1996 and 1997.
8.87 We believe that the USITC Report could perhaps have contained a more thorough
explanation of why the decrease in inventories and the upturns in sales, production and capacity
utilization towards the end of the period of investigation did not detract from the USITC’s
determination of serious injury.  In particular, the USITC could have provided an explanation as towhy it found the upturns in the trends of various factors (sales, production, inventories, capacity
utilization) from 1996 to 1997 to be “minor improvements” that were “isolated”.  Nevertheless, in
the light of the indications in the USITC Report pertaining to the information that was before the
USITC at the time of the serious injury determination and the findings contained in the USITC
Report pertaining to the overall trends in the factors examined over the POI, we consider that, intheir totality, the USITC findings on serious inju ry contain an adequate, reasoned and reasonable
explanation of how the facts as a whole support th e determination of serious injury made by the
USITC, including its determination that the domestic industry remained seriously injured in 1997.  It
is evident to us from the findings in the USITC Report that the USITC has assessed whether the
overall picture painted by the totality of the factors examined demonstrated “significant overallimpairment” of the industry as required by Articles 4.1(a) and 4.2 SA.
8.88 For these reasons, we find that the USIT C's overall determination of serious injury
was not inconsistent with Article 4.2(a) SA .
8.89 In sum, we have found that the USITC did not fail to evaluate all relevant factors
having a bearing on the state of the industry in determining serious injury and that its overall
serious injury determination was not inconsistent with Article 4.2(a) SA.  However,
Article 4.2(b) SA requires that a determination under Article 4.2(a) “ shall not be made ” unless the
investigation demonstrates a causal link between increased imports and serious injury.  We examine
this issue below.
                                                     
90 The Appellate Body has observed that "… a certain factor may not be declining, but the overall
picture may nevertheless demonstrate "significant overall impairment" of the industry…". Appellate BodyReport, Argentina-Footwear Safeguard , supra , note 17, para. 139.
91 USITC Report, p. I-14.
92 The USITC Report, p. I-13, states:  "…gross profit and operating income increased between 1993
and 1994, and then fell sharply in 1995;  further declines in 1996 and 1997 resulted in overall industry losseson wheat gluten operations in both of those years".WT/DS166/R
Page 28
(d) Causation
8.90 A demonstration of the existence of a causal link between increased imports and serious
injury is a fundamental requirement for the imposition of a safeguard measure.  Article XIX:1(a) of
the  GATT 1994 and Article 2.1 SA require that a product is being imported in such increased
quantities and under such conditions as to cause or threaten to cause serious injury to the domestic
industry.  Article 4.2(a) and (b) SA read:
“2.(a) In the investigation to determine whether increased imports have caused or are
threatening to cause serious injury to a domestic industry  under the terms of this
Agreement , the competent authorities shall evaluate all relevant factors of an objective and
quantifiable nature having a bearing on the situation of that industry, in particular, the rateand amount of the increase in imports of the product concerned in absolute and relative
terms, the share of the domestic market taken by increased imports, changes in the level of
sales, production, productivity, capacity utilization, profits and losses, and employment.
(b) The determination referred to in subparagraph (a) shall not be made unless this
investigation demonstrates, on the basis of objective evidence, the existence of the causal
link between increased imports of the produc t concerned and serious injury or threat
thereof .  When factors other than increased imports are causing injury to the domestic
industry at the same time, such injury shall not be attributed to increased imports.”
(emphasis added)
8.91 We consider that an appropriate approach for a panel to take in assessing whether a Member
has fulfilled the requirements of Article 4.2(a) and (b) SA with respect to causation consists of a
consideration of: (i) whether an upward trend in  imports coincides with downward trends in the
injury factors, and if not, whether an adequate, reasoned and reasonable explanation is provided as to
why nevertheless the data show causation; (ii) whether the conditions of competition between the
imported and domestic product as analyzed demonstrate the existence of the causal link between theimports and any injury; and (iii) whether other relevant factors have been analyzed and whether it is
established that injury caused by factors other than imports has not been attributed to imports.  We
observe that this three-step approach to causation was also followed by the panel in Argentina-
Footwear Safeguard and that the Appellate Body saw "no error" in that panel's approach
.93  We note
that, before us, the European Community espoused the latter panel's approach and the United Statesdid not specifically object to it.
(i) whether upward trend in imports coincides with negative trends in injury factors
Arguments of the parties
European Community
8.92 According to the European Community, th e USITC failed to satisfy the element of
coincidence of trends between serious injury and increased imports.  In the view of the European
Community, that the injury factors cited to support the finding of serious injury began declining
before the increase in imports raises serious questions about the existence of a causal link.  The
European Community submits that the USITC provides no analysis or reasoning to demonstrate how
the negative trends in injury factors could have been caused by the increase in imports which onlybegan later.  In the EC view, most factors indica tive of injury either moved negatively before the
increase in imports in 1996 and 1997, moved positively when imports were rising, or both.  In
particular, three factors -- capacity utilisation, domestic shipments and inventories -- worsened
                                                     
93 See Panel Report, Argentina - Footwear Safeguard , supra , note 17, para. 8.229;  Appellate Body
Report, Argentina – Footwear Safeguard , supra , note 17, para. 145.WT/DS166/R
Page 29
before the reference period and actually improved during the period of the alleged "serious injury".94
The European Community also alleges that the US ITC emphasized the absolute increase in imports
while downplaying the trends of imports relative to total United States demand and trends in the
market share of imports.
                                                     
94 See European Community first written submission, Attachment 1-1, paras. 79-80; European
Community second written submission, Attachment 1-4, paras. 80-83.WT/DS166/R
Page 30
United States
8.93 The United States stresses the 38 per cent increase in imports in 1996-1997 from 1995
levels.  Moreover, the United States submits, even though consumption in the United States market
was rising, imports gained in market share during that two-year period (from 50.1 per cent in 1995 to
58.9 per cent in 1996 to 60.2 per cent in 1997).  According to the United States, coming as it didafter a period in which import market share fell slightly, such a rise was sudden and significant.  The
United States submits that the European Community does not explain why the USITC was required
to give precedence to the import trends that the USITC allegedly downplayed.
8.94 Moreover, the United States asserts, the European Community ignores the fact that virtually
all the factors relating to wheat gluten industry health declined in 1996 and 1997 in the face of the
surge in imports.   According to the United States, although the domestic industry was profitable
from 1993 to 1995, it suffered growing operating losses in 1996 and 1997, when imports,
particularly from the European Community, surged and consistently undersold the United States
product.  The United States argues that, as the USITC found, the industry’s gross profit, operating
income, and market share all declined in both 1996 and 1997.  Likewise, both the domesticindustry’s production and shipments fell sharply wh en imports surged, and were at their lowest
levels in 1996-1997.  The United States submits that while there were slight upturns in sales and
production in 1996 and 1997, both indicators remained in 1997 far below their pre-import surge
levels.
Evaluation by the Panel
8.95 We consider that a coincidence in the movements in imports and the movements in injury
factors would ordinarily tend to support a finding of causation, while the absence of suchcoincidence would ordinarily tend to detract from such a finding and would require a compelling
explanation as to why causation is still present.
95  The issue before us is whether the USITC Report
indicates a coincidence between the movements in imports and the movements in injury factors and
whether it contains an adequate, reasoned and reasonable explanation of how the facts support the
USITC determination of causation of serious injury by increased imports.
8.96 With respect to the relationship between the movement in imports and the indicators of
serious injury, the USITC found:
"This surge in relatively low-priced imports in 1996 and 1997 coincided with the decline
in industry performance described above.  There is a direct correlation between the
dramatic increase in wheat gluten imports and the significant decline in domestic wheatgluten industry performance in 1996 and 1997.  In the face of rising domestic demand and
consumption, domestic production, shipments, capacity utilization, unit prices, industry
financial performance, and worker productivity all declined during the period of greatest
import penetration."
96
8.97 Looking at the overall  trends in imports and the overall  trends in serious injury factors
pertaining to the overall situation of the industry over the period of investigation, we consider that
there is a general coincidence between the trends in injury factors and the trends in imports which
would support a finding by the investigating aut hority of a causal connection between increased
imports and serious injury.
                                                     
95 We found guidance for our view in the Panel Report, Argentina-Footwear Safeguard, supra , note
17, paras. 8.237- 8.238; The Appellate Body saw "no error" in the Panel's interpretation of the causation
requirements, or in the Panel's interpretation of Article 4.2(b) SA in that dispute, Appellate Body Report ,
Argentina-Footwear Safeguard, supra , note 17, paras. 144-146.
96 USITC Report, p. I-16.WT/DS166/R
Page 31
8.98 The USITC found that there was an absolute rise in imports of 38 per cent in 1996/1997
over 1995 levels (from 128 million pounds in 1995 to 156 million pounds in 1996 to 177 million
pounds in 1997), and that there was an increase in the market share of imports from 50.1 per cent in
1995 to 58.9 per cent in 1996 to 60.2 per cent in 1997.  We note the EC argument that the 1.3
percentage point rise in the market share taken by imports from 1996 to 1997 would not allow afinding of "increased imports" under Articles 2.1 and 4.2 SA.  We disagree.  In light of the trends
over the course of the POI found by the USITC, in cluding the finding that the share of the domestic
wheat gluten market held by domestic wheat gluten producers fell to its lowest level of the POI in
1997
97, as well as the finding concerning the rate of the absolute increase in imports between 1996
and 199798, we consider that the rate of rise in imports in both absolute and relative terms would not
preclude an investigating authority from characterizing this trend, both qualitatively and
quantitatively, as sufficiently recent, sudden, sharp and significant to cause serious injury.99
8.99 We also note that the information before the USITC indicates that many of the injury factors
declined over the period of investigation, as imports were increasing.  For example, sales,
production, inventories and capacity utilization showed an overall negative trend during the POI.Furthermore, the USITC found that profitability decreased in 1996 and 1997 and the industry was
operating at a loss at the end of the POI.
100
8.100  We observe that the information in the USITC Report indicates that when one looks at the
trends of imports vis-à-vis  the trends in certain individual  injury factors in isolation , several of these
injury factors were declining prior to the surge in imports found by the USITC in 1996-1997.  In
addition, in the face of continuing increased imports in 1996 and 1997, the USITC Report indicates
that several injury factors actually improved.  In particular, information in the USITC Reportindicates that profitability rose in 1993 and 1994, fell sharply in 1995 (before the import surge), and
continued to decline in 1996 and 1997.  Capacity utilization declined from 1993 to 1995 (before the
import surge found by the USITC in 1996 and 1997).  Sales rose from 1993 to 1994, declined in
1995 (before the import surge) and 1996, but then increased from 1996 to 1997 (during the import
surge).  Inventories increased between 1993 and 1995, but then decreased in 1996 and 1997 (duringthe import surge).  The ratio of inventories to ship ments followed a similar trend.  Hourly wages rose
from 1993 to 1994, declined from 1994 (before the import surge) to 1996, and increased again in
1997 (during the import surge).
8.101  We consider that in light of the overall  coincidence of the upward trend in increased imports
and the negative trend in injury factors over the period of investigation, the existence of slightabsences of coincidence in the movement of individual  injury factors in relation to imports would
not preclude a finding by the USITC of a causal link between increased imports and serious injury.
8.102  For these reasons, we find that the USITC Report indicates a general coincidence of
trends and that it contains an adequate, reason ed and reasonable explanation of how the facts
support its findings with respect to this aspect of the causation analysis.
(ii) "under such conditions" - conditions of competition
                                                     
97 USITC Report, pp. I-16, II-25.
98 USITC Report, pp. I-10, II-12.
99 We refer to the language used by the Appellate Body in its Report, Argentina-Footwear Safeguard ,
supra , note 17, para. 131: "And this language in both Article 2.1 of the Agreement on Safeguards  and Article
XIX:1(a) of the GATT 1994, we believe, requires that the increase in imports must have been recent enough,
sudden enough, sharp enough, and significant enough, both quantitatively and qualitatively, to cause or
threaten to cause "serious injury"".  Also see our finding supra , para. 8.34, with respect to "increased
quantities" of imports.
100 USITC Report, p. I-13.WT/DS166/R
Page 32
Arguments by the parties
European Community
8.103  According to the European Community, Article XIX:1 of the GATT 1994 and Article 2 SA
require that a product be imported "under such conditions" as to cause serious injury.  The European
Community also asserts that, pursuant to Articl e 4.2(b) SA, the USITC should have demonstrated,
"on the basis of objective evidence", the existence of this aspect of the causal link between imports
and injury.  Furthermore, under Article 4.2(c), the USITC was required to publish "a detailed
analysis of the case under investigation as well as a demonstration of the relevance of the factors
examined". The European Community alleges that the United States has acted inconsistently with
these obligations.
8.104  According to the European Community, the USITC appears to believe that the "conditions"
under which imports took place which allegedly caused serious injury consisted of the prices of
those imports.  For the European Community, there was no evidence of consistent underselling of
the type necessary to find that imports take place "under such conditions" as to cause injury.  The
European Community is of the view that there is no evidence of a causal link between imports and
price.  With respect to the USITC statement that prices were driven down during 1996 and 1997 by
relatively low-priced imports, the European Community asserts that increased imports were not the
cause of the decline in domestic unit sales values, and that evidence in the USITC Report indicates
that prices went down sharply in 1995, before imports increased.  Furthermore, the European
Community submits, the USITC acknowledges that the price of wheat gluten is directly related to
the protein level in wheat.
United States8.105  The United States submits that the Agreement on Safeguards does not lend itself to giving
price analysis the dispositive position that the EC would give it.  "Price" is not an enumerated
"relevant" factor in Article 4.2(a).  The United States asserts that the European Community does not
explain why the phrase "under such conditions" in Article 2.1 should be regarded as referring to
price at all, much less why it should give to price a relevance greater than the enumerated factorslisted in Article 4.2(a).  At any rate, the United States asserts, the USITC fully considered the
evidence on price in this case and found that it supported an affirmative injury finding.  The United
States does not deny that factors other than imports, such as the protein content of the domestic
wheat crop, can affect domestic demand for, and the domestic price of, wheat gluten.  However,
according to the United States, the only explanation for the substantial price decline in 1996 and1997 in the face of rising demand and consumption was the surge in imports.
Evaluation by the Panel
8.106  The issue before us requires a consideration of the nature of the obligation imposed by the
phrase "under such conditions" in Article XIX:1(a) of the GATT 1994 and Article 2.1 SA.  In
particular, we must consider whether the term "under such conditions" requires a price analysis, andwhether such price analysis must demonstrate evidence of consistent underselling by the imported
product in the domestic market of the importing Member in order to make a finding of serious
injury.  We must then consider whether the causation analysis performed by the USITC is adequate
to comply with the requirement imposed by the phrase "under such conditions" in Articles XIX:1(a)
of the GATT 1994 and Article 2.1 SA and with Article 4.2 SA.
8.107  We first examine the nature of the obligation imposed by the phrase "under such conditions"
in Article XIX:1(a) of the GATT 1994 and Article 2.1 SA.WT/DS166/R
Page 33
8.108  We are of the view that the phrase “under such conditions” does not impose a separate
analytical requirement in addition to the analysis of increased imports, serious injury and
causation.101 Rather, this phrase refers to the substance  of the causation analysis that must be
performed under Article 4.2(a) and (b) SA.  In our view, it must be demonstrated that the conditions
under which increased imports are occurring are injurious, that is, that they are such as to cause
serious injury.  Such causation can be ascertained through an examination of the conditions of
competition between the imported and domestic product in the importing country's market, and the
importing country must therefore perform an adequate assessment of the impact of the increased
imports at issue on the domestic industry under investigation.  These conditions of competition (i.e.
the precise nature of the interaction and relationship between the imported and domestic products) inthe importing country's market will determine whether the conditions under which increased imports
are occurring are such as to cause or threaten to cause serious injury.
8.109  As for the nature and content of the examination concerning the conditions of competition
between the imported and domestic product, we observe that Articles 2 and 4.2 SA make no mention
of “price”.  "Price" is not expressly listed in Article 4.2(a) SA as a "relevant factor" having a bearingon the situation of the domestic industry.  However, this is not to say that "price" may not be a
relevant factor in a given case.  An imported product can compete with a domestic product in various
ways in the market of the importing country.  Clearly, the relative price of the imported product is
one of these ways, but it is certainly not the only way, and it may be irrelevant or only marginally
relevant in a given case.
8.110  Therefore, in the context of safeguards measures, the relevance of "price" will vary from
case to case, in light of the particular circumstances and the nature of the particular product anddomestic industry involved.  Given that this is the nature of the "price" factor under the Agreement
on Safeguards, we consider that the phrase "under such conditions" does not necessarily, in every
case, require a price analysis.  Moreover, if a price analysis is performed, we consider that it need
not necessarily demonstrate consistent underselling by the imported product in the domestic market
of the importing Member in order to make a finding of serious injury.
8.111  In the present case, the European Community focuses upon the "price" aspect of conditions
of competition in its arguments concerning the alleged inconsistency of the USITC Report with the
requirements imposed by the phrase "under such conditions" in Article XIX:1 of the GATT 1994
and Article 2.1 SA, and by the causation requirements of Article 4.2(a) and (b) SA.  The USITC also
placed emphasis on "relatively low-priced imports" in its causation analysis.
102  We turn to an
examination of the EC allegation that the USITC consideration of price is inadequate for the
purposes of establishing a causal link between imports and serious injury under Article 4.2(a) and
(b) SA.
8.112  The USITC Report indicates that the USITC examined "price" and found that it supported a
finding of serious injury caused by imports.  The USITC stated:
"The ratio of imports to consumption then increased sharply to 58.9 per cent in 1996 and
60.2 per cent in 1997.  The record reflects that most of this increase consisted of imports
from the EU.  The record also shows that imports from the EU consistently undersold
                                                     
101 Two previous panels have come to a similar conclusion about the nature of the obligation imposed
by the phrase "under such conditions".  Panel Report, Argentina-Footwear Safeguard, supra , note 17, paras.
8.249-8.252.  The Appellate Body saw "no error" in the panel's approach to causation in that dispute, see
Appellate Body Report, Argentina-Footwear Safeguard, supra , note 17, paras. 140-145.  Panel Report, Korea-
Dairy Safeguard , supra , note 16, paras. 7.51-7.52.  That specific issue was not appealed in that dispute.
102 USITC Report, pp. I-17, I-18.WT/DS166/R
Page 34
domestic wheat gluten.  This surge in relatively low-priced imports in 1996 and 1997
coincided with a decline in industry performance."103
8.113  The USITC Report contains data that support the USITC statement that EC imports
undersold the US product in 1996 and 1997.104  Such data can be found in Table 18 of the USITC
Report, entitled "Vital wheat gluten produced in the United States and the European Union:
weighted-average net delivered selling prices and quantities reported by U.S. producers and
importers, and margins of under/(over)selling, by quarters, July 1992-June 1997”.105
8.114  The USITC also found:
"We note that raw material costs increased over the period examined, particularly in 1996
and 1997.  Consumption also increased significantly during this period. Because demand
for wheat gluten is relatively insensitive to changes in price, we would expect that wheat
gluten producers would be able to pass on these cost increases to their customers.  U.S.
producers testified that, historically, higher raw material costs had been passed through to
their customers. In 1996 and 1997 , however, unit selling values declined  notwithstanding
increased demand and higher raw material costs.  We find that this unusual development
is explained by the dramatic increase in relatively low-priced imports  during this period,
which had the effect of driving down wheat gluten prices ."106 (emphasis added, footnotes
omitted)
8.115  The quarterly pricing data in Table 18 of the USITC Report indicate that, during 1994107,
there was a sharp rise in the price of wheat gluten.  The USITC explicitly acknowledged that this risein price was caused, at least in part, by the low protein content in the wheat crop.
108  During 1995,
prices fell.  Prices then increased slightly in 1996 in comparison with the level of the last quarter of
1995.
8.116  While the USITC states that "unit selling values declined" in 1996 and 1997, the data in
Table 18 indicate that quarterly wheat gluten prices actually increased in the first three quarters of1996 from the level of prices in the last quarter of 1995.  We recall that the USITC found that the
surge in imports occurred in 1996 and 1997.  Data in the USITC Report reflect that, on a quarterly
basis, prices fell in 1995 (before the surge and at least in part due to the protein content of the wheat
crop) and rose in 1996 (during the surge in "relatively low-priced imports").
8.117  Particularly when the USITC itself emphasizes and relies on a decline in unit selling values
(in the face of increased demand and higher ra w material costs) and on "relatively low-priced
imports … which had the effect of driving down wheat gluten prices" as part of its causation
analysis, we believe that the USITC might have provided a more robust explanation in its findings of
                                                     
103 USITC Report, p. I- 16.
104 We note there was an initial difference of views between the parties concerning the period referred
to by the USITC when "imports from the EU consistently undersold domestic wheat gluten"  (European
Community first written submission, Attachment 1-1, paras. 82-83).  The United States clarified before us thatthis reference in the USITC Report to such "consistent underselling" referred to the 1996-1997 period (UnitedStates first written submission, Attachment 2-1, paras. 121-123.  We consider that this view is supported by thecontext of the relevant phrase as it appears in the USITC Report.
105 USITC Report, p. II-33.
106 USITC Report, pp. I-17 and I-18.
107 This reference is to USITC reporting years, i.e. 12-month period ending in June of the relevant
year.
108 USITC Report, p. II-9, pp. I-22-I-23:   "The increase in demand for wheat gluten in 1994 …
resulted at least in part from a weather-related deficien cy in protein content in the wheat crops of the major
producing countries, including the United States, during 1993."  This is also reflected at note 84 on p. II-32 ofthe USITC Report.WT/DS166/R
Page 35
how pricing data interrelated with the movement of trends in imports.  We note that in Part II of the
USITC Report, in its description of pricing information obtained in the investigation, the USITC
characterizes in considerable detail the quarterly pricing trends during the POI.109  Such detailed
characterization is, however, not reflected in the USITC findings in Part I of the USITC Report,
which focus on average annual unit selling values and merely state that "unit selling valuesdeclined".  However , as the annual average trends in price as found by the USITC support the
statement of the USITC
110, we find that the USITC Report contains an adequate, reasoned and
reasonable explanation of how the facts support the determination made on this point, and that the
USITC Report contains a demonstration of the relevance of this factor.
8.118  For these reasons, we find that the United States did not act inconsistently in this
context with the obligations imposed by  the phrase "under such conditions" in
Article XIX:1(a) of the GATT 1994 and Article 2.1 SA nor with its obligations under Article
4.2 SA.
(iii) other factors and attribution
Did the USITC investigate other relevant factors in the context of causation?Arguments of the parties
8.119  The European Community argues that the USITC failed properly to investigate factors other
than the increased imports as possible causes of injury, as required by Article 4.2(b) SA.  According
to the European Community, these factors include: (i) the effect of wheat protein premiums on the
wheat protein price in the US market ; (ii) co-product markets ; (iii) increased capacity ; (iv) input
prices ; and (v) imports by US producers. 
111  According to the European Community, under Article
4.2(a), the competent authorities must, on their own initiative, identify which factors may be relevantand then, on their own initiative, obtain all information which is necessary to evaluate how that
factor developed.  In any event, the European Community submits that the EU producer respondents
raised all of these factors, including wheat protein premiums, before the USITC as relevant for the
whole period of investigation.
8.120  The United States argues that the USITC examined factors other than imports that may be a
cause of serious injury to the domestic industry and included such findings in its report.  The United
States argues that the competent authority should be able to rely on the points raised by the parties,
and does not need to investigate other possible causal factors on its own initiative.  The United States
submits that the EU respondent producers did not raise wheat protein premiums as a possible causal
factor for the whole period of the investigation.
                                                     
109 USITC Report, pp. II-32 ff.
110 USITC Report, pp. II-31 and II-32.
111 The European Community also raised the issue of inclusion of imports from Canada in the
investigation and the exclusion of these imports from the application of the measure.  We discuss this infra .,
paras. 8.160 ff.WT/DS166/R
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Evaluation by the Panel
8.121  As we have indicated112, we read the requirement in Article 4.2(a) SA as mandating that the
investigating authorities evaluate at least all those "factors" enumerated in Article 4.2(a) SA as well
as any other relevant "factors" -- in the sense of factors that are clearly  raised before them as relevant
by the parties in the domestic investigation.  While the investigating authorities certainly enjoy thediscretion to investigate other "relevant factors of an objective and quantifiable nature having a
bearing on the nature of the industry" beyond those th at have been raised by the parties in the course
of the investigation, the investigating auth orities are not, in our view, obligated on their own
initiative  to seek out and evaluate factors other than those explicitly enumerated in Article 4.2(a)
beyond those that are clearly raised before them by the interested parties in the course of theinvestigation.
8.122  From the summary of the arguments in the USITC Report, as well as certain EC Exhibits
113
submitted to us that formed part of the record before the USITC, it is apparent that the EU
respondents in the USITC proceedings clearly raised factors (ii) through (v) referred to above by the
European Community, i.e. developments as to co-products114, a "new domestic producer, and less
than full levels of capacity utilization by domestic producers"115, rising input costs116 and "large-
scale importing by US producers"117 before the USITC.  It is further apparent to us from a review of
the USITC findings that the USITC considered these four possible causes of injury raised by the EU
respondents before it and identified by the European Community in these Panel proceedings.  The
USITC causation findings expressly address co-product markets118; capacity utilization119; input
prices120 and the importation of wheat gluten by United States producers121.
8.123  We turn to the remaining factor identified by the European Community in this context
before us -- the issue of wheat protein premiums.122  With respect to this factor, the European
Community alleges that the USITC failed to collect  data and failed to assess correctly any causal
link between imports and alleged serious injury, in violation of Article 4.2(a) and (b) SA.
8.124  We therefore consider whether the issue of wheat protein premiums was raised by the EU
respondents before the USITC as a relevant factor having a bearing on the situation of the industrythat was possibly causing injury to the domestic industry throughout the POI.  Before us, there is
disagreement between the parties concerning the extent to which the issue of "protein premiums"
was raised by the EU producers in the course of the USITC investigation.  Both parties agree that the
protein content in the wheat crop was a relevant factor in 1993-1994, that this was raised by the EU
respondents before the USITC and that the USITC explicitly considered its relevance in the USITCReport.  However, with respect to the post-1994 period, the United States submits before us that
there was:
                                                     
112 Supra , paras. 8.39, 8.69.
113 Exhibits EC 16-18.
114 USITC summary of EU respondents' argument, USITC Report, p. I-15; USITC findings, USITC
Report, p. I-16.
115 USITC summary of EU respondents' argument, USITC Report, p. I-16; USITC findings, p. I-17.
116 Exhibit EC-16, "Pre-hearing brief of 11 December 1997 lodged by AAC with ITC", p. 29; USITC
findings, p. I-15.
117 USITC summary of EU respondents' argument, USITC Report, p. I-15; USITC findings, USITC
Report, p. I-16.
118 USITC Report, pp. I-16 and I-17.
119 USITC Report, p. I-17.
120 USITC Report, pp. I-17 and I-18.
121 USITC Report, p. I-17.
122 The "protein premium" is the price differential between low- and high-protein wheat.WT/DS166/R
Page 37
" no evidence before the USITC of a drop in the protein content of the wheat crop in 1996
and 1997, or of any other change relating to the protein content of the wheat crop that
would explain the increase in wheat gluten co nsumption in those two years.  Nor did any
of the parties in the USITC investigation make  the argument the EC has advanced in this
proceeding.  While EU producers during the USITC proceeding cited the 1993/94 supply
shortage, fluctuating prices of wheat, and the price premium of wheat over corn as factors
affecting the domestic wheat gluten market, they did not allege a “wheat protein premium
factor” or protein shortfall in the 1996 and 1997 wheat crops.  If the protein factor of
wheat during 1996 and 1997 was a serious factor affecting price and demand for wheat
gluten, it is surprising that it was only discovered by the EC long after the conclusion ofthe USITC investigation."
123
8.125  Before us, in support of its assertion that the issue of the wheat protein premium was raised
before the USITC as a relevant causal factor th roughout the entire POI, the European Community
indicates several places in the USITC record where EU producers mentioned this issue in the oraland written proceedings before the USITC
124, and points to a statement made by the petitioners in
the course of the USITC investigation.125  We have examined this evidence cited by the European
Community before us.  While this evidence demonstrates to us that the issue of the effect of protein
premiums on price during 1993-1994 was certainly raised by the EU producer respondents as
relevant before the USITC, we find that the European Community has not demonstrated to us as a
matter of fact that the EU producer respondents clearly raised the broader issue of wheat protein
premiums as a possible relevant causal factor pertaining to the post-1994 segment of the period ofinvestigation which the European Community raises in these Panel proceedings.
8.126  We note that the USITC expressly acknowledged that the protein content of the wheat crop
has an effect on the demand of wheat gluten
126, and we consider that the USITC might have
included an explicit and distinct examination of the protein content of wheat as a "relevant factor
having a bearing on the situation of the domestic industry" and reflected the results of thatexamination, including the relevance of that factor, in its Report.  However, in light of our finding
that the EU producer respondents did not clearly and persistently pursue this issue before the USITC
as another possible cause of injury in the post-1994 period, we find that the fact that the USITC did
not collect data on this factor and did not include an explicit and distinct examination of this factor in
its Report over and above its considerations of price and demand (which would reflect developmentsin the protein content of the wheat crop), does not constitute a violation of Article 4.2(a) and (b) SA.
8.127  For these reasons, we do not find that the failure by the USITC to investigate the
relevance of the protein premium issue in th e post-1994 segment of the POI constitutes a
violation of Article 4.2(a) and (b) SA.
8.128  It remains for us to examine the consistency with Article 4.2(b) SA of the USITC's
examination of the factors that were  clearly raised before it by the interested parties in the course of
the investigation and were  addressed by it.
                                                     
123 United States second oral statement, Attachment 2-7, para. 25.
124 See European Community second written submission, Attachment 1-4, para. 54, referring to
Exhibit EC-18, pp. 24 and 31; European Community Response to Additional Panel Question 1, Attachment 1-
15.
125 See European Community second written submission, Attachment 1-4, para. 55, referring to
Exhibit EC-17, pp. 149-150.
126 See, for example, USITC Report, p. II-5.WT/DS166/R
Page 38
Did the USITC's examination ensure the non-attributio n to imports of injury caused by other factors?
Arguments of the parties
European Community
8.129  The European Community alleges that the USITC failed to fulfill the obligation in
Article 4.2(b) SA not to attribute to imports inju ry caused by other factors.  According to the
European Community, the United States should have provided an objective criterion to demonstrate
that the injury attributable to imports, after having deducted the injury caused by other factors,
reached the threshold of "serious".  On the basis of the objective elements which they examined or
should have examined, the USITC should never have reached the conclusion that such injury was
“serious”.
8.130  The European Community argues that the United States relies on a "preponderance" test
when determining the causal link.  In the EC view, the United States legislation mandating the
United States authorities to examine whether or not increased imports are only a "substantial cause"
and whether or not certain factors are "a more important cause of serious injury than increased
imports" has no basis in WTO law.  In case of concurring causes of injury, the United States lawprevents the investigating authorities from verifyin g the only important issue, i.e. whether increased
imports are  per se the cause of "significant overall impairment of the position of the domestic
industry". The European Community argues that Article 4.2(b) requires that a Member demonstrate
that "increased imports" caused "serious injury per se , i.e. taken alone".
127  In the EC view, the
investigating authorities cannot attribute the cause of serious injury to increased imports if the
increased imports are a co-cause of such serious injury but do not reach per se  , in isolation, the
threshold of “serious injury”.  According to the European Community, the United States
investigating authorities are limited by the United States law to investigating a different issue, i.e.
whether there is a single cause "more important" than increased imports.  This is incompatible with
Article 4.2 SA.
8.131  The European Community alleges, in particular with respect to increased capacity, that the
USITC violated Article 4.2(b) in that it should not have attributed to increased imports "any (easilyquantifiable)  injury caused by this factor".
128  The European Community urges that the United States
should have excluded the injury caused by overcapacity from its determinations of serious injury and
causation.  In order to do this, it should have dete rmined whether, if capacity had remained the same
since 1993, there still would have been “a significant overall impairment of the domestic industry”.
United States8.132  The United States argues that the USITC spec ifically examined possible alternative causes
of serious injury raised by interested parties in the course of the investigation, including: changes in
co-product markets; domestic producers' importation of wheat gluten; competition among domestic
producers; increased capacity and rising input costs.  The USITC included findings on these possible
alternative causes of serious injury in its report.  According to the United States, in each case, theUSITC found that the asserted cause did not have the effect on the industry suggested ( e.g., co-
production, corn starch competition with wheat starch, importation by domestic producers, rising
prices for inputs) or had only a demonstrably minor role in the serious injury suffered by the industry
(increased capacity).
129  The United States submits that the European Community seeks to have the
Panel re-find the facts as to each of these factors and assess the USITC's weighing of the factors.
                                                     
127 European Community Response to Panel Questions 8 and 9, Attachment 1-3.
128 European Community second written submission, Attachment 1-4, para. 69.
129 United States first written submission, Attachment 2-1, para. 125.WT/DS166/R
Page 39
8.133  In the United States view, the causation standard relevant to WTO review of an injury
determination is set forth in Article 4.2(b).  The USITC determination clearly articulates its reasons
for finding “the causal link” between the increased imports and serious injury.  The United States
argues that nothing in the Agreement on Safeguards requires the competent authority to articulate the
causation standard at all; Article 4.2(b) requires merely that it be applied.
8.134  According to the United States, the USITC specifically addressed each of the other factors
that importers and foreign producers suggested were causing injury, and found that no other factor
that might be adversely affecting the wheat gluten industry was more important than the rapid
increase in imports.130  The United States submits that with respect to co-products, the USITC found
that: there was no decline in wheat starch prices that either paralleled the sharp decline since 1994 ofdomestic wheat gluten prices or explained the sharp decline in the financial performance of domestic
wheat gluten producers; and the relative stability of, and gradual increase in, domestic wheat starch
prices suggested that competition between corn starch and wheat starch was not likely to have much,
if any, effect on wheat gluten production.
131  The United States further argues that the USITC found
that imports by domestic producers were not responsible for the surge in imports that occurred in1996 and 1997.
132  According to the United States, the USITC also found that unit selling values
declined in 1996 and 1997 despite increased demand and higher raw material costs and that this
unusual development was explained by the dramatic increase in relatively low-priced imports during
this period, which had the effect of driving down wheat gluten prices.133  To the extent that one other
factor -- namely, additions to U.S. capacity -- contributed to the decline in capacity utilization in that
period, the USITC demonstrated why it was a less important factor than imports.  Indeed, the United
States asserts, the USITC specifically identified the relative contributions to injury of capacity
utilization and imports.134  The United States argues that the USITC specifically found that if the
domestic industry filled the growth in demand in 1996 and 1997, instead of the increased imports
doing so, the industry would have operated at 61 pe r cent of capacity instead of 44.5 per cent as it
actually did.  Under these conditions, domestic production in 1997 would have been well above,
rather than below 1996 levels.  Capacity utilization in 1997 would have exceeded 1995 levels.  Inshort, according to the United States, "the fall in virtually all indicators of industry performance in
1996 and 1997 compared with prior periods, which the USITC found to constitute serious injury,
would not have occurred."
135  For the United States, the history and context of Article 4.2(b)
demonstrate why the EC’s proposal that the USITC must somehow quantify and deduct from total
injury the specific effects caused by other factors is not required.
8.135  The United States submits that the aspect of US law requiring a finding that imports must be
a “substantial cause” of injury requires the USITC to make a finding related to causation that, while
not required by Article 4.2, helps to ensure that its objectives are realized.  The requirement to
examine the relative weight of other factors ensures that the USITC both examines the causal link
between increased imports and serious injury, as required by Article 4.2(b), and avoids attributing toimports the effects of other causes of injury that are more important.  According to the United States,
while they result in findings that provide more de tail than required under Article 4.2(b), the relevant
United States procedures are entirely consistent with its letter and spirit.
Evaluation by the Panel
8.136  We view the issue before us as whether, in  conducting its investigation into whether
increased imports were "a cause that is important and not less than any other cause" of any serious
                                                     
130 Id., para. 127.
131 Id., paras. 31-32, citing USITC Report, pp. I-16-17.
132 Id., para. 33, citing USITC Report, p. I-17.
133 Id., para. 35, citing USITC Report, p. I-17.
134 Id., para. 127 .
135 Id., para. 132.WT/DS166/R
Page 40
injury to its domestic wheat gluten industry, the USITC satisfied the requirements in Article
4.2(b) SA to demonstrate the causal link between the increased imports and the serious injury, and
not to attribute to imports injury caused by other factors.136  We first consider the nature of the
obligations imposed by Article 4.2(b) with respect to the causation analysis that the investigating
authorities must conduct.
8.137  Article 4.2(b) SA deals specifically with the cau sal link between imports and serious injury.
It requires that the safeguard investigation demonstrate, “on the basis of objective evidence, the
existence of the causal link between increased imports of the product concerned and serious injury or
threat thereof.”  It also stipulates that “[w]hen factors other than increased imports are causing injury
to the domestic industry at the same time, such injury shall not be attributed to increased imports.”Thus, as part of the causation analysis, there must be a sufficient consideration of "other factors"
operating in the market at the same time, so that any injury caused by such other factors can be
properly identified and attributed.
8.138  As we have previously observed, Article 4.2(b) SA contains an explicit textual link to
Article 4.2(a) SA.  It stipulates that "[t]he determination made in subparagraph (a) shall not be made
unless" the investigation demonstrates the existence of the causal link between increased imports and
serious injury.  Article 4.2(a) and (b) require a Member: (i) to demonstrate the existence of the
causal link between increased imports and serious  injury; and (ii) not to attribute injury being caused
by other factors to the domestic industry at the same time to increased imports.  We consider that,
read together, these two propositions require that a Member demonstrate that the increased imports,
under the conditions extant in the marketplace, in and of themselves , cause serious  injury.  This is
not to say that the imports must be the sole causal factor present in a situation of serious injury.There may be multiple factors present in a situation of serious injury to a domestic industry.
However, the increased imports must be sufficient, in and of themselves, to cause injury which
achieves the threshold of "serious" as defined in the Agreement.
8.139  In our view, where a number of factors, one of which is increased imports, are sufficient
collectively  to cause a "significant overall impairment of the position of the domestic industry", but
increased imports alone are not causing injury that achieves the threshold of "serious" within the
meaning of Article 4.1(a) of the Agreement
137, the conditions for imposing a safeguard measure are
not satisfied.  In such a situation, imports may be causing "injury", and there may even be a
demonstration of the causal link between increased imports and "injury".  However, where this
injury does not achieve the threshold of " serious  injury", as that term is defined in Article 4.1(a) SA,
the conditions and circumstances permitting the imposition of a safeguard measure are not present.
                                                     
136 The United States asserts that the "EC makes some statements regarding U.S. law, but the EC did
not challenge U.S. law thus such claims are not within the Panel's terms of reference" (United States first
written submission, Attachment 2-1, footnote 119).  In support, the United States cites the Appellate Body
Report in Guatemala – Anti-dumping Investigation Regarding Portland Cement from Mexico ,
WT/DS60/AB/R, adopted 25 November 1998, para. 73 (the "measure" and the claims concerning that measureconstitute the "matter referred to the DSB" which forms the basis for the panel's terms of reference).  TheUnited States argues:  “The only matter with respect to Articles 2 and 4 of the Safeguard Agreement that hasbeen referred to this Panel is whether the USITC’s findings and conclusion comport with the cited articles.”
We understand that the measure before us is the definitive safeguard measure imposed by the United States,
effective 1 June 1998, pursuant to the United States President's "Proclamation 7103 of May 30, 1998 - ToFacilitate Positive Adjustment to Competition from Imports of Wheat Gluten", supra , note 7 and
"Memorandum of May 30 1998 - Action Under Section 203 of the Trade Act of 1974 Concerning WheatGluten", supra , note 8.  The measure before us is not Section 202 of the United States Trade Act.  We must
examine whether the United States met the requirements in the Agreement on Safeguards for the application of
this measure.  Accordingly, we must examine the findings and conclusions of the USITC as to the conditions
for the imposition of the measure, and the analysis upon which those findings and conclusions are based.
137 Article 4.1(a) SA states: ""serious injury" shall be understood to mean a significant overall
impairment in the position of a domestic industry."WT/DS166/R
Page 41
8.140  This should not be construed to mean that we view the Agreement on Safeguards as
imposing upon the importing Member any particular method for assessing whether any factors other
than imports are causing injury to its domestic market at the same time as imports, or how to go
about ensuring that injury attributable to other factors is not attributed to imports.  The United States
remains free to choose a method for making this assessment and ensuring non-attribution.138
However, while the United States is free to determine an appropriate method of assessing causation,
the method it selects must ensure that the injury caused by increased imports, considered alone, is
"serious" injury, that is "a significant overall im pairment in the situation of the domestic industry".
In order to achieve this, the investigating authorities must ensure that injury attributable to other
factors is not attributed to imports.  While the in vestigating authorities may not be required in their
report explicitly to articulate  a particular “causation standard” beyond that provided for in
Article 4.2(b) SA, the approach that the investigating authorities actually apply  must nevertheless
yield a result that is consistent with the obligations contained in Article 4 SA, including the
obligation not to attribute to imports any injury caused by other factors.
8.141  We note that the panel in United States – Imposition of Countervailing Duties on Imports of
Fresh and Chilled Atlantic Salmon from Norway examined the issue of the treatment to be given to
factors other than subsidized imports in the co ntext of Article 6:4 of the Tokyo Round Subsidies
Code. That panel considered139:
"… that the primary focus of the requirement in Article 6:4 of a demonstration of a
causal relationship between imports under investigation and material injury to adomestic industry was on the analysis of the factors set forth in Articles 6:2 and 6:3, i.e.the volume and price effects of the imports, and their consequent impact on the domesticindustry.  In this connection, the Panel recalled its conclusions regarding the findingsmade by the USITC with respect to these factors.  Under Article 6:4 the USITC wasrequired not to attribute injuries caused by other factors to the imports from Norway.In the view of the Panel this did not mean that, in addition to examining the effects ofthe imports under Articles 6:1, 6:2 and 6:3, the USITC should somehow have identifiedthe extent of injury caused by these other factors in order to isolate the injury caused bythese factors from the injury caused by the imports from Norway.  Rather, it meant that
the USITC was required to conduct an examination sufficient to ensure that in its
analysis of the factors set forth in Articles 6:2 and 6:3 it did not find that material injurywas caused by imports from Norway when material injury to the domestic industryallegedly caused by imports from Norway was in fact caused by factors other than theseimports…"
8.142  We consider that significant differences exist between the text of the particular legal
provisions that formed the basis for the analysis of the United States - Salmon  panel and the legal
context in which the issues before that panel arose (i.e. subsidization/dumping, as opposed to
safeguards).  Nevertheless, to the extent it is relevant to our examination in this dispute, we believe
that the above passage from the United States – Salmon  panel report provides guidance.  We agree
with the view of that panel to the extent that it would require the USITC to conduct a safeguards
examination sufficient to ensure that, in its analysis of the injury factors contained or referred to inArticle 4.2(a) SA, it did not find that serious injury was caused by increased imports of wheatgluten when injury to the domestic industry allegedly caused by increased imports was in fact
                                                     
138 A similar view was expressed by the panel in Korea – Dairy Safeguard , supra , note 16, para. 7.96.
139 SCM/153, adopted by the SCM Committee on  28 April 1994, BISD 41S/576, para. 321. The
panel in United States – Antidumping Duties on Imports of Fresh and Chilled Salmon from Norway , ADP/87,
adopted by the ADP Committee on  27 April 1994, BISD 41S/229, para. 555 similarly examined the issue ofthe treatment to be given to factors other than dumped imports in the context of Article 3:4 of the TokyoRound Anti-Dumping Code.WT/DS166/R
Page 42
caused by factors other than these increased imports .  A Member is not necessarily required to
quantify, on an individual basis, the precise extent of "injury" caused by each other possible factor.
However, a Member must conduct an examination that ensures that any injury caused by such other
factors is not attributed to increased imports.140
8.143  Thus, Article 4.2(a) and (b) SA require that increased imports per se  are causing serious
injury.  Furthermore, the investigating authorities must conduct an examination that ensures that any
injury caused by other factors is not attributed to increased imports.  Where injury caused by one --
or multiple -- other factor(s) is attributed to those other factors, any remaining injury caused by
increased imports may not reach the threshold of " serious  injury", within the meaning of
Article 4.1(a) SA.
8.144  On this basis, we examine whether the causation analysis applied by the USITC in this
safeguard investigation complied with the "non-at tribution" requirement of Article 4.2(b) SA.
8.145  In its investigation, the USITC examined whether increased imports were a “substantial
cause” of serious injury, i.e. “a cause which is important and not less than any other cause.”  The
USITC found as follows:
"We reviewed carefully the alternative causes of injury suggested by the parties and other
possible causes, and have concluded that increased imports are both an important cause of
serious injury and a cause that is greater than any other cause."141
8.146  The USITC Report indicates that the USITC weighed individually each of the other causal
factors in question against imports in order to find whether any one of these factors, on its own, was
“a more important cause of injury” or a “greater cause of serious injury” than increased imports.
The USITC determined that none of these factors, on its own, was “a more important cause of
serious injury” than increased imports.
8.147  With respect to co-products markets, the USITC found:
"We carefully reviewed EU respondents' arguments about the co-product markets.  While
there is evidence that wheat gluten production decisions are affected by market conditions
in the wheat starch market, we conclude that changes in the co-product markets were not
a more important cause of serious injury than increased imports. "142 (emphasis added,
footnotes omitted)
8.148  With respect to rising input costs143, the USITC stated:
                                                     
140 We recognize the practical difficulties that may arise in applying this principle.  While we make a
finding as to the general kind of examination that a Member is required to conduct, we make nopronouncement as to the precise steps that a Member must take in this regard.
141 USITC Report, p. I-16.
142 USITC Report, p. I-16.
143 In light of our finding below, we do not believe it is necessary to examine that EC assertion that
the USITC failed to fulfill the requirements of Article 4.2( b) SA by basing itself on oral assertions by "persons
interested in the outcome of an investigation" (i.e. the presidents of two of the US producers, Midwest and
Manildra) for the proposition that "[b]ecause demand for wheat gluten is relatively insensitive to changes inprice, we would expect that wheat gluten producers woul d be able to pass on these cost increases to their
customers.  U.S. producers testified that, historically , higher raw material costs had been passed through to
their consumers."  According to the EC, the USITC could not rely on these oral assertions without verifying
the correctness of such "interested" allegations through other sources.  See first written submission of the EC,
paras. 97-100; Oral Statement of the EC at the first meeting with the Panel, paras. 84-86; second written
submission of the EC paras. 29-30, 45.WT/DS166/R
Page 43
“Nor do we consider rising prices of wheat and wheat flour, which are the major inputs
into wheat gluten/wheat starch production, to be a more important cause of injury than
increased imports.”144
8.149  With respect to the importation of wheat gluten by United States domestic producers, the
USITC found:
"We do not regard the ongoing importation of wheat gluten by domestic producers as
being a more important cause of the serious injury , as argued by respondents.”145
(emphasis added, footnotes omitted).
8.150  With respect to capacity utilization and increased capacity, the USITC found:
"We considered other possible causes of injury, including competition among domestic
producers, increased capacity and rising raw materials (wheat and wheat flour) costs.  The
domestic wheat gluten market is very competitive.  Producers have ample excess capacity
to meet higher demand.  Also, wheat gluten is a commodity product that sells primarily on
the basis of price, and wheat gluten from different sources is highly interchangeable.  Onenew domestic producer, Heartland, entered the market in 1996.  In addition, the domestic
industry added substantial new capacity early in the period of investigation.  This
increased capacity was added in anticipation of continued strong growth of domestic
demand and consumption.  Industry projecti ons of continued growth in demand and
consumption were largely correct, as apparent consumption increased nearly 18 percent
between 1993 and 1997.  As indicated above, but for the increase in imports, the industry
would have operated at 61 percent capacity in 1997, which is much closer to the level atwhich the industry operated early in the investigative period when it operated reasonably
profitably.  We therefore conclude that neither  domestic competition nor increased
domestic capacity was a more important cause of serious injury than increased
imports ."
146 (emphasis added)
8.151  As we have already observed, Article 4.2(b) SA prohibits the attribution to increased
imports of injury caused by other factors.  We take this to imply that a given factor is either a cause
of injury, or it is not.  If a given factor is a cause of injury (even a minor cause), then, under
Article 4.2(b) SA, such injury "shall not be attributed to increased imports".  We note the United
States assertions that increased capacity had a role (characterized by the United States in theseproceedings as a "demonstrably minor role")
147 in the serious injury suffered by the industry; that "to
the extent that one other factor, namely additions to US capacity -- contributed to the decline in
capacity utilization [in 1996 and 1997], the USITC demonstrated why it was a less important factor
than imports"148; and that the USITC specifically identifi ed the relative contributions to injury of
capacity utilization and imports.149  To us, these assertions constitute an admission by the United
States that at least one factor other than increased imports also contributed to the serious injury
experienced by the domestic industry.  However, we see no indication in the USITC Report  that
imports were not also held responsible for the injury caused by this factor.  As a result of the USITC
causation analysis that weighed each other factor individually against imports to determine whether
such factor was "a more important cause of injury" and then excluded such other factor as a "causeof injury" when it did not, on its own, satisfy this standard, the USITC held that imports were
effectively the sole remaining cause of injury , which the USITC presumed remained "serious".
                                                     
144 USITC Report, P. I-17.
145 USITC Report, p. I-17.
146 USITC Report, p. I-17.
147 United States first written submission, Attachment 2-1, para. 125.
148 United States first written submission, Attachment 2-1, para. 127.
149 Ibid.WT/DS166/R
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However, we see this approach as the converse of ensuring that it was the increased imports alone
which were causing serious  injury.  A demonstration that a given causal factor did not make an equal
or greater contribution to serious injury than imports does not demonstrate that such factor made no
contribution at all  to serious injury.
8.152  The USITC examination as to whether each other factor individually constituted "a greater
cause of injury than imports" is not such as to en sure that "serious injury", within the meaning of
Article 4.1(a) SA, would necessarily still exist after injury attributable to such other causes was not
attributed to imports.  In our view, under the USITC causation analysis applied in this case, it is not
clear that the increased imports of the product concerned cause " serious  injury" to the domestic
industry.  We consider that the USITC's causation analysis does not ensure that imports, in and ofthemselves, are sufficient to cause serious  injury to the domestic industry once injury caused by
other factors is not attributed to imports.
8.153  For these reasons, we  find that the examination of the USITC into whether increased
imports were "a cause that is important and no t less than any other cause" of serious injury
and the resulting conclusion of the USITC in the investigation that led to the imposition of thesafeguard measure at issue that increased imports are "an important cause of serious injury
and a cause that is greater than any other cause” are not consistent with Article 4.2(b) SA as
they do not ensure the non-attribution to imports of injury caused by other factors .
150
(iv) summary with respect to causation
8.154  In sum, we have found that the USITC Report indicates a general coincidence of the upward
trend in imports with the negative trends in the injury factors and that it contains an adequate,
reasoned and reasonable explanation of how the facts support the USITC findings with respect to thefirst aspect of the causation analysis.
151  With regard to the second aspect of the causation analysis
relating to the conditions of competition between the imported product and the domestic product, we
have found that the United States did not act inconsistently with the obligations imposed by the
phrase "under such conditions" in Article XIX:1(a) of the GATT 1994 and Article 2.1 SA nor with
its obligations under Article 4.2 SA.  However, we have found that the USITC examination intowhether increased imports were "a cause that is important and not less than any other cause" of
serious injury and the resulting conclusion of the USITC that increased imports are "an important
cause of serious injury and a cause that is greater than any other cause” are not consistent with
Article 4.2(b) SA as they do not ensure the non-a ttribution to imports of injury caused by other
factors.
(e) Exclusion of certain imports from the application of the measure on the basis of origin
(i) Arguments of the parties
European Community
8.155  In challenging the safeguard investigation and the measure imposed by the United States in
this case, the European Community raises the issue of the inclusion of imports of wheat gluten fromall sources in the investigation, but the exclusion of certain imports from the application of the
                                                     
150 We do not by our finding intend to express any view as to whether or not, had the United States
conducted an examination that ensured that any injury caused by such other factors is not attributed toincreased imports, it could have properly found that there was serious injury caused by increased imports.  As
the United States has itself argued, our task is to review the determination of an investigating authority, rather
than to engage in a de novo  review or to conduct our own assessment on the basis of the raw data that was
before the investigating authority.  See supra , para. 8.3.
151 See supra , para. 8.91 for the three parts of the Panel's approach to causation.WT/DS166/R
Page 45
measure on the basis of origin (in particular, those of Canada, a NAFTA partner) in several contexts
under Articles XIX:1 of the GATT 1994 and Articles 2.1 and 4 SA152 -- in particular, "increased
imports", "serious injury" and "causation".  The European Community also argued that the
procedure followed by the USITC "does not correctly apply the fundamental MFN provision under
Article 2.2 of the SA".153
8.156  The European Community asserts that the United States found serious injury or threat
thereof caused by imports from all sources, including imports from NAFTA countries including
Canada, but then imposed its safeguard measure on wheat gluten only on non-NAFTA countries,
thus excluding Canada.  In the view of the European Community, this constitutes a breach of the
principle of "parallelism" that was recognized in the Argentina - Footwear Safeguard  case.154
According to the European Community, nothing in  Article 4.2 SA allows a Member to conduct a
separate examination of serious injury based on the origin of the imported products concerned.  The
European Community asserts that Article 2.1 SA, and in particular its footnote 1, does not support
the arguments made by the United States (and Canada) in this case.  In the view of the European
Community, the "generic reservation" contained in footnote 1 to Article 2.1 concerning theinterpretation of the relationship between Articles XXIV and XIX of the GATT 1994 has no bearing
on the interpretation of Article 4.2 SA.
United States
8.157  The United States contends that, in its investigation, the USITC found that the serious injury
sustained by the domestic wheat gluten industry was attributable to a surge in imports from the EU
in 1996 and 1997, accompanied by sustained underselling from EU producers.
155  In a second step,
the USITC examined Canadian imports alone and determined that they were not a significant causeof serious injury.  This separate causation analysis of NAFTA imports was conducted pursuant to
US law, as required by Article 802 of the NAFTA.  According to the United States, the USITC's
finding make clear that, unlike in Argentina – Footwear Safeguard , the injury determination was not
based on effects ascribable to Canadian imports.
8.158  The United States does not understand the Appellate Body to have established a broad
requirement of “parallelism”.  Nevertheless, the United States asserts that the procedures
contemplated by Article 802 of the NAFTA, and employed by the United States in this case, satisfies
the purpose of the “parallelism” notion articulated in Argentina-Footwear Safeguard .
8.159  The United States argues that nothing in the Agreement on Safeguards proscribes an
independent causation analysis for imports originating in the territory of another free trade areaparticipant, or suggests that only a single causation analysis is appropriate.  According to the United
States, specific provisions on the application of safeguard measures by members of a customs union
or free trade area are in footnote 1 of the Agreement on Safeguards.  The United States asserts that
the applicable provisions of the GATT 1994, namely Articles XIX and XXIV:8, determine
Members’ rights and obligations regarding the application of a safeguard measure in the context ofan FTA.  In particular, the footnote makes clea r that the non-discrimination requirement of Article
2.2 SA is not pertinent in assessing the safeguards treatment accorded by a customs union or FTA
member to goods originating in other participant countries.  According to the United States, Article
XXIV does not address the sequencing, or number, of causation analyses that may be undertaken as
part of an Article XIX safeguards investigation.
                                                     
152 See infra , paras. 8.184 and 8.220 with respect to the EC claims in this context under Article 5 SA
and Article I of the GATT 1994.
153 EC second written submission, Attachment 1-4, para. 123.
154 EC second written submission, Attachment 1-4, para. 118 – 128. The European Community refers
to Panel Report and Appellate Body Report, Argentina - Footwear Safeguard , supra , note 17.
155 United States Response to Panel Question 29, 17 January 2000.WT/DS166/R
Page 46
(ii) Evaluation by the Panel
8.160  We see the issue before us as whether, in this case, the United States, after including imports
from all sources in its investigation of "increased imports" of wheat gluten into its territory and the
consequent effects of such imports on its domestic wheat gluten industry, was justified in excluding
imports from Canada from the application of the safeguard measure following a separate andsubsequent inquiry concerning whether imports from Canada accounted for a "substantial share" of
total imports and whether they "contributed importantly" to the serious injury caused by imports.
156
8.161  In the course of the present Panel proceedings, the United States confirmed that the USITC
first conducted a "global" investigation concerning injury and causation that included imports of
wheat gluten from all sources , regardless of their origin.  Following an affirmative determination
that wheat gluten was being imported from all sources  into the United States in such quantities as to
cause serious injury to the United States domestic wheat gluten industry157, the USITC conducted a
separate and subsequent examination of whether imports from Canada accounted for a substantial
share of total imports, and whether imports from Canada contributed importantly to the serious
injury caused by imports.158
8.162  The USITC Report contains the following accoun t of the USITC finding made with respect
to imports from Canada (and Mexico) in the separate causation analysis conducted with respect to
these imports:
                                                     
156 In its first written submission, the European Community challenged  the exclusion from the
application of the measure by the United States of imports from Canada "and certain other countries" (EC first
written submission, Attachment 1-1, para. 103); the subsequent EC arguments focused on imports fromCanada in this context (see e.g. EC first oral statement, Attachment 1-2, paras. 87 ff.; EC second written
submission, Attachment 1-4, paras. 118 ff.).  We note that imports from Mexico were also excluded from
application of the measure pursuant to NAFTA and the US implementing legislation.  According to the USITCReport,  "there were no reported imports from Mexico during the period examined" (USITC Report, p. I-19).
Imports from Israel and CBERA and ATPA countries were also excluded from the application of the measure.
According to the USITC Report, there were also "no reported importations of wheat gluten from any of thesecountries during the period of investigation" (with the exception of one importation from Ecuador which mayhave been the result of a data entry error) (USITC Report, p. I-29).  Thus, in addition to imports from thosecountries excluded from the application of the measure pursuant to Article 9.1 SA, imports from Canada,Mexico, Israel, CBERA and ATPA countries were also excluded from the measure.  Of these latter countries,
only Canada in fact had imports into the United States during the period examined by the USITC.  Therefore,
imports from Canada were in fact the only imports that were actually included in the USITC investigation butsubsequently excluded from the application of the measure  (again, apart from imports from those countries
excluded from the application of the measure pursuant to Article 9.1 SA).  For this reason, we focus our
examination here on imports from Canada.
157 In response to a question from the Panel, the United States confirmed that an affirmative
determination under Section 202(b)(1)(A) of the United States Trade Act of 1974 is a determination "that a
product is being imported into the United States in such quantities as to cause or threaten to cause seriousinjury to a US industry producing a like or directly co mpetitive product".  See United States Response to Panel
Question 15, Attachment 2-8.  The USITC Report states, at p. I-10:  "Because section 202 is a global safeguard
law, the Commission considers imports from all sources in determining whether imports have increased."
158 The United States excluded imports from Canada from the application of the safeguard measure on
the basis of Section 311(a) of the NAFTA Implementatio n Act, which, according to the USITC Report, p. I-18,
provides that if the Commission makes an "affirmative injury determination" in an investigation undersection 202 of the United States Trade Act, the Commission must also find whether: (i) imports of the article
from a NAFTA country, considered individually, account for a substantial share of total imports; and
(ii) imports of the article from a NAFTA country, considered individually or, in exceptional circumstances,imports from NAFTA countries considered collectively, contribute importantly to the serious injury, or threatthereof, caused by imports.WT/DS166/R
Page 47
"We make a negative finding with respect to both Mexico and Canada.  There were no
reported imports of wheat gluten from Mexico during the period examined.  Thus,
Mexico does not account for a substantial share of total imports.  Having found that the
first prong of the test is not met, we have made a negative finding with respect to
Mexico.  Canada, on the other hand, was the third largest supplier (after the EU andAustralia) of wheat gluten imports during the most recent 3-year period, accounting for
an average of 10.2 percent of imports.  Therefore, we find that imports from Canada
account for a substantial share of total imports.  However, imports from Canada declined
significantly during the period examined, while imports overall increased, and by 1997
Canada accounted for 8.9 percent of total imports.  In addition, petitioner stated in itspetition that imports from Canada are not contributing importantly to the serious injury
caused by imports.  We therefore find that imports from Canada are not contributing
importantly to the serious injury caused by imports."
159 (footnotes omitted)
and,
"Having made negative findings with respect to imports of wheat gluten from Canada
and Mexico under section 311 of the NAFTA Implementation Act, we recommend that
such imports be excluded from the quantitative restriction."160
8.163  The President's "Memorandum of 30 May 1998 -Action Under Section 203 of the Trade Act
of 1974 Concerning Wheat Gluten" states:
"I agree with the USITC's findings under s ection 311(a) of the NAFTA Implementation
Act, and therefore determine, pursuant to section 312(a) of the NAFTA Implementation
Act, that imports of wheat gluten produced in Canada do not contribute importantly to
the serious injury caused by imports and that imports of wheat gluten produced in
Mexico do not account for a substantial share of total imports of such wheat gluten.
Therefore, pursuant to section 312(b) of the NAFTA Implementation Act, thequantitative limitation will not apply to imports of wheat gluten from Canada or
Mexico."
161
8.164  We understand, therefore, that the United States applied the safeguard measures at issue
after conducting an initial  global investigation of the product (wheat gluten) being imported into the
territory of the United States from all sources  and the effects of those imports on the United States'
domestic industry.  Thus, the overall affirmative determination of serious injury to the domestic
industry caused by increased imports was made on the basis of imports from all sources .
8.165  We turn to examine the nature of the legal obligations imposed by the Agreement on
Safeguards with respect to the scope of the imports subject to the investigation and the scope of theimports subject to the application of the measure.
8.166  Several provisions are relevant to our examination, in particular, Articles 2.1 and 4.2 SA.
Article 2.1 SA provides as follows:
Conditions
1. A Member
1 may apply a safeguard measure to a product only if
that Member has determined, pursuant to the provisions set out below,
that such product is being imported in to its territory in such increased
quantities, absolute or relative to domestic production, and under such
                                                     
159 USITC Report, p. I-19.
160 USITC Report, p. I-21.
161 Supra , notes 8 and 10.WT/DS166/R
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conditions as to cause or threaten to cause serious injury to the
domestic industry that produces like or directly competitive products.
1A customs union may apply a safeguard measure as a single unit or on
behalf of a member State.  When a customs union applies a safeguard
measure as a single unit, all the requirements for the determination ofserious injury or threat thereof under this Agreement shall be based on the
conditions existing in the customs union as a whole.  When a safeguard
measure is applied on behalf of a member State, all the requirements for thedetermination of serious injury or threat thereof shall be based on theconditions existing in that member State and the measure shall be limited tothat member State.  Nothing in this Agreement prejudges the interpretationof the relationship between Article XIX and paragraph 8 of Article XXIV of
GATT 1994.
Article 4.2 SA states, in part:
"(a) In the investigation to determine whether increased imports
have caused or are  threatening to cause serious injury to adomestic industry  under the terms of this Agreement, the competent
authorities shall evaluate all relevant factors of an objective  andquantifiable nature having a bearing on the situation of thatindustry, in particular, the rate and amount of the increase inimports of the product concerned in absolute and relative terms, theshare of the domestic market taken by increased imports, changesin the level of sales, production,  productivity, cap acity utilization,
profits  and losses, and employment.
(b) The determination referred to in subparagraph (a) shall not
be made unless this investigation demonstrates, on the basis ofobjective evidence, the existence of the causal link betweenincreased imports of the product concerned  and serious injury or
threat thereof.  When factors other than increased imports arecausing injury to the domestic industry at the same time, suchinjury shall not be attributed to increased imports." (emphasisadded)
8.167  In our view, the text of Articles 2.1 and 4.2 contains a requirement of symmetry between the
scope of the imported products subject to the investigation and the scope of the imported products
subject to the application of the measure.  Article 2.1 SA refers to "a product".  In order for a
Member to apply a safeguard measure, this provision requires that " such product " (emphasis added)
"is being imported into its territory in such increased quantities … and under such conditions as to
cause or threaten to cause serious injury to the domestic industry that produces like or directlycompetitive products."  There exists a basic symmetry between the terms "a product" and "such
product" in Article 2.1 SA.  Both terms must refer to the same  thing.  That is, a safeguard measure
must be applied to a product , and it is increased imports of such product  into the territory of the
importing Member that must have been determined to  cause or threaten to cause serious injury.  In
our view, there is no basis in Article 2.1 SA for a distinction to be drawn on the basis of origin
between the "product" subject to the investigation and the "product" subject to the application of the
measure, and thus there is an implied symmetry w ith respect to the product that falls within the scope
of a safeguard  investigation   and the product that falls within the scope of the  application  of the
safeguard measure.WT/DS166/R
Page 49
8.168  Similarly, Article 4.2(a) refers to "the investigation to determine whether increased imports
have caused or are threatening to cause serious injury to a domestic industry….".  Article 4.2(b)
stipulates that this determination "shall not be made unless this investigation demonstrates … the
existence of the causal link between increased imports  of the product concerned and serious injury
or threat thereof ….". (emphasis added)  These provisions indicate that it is increased imports of "theproduct concerned" that must form the basis for the determination of serious injury and causal link.
In our view, there is no basis in Article 4.2 SA for a distinction to be drawn on the basis of the origin
of a product when examining the element of causation in a safeguards investigation.
8.169  We find contextual support for our view in Article 2.2 SA, which mandates that:
"Safeguard measures shall be applied to a product being imported
irrespective of its source."
8.170  We find further confirmation of our view that there is a requirement of symmetry between
the imports subject to the scope of the investigation and the imports subject to the scope of the
measure in the Appellate Body Report in Argentina-Footwear Safeguard .  There, the Appellate
Body stated the following:
"We now turn to examine whether the Panel was correct in its interpretation that
there is an implied " parallelism  between the scope of a safeguard  investigation  
and the scope of the  application  of safeguard measures."
162  Article 2.1 provides
that:
A  Member  may  apply a safeguard measures …  only  if  that Member
has determined … that such product is being imported into its
territory   in such increased quantities … and under such conditions as
to cause or threaten to cause serious injury to the domestic industry …
(emphasis added)
Article 4.1(c) defines "domestic industry" as meaning "the pr oducers as a whole of
the like or directly competitive products operating  within the territory of a Member
…". (emphasis added)  Taken together, th e provisions of Articles 2.1 and 4.1(c) of
the  Agreement on Safeguards  demonstrate that a Member of the WTO may only
apply a safeguard measure after that Member has determined that a product is being
imported  into its territory   in such increased quantities and under such conditions as
to cause or threaten to cause serious injury to  its domestic industry  within its
territory .  According to Articles 2.1 and 4.1(c), therefore, all of the relevant aspects of
a safeguard investigation must be conducted by the Member that ultimately applies
the safeguard measure, on the basis of increased imports entering its territory and
causing or threatening to cause serious injury to the domestic industry within its
territory.
While Articles 2.1 and 4.1(c) set out the c onditions for imposing a safeguard measure
and the requirements for the scope of a safeguard  investigation , these provisions do
not resolve the matter of the scope of  application   of a safeguard measure.  In that
context, Article 2.2 of the  Agreement on Safeguards   provides:
Safeguard measures shall be applied to a product being imported
irrespective of its source.
                                                     
162Panel Report , Argentina – Footwear Safeguard, supra , note 17, para. 8.87.WT/DS166/R
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As we have noted, in this case, Argentina applied the safeguard measures at issue
after conducting an investigation of products being imported into Argentine
territory and the effects of those imports on Argentina's domestic industry.  In
applying safeguard measures on the basis of this investigation in this case,
Argentina was also required under Article 2.2 to apply those measures to importsfrom all sources, including from other MERCOSUR member States.
On the basis of this reasoning, and on the facts of this case, we find that Argentina's
investigation, which evaluated whether serious injury or the threat thereof was
caused by imports from all  sources, could only lead to the imposition of safeguard
measures on imports from  all  sources.  Therefore, we conclude that Argentina's
investigation, in this case, cannot serve as a basis for excluding imports from other
MERCOSUR member States from the application of the safeguard measures."
163
8.171  Having established that there is a requirement of symmetry under Articles 2.1 and 4.2 SA
between the scope of the imports subject to a safeguards investigation and the scope of the imports
subject to the application of the measure164, we examine whether the approach of the USITC in its
investigation achieved this symmetry.
8.172  The United States argues that "the procedures contemplated by NAFTA Article 802, and
employed by the United States in the case of its wheat gluten safeguard, satisfies the purpose of the
“parallelism” notion the Footwear  panel articulated".165  According to the United States, this purpose
"is to ensure that when a Member attributes serious injury to imports originating in the territory of a
country that is a party to a customs union (or FTA, in this case), those imports should be included in
the safeguard measure the Member determines to apply."166  The United States argues that "Article
802 and US implementing provisions provide for the exclusion of Mexican and Canadian imports
from an eventual safeguard measure where they did not play a significant role in causing serious
injury or threat of injury."167
8.173  We do not agree with the United States that, in this case, the treatment of imports from
Canada in the investigation and in the subsequent exclusion of those imports from the application ofthe measure comports with the symmetry that we have found to be required by Articles 2.1
and 4.2 SA.
8.174  We recall that the term "serious injury" is defined in Article 4.1(a) SA as "a significant
overall impairment in the position of a domestic industry".  In this case, the USITC made a global
determination of "serious injury".  This determination was one of serious injury caused by totalimports of the product into its territory from all sources .  After the USITC had determined serious
injury to have been caused by increased imports of the product concerned from all sources , it
subsequently excluded  from the application of the measure imports from certain sources (in this case,
particularly, Canada).  It is our understanding that the USITC initially attributed injury to imports
from all sources, including imports from Canada, in order to reach its overall finding of "seriousinjury" caused by imports, and then, on the basis of a separate and subsequent  analysis concerning
imports from Canada, excluded imports from Canada from the application of the measure.
                                                     
163 Appellate Body Report, Argentina-Footwear Safeguard , supra , note 17, paras. 111-113.
164 The only explicit departure from this principle in the Agreement on Safeguards is in Article 9.1
SA, which provides that a safeguard measure "shall not be applied against a product originating in adeveloping country Member as long as its share of imports of the product concerned in the importing Memberdoes not exceed 3 per cent, provided that developing country Members with less than 3 per cent import  share
collectively account for not more than 9 per cent of total imports of the product concerned."
165 United States Response to Panel Question 30, Attachment 2-4, para. 108.
166 Ibid.
167 Ibid. , para. 109.WT/DS166/R
Page 51
8.175  The United States contends that, because of the USITC's separate and subsequent analysis of
imports from Canada, "the USITC’s overall causa tion finding did not depend on the inclusion of
Canadian imports."168  However, the fact that the USITC found that imports from Canada -- which it
deemed to constitute a "substantial share" of total imports -- nevertheless did not "contribute
importantly" to the serious injury caused by imports does not, in our view, demonstrate that importswere causing " serious  injury", within the meaning of Article 4.1(a) SA, after the exclusion of
imports from Canada (at the time, the third largest supplier of wheat gluten to the United States) and
the consequent effects of these imports. Under these circumstances,
 there is no demonstration  that
the remaining imports of the product concerned would still be sufficient to cause " serious  injury" to
the domestic industry.  Our view is not changed by th e fact that imports from Canada declined in the
years in question as they still accounted for 11.0 per cent and 8.9 per cent of total imports into the
United States domestic market in 1996 and 1997, respectively.169
8.176  The unsupportability of the United States' approach can be demonstrated by taking it to its
logical extreme.  An approach that excludes from the application of the measure imports of certain
countries if they do not account for a "substantial share" of total imports and do not "contributeimportantly" to the serious injury caused by imports might also result in a situation where, after
multiple minor quantities of imports are excluded from the application of the measure, which
collectively  accounted for a major proportion of imports, it would no longer be clear that any injury
remaining that was due to the remaining imports woul d still achieve the threshold of "serious" as that
term is defined in Article 4.1(a) of the Agreement on Safeguards.  For example, assume that the
imports of 5 countries, each accounting for approximately 10% of total imports, were all deemed
individually not to account for a "substantial share" of total imports" and not to "contributeimportantly" to serious injury and on this basis were thus excluded.  Collectively, such imports
account for 50% of total imports.  There is no demonstration that any injury caused by imports
remaining after the exclusion of 50% of total imports would still reach the threshold of " serious
injury".
8.177  We consider that in the circumstances of the present case, in applying safeguard measures
on the basis of this investigation in this case, the United States was also required under Articles 2.1
and 4.2 SA to apply those measures to imports fr om all sources, including from Canada, another
NAFTA member State.  On this basis, we conclude that the United States, on the facts of this case,
cannot justify the non-application of its safeguard measures to imports from Canada, another
NAFTA member state, on the basis of an initial  global safeguard investigation that found serious
injury, within the meaning of Article 4.1 SA, caused by  increased imports from all sources ,
including imports from Canada.
8.178  We turn now to the argument of the United States that "Article XXIV provides an exception
to Article XIX of the GATT 1994"
170 and that "[a]n examination of Article XXIV demonstrates that
the United States' treatment of Canada both with respect to the injury investigation and the remedyapplied are consistent with Article XXIV".
171  According to the United States, the last sentence of
footnote 1 SA contains specific provisions on the application of safeguard measures by members of
a customs union or free trade area.  The United States asserts that the question of how a free trade
area member may/must treat imports from its free trade area partners cannot be answered by
reference to the Agreement on Safeguards, but rather by reference to GATT Articles XXIV andXIX.  In particular, the United States continues, footnote 1 SA makes it clear that the non-
                                                     
168 United States Response to Panel Question 29, Attachment 2-4, para. 93.
169 As the USITC found, such imports accounted for an average of 10.2 per cent of the subject imports
over the "most recent 3-year period".  USITC Report, p. I-19.
170 United States Response to Panel Question 8, Attachment 2-8, para. 13.
171 Ibid. , para. 15.WT/DS166/R
Page 52
discrimination requirement of Article 2.2 SA is not pertinent in assessing the safeguards treatment
accorded by a customs union or FTA member to goods originating in other participant countries.172
8.179  In addressing this argument, we note first that the obligations in Article XIX of the GATT
1994 and Agreement on Safeguards are cumulative.173  Thus, "any safeguard measure imposed after
the entry into force of the WTO Agreement  must comply with the provisions of both the Agreement
on Safeguards and  Article XIX of the GATT 1994."174 (footnote omitted, emphasis added)
8.180  Furthermore, we understand that Article XXIV of the GATT 1994 may provide a defence to
a claim of violation of a provision of the GATT 1994175, and may also provide a defence to a claim
of inconsistency with a provision of another covered agreement if it is somehow incorporated into
that provision or agreement.176
8.181  In the present case, while the United States has argued that Article XXIV of the GATT 1994
would provide it with a defence to a violation of Article XIX of the GATT 1994, it has confirmed in
these proceedings its understanding that "Article XXIV provides neither an exception nor a
derogation to the provisions of the Safeguards Agreement".177  Therefore, the United States is not
arguing that Article XXIV of the GATT 1994 would provide it with a defence to a violation of aprovision of the Agreement on Safeguards.  We therefore do not examine whether Article XXIV of
the GATT 1994 may provide a defence to a violation of a provision of the Agreement on Safeguards.
In any event, contrary to the argument of the United States
178, we do not read the last sentence in
footnote 1 SA179 as establishing that the question of how a free trade area member may/must treat
imports from its free trade area partners cannot be answered by reference to the Agreement on
Safeguards, but rather only by reference to GATT Articles XXIV and XIX.  As we have already
indicated, we believe that the symmetry that we have found to be required by Articles 2.1 and 4.2 ofthe Agreement on Safeguards between the scope of the imported products subject to the
investigation and the scope of the imported products subject to the application of the measure is also
relevant in this context.  Our view is not changed by footnote 1 SA.
8.182  For these reasons, we find that, in this case, the United States has acted inconsistently
with Articles 2.1 and 4.2 SA by excluding imports from Canada from the application of thesafeguard measure (following a separate and subsequent inquiry concerning whether imports
from Canada accounted for a "substantial share" of total imports and whether they
"contributed importantly" to the "serious inju ry" caused by total imports) after including
                                                     
172 US Response to Panel Question 30, Attachment 2-4, paras. 99-100.
173 We find support for this view in Appellate Body Report, Korea – Dairy Safeguard , supra , note 16,
para. 77;  Appellate Body Report, Argentina-Footwear Safeguard , supra , note 17, para. 84.
174 Ibid.
175 We find confirmation for this view in Appellate Body Report, Turkey – Restrictions on Imports of
Textiles and Clothing Products  ("Turkey-Textiles "), WT/DS34/AB/R, adopted 19 November 1999, para. 58.
There, the Appellate Body expresses the view that "A rticle XXIV may justify a measure which is inconsistent
with certain other GATT provisions".
176 In its Report in Turkey –Textiles , the Appellate Body noted that "legal scholars have long
considered Article XXIV to be an "exception" or a possible "defence" to claims of violation of GATT
provisions" ( supra , note 175, para. 45, note 13).  However, the Appellate Body also observed that the chapeau
of paragraph 5 of Article XXIV refers only to the provisions of the GATT 1994 (and not to the provisions ofother WTO Agreements).  Because the Appellate Body viewed Article 2.4 of the Agreement on Textiles andClothing as incorporating Article XXIV of the GATT 1 994 into that Agreement, it noted that Article XXIV
"may be invoked as a defence to a claim of inconsistency with Article 2.4 of the ATC, provided that theconditions set forth in Article XXIV for the availability of this defence are met".
177 United States Response to Panel Question 8, Attachment 2-8, para. 13.
178 Supra , para. 8.178; US Response to Panel Question 30, Attachment 2-4, paras. 99-100.
179 The last sentence of footnote 1 SA reads:  "Nothing in this Agreement prejudges the interpretation
of the relationship between Article XIX and paragraph 8 of Article XXIV of GATT 1994."WT/DS166/R
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imports from all sources  in its investigation of "increased imports" of wheat gluten into its
territory and the consequent effects of such imports on its domestic wheat gluten industry.  We
are of the view that, in this case, the United States was not justified in departing from the
explicit provisions of Articles 2.1 and 4.2 SA by excluding from the application of its safeguard
measure imports from Canada after having included such imports for the purposes ofreaching its overall finding of serious injury caused by increased imports of the product
concerned .
8.183  We do not believe that we have been asked to rule, and consequently make no ruling, on
whether or not, as a general principle, a member of a free trade area can exclude imports from other
members of that free trade area from the application of a safeguard measure.
8.184  In light of our findings on Articles 2.1 and 4.2 SA, and in light of our overall conclusion, we
do not find it necessary to address, in this context,  the EC's claims under Article 5 SA or Article I of
the GATT 1994.  That is, having determined that the measure at issue is inconsistent with Articles
2.1 and 4.2 SA, and exercising the discretion implicit in the principle of judicial economy, we do not
deem it necessary to examine whether the inconsistent measure is further in breach of Article 5 SAor Article I of the GATT 1994.  We therefore make no pronouncement on the admissibility of the
EC claim concerning Article I with respect to the United States treatment of imports from Canada, in
light of the terms of the panel request
180 which alleges that  "the measure was designed and applied in
order to breach the most-favoured-nation principl e under Article I of GATT 1994, particularly since
Australia is favoured in terms of impact on trade", but makes no mention of Canada in this
context.181
2. Claims under Articles 8 and 12 SA
(a) Type and timing of notifications
(i) Arguments of the parties
European Community
8.185  The European Community alleges that the United States did not make timely notifications of
the steps associated with the imposition of its safeguard measure in accordance with Article 12 SA.In particular, the European Community asserts that the United States did not make timely
notifications of:
• the initiation of the investigation under Article 12.1(a) (1 October 1997
182; notification
17 October 1997; WTO document dated 21 October 1997)183;
• the determination of serious injury caused by increased imports under Article 12.1(b)
(15 January 1998; notification 11 Februa ry 1998; WTO document dated 12 February
1998); and
                                                     
180 WT/DS166/3.
181 See European Community second oral statement, Attachment 1-6, para. 127.
182 We note that the notice of institution and scheduling of the USITC investigation which was
attached to the notification under Article 12.1 (a) SA mentions 19 September 1997 as the effective date ofinstitution. The date of 1 October 1997 is the date of publication of the initiation of the investigation in the
Federal Register.
183 The European Community cites the date of WTO circulation of the documents, rather than the date
that appeared on the communication from the US to the WTO. We have conducted our examination on thebasis of the date of notification to the WTO, rather than on date of circulation of WTO document.WT/DS166/R
Page 54
• the decision to apply the measure under Article 12.1(c) (the United States President took
the decision to apply the measure on 30 May 1998; the United States imposed its finalmeasure effective 1 June 1998; the United States notified this under Article 12.1(c) in a
document dated 4 June 1998; and the WTO document was dated 8 June 1998).
8.186  The European Community asserts that according to the plain text and meaning of Article 12
SA, these procedural steps, findings and decisions had to have been made at a date that would haveallowed the Committee on Safeguards and, possibly, the Council for Trade in Goods, to request
additional information and hold a meaningful discussion.  The European Community argues that the
United States notifications under Article 12.1(a) and (b) SA fail to comply with the requirement of
immediate notification under Article 12.1 SA.
8.187  The European Community further argues that th e United States failed to provide meaningful
and timely notification of the proposed measure as required by Article 12 of the Agreement on
Safeguards. According to the European Community, Article 12 SA establishes a sequence of events
starting with the notification under Article 12.1(c) SA providing information to the Committee on
Safeguards and the Council for Trade in Goods  under Article 12.2 SA and consultations under
Article 12.3 SA on the proposed measure. The Eu ropean Community asserts that the United States
did not comply with its obligation under Articles 12.1(c) and 12.2 SA to notify the proposed  final
measure to the Committee on Safeguards before  implementing that final measure.
United States
8.188  The United States argues that, consistent with the requirements of Article 12 SA, it made
timely notifications. The United States argues that the text of Article 12.1 SA makes it clear that
notification can only be made after  the finding or the decision concerned has been made. The United
States submits that it notified the Committee on Safeguards of the initiation of the investigationunder Article 12.1(a) only days after its publication in the Federal Register. With respect to its
Article 12.1(b) notification of finding of serious injury, the United States argues that Article 12.1(b)
SA clearly provides that a Member's obligation to notify only arises after  it has made a serious injury
determination. Similarly, the United States asserts that Article 12.1(c) SA requires notification once
the decision to apply the measure is taken:  in this case, the United States President took the decisionto apply the measure on 30 May 1998 and the United States notified this decision on 4 June 1998.
While the United States disputes the existence of an obligation to notify a proposed measure  before
any measure is taken, in the alternative, it asserts that the notification of 24 March 1998, made under
Article 12.1(b) SA, nevertheless complies with this alleged requirement.  The United States submits
that the Agreement on Safeguards does not preclude the alteration of a proposed measure followingan Article 12.1(b) notification.
(ii) Evaluation by the Panel
8.189  We will examine the provisions of Article 12 of the Agreement on Safeguards detailing the
requirements concerning notifications to the Committee on Safeguards.  In relevant part,
Article 12 SA provides as follows:
"Article 12
Notification and Consultation
1. A Member shall immediately notify the Committee on Safeguards upon:
(a) initiating an investigatory process relating to serious injury or threat thereof
and the reasons for it;WT/DS166/R
Page 55
(b) making a finding of serious injury or threat thereof caused by increased
imports;  and
(c) taking a decision to apply or extend a safeguard measure.
2. In making the notifications referred to in paragraphs 1(b) and 1(c), the Member
proposing to apply or extend a safeguard measure shall provide the Committee on
Safeguards with all pertinent information, which shall include evidence of serious
injury or threat thereof caused by increased imports, precise description of theproduct involved and the proposed measure, proposed date of introduction, expected
duration and timetable for progressive liberalization.  In the case of an extension of
a measure,  evidence that the industry concerned is adjusting shall also be provided.
The Council for Trade in Goods or the Committee on Safeguards may request such
additional information as they may consider necessary from the Member proposingto apply or extend the measure.
3. A Member proposing to apply or extend a safeguard measure shall provide adequate
opportunity for prior consultations with those Members having a substantial interest
as exporters of the product concerned, with a view to,  inter alia, reviewing the
information provided under paragraph 2, exchanging views on the measure and
reaching an understanding on ways to achieve the objective set out in paragraph 1 ofArticle 8.
4. A Member shall make a notification to the Committee on Safeguards before taking a
provisional safeguard measure referred to in Article 6. Consultations shall be
initiated immediately after the measure is taken.
5. The results of the consultations referred to in this Article, as well as the results of
mid-term reviews referred to in paragraph 4 of Article 7, any form of compensation
referred to in paragraph 1 of Article 8 and proposed suspensions of concessions and
other obligations referred to in paragraph 2 of Article 8, shall be notifiedimmediately to the Council for Trade in Goods by the Members concerned.…"
8.190  We consider that Article 12 SA refers to two different points in time which determine the
timeliness of the notification of any decision or finding by a Member.  First, Article 12.1 SA refers
to the actual decision or finding.  The notification is to be made immediately following  this decision
or finding.  Second, we consider that Articles 12.2 and 12.3 SA provide that the notifications of
Article 12.1 are to be made in any case before  the implementation of the measure in order to allow
for prior consultations on the proposed measure.  In sum, we find that the notifications of
Article 12.1 are situated in time between the moment of making the decision or finding to be notified
and the final application of the measure concerned.
Compliance with Article 12.1 SA: the requirement of immediacy
8.191  For the sake of clarity, we recall that the United States made the following notifications to
the Committee on Safeguards regarding its wheat gluten investigation:
notification under Article 12.1(a) SA
• On 1 October 1997, the United States decided to initiate a safeguards investigation regarding
imports of wheat gluten.  In a communication dated 17 October 1997 (i.e. 16 days later), theWT/DS166/R
Page 56
United States notified the Committee on Safeguards, under Article 12.1(a), of its decision to
initiate an investigation.184
notifications under Article 12.1(b) SA
• On 15 January 1998, the USITC found that there was evidence of serious injury caused by
increased imports and the United States notified the Committee on Safeguards pursuant to
Article 12.1(b) SA of these findings in a communication dated 11 February 1998 (i.e. 26 days
later).185
• On 18 March 1998, the USITC forwarded its Report containing its injury findings and remedy
recommendations to the President of the United States. In a communication dated 24 March
1998 (i.e.6 days later), the United States notified to the Committee on Safeguards, pursuant to
Article 12.1 (b) SA, a finding of serious injury caused by increased imports of wheat gluten.186 A
copy of this USITC Report, also containing the USITC's analysis and a summary of the
information collected during the investigati on and excluding information identified as
confidential information, was provided with the United States notification.
• On 3 April 1998 the USTR requested that the USITC provide additional information on the
degree to which the domestic industry's adjustment plan would improve its competitiveness in
the mid and long-term. The additional information was requested to assist the inter-agency group
that was considering what action to recommend that the President take. On 8 April 1998, the
United States notified the Committee on Safeguards pursuant to Article 12.1 (b) SA of this
request for additional information and informed the Committee that 31 May 1998 was the
ultimate date for the President to determine what safeguard action would be taken.187
notification under Article 12.1(c) SA
• On 30 May 1998, the United States President decided to apply a safeguard measure and on  1
June 1998, the United States imposed quantitative restrictions in the form of a quota on imports
of wheat gluten for a period of just over three years.  On 4 June 1998 (i.e. 5 days after the
decision was taken), the United States notified the Committee on Safeguards pursuant to Article
12.1(c) SA of the decision to apply a safeguard measure.188
8.192  We recall that Article 12.1 SA contains an explicit temporal guideline that applies to the
three types of notifications explicitly enumerated in that Article.  It states that “a Member shallimmediately  notify the Committee … upon ”: (a) "initiating" a safeguard investigation; (b) "making a
finding of serious injury or threat thereof caused by increased imports"; and (c) "taking a decision to
apply or extend a safeguard measure."
8.193  The panel in Korea – Dairy Safeguard  found that the term "immediately" implies a certain
urgency and is a function of the content of the notification itself:
"Article 12.1 provides that "A Member shall immediately notify the Committee on
Safeguard upon …" (emphasis added).  The ordinary meaning of the term
"immediately"189 introduces a certain notion of urgency.… We note finally that no
                                                     
184 G/SG/N/6/USA/4.
185 G/SG/N/8/USA/2.
186 G/SG/N/8/USA/2/Rev.1.
187 G/SG/N/8/USA/2/Rev.1/Suppl.1.
188 G/SG/N/10/USA/2 and G/SG/N/11/USA/2.
189 Original footnote: "The New Webster Encyclopaedic Dictionary defines immediately as "without
delay, straightaway"; the New Shorter Oxford Dictionary defines it as "without delay, at once, instantly".WT/DS166/R
Page 57
specific number of days is mentioned in Article 12.  For us this implies that there is
a need under the agreement to balance the requirement for some minimum level of
information in a notification against the requirement for “immediate” notification.
The more detail that is required, the less “instantly” Members will be able to notify.
In this context we are also aware that Members whose official language is not aWTO working language, may encounter further delay in preparing their
notifications."
190
8.194  We consider that the text of Article 12.1 SA is clear and requires no further interpretation.
The ordinary meaning of the requirement for a Member to notify immediately its decisions or
findings prohibits a Member from unduly delaying the notification of the decisions or findingsmentioned in Article 12.1 (a) through (c) SA. Observance of this requirement is all the more
important considering the nature of a safeguards investigation. A safeguard measure is imposed on
imports of a product irrespective of its source and potentially affects all Members. All Members are
therefore entitled to be kept informed, without delay, of the various steps of the investigation.
8.195  We will now consider the United States notifications under Article 12.1 SA which the
European Community alleges were not made imme diately after the decision or the finding was
made. These are the notification under Article 12.1(a) SA of the initiation of the investigation and
the notification under Article 12.1(b) SA of the finding of serious injury caused by increased
imports.
8.196  According to the date mentioned on the United States notification under Article 12.1(a) SA
of the initiation of the investigation, the United States initiated a safeguards investigation on imports
of wheat gluten into the United States on 1 October 1997.  The United States notified the initiationof this safeguards investigation on 17 October 1997, i.e. 16 days later.  The information contained in
the notification is minimal.  A copy of the notice of institution and scheduling of the investigation by
the USITC is annexed.
8.197  We therefore find that the delay of 16 days between the initiation of the investigation
and the notification thereof does not satisfy the requirement of immediate notification of
Article 12.1 (a) SA.
 191
8.198  On 15 January 1998, the USITC found that wheat gluten was being imported in such
increased quantities as to be a substantial cause of serious injury to the domestic wheat gluten
industry.  The United States notified this finding of serious injury caused by increased imports under
Article 12.1 (b) SA  to the Committee on Safeguards only 11 February 1998, i.e. 26 days later. This
one-page notification refers to the USITC Report, which was to be published on 18 March 1998.
8.199  We therefore find that the delay of 26 days between the finding of serious injury and
the notification thereof does not satisfy the requirement of immediate notification of Article
12.1 (b) SA.
Requirement to make notification under Article 12.1(c) SA before implementation of the
measure.
8.200  As we established above, a Member is required to notify the decision to apply a measure
immediately after the decision is made.  However, we consider that Article 12.1(c) SA as informed
                                                     
190 Panel Report, Korea –Dairy Safeguard , supra , note 16, para. 7.128
191 As noted above, note 182, the notice of institution and scheduling of the investigation which was
attached to the notification under Article 12.1 (a) SA mentions 19 September 1997 as the effective date ofinstitution. If one were to take this date as the date of initiation, the delay between the initiation of theinvestigation and the notification thereof of 27 days would be even less "immediate".WT/DS166/R
Page 58
by Articles 12.2 and 12.3 SA requires that the notification of the decision to apply a measure is to be
made in any case before the measure is implemented.
8.201  Article 12.2 SA provides that a Member proposing to apply or extend a safeguard measure
shall provide the Committee on Safeguards with all pertinent information. The information required
shall include a precise description of the product involved and of the proposed measure, theproposed date of introduction, its expected duration and the timetable for a progressive liberalization
of the measure. Article 12.3 SA requires a Member proposing to apply or extend a safeguard
measure to provide adequate opportunity for prior consultations.
8.202  Articles 12.2 SA and 12.3 SA thus stipulate that the notifications under Article 12.1(b) and
(c) which are to be made immediately following the decision or the finding shall contain information
concerning the proposed measure  and shall be made at such time as to provide adequate opportunity
for prior  consultations. The language of Article 12.2 SA and Article 12.3 SA therefore confirms the
importance of notifying a proposed  measure before it is applied in order to allow adequate
opportunity for prior consultations, that is, consultations before the measure is effectively applied.
With reference to the notifications under Articles 12.1(b) and Article 12.1(c) SA concerningrespectively the finding of serious injury caused by increased imports and the decision to apply a
measure, Article 12.2 SA refers, inter alia , to "the Member proposing  to apply or extend a safeguard
measure", "a precise description of … the proposed  measure", and the " proposed  date of
introduction" of the measure (emphasis added).  Article 12.3 refers to "the Member proposing  to
apply or extend the measure" and requires that the Member "shall provide adequate opportunity for
prior  consultations…" (emphasis added).
8.203  The reports of the panel and the Appellate Body in Korea – Dairy Safeguard  provide
relevant guidance.  The panel in Korea-Dairy  concluded that Articles 12.2 and 12.3 SA implicitly
require that any proposed  measure be notified before  the consultations referred to in Article 12.3 SA
in order to allow for meaningful and informed consultations.  In this respect, the panel stated
192:
"Thus, Article 12.1, 12.2 and 12.3 taken together makes it clear that before a
definitive safeguard measure may be applied, the Member proposing to apply itmust notify all the pertinent information regarding the proposed measure and the
factual basis (the injury finding) for applying it, and must provide an opportunity for
consultations with Members whose trade will be affected by the proposed measure.
In other words, details of the measure proposed must be notified before it is applied,
so that affected Members may consult about it before it takes effect."
8.204  We recall that the Appellate Body agreed with the panel in Korea – Dairy Safeguard  that
193:
"… the notification serves essentially a transparency and information purpose.  In
ensuring transparency, Article 12 allows Members through the Committee on
Safeguards to review the measures.  Another purpose of the notification of the
finding of serious injury and of the proposed measure is to inform Members of thecircumstances of the case and the conclusions of the investigation together with the
importing country's particular intentions.  This allows any interested Member to
decide whether to request consultations with the importing country which may lead
to modification of the proposed measure(s) and/or compensation".
8.205  The text of Article 12.2 SA speaks of proposed  measures in the context of both Article
12.1(b) and (c) notifications.  That is, a measure that is notified under Article 12.1(c) SA would still
be a "proposed" measure. Article 12.2 SA requires that information be given in an Article 12.1(c)
                                                     
192 Panel Report, Korea –Dairy Safeguard, supra , note 16, para. 7.120.
193 Appellate Body Report, Korea –Dairy Safeguard, supra , note 16, para. 111.WT/DS166/R
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notification on the "proposed" date of introduction and the "expected" duration and timetable for
progressive liberalization.  The purpose of notifying a proposed measure after  taking a decision to
apply it and before  it is applied is in order to "provide all pertinent information" in order to furnish a
basis for the consultations referred to in Article 12.3 SA.194
8.206  Article 12.1(c) SA, read in conjunction with Article 12.2 and 12.3, refers to a final proposed
measure, i.e. the measure that the WTO Member concerned intends to adopt and not one that the
Member has already implemented. Otherwise, the requirements of transparency and information
would not be fully served. It should be recalled that the objective of the prior consultations as set out
in Article 12.3 SA is to review the information pr ovided in the notifications, exchange views on the
measure and reach an understanding on ways to achieve the objectives of Article 8.1 SA. The latterprovision requires a Member proposing to apply  a safeguard measure to endeavour to maintain a
substantially equivalent level of concessions and other obligations to that existing under the GATT
1994. The Agreement on Safeguards thus requires a Member when proposing to apply a safeguard
measure to provide an adequate opportunity to consult with affected Members prior to the
application of the measure inter alia  to discuss ways to maintain an equivalent level of concessions
and perhaps agree on adequate means of trade compensation. The requirement to endeavour to
maintain a substantially equivalent level of concessions between the Member proposing to apply a
measure and exporting Members affected by such a measure is intrinsically linked with the fact that
"taking a safeguard action results in restrictions on imports arising from 'fair' trade". 
195 The
obligation to provide adequate opportunity for prior  consultations is therefore essential to the proper
application of the safeguard mechanism.
8.207  We recall that the United States applied the safeguard measure at issue on 1 June 1998.
However, it notified its decision of 30 May 1998 to apply a measure under Article 12.1(c) SA only
on 4 June 1998, i.e. three days after the measure was effectively imposed.  We note in passing that
the delay of 5 days between the decision to apply a safeguard measure and the notification thereof
might well satisfy the requirement of immediate notification of Article 12.1 SA.  However, we find
that the United States notification of this decision after the measure had been implemented,
violated the United States obligation under Article 12 SA to make timely notification under
Article 12.1 (c) SA of its decision to apply a measure.
8.208  We will briefly address two other arguments of the United States in support of its position
that the Agreement on Safeguards does not require a Member to notify its proposed measure before
it is applied. First, the United States points to the notification provision concerning provisionalsafeguard measures. The United States argues that if such an obligation of prior notification were to
exist with regard to final measures, the Agreement would have explicitly stated so as is the case in
Article 12.4 SA concerning provisional safeguard measures. Second, the United States asserts that
the obligation to notify the proposed measure would run counter to the purpose of encouraging
positive consultations with interested Members since no Member would be inclined to change themeasure as a result of consultations with other Member since any change would lead to a new round
of notifications of the new proposed measure. This, the United States asserts, cannot have been the
intention of the drafters.
8.209  Article 12.4 SA requires Members to notify any provisional safeguard measure before it is
taken and provides that consultations be initiated immediately after the measure is taken. Accordingto Article 6 SA, a Member may only take provisional safeguard measures pursuant to a preliminary
                                                     
194 It is thus irrelevant to our examination of the timeliness of the United States notification under
Article 12.1 (c) SA that the United States notified the USITC's remedy recommendation to the Committee on
Safeguards on 24 March 1998.  The language of Article 12.2 and 12.3 SA makes it clear that the measure
notified under Article 12.1 (c ) SA is still a proposed measure and that its notification has to be made beforethe implementation of the measure in order to allow for an adequate opportunity for consultations.
195 Appellate Body Report, Korea –Dairy Safeguard, supra , note 16, para. 87.WT/DS166/R
Page 60
determination that there is clear evidence that increased imports have caused or are threatening to
cause serious injury. Article 12.4 SA thus requires a Member to notify the decision to apply a
provisional safeguard measure after a preliminary determination of increased imports causing or
threatening to cause serious injury is made but befo re taking the measure. We consider therefore that
Article 12.4 SA in fact strengthens the general rule that a Member is to notify its decision to apply asafeguard measure before it is applied, even if it is only a provisional safeguard measure. What is
different from the notification requirements concerning final measures is the obligation to initiate
consultations only after  the (provisional) measure is taken.  It seems logical to us that it may well
have been the absence of a requirement for prio r consultations regarding provisional safeguard
measures that led to the explicit requirement of Article 12.4 SA to notify the provisional measurebefore applying it.
8.210  Finally, we do not believe that, as the United States is arguing, the obligation to notify the
proposed measure would give rise to a long chain of new notifications in case the measure is
amended as a consequence of the consultations. We refer to Article 12.5 SA which provides inter
alia that the results of any consultations shall be  notified immediately to the Council for Trade in
Goods through the Committee on Safeguards. This would imply that in case consultations lead to a
modification of the measure, the modification is to be notified under Article 12.5 SA. Members are
entitled to assume that in the absence of any notification under Article 12.5 SA, the safeguard
measure applied is the measure proposed and notified under Article 12.1 (c) SA.
Summary
8.211  In sum, we have found that  the United States violated the requirement concerning timely
notification of Article 12 SA.  Both its notifications of the initiation of the investigation and of thefinding of serious injury caused by increased imports of 17 October 1997 and 11 February 1998
respectively were not made immediately after the decision or the finding as required by
Article 12.1 SA. Moreover, and more importantly, we have found that  the United States did not
provide a timely notification under Article 12.1(c) SA of its proposed final measure since the United
States notified its decision to apply a measure three days after the measure had been implemented.
(b) Adequacy of consultations
(i) Arguments of the parties
European Community
8.212  The European Community acknowledges that co nsultations took place between the parties
on 24 April 1998 and 22 May 1998. The European Community emphasizes that such consultationsonly dealt with information provided by the United States in its Article 12.1(b) notifications and
therefore cannot be considered prior consultations on the final proposed measure, i.e. the measure in
its final form, in terms of form, level and duration.
8.213  The European Community further submits that the United States did not make a genuine
endeavour to maintain a substantially equivalent level of concessions and never offered a meaningfulopportunity for consultation and negotiation, thereby violating Articles 8.1 and 12.3 SA.  The
European Community argues that the obligation to engage in meaningful consultations prior to
altering the balance of negotiated concessions, even temporarily, is fundamental to the functioning
of the WTO system.  According to the European Community, the United States failed to demonstrate
that it has actively and concretely offered adequate compensation and that compensation wasrejected (or at least not accepted) by the Member concerned.
United StatesWT/DS166/R
Page 61
8.214  The United States asserts that it held consultations with the European Community on
24 April 1998 and 22 May 1998 in accordance with Article 12.3 SA.  The United States argues that
the European Community acknowledged that consultations concerning the wheat gluten
investigation took place under Article 12.3 SA in two letters dated 8 May 1998196 and
21 May 1998197 respectively. Finally, the United States considers that the Panel should reject the
European Community's claim that a Member is required to provide concessions before it can take a
safeguard action.
                                                     
196 Exhibit US-11.
197 Exhibit US-12.WT/DS166/R
Page 62
(ii) Evaluation by the Panel
8.215  Article 8.1 provides as follows:
Article 8
Level of Concessions and Other Obligations
1. "A Member proposing to apply a safeguard measure or seeking an
extension of a safeguard measure shall endeavour to maintain a
substantially equivalent level of concessions and other obligations to
that existing under GATT 1994 between it and the exporting Memberswhich would be affected by such a measure, in accordance with the
provisions of paragraph 3 of Article 12. To achieve this objective, the
Members concerned may agree on any adequate means of trade
compensation for the adverse effects of the measure on their trade."
8.216  The principal issue confronting the Panel is whether Articles 12.3 SA and 8.1 SA require
that the consultations referred to in these provisions must include consultations on the final proposed
measure. Clearly, consideration of this issue is intimately intertwined with the Panel's view of the
requirements of Article 12 SA concerning the type and timing of notifications.
198 As we established
above, consultations on the proposed measure under Article 12.3 SA would necessarily take place
after  a Member has notified the "proposed" measure but before  that measure is actually applied.
8.217  In this case, the United States applied its safeguard measure effective 1 June 1998, 2 days
after the United States President had decided upon the safeguard measure to be applied and had
"taken the decision" to apply that measure on 30 May 1998.  While the parties have confirmed that
consultations did take place on the basis of the United States notifications under Article 12.1(b)
concerning the USITC's finding of serious inju ry and the USITC's recommendations on remedy, no
consultations were held on the final proposed measure as approved by the United States President on30 May 1998. Therefore, the Panel considers that, while consultations may have been held on the
basis of the notifications made by the United States under Article 12.1(b) SA, the United States did
not provide "an adequate opportunity for prior consultations" on this final proposed measure, within
the meaning of Article 12.3 SA. This necessarily im plies that the United States did not fulfil its
obligations under Article 8.1 SA to endeavour to maintain a substantially equivalent level ofconcessions and other obligations, in accordance with the provisions of paragraph 3 of Article 12.
8.218  The fact that consultations took place between the United States and the European
Community on 24 April 1998 and 22 May 1998 does not affect this finding. It should be recalled
that Article 12.1(b) SA, read together with Articles 12.2 and 12.3 SA, envisages that consultations
may also be held on the basis of Article 12.1(b) notifications concerning a finding of serious injury.Members are encouraged to consult with each other before a final decision on whether to apply a
measure is taken. Such consultations could fulfil part of the aims of Article 12.3, i.e. to review the
information contained in the notifications and possibly exchange views on the measure. However,
one of the important objectives of the consultations under Article 12.3 SA is to reach an
understanding on ways to achieve the objective of Article 8.1 concerning compensation. Weconsider that it is only after a decision to apply a measure is taken and information is given on the
final proposed measure, that informed and meaningful consultations can be held under Article 12.3
and 8.1 SA. Another interpretation would mean that WTO Members would be consulting on a
hypothetical measure that might not come into effect.
                                                     
198 See discussion supra , paras. 8.189-8.211.WT/DS166/R
Page 63
8.219  We found above199 that the United States did not provide a timely notification under
Article 12.1 (c) SA of its proposed final measure since the United States notified its decision to
apply a measure three days after the measure had been implemented.  For the same reason, we find
that the United States violated the obligat ion of Article 12.3 SA to provide adequate
opportunity for prior consultations on the measure .  Hence, we find that the United States also
violated its obligation under Article 8.1 SA to en deavour to maintain a substantially equivalent
level of concessions and other obligations to that existing under GATT 1994 between it and the
exporting Members which would be affected  by such a measure, in accordance with
Article 12.3 SA.
3. Claims under Article XIX of the GATT 1994 ("unforeseen developments"); Article 5 SA
and Article I of the GATT 1994
8.220  The European Community also makes claims under Article XIX:1(a) ("unforeseen
developments"), Article 5 SA and Article I of the GATT 1994.  We note that a "panel need only
address those claims which must be addressed in order to resolve the matter in issue in the
dispute".200  As we have found that the United States definitive wheat gluten safeguard measure
based on the United States investigation and determination to be inconsistent with Articles 2.1 and
4.2 of the Agreement on Safeguards, we do not consider it necessary to examine these claims of the
European Community under Article 5 SA and Articles I and XIX of the GATT 1994. That is, having
determined that the measure at issue is inconsistent with Articles 2.1 and 4.2 SA, and exercising the
discretion implicit in the principle of judicial economy, we do not deem it necessary to examine
whether the measure at issue is also inconsistent with Article XIX of the GATT 1994 ("unforeseen
developments") nor whether the form, level and allocation of the inconsistent measure are in breachof Article 5 SA or Article I of the GATT 1994.
201
4. Claim under Article 4.2 of the Agreement on Agriculture
8.221  The European Community included a claim under Article 4.2 of the Agreement on
Agriculture in its panel request.  However, the European Community did not develop this claim in
any of its written or oral submissions to the Panel.  We thus consider that this claim has beenabandoned.
                                                     
199 See supra , para. 8.207.
200 Appellate Body Report, United States – Measure Affecting Imports of Woven Wool Shirts and
Blouses from India , WT/DS33/AB/R, adopted 23 May 1997, p. 19.
201 We find support for our approach in Appellate Body Report , Canada - Certain Measures Affecting
the Automotive Industry , WT/DS139/AB/R, WT/DS142/AB/R, adopted 19 June 2000, paras. 112-117.  In this
Report, the Appellate Body cites its previous Reports in United States - Measure Affecting Imports of Woven
Wool Shirts and Blouses from India , WT/DS33/AB/R, adopted 23 May 1997, p. 18 and Australia - Measures
Affecting the Importation of Salmon , WT/DS18/AB/R, adopted 6 November 1998, para. 223, and confirms
that, "[i]n discharging its functions under Articles 7 and 11 of the DSU, a panel is not … required to examineall legal claims made before it.  A panel may exercise judicial economy."WT/DS166/R
Page 64
IX. CONCLUSIONS AND RECOMMENDATION
9.1 In light of the findings made in section VIII above, we conclude that the United States has not
acted inconsistently with Articles 2.1 and 4 of the Agreement on Safeguards or with
Article XIX:1(a) of the GATT 1994 in:
(i) redacting certain confidential information from the published
USITC Report; or
(ii) determining the existence of imports in "increased quantities" and
serious injury.
9.2 In light of the findings made in section VIII above, we conclude that the definitive safeguard
measure imposed by the United States on certain imports of wheat gluten based on the United Statesinvestigation and determination is inconsistent with Articles 2.1 and 4 of the Agreement on
Safeguards in that:
(i) the causation analysis applied by the USITC did not ensure that
injury caused by other factors was not attributed to imports; and
(ii) imports from Canada (a NAFTA partner) were excluded from the
application of the measure after imports from all sources were included in
the investigation for the purposes of determining serious injury caused by
increased imports (following a separate inquiry concerning whether imports
from Canada accounted for a "substantial share" of total imports and whether
they "contributed importantly" to th e "serious injury" caused by total
imports).
9.3 In light of the findings made in section VIII above, we also conclude that the United States
failed to notify immediately the initiation of the investigation under Article 12.1(a) and the finding
of serious injury under Article 12.1(b) SA.  We further conclude that, in notifying its decision to take
the measure after the measure was implemented, the United States did not make timely notification
under Article 12.1(c).   For the same reason, the United States violated the obligation of Article 12.3
SA to provide adequate opportunity for prior consultations on the measure.  Hence, the United States
also violated its obligation under Article 8.1 SA to  endeavour to maintain a substantially equivalent
level of concessions and other obligations to that existing under GATT 1994 between it and the
exporting Members which would be affected by such  a measure, in accordance with Article 12.3 SA.
9.4 Under Article 3.8 of the DSU, in cases where there is an infringement of the obligations
assumed under a covered agreement, the action is considered prima facie  to constitute a case of
nullification or impairment of benefits under that agreement.  Accordingly, we conclude that the
United States has nullified or impaired benefits accruing to the European Community under the
Agreement on Safeguards within the meaning of Article 3.8 of the DSU.
9.5 The Panel recommends  that the Dispute Settlement Body request the United States to bring its
measure into conformity with the Agreement on Safeguards.WT/DS166/R
Page 65
ATTACHMENT 1-1
FIRST WRITTEN SUBMISSION OF THE EUROPEAN COMMUNITY
(15 November 1999)
TABLE OF CONTENTS
Page
1. OBJECTIVES OF THE EC AND METHODOLOGY 67
2. FACTS CONCERNING THE PROCEDURE 68
2.1 The US WG S procedure....................................................................................................... ...............68
2.2 A description of the US wheat  gluten safeguard measure....................................................................69
2.3 The reactions  by the EC..................................................................................................... ..................70
3. FACTS CONCERNING THE WHEAT STARCH/WHEAT GLUTEN INDUSTRY 70
3.1 Description of the product, its production process, its applications, the co-product nature of the
industry, and a number of other factors ........................................................................................ .................70
3.1.1 The product 703.1.2 The production process 713.1.3 Applications (uses) of wheat gluten 71
3.1.4 The co-products nature of the wheat starch/wheat gluten industry 71
3.1.5 Factors influencing demand for and price of wheat gluten; competing products 72
3.2 Description of the wheat gluten ma rket, in particular in the US..........................................................73
3.2.1 The US industry 73
3.2.2 The US market 73
4. THE COMPELLING CONDITIONS UNDER ARTICLE XIX GATT 1994 AND ARTICLES 2
AND 4 OF THE AGREEMENT ON SA FEGUARDS. THE US WGS CASE 74
4.1 ITC uses, without justif ication, unverifiable data .......................................................................... ......75
4.2 "Unforeseen developments" ................................................................................................... .............76
4.3 "Increased quantities"...................................................................................................... ....................77
4.4 "Under such conditions"..................................................................................................... .................77
4.5 "Serious injury" ............................................................................................................ .......................78
4.5.1 The evidence gathered by the ITC did not warrant a "serious injury" finding 784.5.1.1 The rate and amount of the increase in imports of the product concerned and the share
 of the domestic market taken by increased imports 78
4.5.1.2 Sales 79
4.5.1.3 Production 794.5.1.4 Capacity utilisation 804.5.1.5 Profits/losses 824.5.1.6 Employment 83
4.5.1.7 Other Factors – Wages 84
4.5.1.8 Other factors – Inventories 844.5.2  Not all relevant factors were appropriately investigated by the ITC 854.5.2.1 Productivity 84
4.5.2.2 New entries/expansion while injury is supposedly taking place 84
4.5.2.3 Developments as to co-products were completely ignored. 854.5.2.4 Imports as positive business st rategy of certain US producers 86
4.6 "As to cause" ............................................................................................................... ........................86
4.6.1 Does upward trend in imports coincide with negative trends in injury factors 87
4.6.2 Conditions of competition 874.6.3 Insufficient weight given to analysis of other factors which caused
US wheat starch/wheat gluten industry difficulties 89
4.6.3.1 Wheat protein premiums determine the wheat gluten price on the US market 89
4.6.3.2 The situation in the co-products markets 894.6.3.3 Capacity utilisation 924.6.3.4 Input prices 92
4.6.3.5 Imports by US producers themselves 93WT/DS166/R
Page 66
4.6.3.6 Imports by countries excluded from the application of the US
WGS were not excluded from the investigation 93
4.6.4 No standard of causality was used by the US 94
4.7 Conclusion as regards this chapter.......................................................................................... .............94
5. THE US WGS IS IN BREACH OF ARTICLE 5 OF THE SA 94
5.1 Article 5, paragraph 1, 1st sentence........................................................................................ .............94
5.1.1 General overview of the issue in the context of the present dispute 955.1.2 Application to the present dispute: the form and the extent of the US WGS. 97
5.2 Article 5, paragraph 1,  2nd sentence of the SA.............................................................................. ....100
5.3 Article 5, paragraph 1, 3
rd sentence ...................................................................................................101
5.4 Article 5, paragraph 2(a)................................................................................................... .................101
5.4.1 No prior consultation and no justification 102
5.4.2 The US WGS unfairly reallocates market share between WTO Members 102
5.5 Article 5, paragraph 2(b) ................................................................................................... ................102
6. THE US WGS IS IN BREACH OF  ARTICLES 8 AND 12 OF THE SA 104
6.1 Immediate notification and prior consultation............................................................................... ....105
6.2 Inadequate consultations.................................................................................................... ................106
7. THE US WGS IS IN BREACH OF ARTICLE I OF GATT 1994 107
8. CONCLUSIONS 108LIST OF EC EXHIBITS 109WT/DS166/R
Page 67
1. OBJECTIVES OF THE EC AND METHODOLOGY
1. The European Communities submit at the outset of this procedure that, in their view, this
case goes far beyond the economic issue as such and is exemplary of a distorted use of legitimate
procedures under the WTO Agreements. In fact, it appears from objective facts as they will beshown during this procedure that the United States, by taking the safeguard measure on wheat gluten
(hereinafter: the US WGS) was driven by political and protectionist aims, rather than WTO-
compatible preoccupations concerning its domestic industry.
2. Firstly, the EC will demonstrate that behind the choices made in this matter by the US
authorities most likely lies the WTO-incompatible attempt to protect some egregious errors in the
economic strategy of the US wheat starch/wheat gl uten producers and to influence the competitive
relations between the wheat starch/wheat gluten producers and the corn starch/corn gluten producers
in the US, at the expense of the EC originated wheat gluten, its producers and its exporters.
3. As a second main issue, the conduct of the investigation by the US authorities was turned in
such a way as to make the facts say what they cannot objectively say. Internal contradictions,
voluntary silence on decisive relevant issues of fact and law, and even unsupported " petitiones
principii " (i.e. non-demonstrated sweeping assertions) punctuate the ITC report1, which the US
President took as a basis for his decision to apply the US WGS.
The EC will demonstrate that a good faith consideration of the facts as exposed in the ITC
report itself together with the facts that the private participants have publicly submitted to the US
authorities should have led the US government to the opposite conclusion, i.e. the rejection of the
petition requesting the application of the US WGS.
In this respect, the EC would like to clarify immediately an issue of procedural nature,
whose importance has however a bearing on the conduct of this Panel and ultimately on its final
findings.
The EC does not request the panel to engage in a de novo  exercise. It would not only be
inappropriate in terms of WTO procedure; it would also confuse the repartition of responsibilitiesbetween the WTO Member that applies the safeguard measure, in casu  the US, and the Panel, whose
task is, according to Article 11 of the DSU, "to assist the DSB in discharging its responsibilities
under this Understanding".
The EC expects therefore that this Panel will make an objective assessment of whether- the domestic authority has considered all relevant facts as a whole, including
specifically each factor listed in Article 4.2(a) of the WTO Agreement on
Safeguards ("SA"),
- the published report of the investigation contains adequate explanation of how the
facts support the determination made, and finally,
- the determination made is consistent with US obligations under the Safeguards
Agreement, the GATT 1994 and the Agreement on Agriculture.
2
                                                     
1 Exhibit EC-1
2See Report by the Panel on Korea – Definitive Safeguard Measure on Imports of Certain Dairy
Products, WT/DS98/R, 21 June 1999, hereinafter " Korea-Dairy" at paragraph  7.29 and Report by the Panel
on Argentina – Safeguard Measures on Imports of Footwear, WT/DS121/R, 25 June 1999, hereinafter
"Argentina-Footwear" at paragraph  8.124.WT/DS166/R
Page 68
In this respect, the role of the Panel is to determine whether the ITC fully and objectively
considered the evidence before it, including an y evidence that detracts from an affirmative
determination of increased imports, serious injury or causation.3
The Panel should also verify the adequacy of the ITC’s reasoning by reviewing whether the
findings and conclusions made by the ITC are consistent with the evidence.4
4. As a third main issue, the US WGS is a clearly disproportionate and unbalanced measure.
The EC will demonstrate that, on the one hand, the US measure is built upon the WTO-incompatibledesign to re-determine the competitive relations between third country products and producers in theUS, thus blatantly violating the MFN provisions of the GATT/WTO. On the other hand and in any
case, the extent of the US WGS goes far beyond what even the erroneous conclusions in the ITC
report could justify.
5. As a fourth and final main issue, the US failed to notify the Committee on Safeguards in a
timely manner of each and every step of the procedure as required by the SA and never engaged in
good faith consultations with a view to re-establish the balance of concessions undermined by the
US WGS. The imperative procedural guarantees contained in Articles 8 and 12 SA were in fact
repeatedly disregarded. Moreover, and if possible even more seriously, the US WGS is a unilateral
attempt to bring a negotiating position of the US back to before the conclusion of the UruguayRound tariff negotiations. Any WTO Member can always achieve such a result by engaging in bona
fide negotiations and by offering adequate compensation with the aim to preserving the balance of
concessions achieved in the multilateral rounds of tariff negotiations. However, the US has clearly
failed to do that.
2. FACTS CONCERNING THE PROCEDURE
2.1 The US WGS procedure
6. This dispute concerns a definitive safeguard measure imposed by the United States on
imports of wheat gluten classified under tariff headings HS 1109.00.10 and 1109.00.90.
7. The Wheat Gluten Industry Council of the United States, which consists of only two of the
four US producers
5, filed a petition with the US International Trade Commission (ITC) on
19 September 1997 requesting a safeguard action against imports of wheat gluten.
8. The ITC initiated an investigation on 1 October 1997 to determine whether wheat gluten was
being imported into the United States in such increased quantities as to be a substantial cause of
serious injury, or the threat thereof, to the domestic industry producing an "article" (i.e. a product)
like or directly competitive with the imported article (USITC Investigation No. TA-201-67). The
period of investigation used by the US authorities was July 1992 to June 1997.6
9. On 21 October 1997, the United States notified the WTO Committee on Safeguards pursuantto Article 12.1 (a) of the Agreement on Safeguards of the initiation of the safeguard investigation.
7
A public hearing in connection with the injury phase was held on 16 December 1997.
                                                     
3Korea - Dairy , paragraph 7.30.
4Argentina - Footwear , paragraph 8.124.
5 ITC report at I-5 and II-6
6 ITC report at II-3.  The ITC used the "marketing years" in that industry, i.e. 12-month periods
running from July to June.  The "marketing year 1997" is therefore the period from 1 July 1996 to 30 June1997.
7 See WTO doc. G/SG/N/6/USA/4WT/DS166/R
Page 69
10. On 15 January 1998, the ITC voted that wheat gluten was being imported into the United
States in such increased quantities as to be a substantial cause of serious injury to the domestic wheat
gluten industry. A hearing on the question of remedy was held on 10 February 1998.
11. On 12 February 1998, the United States notified the Committee on Safeguards pursuant to
Article 12.1(b) of the finding of serious injury.8
12. The report of the investigation, including the remedy recommendations of the ITC, was
published on 18 March 1998 and forwarded to the president of the United States. The report wasnotified to the Committee on Safeguards on 27 March 1998.
9  The report (hereinafter referred to as
"the ITC-report" or "ITC-report") is annexed as Exhibit EC-1.
13. On 9 April 1998, the United States notified the Committee on Safeguards pursuant to
Article 12.1 (b) that the US Trade Representative had requested additional information from the ITCon the degree to which the domestic industry’s adjustment plan would improve its competitiveness
in the mid- and long-term.
10
14. On 1 June 1998, the United States imposed quantitative restrictions in the form of a quota on
imports of wheat gluten from the European Communities, Australia and other countries for a period
of just over three years. The US presid ent's decision is annexed as Exhibit EC-2.
15. On 4 June 1998, the United States notified the Committee on Safeguards pursuant to
Article 12.1(c) and Article 9, footnote 2, of the decision to apply a safeguard measure and to exempt
imports from developing countries from the application of the measure.11
2.2 A description of the US wheat gluten safeguard measure
16. The total quota is 57.521 metric tonnes (126.812 million pounds)12 in the first year of its
application.13  The quota became effective 1 June 1998.
17. The country quotas for the first year of application were allocated as follows:
Australia 28,315 t (62.425 million pounds) (49 per cent)EC 24,513 t (54.041 million pounds) (43 per cent)
Others  4.695 t (10.346 million pounds) (5 per cent)
Certain countries are exempt from the quota, notably Canada, the third largest supplier of
wheat gluten to the US during the period of investigation (10 per cent of imports).
18. The relief period is currently aimed to expire on 1 June 2001.
2.3 The reactions by the EC
19. On 3 August 1998, the European Communities notified the Committee on Safeguards
pursuant to Article 12.5 of its proposed suspension of concessions and other obligations referred to
                                                     
8 See WTO doc. G/SG/N/8/USA/2
9 See WTO doc. G/SG/N/8/USA/2/Rev.1
10 See WTO doc. G/SG/N/8/USA/2/Rev.1/Suppl.1
11 See WTO docs. G/SG/N/10/USA/2 and G/SG/N/11/USA/2
12 The ratio of a US pound to a kilogram is 2.2046.
13 The quota will increase six per cent annually for the duration of the relief period.WT/DS166/R
Page 70
in Article 8.2 of the Agreement on Safeguards to be applied from 1 June 2001 or five days after the
date of a decision from the WTO Dispute Settlement Body that the safeguard measure imposed by
the United States is incompatible with the WTO Agreements.14  
20. On 17 March 1999, the European Communities requested consultations with the United
States regarding the definitive safeguard measure on wheat gluten.15  The request for consultations
was made under Article 4 of the Understanding on Rules and Procedures Governing the Settlement
of Disputes (DSU), and pursuant to Article XXII :1 of the General Agreement on Tariffs and Trade
(GATT 1994), Article 14 of the Agreement on Safeguards, and Article 19 of the Agreement on
Agriculture.
21. Consultations were held in Geneva on 3 May 1999 but no mutually satisfactory solution was
reached. On 3 June 1999, the European Communities requested the establishment of a panel and this
Panel was established on 26 July 1999.16  Australia, Canada and New Zealand reserved their third-
party rights.
22. On 9 June 1999 the US notified to the WTO its decision to reduce the quota allocated to
imports originating in the EC for the 2nd quota year due to an alleged "overfill" of the quota during
the first quota year.17
23. On 11 October 1999, the parties agreed on the composition of the Panel.18
3. FACTS CONCERNING THE WHEAT STARCH/WHEAT GLUTEN INDUSTRY
3.1 Description of the product, its production process, its applications, the co-product
nature of the industry, and a number of other factors
3.1.1 The product
24. Wheat gluten is a high protein product produced from wheat flour. It is described by the ITC
as "the natural protein portion of wheat that is extracted after wheat is milled into flour".19
25. "Vital" wheat gluten means wheat gluten which still has all its original characteristics (theycan be lost for instance due to overheating). These include what the ITC calls "visco-elastic
properties"
20.  Simply put, when wheat gluten is mixed with water, it forms a dough (see Exhibit EC-
3, picture on right-hand side). It is then a tough, elastic greyish substance resembling chewing gum.
In the bakery process, its main application in th e US, it is the gluten in flour that, when dough is
kneaded, helps hold in the gas bubbles formed by  the leavening agent. Gas contained within the
dough helps the bread or other baked good to rise, creating a light structure.
                                                     
14 See WTO doc. G/L/251 and G/SG/N/12/EEC/1
15 See WTO doc. WT/DS166/1
16 See WTO doc. WT/DS166/3
17 See WTO doc. G/SG/N/10/USA/2/Suppl.1 and G/SG/N/11/USA/2/Suppl.1. Subsequently, the US
provide a corrigendum to these notifications (G/SG/N/10/USA/2/Suppl.1/Corr.1 and G/SG/N/11/USA/2/
Suppl.1/Corr.2).
18 See WTO doc. WT/DS166/4
19 ITC report at I-3, footnote 1.
20 ITC report at II-5.WT/DS166/R
Page 71
3.1.2 The production process
26. Exhibit EC-4 provides a flowchart of the production processes by which wheat starch and
wheat gluten are produced.
An unprocessed wheat kernel, commonly known as a wheat berry, is made up of three major
portions: bran (the rough outer covering), germ, and endosperm (see Exhibit EC-5). The wheat
endosperm, which makes up the majority of the kernel, is full of starch, protein, niacin, and iron. It is
the protein in the wheat endosperm, which constitutes the wheat gluten. During the so-called "dry
milling" process the wheat is separated into three fractions: bran, germ, and flour.
27. The flour is then made into dough by mixing it with water. As a result, the links between the
gluten polymers become stronger resulting in the formation of gluten lumps in the dough slurry. The
formation of gluten lumps makes it possible to se parate the gluten from the other flour components.
28. Then, the dough is separated into gluten, starch, and effluents. The process is described by
the ITC as "somewhat akin to taking a ball of dough (flour and water), and rinsing it until all the
starch is washed away, leaving only the gluten".21
29. During refining, starch and effluents still present in the gluten are washed out, and after
dewatering the gluten is dried.
3.1.3 Applications (uses) of wheat gluten
30. According to the ITC  about 80 per cent of the wheat gluten consumed in the United States
serves as an input to the milling and baking industry to supplement the gluten in the flours used to
make baked goods.22 The function is mainly to increase the protein content (for instance in years
where the protein content of wheat is low), or to influence the volume/structure/softness of the baked
goods. (See Exhibit EC-6). Non-bakery uses, incl uding in the pet food industry, account for the
remaining 15-20 per cent of consumption23.  (See for a description of the various uses Exhibit EC-7).
3.1.4 The co-products nature of the wheat starch/wheat gluten industry31. A very important point, which should be made clear from the outset, is the co-product nature
of the wheat starch/gluten industry. As the ITC itself observes:
"The process of manufacturing wheat gluten always results in two products: one part
of gluten and approximately five parts of starch".24 (emphasis added)
Moreover, there are always effluents, which can be sent to a distillery for utilisation in the
production of ethanol or food-grade alcohol.25  This is confirmed by figure 1 in the ITC report, a
wheat gluten production schematic drawn up by one of the US producers, in which it is indicated
that part of the starch slurry waste stream goes to distillers.26  It is also possible to use certain parts of
the effluents as animal feed stock, and others as wheat feed. (See Exhibit EC-8)
                                                     
21 ITC report at II-5.
22ITC report at I-6.
23 ITC report at II-5.
24 ITC report at II-5.
25 ITC report at II-5.
26 ITC report at II-7 right hand side.WT/DS166/R
Page 72
32. Furthermore, the fact that much more wheat starch than wheat gluten is produced should be
underlined. One hundred kilograms of flour will yield approximately 11 to 13 kilograms of wheat
gluten and 63 to 65 kilograms of starch.27
33. Because of the integrated nature of the production process, the financial performance of theindustry is determined by
(1) sales of all products – wheat gluten, wheat starch, alcohol products derived from
wheat starch (including ethanol), and ot her derivatives (e.g. feedstuffs); and
(2) total operating costs, mainly raw materials and energy.
Revenues from wheat gluten generally account for 20-35 per cent of total revenues, with
wheat starch and alcohol products accounting for 65-80 per cent of revenues.28
3.1.5 Factors influencing demand for and price of wheat gluten; competing products
34. The price of wheat gluten is directly related to the protein level in wheat.29  As we have
seen, wheat gluten is the only product that can be used as a supplement to wheat flour used in bread
making in order to attain the desired level of protein for the baking purpose. In general, bread
making requires a high level of wheat protein.
Therefore, in years when the general protein level in harvested wheat is low, demand for
wheat gluten goes up - since more wheat gluten is needed to supplement the protein level of wheat
used in bread making and therefore upward pressure is exerted on price. In contrast, when the
general protein level in harvested wheat is high, demand for wheat gluten goes down, and therefore
downward pressure is exerted on  price .
35. As the ITC itself put it, in particular with respect to the milling and baking industry:
"Demand for wheat gluten increases during periods when the protein level in wheat
is low, since more wheat gluten is needed to supplement the protein level in wheatflour used for baking bread. In contrast, when the protein level in wheat is high, less
wheat gluten is demanded to add to the baking flour".
30
36. Thus, in those cases where wheat gluten is used as a protein supplement in the baking sector,high-protein wheat flour can be substituted.
31  The competition between these two products thus
plays a pivotal role on the US market.
37. Furthermore, since – as was explained above – the industry is necessarily a co-product
wheat starch/wheat gluten industry, the competition between wheat starch and corn  starch in the US
market should be emphasised from the outset. Corn  is the most economical and consequently the
most commonly used raw material for starch produc tion in the United States. Much more starch can
be produced from corn than from wheat; the raw material cost in the US of corn starch had a 45 per
cent competitive advantage during the period of inve stigation. The EC will return to this below when
it will discuss factors which the US authorities did not (or at least not adequately) investigate.
                                                     
27 ITC report at II-6.
28This can be deducted from Table 9 to the ITC report (at II-19).
29 See for instance ITC report at I-23.
30 ITC report at I-23
31 ITC report at II-27.WT/DS166/R
Page 73
3.2 Description of the wheat gluten market, in particular in the US
3.2.1 The US industry
38. There are four US producers of wheat starch/wheat gluten:
- Archer Daniel Midland (" ADM ");
- Heartland Wheat Growers (" Heartland ");
- Manildra Milling Corporation (" Manildra "); and
- Midwest Grain Products, Inc. (" Midwest ").32
39. With respect to Heartland, Manildra and Midwest the ITC stated:
"These three firms accounted for the substantial majority of domestic production of
wheat gluten. Each of the companies produces wheat gluten and wheat starch in ajoint production process. Each of the companies also produces other by-products or
related products, especially alcohol".
33
Of course, also ADM necessarily produces both wheat starch and wheat gluten.34
40. It is important to note at this stage that US domestic production capacity was substantiallyincreased during the investigation period. For instance, Heartland began producing wheat starch and
wheat gluten in June 1996. Manildra has two plants, one of which is a new facility which beganproduction in May 1994.
35  Midwest's plants also underwent se veral expansions and upgrades during
the investigation period.36
41. Finally, it is necessary to draw attention to the fact that Manildra is the daughter company of
an Australian group, which owns two Australian producers of wheat gluten37, which may explain the
discriminatory structure given to the safeguard measure by the US (see below Chapters 5 and 7).
3.2.2 The US market42. As a result of the Uruguay Round negotiations, the US granted tariff concessions on wheat
gluten. These are described in Exhibit EC-9. The duty applied in 1993 and 1994 for wheat gluten
was 8 per cent, unless the wheat gluten was destined to be used as animal feed, in which case it was
4 per cent. These duties are gradually reduced as from 1995 until the year 2000, when the duty will
be 6.8 per cent, and 1.8 per cent if destined for animal feed.
38
43. Apparent consumption of wheat gluten in the US increased nearly 18 per cent between 1993
and 1997.39  According to the ITC,
"US demand for wheat gluten, as measured by total US apparent consumption,
increased significantly during 1993-1997, from 249.7 million pounds in 1993 to294.2 million pounds in 1997, or by about 18 per cent".
40
                                                     
32ITC report at I-5-6.
33 ITC report at I-13.
34This is confirmed by the description of ADM in the ITC report at II-8.
35 ITC report at II-17.
36 ITC report at II-6.
37 ITC report at II-8. Two of the companies in the Manildra group (Manildra US and Shoalhaven
Starches Pty.) account for the dominant share of exports of wheat gluten from Australia to the US
38 ITC report at II-6.
39 ITC report at I-17.WT/DS166/R
Page 74
44. Wheat gluten is imported into the US from many countries41, including Australia, Canada,
the EC, and other countries. During the period of investigation, imports of wheat gluten into the US
increased from 128 million pounds in 1993 to 177 million pounds in 1997. Thus, the market share of
imported wheat gluten increased from 51.26 per cent in 1993 to 60.16 per cent in 1997 of the total
US apparent consumption (i.e. increasing by 8,9 percentage points in volume). In particular in 1996imports from significant suppliers (i.e. Australia, Canada and the EC) increased.
42
4. THE COMPELLING CONDITIONS UNDER ARTICLE XIX GATT 1994 AND
ARTICLES 2 AND 4 OF THE AGREEMENT ON SAFEGUARDS. THE US WGS
CASE
45. According to Article XIX.1 (a) of the GATT,
"If, as a result of unforeseen developments and of the effect of the obligations
incurred by a contracting party under this Agreement, including tariff concessions,any product is being imported (…) in such increased quantities and under such
conditions as to cause or threaten serious injury to domestic producers in that
territory of like or directly competitive products, the contracting party shall be free
(…) to suspend the obligation in whole or in part or to withdraw or modify the
concession".
A WTO Member, in casu  the US, planning to introduce a safeguard measure must therefore show
that the increased imports are the result of "unforeseen developments".
46. Article 2:1 Agreement on Safeguards (footnote omitted) reads as follows:
"A Member may apply a safeguard measure to a product only if that Member has
determined, pursuant to the provisions set out below, that such product is beingimported into its territory in such increased quantities , absolute or relative to
domestic production, and under such conditions  as to cause or threaten to cause
serious injury  to the domestic industry that produces like or directly competitive
products." (emphasis added).
Therefore, the safeguard investigation had to establish in this case that wheat gluten was being
imported into its territory in such increased quantities , absolute or relative to US production, and
under such conditions  as to cause serious injury  to the US industry.
47. According to Article 4 SA, second paragraph,
"(a) In the investigation to determine whether increased imports have caused or are
threatening to cause serious injury to a domestic industry under the terms of this Agreement,
the competent authorities shall evaluate all relevant factors of an objective and quantifiable
nature having a bearing on the situation of that industry, in particular, the rate and amount of
the increase in imports of the product concerned in absolute and relative terms, the share ofthe domestic market taken by increased imports, changes in the level of sales, production,
productivity, capacity utilisation, profits and losses, and employment.
(b) The determination referred to in subparagraph (a) shall not be made unless this
investigation demonstrates, on the basis of objective evidence, the existence of the causal
link between increased imports of the product concerned and serious injury or threat thereof.
                                                                                                                                                                  
40 ITC report at I-22.
41 ITC report at top of page I-6.
42 ITC report at II-25.WT/DS166/R
Page 75
When factors other than increased imports are causing injury to the domestic industry at the
same time, such injury shall not be attributed to increased imports.
(c) The competent authorities shall publish promptly, in accordance with the provisions
of Article 3, a detailed analysis of the case under investigation as well as a demonstration ofthe relevance of the factors examined."
Thus the US authorities should have complied with a number of detailed obligations as set out in this
provision, some of which complement the above-mentioned conditions under Article 2 SA.
48. The US has repeatedly and seriously violated its obligations resulting from the above-
mentioned provisions, as the EC will demonstrate in the following sub-chapters:
4.1 ITC uses, without justification, unverifiable data
49. Practically all the data in the ITC report on which its findings are based, have been omitted
from the version of the report available for scrutiny. The reader will find very often "***" where
facts are discussed which are relevant for determining whether a safeguard measure may be taken.
The EC does not contest that under certain very specific circumstances the protection of
certain information regarding individual companies may be justified. However, not even aggregate
data for the whole US wheat gluten/wheat starch industry are provided, even though the ITC sees no
problem whatsoever in providing aggregate data with respect to the EC industry. A particularly
flagrant example is the historical dataset for the price of wheat gluten on the US market, which isheld to be confidential in respect of US product while the parallel price data for the EC product on
the same US market are published.
43
The ITC’s findings based on secret data are entirely unverifiable, without sufficient
justification. They are also unreviewable.
The US authorities are required to provide "a detailed analysis of the case under
investigation as well as a demonstration of the relevance of the factors examined". This requirementpresupposes that the detailed analysis and the demonstration of the relevance of factors are published
and not held secret, unless confidentiality is really an issue. If analyses based so completely on
undisclosed data as in the present case were accepted, the stringent requirements to motivate andjustify such findings would become void of effect.
The US has violated therefore Articles 2 and 4 of the SA.
                                                     
43 ITC report at II-33WT/DS166/R
Page 76
4.2 "Unforeseen developments"
50. It clearly results from the wording of Article XIX.1 (a) GATT 1994 that in order to allow the
imposition of a safeguard measure, not any increase in imports is relevant, but only those which
result from both "unforeseen developments" and "compliance with GATT obligations", includingtariff liberalisation according to a Member's Schedule of Concessions.
51. Increased imports as a consequence of the obligations incurred under GATT 1994, including
the tariff concessions agreed for wheat gluten during the Uruguay Round cannot be considered
"unforeseen" within the meaning of Article XIX:1(a) GATT 1994.
44  If it were otherwise, a WTO
Member would be allowed to withdraw the very bene fits which it had agreed to when entering into
tariff commitments.  This would neither be consistent with a good faith interpretation of that
provision nor with the liberalisation aims pursued by the GATT 1994 and the WTO Agreement
overall.45
52. In essence, Article XIX requires a logical chain which starts with incurring obligations underGATT 1994, followed by an intervening unforeseen development, which results eventually in
increased imports, causing serious injury. It should be noted that not the increase in imports must be
unforeseen but rather the "development" which has led, together with GATT obligations, to
increased imports.
53. In addition, as stated above, safeguard measures are by definition "emergency" measures.
The very nature of a safeguard measure is to t ackle an urgent situation which was not expected.
Thus, a WTO Member wishing to impose a safeguard measure must prove that an "unforeseen
development" was the cause, or at least the determining cause, of the increased imports.
However, in the present case, the events lead ing eventually to the application by the US
President of the US WGS were entirely foreseeable. They were the combined effect of free
economic choices of the US domestic industry to  increase production (which turned out to be
nothing less than an unconsidered gamble) and of the competition on the US internal market
between the US produced wheat starch and US produced corn starch.
As the EC will explain later in this document, safeguard measures cannot be used to protect
domestic suppliers who increased their capacity in  an irrational manner. They neither took into
account that the favourable market conditions stemming from the low protein content of the wheat
harvest for two years would be unlikely to continue, nor that in view of the tariff bindings which the
US had accepted, increased domestic demand could very well turn to foreign suppliers. Also, asafeguard measure cannot be used in order to establish artificial conditions of competition between
domestically produced competing products (in casu, wheat starch vs. corn starch) at the expense of
the entirely legitimate importation from other WTO Members, in casu the EC, of a co-product, the
wheat gluten.
54. The EC submits therefore that, by imposing safeguard measures in the absence of an
increase in imports of wheat gluten resulting from "unforeseen developments", the US violated the
obligations which it assumed under Article XIX:1(a) GATT 1994.
4.3 "Increased quantities"
                                                     
44 This also reflects a generally accepted tenet of economic theory, i.e. that tariff protection can be
measured in advance according to specific formulas: see B. Hoekman, M. Kostecki, The Political Economy of
the World Trading System, Oxford, 1995, pp. 88, 93.
45 See the Preambles of the Agreement establishing the World Trade Organisation and of GATT
1994, both referring to "reciprocal and mutually advantageous agreements directed to the substantial
reduction of tariffs and other barriers to trade."WT/DS166/R
Page 77
55. According to Article 2 of the SA, one of the conditions for applying a safeguard measure is
that a product is being imported
"in such increased quantities, absolute or relative to domestic production" as to
cause or threaten to cause serious injury to the domestic industry.
However, the ITC's analysis was limited to a comparison of absolute data, often selectively chosen46,
and focusing on end-to-end data.47  Moreover, by so doing the US authorities included imports from
Canada and certain other countries which were eventually excluded from the application of the
safeguard measure.
This is in breach of the principle of parallelism that was recognised by the Argentina-
Footwear  panel report.48
"This result supports the interpretation that the two options offered by the footnote
to Article 2.1 read in conjunction with Article 2.2 imply a parallelism  between the
scope of a safeguard investigation  and the scope of the  application of safeguard
measures.  Thus, in the light of the context of the footnote to Article 2.1, a member-
state-specific investigation in which serious injury or threat thereof is found based
on imports from all sources could only lead to the imposition of safeguard measures
on a MFN-basis against all sources of intra-regional as well as extra-regional supply
of a customs union."
Even if NAFTA is not a customs union, the EC does not see any reason why this specific principle
should not apply equally to free-trade areas. Thus, the US breached Articles XIX GATT and 2 SA.
4.4 "Under such conditions"
56. Another condition for being allowed to take a safeguard measure, found both in Article XIX
GATT 1994 and in Article 2 SA, is that the product is being imported "under such conditions" as to
cause or threaten to cause serious injury. However, this should be read in the light of two important
facts:
- The ITC appears to believe that the "conditions" under which imports took place
which allegedly caused serious injury consisted of the prices of those imports.49  It is
however clear from the ITC report that prices of EC imports went up and then
decreased during much of the period of investigation, and were virtually the same at
the end of the period for which the ITC assembled data as at the beginning.50
- Moreover, in 35 per cent of the cases, the EC imports quarterly selling price was as
high or higher than the US price.51  Furthermore, in probably52 the majority of cases
                                                     
46 The ITC report sometimes refers to the whole of the 1993-1997 period, i.e. the investigation period,
some other times it takes other references arbitrarily chosen within that period which probably was considered
as suiting better a pre-constituted line of reasoning.
47 This approach must be wrong: imagine for example that a Member had imported only one ton of
wheat gluten. Would an increase of 200 per cent of imports, i.e. by two tonnes, justify a safeguard measure?
48 At paragraph 8.87; see also 8.102.
49 ITC report at I-16.
50 ITC report at II-33 and Figure at top of page II-35.
51 ITC report II-36.
52 As noted above, historical price data of US product is, unjustifiably, held secret; ITC report at II-
33.WT/DS166/R
Page 78
the price difference was only a few per cent, which would not be statistically
significant. There was, therefore, no evidence of consistent underselling of the type
necessary to find that imports take place under such conditions as to cause injury.
The ITC therefore violated Art. XIX GATT and 2 SA by nevertheless finding that
that was the case. The EC will come back to this issue in the "as to cause" chapter
below.
4.5 "Serious injury"
57. In this respect, Article 4 paragraph 2(a) of the Safeguard Agreements is important. It
provides that
"In the investigation to determine whether increased imports have caused or are
threatening to cause serious injury to a domestic industry (…), the competent
authorities shall evaluate all relevant factors of an objective and quantifiable nature
having a bearing on the situation of the industry (…)".
Accordingly, procedural and substantive obligations are imposed upon a Member wishing to
introduce a safeguard measure: that Member must, on the one hand, evaluate all  factors having a
bearing on the situation and consequently, on the other hand, it must demonstrate that serious  injury
has taken place.
58. The EC's complaints with respect to the ITC’s serious injury finding can be structured under
the following two headings:
(i) the findings and conclusions of the ITC with regard to those factors which it did
investigate were not supported by the evidence;
(ii) moreover, the US authorities failed, contrary to their obligations under Article 4.2
SA, to evaluate all factors having a bearing on the situation of the industry.
The EC considers it appropriate to apply, on this point, the clarifications of the standards with
respect to a serious injury finding/investigation, which were provided by the Panels in Argentina-
Footwear53 and Korea-Dairy.54
4.5.1 The evidence gathered by the ITC did not warrant a "serious injury" finding
4.5.1.1 The rate and amount of the increase in imports of the product concerned  and the share of the
domestic market taken by increased imports
59. These conditions are developed in Art. 4.2 (a) of the SA, which provides that the competent
authority must evaluate
"the rate and amount of the increase in imports of the product concerned in absolute
and relative terms" as well as "the share of the domestic market taken by increased
imports".
                                                     
53 Paragraph 8.123
54 Paragraph 7.29WT/DS166/R
Page 79
60. The ITC places great emphasis on the fact that imports into the US had increased by almost
38 per cent during 1993 to 1997.55  However, in considering this figure the ITC unjustifiably
downplayed a number of key elements. In particular , US demand went up by 18 per cent in the same
period.56  As a result, the market share of imports from all sources into the US only went up by
approximately 9 percentage points, both in terms of quantity and value, during the entire period.57  In
other words: on average, imports increased by less than 2 percentage points per year, relative to total
US demand.58  Furthermore, the market share of imports was level from 1993 to 1995, before
increasing by 6.8 percentage points from 1995 to 1996 and 2.4 percentage points from 1996 to 1997.
Since increased imports are a necessary condition for taking a safeguard action, any evidence of
injury prior to 1996 is not relevant to a determination that increased imports caused serious injuryand should not have been relied on by the ITC in its findings.
However, the US authorities clearly failed to take that into account.Moreover, as was discussed under "increased imports" above, the ITC failed to apply the
parallelism principle since, on the one hand, it included Canada and certain other countries when it
considered the rate and amount of increase of imports as well as their market share during the
"serious injury" examination. On the other hand, the US authorities excluded Canada and certain
other countries from the application of the US WGS.  This is not only in contradiction with Articles
XIX GATT and 2 SA, as discussed above, but also with Article 4 SA.
4.5.1.2 Sales61. Changes in the level of sales are explicitly mentioned in Art. 4.2 (a) SA as a factor to be
investigated.
The ITC addresses this issue in a contradictory way. On the one hand, the ITC states that
"Domestic shipments…" (by which is apparently meant sales on the US home market) "…followed
a similar trend [as production], initially rising and then falling, and they were at their lowest level of
the investigative period in 1996 and 1997".
59  On the other hand, sales are mentioned in Part II of the
report (information obtained in the investigation), in which the ITC states: "The ending period sales
quantity is about 24 per cent higher than the sales quantity at the beginning of the 5-year period".60
This last piece of objective evidence shows unequivocally that the US industry was not
suffering any injury. It is also in conformity with evidence provided elsewhere in the ITC report61
from which it appears that in 1997 domestic shipments had increased by 7.7 per cent compared to
1996.
4.5.1.3 Production62. Between the first and the last year of the investigation period, US production decreased only
very slightly, namely by 4.5 per cent, from 128 million pounds in 1993 to 122 million pounds in
                                                     
55 ITC report at I-23
56 ITC report at I-22
57 From 51.4 to 60.2 per cent in terms of quantity, and from 49.1 to 58.3 per cent in terms of value.
See ITC report at II-25.
58 The EC notes at this stage that the US has decided that an annual increase of 6 per cent in imports
was acceptable when it adopted the US WGS.
59 ITC report at page I-13
60 ITC report at II-32
61 ITC report at page II-16WT/DS166/R
Page 80
1997.62  This is already in itself an entirely normal fluctuation and certainly does not warrant a
finding that an industry is suffering serious injury, i.e. a significant overall impairment.
Moreover, production declined in only one year (1996) of the investigation period. It was
going up again at the end of the investigation period, from 112 million pounds in 1996 to 122million pounds in 1997.
63  The reason for the one-time decline was - as becomes clear upon close
reading of the ITC report - that in the two years before, demand had been exceptionally high mainly
due to "a weather-related deficiency in protein content in the wheat crops of the major producingcountries, including the United States, during 1993".
64
Data on production thus do not warrant any finding of "serious injury".
4.5.1.4 Capacity utilisation63. Capacity utilisation is defined as production (which was just discussed) divided by
production
capacity.
An important factor in the ITC injury-finding was that capacity utilisation fell substantially
in the period of investigation.
65  However, in the previous paragraph it was noted that US wheat
gluten production hardly fell in the period of investigation. This means that the fall in capacity
utilisation was almost entirely due to increase in US production capacity over the period ofinvestigation. Indeed, as the ITC itself states, "a large increase in capacity by US producers" was one
of the major reasons why available supply in the US market increased.
66  US capacity increased by
no less than 68.2 per cent, or 111 million pounds, during the 1993-1997 period of investigation.67
The ITC refers to this as "ample excess capacity of domestic producers".68  This increase in US
capacity took place – again in the words of the ITC – "in anticipation of significant increases indomestic consumption".
69  Most of this increase in capacity was in place by June 1995".70
Thus, the US wheat gluten industry constructed additional capacity (apparently) assuming
that it, and it alone, would be the one to satisfy the increase in domestic consumption. When
however it turned out that many US wheat gluten buyers chose foreign suppliers, including ECsuppliers, to satisfy their increase in demand, two of  the four US producers turned to the ITC. The
US authorities then engaged in a process to protect the US industry from the consequences of the
poor investment decisions of two producers.
There exist perfectly legitimate means by which the US could have ensured that their
domestic suppliers could compete with foreign suppliers on terms which allowed them to expand
their capacities and resist competition from US produced corn products. In particular, during the
                                                     
62 ITC report at I-12/13. See also table 5 to the ITC report at II-15.
63 ITC report at Appendix C, page C-4
64 ITC report at I-22/23
65 From 78.3 per cent in 1993 to 42.0 per cent in 1997. However, as the ITC itself acknowledges,
capacity utilisation was going up again by 1997 (the last year of the period investigated by the ITC).
66 ITC report at I-22.
67 ITC report at I-24
68 ITC report at I-27.
69 ITC report at I-12.
70 ITC report at I-12. It may be that the reason for this decision by US wheat gluten producers to
increase capacity was the fact that in 1994 demand for and the price of wheat gluten went up. See ITC report at
I-23. If this is the case, and given that the 1994 phenomena was due to a weather-related deficiency in proteincontent in the wheat crops, the US producers were in effect staking their prospects on either continued poorquality harvests or securing unjustified governmental protection.WT/DS166/R
Page 81
Uruguay Round71, it could have renegotiated its tariff binding for imported wheat gluten upwards.
But, as is apparent, the US failed to do so probably because it would have been at a cost.
The EC cannot accept that afterwards, safeguard measures without compensation are used to
protect domestic suppliers who increased their capacity in an irrational manner72, i.e. not taking into
account that, in view of the tariff bindings which the US had accepted, additional domestic demand
could very well turn to foreign suppliers.
64. The ITC also states that
"… but for the increase in imports, the industry would have operated at 61 per cent
of capacity in 1997, which is much closer to the level at which the industry operated
early in the investigative period when it operated reasonably profitably".73
In other words: the US industry had apparently so much over-invested in new capacity in thebeginning of the period of investigation, that – even if imports had not increased at all during thatperiod – nevertheless a significant reduction in capacity utilisation would have been found in 1997.
This means that the increase in imports was not the cause of the reduction in capacity utilisation.
Expressed in figures: if US capacity had not increased since 1993, at the end of the period of
investigation capacity utilisation would have been 74.8 per cent, a decline of less than 4 percentage
points. In fact, over the period under examinati on, capacity utilisation decreased from 78.3 per cent
to 44.5 per cent, a fall of 34 percentage points. Thus, almost 89 per cent per cent of the decline incapacity utilisation is the result of the US indust ry’s own decision to expand capacity without having
a reasonable prospect that US buyers of wheat gluten would turn to them for the increased needs.
This is shown in the following table and figure.
                                                     
71 Which ended on 15 April 1994.
72 For instance, Heartland began construction of its Russell plant in July 1993, well in the middle of
the negotiations on agricultural products in the Uruguay Round. See ITC report at II-8.
73 ITC report at I-17WT/DS166/R
Page 82
The US authorities fail to explain why an industry allegedly suffering "serious injury" would
be increasing its production capacities when it is already operating at substantially less than fullcapacity.
This badly planned investment has resulted in an increase of production costs and has had a
negative impact on profits.
By failing to take all factors mentioned above correctly into account, the US authorities have
violated Articles 2 and 4 SA.
4.5.1.5 Profits/losses65. It should be noted that the ITC states that it received usable financial data only from three of
the four domestic producers of wheat gluten, and not from ADM.
74  Furthermore, one of the firms
which did provide usable financial data only started producing wheat gluten in June 1996, the last
month of the fourth year of the period of investigation. In other words, only for two of the firms in
the industry were data available relating to the whole period of investigation.
                                                     
74 ITC report at I-13.1993 1994 1995 1996 1997
Capacity (1,000 pounds) 162.856 208.832 253.712 267.168 273.895
Production (1,000 pounds) 127.525 140.745 142.650 112.167 121.762
Capacity utilization % 78,3% 67,4% 56,2% 42,0% 44,5%
Capacity utilisati on, if capacity
had been held at 1993 level %78,3% 86,4% 87,6% 68,9% 74,8%
Table: US wheat gluten capacity, production and capacity utilization
source: ITC II-15
Capacity utilization of US wheat gluten production
0%10%20%30%40%50%60%70%80%90%100%
1993 1994 1995 1996 1997
Capacity utilization %
Capacity utilisation, if  capacity had been held at 1993 level %WT/DS166/R
Page 83
66. Moreover, the finding of the ITC that profitability had gone down was based on allocation of
profits by the US producers between the co-products of wheat gluten and wheat starch and derived
products. Obviously, the manner in which financial factors such as costs and revenues are allocated
can have a tremendous impact on the perceived profitability of the individual segments within anindustry. However, because the wheat gluten/wheat starch industry relies by necessity on a single
raw material input (wheat or wheat flour
75) and utilises a single production line that results in wheat
gluten, wheat starch, and effluents suitable for pro ducing e.g. alcohol, any allocation of profitability
among the output products is arbitrary.
Moreover, the fact that the US industry has heavily invested to increase its production
capacity has had a negative impact on production costs and profits. The ITC fails to take that
element into account in its analysis.
67. In addition, the data provided by US producers to argue that the profitability of their wheat
gluten sales had gone down, are entirely unverifiable for anybody outside the ITC. The ITC limits
itself to observing that "based on a careful review of the allocation methodologies used by domestic
wheat gluten producers (…), we find those allocations to be appropriate".
Which methodologies were used remains entirely unclear.In a safeguard investigation, the competent authorities are required to provide an adequate
explanation of how the facts support the determination made.
76  With regard to profitability the ITC
has not done so, which constitutes another violation of Article 4.2 SA provisions.
68. The EC will return to the issue of profitability when discussing the factors which the ITC
failed to investigate.
4.5.1.6 Employment
69. During the period examined the average number of production and related workers as well
as the number of hours worked increased.
Such data are clearly not an indication of "serious injury". Whilst there are some allegations
in the report of losses of managerial and administrative jobs, the ITC-report does not contain any
verifiable data whatsoever on that issue.
It is also telling in this respect that the IT C expects that imposition of the safeguard measure
will increase, in the short term, the number of US workers producing wheat gluten in the range of
merely ten to fourteen.77  It is therefore clear that employment was hardly affected, let alone
seriously affected, by the increased imports.
                                                     
75 At least one of the major US producers concerned purchases wheat flour as the raw material rather
than wheat grain. This means it loses the margin reserved to the miller, thus squeezing profits further. This fact
was not taken into account by the ITC.
76 Argentina-Footwear 8.124.
77 ITC report at I-30.WT/DS166/R
Page 84
4.5.1.7 Other Factors – Wages
70. During the period examined, hourly wages rose in three of the five years, in particular also
in 1997, which shows that there is no connection between imports and wages. Moreover, overall
wages paid increased and certain salary cuts were restored by the end of the investigation period.78
Thus, the situation was far from one of "serious injury".
4.5.1.8 Other factors – Inventories
71. A rise in inventories is another factor cited in the ITC report as evidence of serious injury.79
Inventories rose by 101.3 per cent from 1993 to 1997. However, all of the increase occurred from
1993 to 1995, when inventories increased by over 200 per cent.  In the only two years in which
imports increased, 1996 and 1997, inventories declined by 34.2 per cent, as shown in the table
below.  Clearly, the fact that inventories went  down during the last two years in which imports
increased not only fails to support a finding of serious injury, but instead provides cogent evidence
to the contrary. In this respect, it is clear from the rationale of the safeguard instrument as anemergency measure that particular consideration must be given to the most recent time periods. In
fact, a safeguard measure can only be imposed if there is present serious injury or threat thereof.
4.5.2  Not all relevant factors were appropriately investigated by the ITC
                                                     
78 ITC report at II-17, see also page I-13.
79ITC Report at I-13.1,000 pounds 1 9 9 31 9 9 41 9 9 51 9 9 61 9 9 7
Imports into US 128.337 124.188 127.912 156.024 177.073
Inventories (end-of-period) 4.539 7.085 13.883 11.491 9.137
Table: US wheat gluten imports and inventories, 1993-1997
source: ITC II-12,16
Changes in US wheat gluten imports and inventories, 
showing absense of correlation
020.00040.00060.00080.000100.000120.000140.000160.000180.000200.000
1993 1994 1995 1996 19971.000 pounds
02.0004.0006.0008.00010.00012.00014.00016.000
1.000 pounds
Imports into US Inventories (end-of-period)WT/DS166/R
Page 85
72. As the EC has already observed, the role of the Panel is to determine whether the ITC fully
and objectively considered all the evidence before  it, including any evidence that detracts from an
affirmative determination of serious injury or causation.80  The EC will show that the ITC has failed
to do so.
4.5.2.1 Productivity73. Under Art. 4.2 (a) SA, the ITC was required to evaluate all relevant factors having a bearing
on the situation of the US wheat gluten/wheat star ch industry, and in particular those explicitly
mentioned in that provision.
81  Developments in productivity in the US wheat starch/gluten industry
should therefore no doubt have been considered in the investigation and in the report.
Productivity refers to the ratio of output to all inputs. The ITC’s analysis is, however, limited
to analysing worker productivity82, even though it acknowledges that "production of wheat gluten is
extremely capital intensive and requires very few production workers".83  Thus analysing worker
productivity cannot possibly be sufficient to evaluate overall industry productivity, it must take into
account in particular capital investment.
The US therefore failed to meet its obligation to investigate overall industry productivity and
it consequently violated Article 4 SA.
4.5.2.2 New entries/expansion while injury is supposedly taking place
74. The ITC notes: "[O]ne new domestic produc er, Heartland, entered the market in 1996. ".84  It
is incomprehensible that a domestic producer would enter a market which was at that point in time
allegedly being seriously injured by imports. However, the ITC doesn’t provide any explanation
how, in spite of this fact, it could find that the domestic industry was, at that time, being seriously
injured by imports.
75. Midwest’s Atchison plant underwent several expansions and upgrades throughout the period
examined.85  What happened exactly is (once again) removed from the ITC report. However, the text
("In 1996, ***. In 1997, ***") implies that this took place in the years subsequent to the period when
the alleged serious injury had taken place. Again, the facts argue against a serious injury finding.
4.5.2.3 Developments as to co-products were completely ignored.
76. As set out above, the production of wheat gluten always involves, at the same time, the
production of other products, and even – as far as starch is concerned – in much greater quantities
than wheat gluten. In its injury-analysis86, the ITC acknowledges this fundamental fact:
"Each of the companies produces wheat gluten and wheat starch in a joint
production process. Each of the companies also produces other by-products or
related products, especially alcohol".87
                                                     
80Korea - Dairy , paragraph 7.30.
81 This was confirmed by Korea-Dairy , paragraphs 7.55 and 7.68.
82 See ITC report at I-14 top of page, which only contains references to "worker productivity".
83 ITC report at I-13.
84 ITC report at I-17.
85 ITC report at II-6.
86 ITC report at I-12 through 14.
87 ITC report at I-13.WT/DS166/R
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Nevertheless, the ITC completely failed to investigate how this fact that necessarily co-
products are produced influence US wheat starch/gluten producers profitability, even though this
fact incontestably – using the terms of Art. 4 para. 2 of the SA - has "a bearing on the situation of
[the US wheat starch/gluten] industry".
This omission provides another reason to reject the ITC’s final report as flawed, since in
their pre-hearing report the ITC’s staff had stated : "Because of the joint cost allocation used to
determine profitability of the wheat gluten industry, the revenue flow from wheat starch that the US
producers can obtain affects wheat gluten profitability".88
4.5.2.4 Imports as positive business strategy of certain US producers
77. One important US producer of wheat starch/wheat gluten is Manildra, which is part of the
US branch of an Australian group owning two Au stralian companies manufacturing wheat gluten.89
It is a fair assumption that large parts of imports of wheat gluten from Australia were attributable to
this particular company. In fact, because of the company structure, the Manildra group can decide
entirely freely whether to produce wheat gluten in  Australia and bring it over to the US, or to
produce it in the US, depending on the market situ ation. Moreover, by importing wheat gluten from
its Australian sister-companies, rather than producing it domestically, a company like Manildra
avoids having to dispose of the co-products and by -products, starch and alcohol in the US, when the
US market conditions for those products are not profitable over time. This situation was objectively
present during (at least part of) the period of investigation.
A considered deliberate policy of importation by a domestic company, which corresponds to
its business strategy optimising profits cannot, by definition, be considered an injury, let alone a
serious injury in order to justify a safeguard measure.
The ITC report completely fails to address this issue. The US thus violated Articles 2 and 4
SA.
4.6 "As to cause"
78. The ITC failed to establish a causal link between increased imports and serious injury to the
domestic industry as required by Articles 2 and 4.2 of the Safeguards Agreement. Article 4.2(b) is
very specific in its requirement for the competent au thority to demonstrate, "on the basis of objective
evidence", the existence of a causal link. For a causation analysis to meet the requirements of
Articles 2 and 4.2 SA, it must consist of at least three elements:
(i) an analysis of whether the upward trend in imports coincides with negative trends in
injury factors;
(ii) an analysis of whether the conditions of competition between the imported product
and the domestic product demonstrate, on the basis of objective evidence, a causal
link between increased imports and serious injury; and
(iii) an analysis of other relevant factors and their proper attribution.90
                                                     
88 Pre-hearing staff report II-30.
89 ITC report at II-9.
90Argentina - Footwear , para. 8.229.WT/DS166/R
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4.6.1 Does upward trend in imports coincide with negative trends in injury factors?
79. The ITC states: "This surge in relatively low-priced imports in 1996 and 1997 coincided
with the decline in industry performance described above. There is a direct correlation between the
dramatic increase in wheat gluten imports and the significant decline in domestic wheat glutenindustry performance in 1996 and 1997"
91 (emphasis added).
80. The EC considers that the facts relating to most of the factors invoked by the ITC to find
injury show otherwise. Most factors indicative of injury either moved negatively before the increase
in imports in 1996 and 1997, moved positively when impor ts were rising, or both. In particular, three
factors (capacity utilisation, domestic shipments and inventories) worsened before the reference
period and actually improved during the period of the alleged "serious injury".
Capacity utilisation consistently declined from 1993 to 1995, so before what the ITC
describes as a "dramatic" increase in imports, and then improved from 1996 to 1997.92
Domestic shipments  first declined in 1995, again before what the ITC describes as a
"dramatic" increase in imports, but increased from 1996-1997.93
Equally, the negative trend for end of period inventories  lasted until 1995 but was reversed
in 1996 and 1997 when the situation clearly improved.94  The ratio of inventories to US shipments
and production followed a similar trend..95
Profitability  began to decline in 1995, before the increase in imports, and hourly wages
declined in 1995 but were increasing in 1997.
With respect to employment , the only two declining factors identified are hourly wages and
worker productivity.  Hourly wages began declining in 1995 and were rising by 1997. Data relating
to worker productivity is held secret and therefore unverifiable.96  Finally, annual average unit
shipment values  for US wheat gluten already declined in 1995.97
The ITC failed to satisfy the first element of the causation analysis, a coincidence of trends
between serious injury and increased imports. The ev idence that the injury factors cited to support
the finding of serious injury began declining before the increase in imports raises serious questions
about the existence of a causal link. The ITC provides no analysis or reasoning to demonstrate how
the negative trends in injury factors could have been caused by the increase in imports which began
later.
4.6.2 Conditions of competition81. Under Article XIX GATT as well as Article 2 SA, in order for safeguard measures to be
allowed, products must be not only be imported in strongly increased quantities, but also
"under such conditions as to cause or threaten to cause serious injury".
                                                     
91 ITC report at I-16.
92 ITC report at II-15.
93 ITC report at II-16.
94 ITC report at page II-16.
95 ITC report at page II-14.
96 ITC report at page II-16, table 8.
97 ITC report at II-16WT/DS166/R
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Pursuant to Art. 4.2 (b) of the SA, the ITC investigation should have demonstrated, "on the basis of
objective evidence", the existence of this aspect of the alleged causal link between imports and
injury.
Under Art. 4.2 (c) of the SA, the US was under the obligation to publish
"a detailed analysis of the case under investigation as well as a demonstration of the
relevance of the factors examined". (emphasis added)
82. The US has not fulfilled this obligation. In the part of the ITC report on causation98, the ITC
states:
"The record also shows that imports from the EU consistently undersold domestic
wheat gluten". (emphasis added)
The statement as such is unverifiable, since the relevant data on US domestic producers’ sales prices
have been removed from the public version of the ITC report, even in the aggregate format.
However, the few data which the ITC does mention show that this statement represents a
distortion of the facts. Elsewhere in the report99 it is clearly stated that out of twenty quarterly price
comparisons between domestic and imported EU vital wheat gluten, in six cases the imported EU
product was priced higher than the US produced product, and in one case at the same price.
In this respect, it is also noteworthy that at the end of the period for which the ITC gives EC
prices (first half 1997), those were practically the same as at the beginning of that period (secondhalf 1992).
100
Finally, one should take into account that price competition between imported and US wheat
gluten was also entirely legitimate.
83. As it appears, the assumption in the ITC’s reasoning is that it was the price of EU imports
which forced US producers to sell at prices which resulted in losses, thus causing serious injury.101
The EC has already shown, in the previous paragraph, that there was no question of consistentunderselling by EC imports, as the ITC alleges in its findings. Indeed, decline in domestic shipment
values began in 1995, the year before the increase in imports.
102  One cannot conclude that increased
imports were the cause of the decline in domestic unit sales values.
Moreover, the ITC acknowledges that the price of wheat gluten is directly related to the
protein level in wheat.103  When the protein level in wheat is low, demand for wheat gluten goes up –
since more wheat gluten is needed to supplement the protein level of wheat used in bread baking -and therefore the price goes up. In contrast, when the protein level in wheat is high, demand for
wheat gluten goes down, and its price goes down. Bread baking accounts for 80 per cent of US
wheat gluten use. In other words, the ITC was well aware that the price prevailing on the US market
was due to be influenced by developments in the protein level of US wheat crops.
                                                     
98 ITC report at I-16 to I-18.
99 ITC report at II-36.
100 ITC report at II-35.
101ITC report at I-16, in conjunction with I-13 2nd full para.
102 ITC report, Appendix C, at page C-4, under US shipments unit value.
103 For instance ITC report at I-23.WT/DS166/R
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4.6.3 Insufficient weight given to analysis of other factors which caused US wheat starch/wheat
gluten industry difficulties
84. In order to warrant a safeguard measure, an investigation must, on the basis of objective
evidence, demonstrate "the" causal link between increased imports and (threat of) serious injury. Ifother factors are causing injury at the same time, such injury shall not be attributed to increased
imports. (Art. 4.2 (b) SA). The ITC has not properly fulfilled its obligations in this respect.
In the present case, the consideration of other factors takes on a heightened importance for
three reasons.  First, the very nature of a  the wheat gluten/wheat starch industry is such that otherfactors, i.e., the conditions in the wheat starch and alcohol markets, are critical to the overall
situation of the industry.  Second, the overwhelming evidence that the injury experienced by the
industry began before the increase in imports is strongly suggestive that factors other than increased
imports caused the injury.  Third, analysis of the relevant data demonstrate that domestic prices were
not affected by imports. In light of this, the causation analysis required careful scrutiny andevaluation of other relevant factors to meet the requirements of Article 4.2(b).  The evaluation of
other factors in the ITC Report did not meet the standard required.
4.6.3.1 Wheat protein premiums determine the wheat gluten price on the US market85. In the previous sub-chapter, the EC already explained that – as the ITC itself acknowledges -
the price of wheat gluten is directly related to the protein level in wheat. However, contrary to itsobligation under Art. 4.2 (a) of the SA to evaluate all relevant factors, the ITC has completely
omitted to examine this issue. The EC attaches a detailed analysis of this question. (Exhibit EC-10)
This analysis shows that the primary factor affecting unit sales values was the protein level
of US wheat/wheat flour as measured by protein premiums for US wheat.104  It appears from this
analysis that wheat gluten imports had virtually no effect on US wheat gluten prices. Movements in
wheat gluten prices during the 1993 to 1997 peri od were explained primarily by wheat protein
premiums.
In other words, the ITC has not only failed to evaluate this factor, which is in itself already a
violation of Art. 4.2 (a) of the SA, but such eval uation should also have led it to a different
conclusion.
4.6.3.2 The situation in the co-products markets
(A) Wheat starch
86. With respect to wheat starch, the analysis of the ITC – consisting of only a few sentences - is
in fact limited to two points:
(i) wheat starch prices were at their highest level at the end of the investigative period
in 1997;
(ii) that fact suggests that competition between corn starch and wheat starch is not likely
to have had much effect on wheat gluten production.105
                                                     
104 The protein premium is a measure of the level of protein in wheat. One common measure is the
difference between Kansas City prices for hard red winter wheat, ordinary protein, and 13 per cent protein
wheat. When the protein content of ordinary wheat is low, buyers will pay more for higher protein wheat andthe premium increases.
105 ITC report at I-16-17.WT/DS166/R
Page 90
87. This is, of course, an evident over-simplification of a very important issue. All US producers
concerned produce, from the same wheat, both  wheat gluten and wheat starch, in the same
production facilities.106  As was explained before, for every kilogram of wheat gluten produced,
about 5 kilograms of wheat starch are produced. Anything which influences the profitability of the
starch part of their business therefore necessarily influences the profitability of their entireoperations.
88. The wheat starch price at the end of the investigative period is, of course, a factor in the
analysis of the profitability of wheat starch production, but clearly only one of many. Other relevant
factors were however completely ignored by the ITC in its analysis. For instance, US wheat starchprices fell after 1992/1993 until 1994/1995 and still remained below 1992/1993 levels in 1995/1996.
(See Exhibit EC-11). Also, US wheat starch cons umption was much less – compared to 1995 - in
1996 and 1997, the exact same years in which allegedly increased wheat gluten imports caused
serious injury. Apparent consumption of wheat starch was about 12 per cent and 7 per cent below the
1995 level in 1996 and 1997, respectively.
107  Furthermore, wheat starch production capacity had
increased by 93 per cent from 1993 to 1997.108
89. At the same time, as was already stated in Part  3 of this submission, wheat starch had to face
fierce competition from corn starch during the whole of the period of investigation. Wheat starch has
similar physical characteristics as starches derived from other raw materials and is used for most of
the same purposes. (Except that in the US, wheat starch is not used to make sweeteners, a point to
which the EC will return in a moment).
However, average annual monthly cash wheat prices during the 1993 to 1997 period ranged
from 26 per cent to 58 per cent above cash corn prices. (Exhibit EC-12 for wheat prices and Exhibit
EC-13 for corn prices). Moreover, nearly 25 per cent more starch is produced from a ton of corn than
a ton of wheat – about 690 kilograms of corn starch vs. 575 kilograms of wheat starch. Thus, in theUS the raw material cost of wheat starch is 45 per cent higher than for corn starch. This appears from
the following table:
US produced Wheat and Corn Starch
Competitive advantage of corn over wheat
(average cash prices over the 1993 to 1997 period)
Wheat Corn Competitive
advantage of corn
over wheat (%)
Starch yield % 57.5 69
Weight of wheat/corn to yield 1 Kg of starch (Kg) 1.74 1.45 20%
Cash price ($/Kg)1090.159 0.105 34%
Cost of wheat/corn input to produce 1 Kg of
starch ($/Kg)0.277 0.152 45%
90. On top of this, two US policies encourage and favour corn starch producers and the
expansion of corn wet milling capacity. The first is a tax benefit for ethanol, which works out in
practice to be more beneficial to corn wet millers than for wheat starch/wheat gluten producers.110
                                                     
106 Description in ITC report at II-7-8.
107 See on this point also table C-2, at page C-6 of part II of the ITC report, from which it appears that
US wheat starch production was about 447.000 pounds in 1995, then fell to about 421.000 in 1996, and in
1997 slightly climbed again to about 430.000.
108 ITC report at Appendix C, page C-6.
109 Cash prices for #2 yellow corn in central Illinois and cash prices for wheat, Kansas City, ordinary
protein hard red winter.WT/DS166/R
Page 91
The second is US sugar policy, which has provided incentives for substantial growth in
production and consumption of high fructose corn  sweetener (HFCS) – a product made from corn
starch - over the past 20 years.  The US sugar policy keeps US sugar prices well above world prices,
allowing HFCS to be produced profitably and to s ubstitute for sugar as an ingredient in products
such as soft drinks. Over the period 1985/86–1996 /97, wholesale refined sugar prices ranged from
$0.25-0.29 per pound, compared with wholesale HFCS prices of $0.16-$0.21 per pound.111  With the
high price umbrella provided by the US sugar policy, HFCS producers have been assured of
profitable prices for HFCS and a growing demand for HFCS.
The expansion of corn wet milling capacity encouraged by these two policies favourable to
corn starch has resulted in the availability of abundant supplies of corn starch on the US market.
91. It should be noted that two thirds of the wheat gluten importers/purchasers responding to the
questionnaires in the ITC investigation reported that the most significant factor affecting the
competitiveness of wheat gluten in the US market was the difficulty of selling wheat starch in the
US market, where cheaper corn starch is the predominant starch sold.112
92. In the light of all these factors, which had been brought to the attention of the ITC before it
made its findings113, it is clear that the ITC has not fulfilled its obligation under Article 4 of the SA
to seriously and thoroughly evaluate the situation with regard to wheat starch, even though it clearly
is one having a bearing on the US wheat starch/wheat gluten industry.
(B) Ethanol/alcohol93. Ethanol and food-grade alcohol are products of the wheat gluten/wheat starch production
process. The wheat starch slurry that results from the first step of the production process is furtherprocessed into either wheat starch or alcohol products.
114  From the description of the US producers,
it also clearly appears that many of them even have their own facilities to produce (food-grade and
fuel-grade) alcohol and ethanol.115  Therefore, as the ITC itself acknowledges,
"the volume and valuation of " B " starch (slurry) internally transferred to make
alcohol products have varying effects on the profitability of each of the
producers".116
94. The net sales data reported in the ITC report117 for one of the US producers, Midwest, show
the importance of alcohol products to a wheat gluten/wheat starch operation (59 per cent of total net
sales over the period of investigation, more than twice as much as for wheat gluten). Furthermore,
the ITC notes that "there is evidence that Midwest reduced its wheat gluten production in 1995, for
reasons related at least in part to conditions in the alcohol market (…)".118  Indeed, US ethanol
production had gone down severely in 1995 and remained below the 1994 level at least until 1997
(see Exhibit EC-14). Nevertheless, even though the EC  industry had explicitly pointed out to the ITC
                                                                                                                                                                  
110 Gasoline marketers that blend their fuels with ethanol are eligible for a $0.054 per gallon reduction
from the federal excise tax on gasoline (about $0.183 per gallon).
111 USDA/ERS Sugar and Sweetener Situation and Outlook Year Book 1998 and supplemental data
from ERS.
112 ITC report at II-37 .
113 ITC report at I-15 2nd full para.
114ITC Report at II-5 and II-6 for a description of the production process.
115 ITC report at II-6- and II-7.
116 ITC report at II-20.
117 ITC report at II-19.
118 ITC report at I-17.WT/DS166/R
Page 92
that there was a weakness in the ethanol market119, the ITC found it unnecessary to investigate this
issue further. Instead, it downplayed the issue as a problem only facing Midwest, without giving any
serious explanation.120
95. Clearly, this constitutes, again, a failure by the ITC to comply with its obligation to evaluateall relevant factors.
4.6.3.3 Capacity utilisation
96. As has already been explained above, the reason why capacity utilisation has gone down
was not increased imports, but ill-timed and ill-considered industry decisions to expand capacity. In
fact, capacity was expanded by 68 per cent121, while apparent consumption of wheat gluten grew
only by 18 per cent over the period of investigation.122  It is clear therefore, that under Article 4.2
(b), last sentence, of the SA, the reduction in ca pacity utilisation cannot be attributed to imports.
4.6.3.4 Input prices
97. As the ITC acknowledges, wheat and wheat flour represent the predominant raw material
cost to produce wheat gluten.123  The ITC also notes that these raw material costs generally rose in
the US during the entire period examined124, and "particularly in 1996 and 1997".125  In fact, wheat
prices jumped from $132/ton in June 1994 to $258/ton in May 1996, an increase of 95 per cent.126
The timing of this huge price increase coincides with the sharp decline in profitability reported in
1995.127
98. The ITC wipes this issue off the table by stating that demand for wheat gluten is relatively
insensitive to price, and that it would expect that wheat gluten producers would be able to pass on
these cost increases to their customers.128  The only basis for this expectation appears to be oral
statements during the investigation by the two comp anies seeking import relief. There is no objective
or quantifiable evidence to support these assertions.
99. In fact, it is completely at odds with the acknowledgement by the ITC, elsewhere in the
report, that "[W]hen wheat gluten is used primarily as a protein supplement in the baking sector,high-protein wheat flour can be substituted".
129
As stated in the factual part of this submission (Part 3.1.3), about 80 per cent of wheat gluten
is bought by the baking sector for this purpose.130  Reported contract periods for wheat gluten sales
were generally 3-12 months contracts for the US producers, with prices and quantities fixed for theperiod of the contract.
131  Nothing prevented US bakers, therefore, from keeping their wheat gluten
supplier to the price fixed in the contract for the duration thereof, and then turn to a high protein
                                                     
119 ITC report at I-15.
120 ITC report at I-17.
121 ITC report at II-14.
122 ITC report at I-17.
123 ITC report at II-27.
124 ITC report at II 37.
125 ITC report at I-17.
126 These data derive from Exhibit EC-12. In practice, Exhibit EC-12 provides for monthly prices in
US$ per bushel. The conversion rate from bushel to ton is MAIZE: 1 metric ton = 39.37 bushels; WHEAT: 1metric ton = 36.75 bushels.
127 ITC report at II-18.
128 ITC report at I-17 bottom of page.
129 ITC report at II-27.
130 ITC report at II-27.
131 ITC report at II-30.WT/DS166/R
Page 93
wheat or wheat flour supplier if the wheat gluten supplier wished to raise his price. Following the
1993/1994 crop, the protein content of US wheat generally improved. Significantly, US imports of
high protein wheat from Canada over the 1993 to 1997 period averaged about 1.44 million tons
annually, compared to about 0.412 million tons annually in 1991-1992 (Exhibit EC-15).
100. The ITC has therefore also clearly failed in examining seriously and thoroughly whether
high132 wheat and wheat flour prices in the US were not the real cause of the (alleged) injury.
4.6.3.5 Imports by US producers themselves
101. The EC has already noted that part of the imports was imported by US wheat starch/wheat
gluten producers themselves.133  Unfortunately, again, all relevant data are removed from the public
version of the ITC report. The ITC does state, however, on the one hand that the part of imports by
US producers themselves rose in 1994 relative to 1993, and on the other hand that that part remained
relatively stable during the period examined. It furthermore explicitly acknowledges that the USmarket depends in part on imports to meet domestic demand.
102. The EC has already discussed the question of imports by US wheat starch/ wheat gluten
producers themselves under "serious injury" above. These facts of course also have a bearing with
respect to the causation analysis. Again, by importing wheat gluten from its Australian sister-
companies, rather than producing it domestically, a company like Manildra avoids having to dispose
of the co-product, starch, and alcohol on the US market when the conditions in that market for thoseproducts are not good. Furthermore, Australian production conditions favour wheat starch, owing to
a lack of competition from corn, and demand for wheat gluten is relatively weak, again favouring
export of the latter product to the US
Therefore the data for the imports from Australia to the US by US producers should have
been excluded entirely from the causation analysis and findings. The failure to do so constitutes a
violation of the entire Article 4.2 SA.
4.6.3.6 Imports by countries excluded from the application of the US WGS were not excluded from
the investigation
103. Canada and certain other countries have been excluded from the application of the US WGS.
The Panel in Argentina- Footwear  has already ruled that, in the light of Article 2 of the SA, a
safeguard measure only on certain sources of supply cannot be justified on the basis of an
investigation which finds serious injury caused by imports from all sources of supply.134
Thus, what a WTO Member clearly cannot do, is find that total imports cause or threaten to
cause serious injury, and then exclude one of the biggest suppliers from the safeguard measure.However, that is exactly what the US has done.
All the ITC’s determinations on increased imports, serious injury, and causation are based
on total imports into the US. Moreover, Canada was the third largest supplier of wheat gluten
imports during 1995-1997, accounting for an average of 10.2 per cent of imports. For instance,
imports from Canada amounted to 7,788.31 tons in 1996.
                                                     
132 In absolute terms as well as relative to corn.
133 ITC report at I-17 and II-14.
134 See the Panel’s reasoning starting at para. 8.75. Of course, the Panel was dealing with a situation
involving a customs union, but there is no reason whatsoever not to require the same parallelism in the case ofa WTO Member which is a member of a free trade area. It is noteworthy that the Panel rejected theArgentinean argument based on US practice, and particularly the wheat gluten safeguard measure, para. 8.100.WT/DS166/R
Page 94
4.6.4 No standard of causality was used by the US
104. The US seems to rely on a vague notion of preponderance when determining the causal link
between increased imports and "serious injury".  However, nowhere does the US spell out any
objective criteria justifying the implementation of such notion.
More importantly, after having recognised that other factors135 contributed to injury,
nowhere does the US indicate how it came to the c onclusion that the injury attributable, in its -
erroneous - view, to increased imports could be defined as "serious injury". To put it another way,
the US should have provided an objective criterion on the basis of which it could be demonstratedthat the injury attributable to imports, after havi ng "deducted" the injury caused by other factors,
reached the threshold necessary for being qualified as "serious", i.e. a "significant overall
impairment in the position" of its domestic industry.
The US clearly failed to do that. This is in itself a violation of Article 4.2 (b) and (c) SA. In
addition, it is the EC's view that the US, on the basis of the objective elements which they examined
or should have examined, should never have reached that conclusion.
4.7 Conclusion as regards this chapter
105. The US authorities have not fulfilled their obligations in determining whether serious injury
occurred, and whether increased imports caused this  injury. In fact, few factors suggest any form of
injury, and as far as they do, it is clear that they have not been caused by increased imports, nor by
the conditions under which those have taken place. The US WGS is therefore in breach of Articles
XIX of GATT 1994, as well as Articles 2 and 4 of the SA.
5. THE US WGS IS IN BREACH OF ARTICLE 5 OF THE SA
106. Article 5 of the SA contains a number of obligations, which are binding upon each and every
WTO Member upon applying a safeguard measure.
5.1 Article 5, paragraph 1, 1st sentence
107. The Panel report on Korea- Dairy  has partially addressed the interpretation of this provision.
It is worth reminding here certain of its conclusions.
136
"The first sentence of Article 5.1 does contain a very specific obligation.  Thisobligation is to apply a measure that is commensurate with the goals of preventing
or remedying the serious injury suffered by the domestic industry and of facilitating
the adjustment of the domestic industry.  Our interpretation of this obligation is
bolstered by the last sentence of Article 5.1, which provides that Members "should
choose measures most suitable for the achievement" of the objectives of preventingor remedying the serious injury and facilitating adjustment."
"In our view a measure is defined by the following elements: product coverage,
form, duration and level. Thus, in order to comply with Article 5.1 a Member must
apply a measure which in its totality is no more restrictive than is necessary to
prevent or remedy the serious injury and facilitate adjustment.  In addition, it must
be possible for a Panel to evaluate, in accordance with the applicable standard of
review, whether a Member has acted in compliance with Article 5.1.  Therefore, the
                                                     
135 In the sense of Article 4.2 (b), last sentence, SA.
136 Paragraphs 7.100 and 7.101WT/DS166/R
Page 95
Member applying the measure must provide a reasoned explanation as to how the
authorities reached the conclusion that the particular measure in question satisfies all
the requirements of Article 5.1. We consider that the obligations of the first sentence
of Article 5.1 apply to all safeguard measures in their entirety."
5.1.1 General overview of the issue in the context of the present dispute
108. According to Article 5, paragraph 1, 1st sentence
"A Member shall apply safeguard measures only to the extent necessary to prevent
or remedy serious injury and to facilitate adjustment".
109. This provision introduces in the SA the so-called "proportionality rule" that compels the
WTO Member wishing to apply a safeguard measure to limit the application of such a measure (that
must in any case comply with the other obl igations under the SA) to the following:
(a) the application must ("shall")
(b) be limited to measures "only"
(c) "to the extent" "necessary to prevent or remedy"
(d) "serious injury"
(e) and "to facilitate adjustment".
The EC would recall at this juncture that the Appellate Body in its " US- Underwear " report
has defined the possibility for a WTO Member to adopt a safeguard measure as
"(…) an (…) ability to restrict the entry into its territory of goods in the exportation
of which no unfair trade practice such as dumping or fraud or deception as to origin,
is alleged or proven".137
110. As far as points (a) and (b) above are concerned, the expressions are self-explanatory: they
clearly set an unsurpassable limit for the Member applying the safeguard measure.
111. Within the imperative limits under (a) and (b), point (c) introduces the proportionality test:
only insofar as the safeguard measure - which the Member plans to apply - is "necessary" to prevent
or remedy a serious injury, it can be admitted.
The ordinary meaning of the word "necessary" is "requiring to be done, achieved, requisite,
essential".138 Thus, the Member wishing to apply the safeguard measure is obliged to provide
justification on whether the proposed measure is "necessary", i.e. is "required to be done", in order to
prevent or remedy serious injury. The Korea-Dairy  panel indicated that the investigating authority
must demonstrate that it has
"considered all relevant information and explained [its] decision that the measure
chosen was no more restrictive than necessary to prevent or remedy serious injury ...
and to facilitate the industry’s adjustment".139
                                                     
137 Report by the Appellate Body on United States – Restrictions on Imports of Cotton and Man-made
Fibre Underwear , AB-1996-3, WT/DS24/AB/R, 10 February 1997, at page 13. The AB ruling holds entirely
its validity for this case even if in the US–Underware  case it was taken in the context of a specific transitional
safeguard measure under the Agreement on Textiles and Clothing.
138 Oxford English Reference Dictionary, Oxford University Press, 1995, page 968
139Korea - Dairy , para. 7.101.WT/DS166/R
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112. On point (d), the term "serious injury" should be understood not only in accordance with the
definition in Article 4.1 (a) of the SA140 but also in their immediate context and in light of the object-
and-purpose pursued by the WTO Contracting Parties. As the Panel final report on US - Sections
301-310  rightly indicated at paragraph 7.19:141
"(…) the elements referred to in Article 31 [of the Vienna Convention] – text,
context and object-and-purpose as well as good faith – are to be viewed as one
holistic rule of interpretation rather than a sequence of separate tests to be applied in
a hierarchical order.142  Context and object-and-purpose may often appear simply to
confirm an interpretation seemingly derived from the "raw" text.  In reality it isalways some context, even if unstated, that determines which meaning is to be taken
as "ordinary" and frequently it is impo ssible to give meaning, even "ordinary
meaning", without looking also at object-and-purpose".
In this perspective, Article 4.2 (b) of the SA, in regulating causation, defines which serious injury is
relevant in order to allow a WTO Member to take safeguard action. It clearly indicates that, on the
one hand, the determination of serious injury can only be made when the existence of the casual link
between increased imports of the product concerned and serious injury is demonstrated on the basisof objective evidence. On the other hand,
"[W]hen factors other than increased imports are causing injury to the domestic
industry at the same time, such injury shall not be attributed to increased imports".
In other words, "necessary to prevent or remedy serious injury" in Article 5.1 SA means "serious
injury" attributable to "increased imports" only.
113. Thus, according to Article 5.1 SA, the extent of the measure must be limited to the remedy
or prevention of the serious injury, which is demonstrated to be its cause. The imported productscannot bear the consequences of injuries, which cannot be attributed to them: this is not permittedunless a bona fide  prior negotiation under Article XXVIII  of the GATT 1994 is followed (which in
turn implies that an adequate compensation is offered).143
114. Finally, in accordance with point (e), the future adjustment of the domestic industry shall
also be considered.
                                                     
140 "Serious injury" shall be understood to mean a significant overall impairment in the position of a
domestic industry".
141 Not yet adopted
142 [original footnote ] As noted by the International Law Commission (ILC) – the original drafter of
Article 31 of the Vienna Convention – in its commentary to that provision:
"The Commission, by heading the article 'General Rule of Interpretation' in the singular and by underlining theconnection between paragraphs 1 and 2 and again between paragraph 3 and the two previous paragraphs,intended to indicate that the application of the means of interpretation in the article would be a singlecombined operation.  All the various elements, as they were present in any given case, would be thrown intothe crucible and their interaction would give the legally relevant interpretation.  Thus [Article 31] is entitled
'General rule of interpretation' in the singular, not 'General rules ' in the plural, because the Commission
desired to emphasise that the process of interpretation is a unity and that the provisions of the article form asingle, closely integrated rule" (Yearbook of the ILC, 1966, Vol. II, pp. 219-220).See also, Sinclair, I., The Vienna Convention on  the Law of Treaties , 2
nd Edition, Manchester University Press,
1984, p. 116:"Every text, however clear on its face, requires to be scrutinised in its context and in the light of the object and
purpose which it is designed to serve. The conclusion which may be reached after such a scrutiny is, in most
instances, that the clear meaning which originally presente d itself is the correct one, but this should not be used
to disguise the fact that what is involved is a process of interpretation".
143 Panel report on NewsprintWT/DS166/R
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115. Consequently, as the above mentioned panel in Korea - Dairy  indicated, the investigating
authority must demonstrate that it has "considered all relevant information and explained [its]
decision that the measure chosen was no more restrictive than necessary to prevent or remedy
serious injury ... and to facilitate the industry’s adjustment."
The requirement to justify that the measure chosen is applied only to the extent necessary
applies to all elements of the measure: product coverage, form, duration, and level.144
116. Moreover and in any case, the safeguard measure can only be justified if it remedies orprevents the serious injury which was objectively demonstrated as having been the effect of the
increased imports and that could not be attributed to other factors other than increased imports.
5.1.2 Application to the present dispute: the form and the extent of the US WGS.
117. The European Communities submits that the United States has failed to provide sufficient
justification for the form of the measure.
118. The ITC Report acknowledges that of the three possible import relief measures – tariffs,
tariff-rate quotas, and quotas – a tariff is the least trade distortive.145
Since the first sentence of paragraph 1 of Article 5, as interpreted by the Korea-Dairy  panel
report, requires the use of the least trade restrictive import measure, a tariff should be used unless, as
provided by the third sentence of paragraph 1, a tariff would not be suitable to remedy the serious
injury and facilitate adjustment.
119. The explanation provided by ITC Report for choosing quantitative restrictions is less than
adequate.146
120. The first factor considered in rejecting a tariff, as an appropriate relief measure, was the co-
product nature of the industry. The ITC concluded that since demand for wheat starch has an effect
on the production and price of wheat gluten, it would be impossible to calculate an appropriate tarifflevel that would limit imports of wheat gluten if global wheat starch demand were to rise, leading to
increased supplies of wheat gluten available for export.
However, this relationship between wheat starch and wheat gluten, when raised by the EC
industry during the investigation as a causal factor for injury, was rejected by the ITC.
147 The ITC
Report is thus based on an inconsistent analysis of the underlying facts.
121. The US cannot have it both ways: either it considers (as it should) the co-product nature of
the industry when determining the "serious injury" and the causal link with the imported products.
However, in this case, as the EC has explained above, the US WGS would no longer be justified.
122. Or, the US (erroneously) does not take into account the co-product nature of the industry. In
this case, however, that element cannot justify later the choice of the form of the safeguard measure
in order to remedy a serious injury allegedly concerned only with the imported products. In other
words, the imported products cannot be made to bear the consequences of injuries that the applying
Member does not consider the cause of the serious injury.
                                                     
144See Korea - Dairy , para. 7.100.
145ITC report at I-26.
146 ITC report at I-26-27.
147ITC Report at I-16 - 17.WT/DS166/R
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123. Moreover, the US offers no evidence to indicate that wheat starch demand outside the US is
expected to rise. This is again a petitio principii . The conclusion that a tariff would be ineffective as
a relief measure because of the co-product nature of the industry is thus based on unsupported
speculation about what could happen rather than a reasoned analysis supported by evidence.
124. The second factor considered in rejecting a tariff is the alleged price underselling of EC
wheat gluten in the US market, the evidence for which has already been shown inadequate.148
Again, the ITC report offers no evidence to support its allegation that prices for wheat starch in theEC market allow for cross-subsidisation of wheat gluten in the US market.
This unsupported allegation is cited as evidence, along with capacity expansion in the EC,
that "even a 50 per cent ad valorem  increase in tariffs (...) would be inadequate".
149
Moreover, the report fails to indicate, in the context of a necessarily co-product  industry
such as the wheat gluten/wheat starch industry, what would be wrong if companies exploited their
wheat gluten/wheat starch combined production in order to maximise their profits. In fact, given the
identical nature of the co-product wheat gluten/wheat starch industry in the US and in the rest of the
world, including the EC, the ITC report fails to indicate why the US industry itself does not exploit
that combined production.
The ITC asserts its belief that "it is possible that EC exporters would choose to absorb any
tariff increase permitted under current law" .150  Beliefs and unsupported allegations can not satisfy
the requirement to provide a reasoned explanation of how the ITC reached its conclusion that a tariff
would not offer adequate protection. The Panel is invited to consider the fact that, if the US position
as expressed by the ITC were retained, tariff measures could always be avoided (and thus quotas
always be imposed) by simply "guessing" that the exporters could "absorb" the additional costs
deriving from the increased tariff. This outcome w ould however be contrary to text and the spirit of
Article 5.1 as interpreted by the " Korea-Dairy " panel.
125. The third factor cited is that "a high tariff would be inequitable in that it is likely to further
drive [other foreign] suppliers from the US market". This explanation for rejecting a tariff is very
troubling.
The ITC clearly sees its role as protecting the market share of other importers against the
EC. This is blatantly inconsistent with Article I of the GATT 1994 and Article 2.2 of the SA. The
purpose of a safeguard action is solely to protect a domestic  industry from injury. A safeguard
measure has to be applied to all imports irrespective of source. Article 5.2(b) establishes the strictconditions under which a country may be discriminated against in the application of a quantitative
restriction.
However, that provision only comes into play once a decision to impose a quantitative
restriction has been made in full compliance with Article 5.1. Nothing in Article 5.1 permits aMember to consider, in selecting the appropriate remedy, the extent to which the remedy permits
discrimination among Members or, worse, permits that Member to establish its own agenda with
respect to its "preferred" importers as compared to "less preferred" importers. The ITC Report
provides no reasoned explanation to demonstrate that it is necessary to discriminate against imports
from the European Communities in order to prevent or remedy serious injury to the US industry.
                                                     
148 Section 4.4 above.
149 ITC-Report at I-26.
150 ITC report at I-26.WT/DS166/R
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The EC will examine this issue further in the context of the examination of the violation by
the US WGS of Article I of the GATT 1994
126. Finally, assuming arguendo  that the US WGS is at all justified, quod non , the United States
has in any case failed to examine a fundamental element under Article 5.1, i.e. the fact that thesafeguard measure must be applied "only to the extent  necessary to remedy the serious injury" for
which a causal link could be established with the increased imports of wheat gluten.
127. While reading the ITC report, the Panel will immediately notice that the ITC
151 refers itself
to the fact that it "reviewed carefully the alterna tive causes of injury suggested by the parties and
other possible causes". This review prompted the ITC into affirming that "[W]hile there is evidence
that wheat gluten production decisions are affected by market conditions in the wheat starch market,
we conclude that changes in the co-product markets were not a more  important cause of serious
injury than increased imports" (emphasis added). The ITC added further on that "[W]hile there is
evidence that Midwest reduced its wheat gluten produc tion in 1995 for reasons related at least in part
to conditions in the alcohol market, Midwest's action explains, at most, only part of the problem
faced by one producer" (emphasis added). The ITC insisted then on the fact that "(…) neither
domestic competition nor increased domestic capacity was a more important  cause of serious injury
than increased imports" (emphasis added).
128. It appears evident from the above that the US  authorities are instructed by their internal
legislation to follow a notion of preponderance when determining the causal link for the applicationof a safeguard measure: the "more important" cause of injury thus determines their decision. The EC
has already indicated above the ITC report's deficiencies in this respect. In any case, whatever the
WTO-compatibility as such might be of sections 201 and following of the US Trade Act of 1974
(which is not under the scrutiny of this Panel), the application of the notion of preponderance in thedetermination of the causal link (under Article 4.2 SA) cannot be used at all to assess necessity under
Article 5.1: preponderance is in fact not equal to (rather, it contradicts) the rule of proportionality
required under Article 5.1 of the SA.
129. The form and the extent of the US WGS are thus clearly in breach of Article 5.1, 1st
sentence, of the SA.
                                                     
151 ITC report at I-16 to I-18.WT/DS166/R
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5.2 Article 5, paragraph 1, 2nd sentence of the SA
130. According to Article 5, paragraph 1, 2nd sentence of the SA
"If a quantitative restriction is used, such a measure shall not reduce the quantity of
imports below the level of a recent period which shall be the average of imports in
the last three representative years for which statistics are available, unless clear
justification is given that a different level is necessary to prevent or remedy serious
injury".
131. This provision is the application of the proportionality principle examined above to the
specific case of a quantitative restriction. As the ITC itself acknowledged in its report, a quantitative
restriction is the most extreme and restrictive measure that a Member could take.152 It is the most
trade-disruptive measure of all possible measures. It is the least likely to develop trade relations
between Members, as the reading of Article XI of GATT 1994 confirms. Thus, the proportionality
rule in article 5.1, 1st sentence, needs to be read in an even more rigorous way when referred to the
hypothesis covered by the 2nd sentence, i.e. the quantitative restrictions.
132. The US authorities have disregarded all obligations flowing from this provision.133. The second sentence of Article 5.1 states that a "clear justification" is necessary to use a
period other than the previous three years as the basis for establishing a quota. The provision
requires much more than a simple allegation: the or dinary meaning of the term "clear" justification is
providing a reason that is more evident, straightforward, indisputable than a simple obiter dictum  or
a vague reference to economic events.
134. In the case of the US WGS, the ITC has referred to an increase in imports153 as sole
justification for using a representative period different from the one based on the last three years forwhich statistics were available. This justification is not only "unclear", it is absurd since a safeguard
measure can only  be applied if imports have increased.
As a matter of logic, if an increase in imports were a "clear" justification for using a
representative period other than the "last three representative years for which statistics are available",this situation would always apply, rendering incomprehensible the provision as it stands. If the US
were correct, the WTO Contracting Parties would have drafted the text as follows: "the three mostrecent years prior to  the increase in imports ". However, the term "last three representative years for
which statistics are available" is not qualified by the words "prior to the increase in imports" in
Article 5.1.
Moreover, the EC recalls that the Panel report on "EC - Bananas - Recourse to Article 21.5
by Ecuador "
154 stated that
"If data from a period are out of date or imports distorted because the relevant
market is restricted, then using that period as a representative period cannot achieve
the aim of the chapeau.  Thus, under GATT practice it is necessary that the
"previous representative period" for purposes of Article XIII:2(d) be the most recent
period not distorted by restrictions."
                                                     
152 ITC report at I-26
153 ITC report at I-28
154 Report by the Panel on European Communities – Regime for the Importation, Sale and
Distribution of Bananas – Recourse to Article 21.5 by Ecuador , WT/DS27/RW/ECU, 12 April 1999, at
paragraph 6.39. That Panel referred expressly to the previous panel reports on " EEC - Apples from Chile " and
"Japan - Agricultural Products " that decided along the same lines.WT/DS166/R
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Of course, there was no restriction or distortion in imports of wheat gluten from the EC, which
entered entirely legitimately into the US customs territory in application of entirely valid tariff
concessions made by the US as a result of the Uruguay Round.
135. It is as much a matter of ordinary meaning as a matter of logic to conclude that a Member
applying a safeguard measure is required by Article 5.1, 2nd sentence, to demonstrate something
more than an increase in imports in order to establish a "clear justification" for using a different
representative period.
136. This "something more" is clearly lacking in the case of the ITC report. The ITC report states
that "in the absence of anomalous circumstances that render any of [the most recent three] years
unrepresentative of imports, any quantitative restriction should take into account average import
levels during the most recent three years".155  The report then concludes that a quantitative restriction
based on the average of the most recent three years would not remedy the serious injury and
therefore a different quantity is clearly justified. In recommending a quota based on 1993-95 importlevels, the entirety of the reasoning provided is  the following: "[O]ur economic analysis indicates
that a quota that restores imports approximately to the relative market shares prevailing in 1993-95
would allow the domestic industry to return to reasonable operating profits".
156
137. This statement does not demonstrate how the ITC arrived at its conclusion that this level of
imports would allow the industry to return to profitability, it merely restates its conclusion that this isthe appropriate level. It is a self-contained circ ular reasoning that does not provide any meaningful
criterion that could assure the reader that the US  indeed had a "clear" justification allowing it to
depart from the rule.
138. Consequently, the United States has failed to satisfy its obligation to provide a reasoned
explanation of its conclusion that a "clear justification" exists for using a representative period otherthan the three most recent years.
157
5.3 Article 5, paragraph 1, 3rd sentence
139. In the light of the above, it becomes inevitable also to conclude that the US has not chosen
"the most suitable" measure "for the achievement of [the objectives in Article 5.1]". Thus, the US
has violated also Article 5.1, 3rd sentence SA.
5.4 Article 5, paragraph 2(a)
140. According to Article 5.2 (a) of the SA
"In cases in which a quota is allocated among supplying countries, the Member
applying the restrictions may seek agreement with respect to the allocation of shares
in the quota with all other members having a substantial interest in supplying theproduct concerned. In cases in which this method is not reasonably practicable, the
member concerned shall allot to Members having a substantial interest in supplying
the product shares based upon the proportions, supplied by such members during a
previous representative period, of the total quantity or value of imports of the
                                                     
155Ibidem .
156ITC report at I-28.
157The Presidential Proclamation implementing the safeguard measure (Fed. Reg. Vol. 63, No. 106,
pp. 30363-30364, 3 June 1998) and the Memorandum in support of the Proclamation (Fed. Reg. Vol. 63, No.106, pp. 30357-30360, 3 June 1998) provide no further explanation of the US reasoning for establishing aquota based on 1993-95 imports.WT/DS166/R
Page 102
products, due account being taken of any special factors which may have affected or
may be affecting the trade in the product".
5.4.1 No prior consultation and no justification
141. The provision above is taken word for word from the text of Article XIII.2 (d) of GATT
1994 which deals with the "Non discriminatory Administration of Quantitative Restrictions". The
Panel report on EC- Bananas  stated158 the following:
The text of Article XIII:2(d) provides that where the first "method", i.e., agreement,
is not reasonably practicable, then an allocation must be made.  Thus, in the absenceof agreements with all Members having a substantial interest in supplying the
product, the Member applying the restriction must allocate shares in accordance
with the rules of Article XIII:2(d), second sentence.
142. The US opened consultations with none of the Members having a substantial interest in
supplying the product concerned with a view to achieving an agreed allocation.
159
143. Moreover, no explanation is given as to why that method was not "reasonablypracticable".
160
5.4.2 The US WGS unfairly reallocates market share between WTO Members
144. The remedy applied by the United States unfairly reallocates market share from one WTO
Member to another. Paragraph 2(a) of Article 5 requires a quantitative restriction to be allocated
among substantial suppliers on the basis of proportional shares in a previous representative period
for which reliable statistics are available. In this case, the previous representative period was 1995-
97.
145. During this period, the average import shares were as follows:
Australia 38%
Canada 10%
EC 47%Others  5%
146. Despite having a 47 per cent share of the market in the previous representative period, the
EC was allocated only a 43 per cent share of the quota. Australia, on the other hand, was allocated a
share of 49 per cent, compared to its share in the previous representative period of 38 per cent.
147. The US has thus clearly and repeatedly breached Article 5.2 (a) of the SA.
5.5 Article 5, paragraph 2(b)
148. According to article 5, paragraph 2 (b)
"A Member may depart from the provisions in subparagraph (a) provided that
consultations under paragraph 3 of Article 12 are conducted under the auspices of
the Committee on Safeguards provided for in paragraph 1 of Article 13 and that
clear demonstration is provided to the Committee that ( i) imports from certain
                                                     
158 Paragraph 7.72
159 ITC report at I-29
160 IbidemWT/DS166/R
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Members have increased in disproportionate percentage in relation to the total
increase of imports of the product concerned in the representative period, ( ii) the
reasons for the departure from the provision in subparagraph (a) are justified and
(iii) the conditions of such departure are equitable to all suppliers of the product
concerned. The duration of such measure shall not be extended beyond the initialperiod under paragraph 1 of Article 7 (…)".
149. The United States have failed to meet the requirements of paragraph 2(b).
150. Firstly, the obligatory pre-condition set out in the incipit  to Article 5.2 (b) ("provided that
consultations under paragraph 3 of article 12 are conducted under the auspices of the Committee on
Safeguards") was not fulfilled.
151. To satisfy the requirements of paragraph 2(b), consultations should have been held with the
EC, at the initiative of the applying Member, i.e. the US, during which the specific details of the
allocation of the tariff-rate quota were made known to the EC.
The United States should have also presen ted its justifications for departing from the
provisions of paragraph 2(a) and provided a satisfactory explanation of how the allocation of the
tariff-rate quota is equitable to all suppliers. A mere notification of the safeguard action to be taken
does not satisfy the consultation requirement. Article 12.3, which is referenced in paragraph 2 (b) of
Article 5, specifically states that the consulta tions should provide for an exchange of views.
A mere notification is not the same as an exchange of views at the initiative of the applying
Member.
152. Secondly, paragraph 2(b) of Article 5 permits a Member to deviate from the formula in
paragraph 2 (a) only if three conditions, taken together, are met among which ( iii) if the conditions
of the departure are equitable to all suppliers of the product concerned.
153. Because of the exceptional nature of this provision, Members should be held to the strictest
standard when applying this provision.
A safeguard action requires no finding of wrongdoing on the part of the exporting countries.
In fact, exporting Members are penalised for engaging in precisely the activity that the rules of the
WTO are designed to facilitate. The equity argument for allowing a Member taking a safeguard
action to discriminate against efficient suppliers of the product concerned is not sustainable. In fact,
Article 5.2 (b) (iii) refers to conditions, which are "equitable to all suppliers of the product
concerned" (thus including the most efficient) and not just to "more equitable conditions".
154. A superficial approach to this issue might suggest that a Member whose exports of the
product have increased relative to other suppliers could be said to have contributed more to the
injury.
155. However, a more careful regard of the issue excludes such an apparently "obvious" (in fact,
erroneous) reading. The exporting Member has exercised its right to increase imports in full  legality,
i.e. under non-discriminatory, valid and applicable multilateral tariff concessions. If this perspectiveis considered, it becomes apparent that upon the application of the special provision under
Article 5.2(b), the more efficient Member does not suffer less or like any other exporter, it suffers
doubly. Not only is the efficient exporting Member punished by the establishment of the safeguardmeasure for being more competitive than the domestic industry, it is also punished for being more
efficient than other suppliers.WT/DS166/R
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156. In order to avoid unjustifiable violation of the MFN clause and in line with the second and
third conditions in paragraph 2 (b), this reallocation should only be allowed where the applying
Member has "clearly" demonstrated in the investigation report that it has a direct bearing with the
benefits for the domestic industry.
157. Otherwise, using a safeguard action to reallocate import market shares is both unjustifiable
and inequitable and thus in violation of, inter alia, Article 5 SA. In fact, it would be extraordinary to
provide the importing Member, in the context of an emergency action to protect its own domestic
industry, with the unrelated power to organise the trade relations between other Members.
158. In the current case, the United States has provided no justification for reallocating market
shares from the EC suppliers to the Australian suppliers, nor has there been any attempt to
demonstrate how such a reallocation of market share is equitable to all suppliers of the product
concerned. The reallocation is patently inequitable because it discriminates against the EC in favour
of Australia.
The method for allocation of the tariff-rate quota is all the more suspect because one of the
four companies comprising the US industry is owned by the same Australian company that owns
two of the Australian wheat gluten producers who export to the United States.161  While an important
US producer has a clear interest in this reallocation, this interest is not protected, and cannot be
protected, by making use (in fact, ab use) of Article XIX GATT or the SA.
159. It is thus more than justified to assert that the US authorities discriminated in favour of an
Australian wheat gluten producer (in its capacity of owner of a US producer) when favouring the
wheat gluten sources where that company has significant economic interests. This, of course, has
nothing to do with the protection of the domestic industry from serious injury caused by increased
imports.
160. The United States has failed to provide a justification for reallocating market share other
than the increase in imports. Nor is any evidence provided that the allocation is equitable to all
suppliers.162  Absent a clear demonstration of benefit to the domestic wheat gluten industry from the
reallocation of market share from the EC to Austra lia, the panel should find that the United States
has failed to meet the burden imposed by Article 5.2 (b) for deviating from the normal process of
allocating tariff-rate quotas.
6. THE US WGS IS IN BREACH OF ARTICLES 8 AND 12 OF THE SA
161. Article 12 of the SA provides mainly for proced ural rules to be followed during the process
of investigation and application of a safeguard measure. Moreover, it obliges the Member concerned
to a transparent conduct vis-à-vis not only the Members whose exports are targeted by the on-going
procedure but also the entire Membership of the WTO. Finally, by imposing a procedure in order to
consult the targeted Members, the combination of Articles 12 and 8 provide for the legal frameworkfor re-establishing the balance of concessions that is breached by the emergency action put in place
through the safeguard measure.
162. As is apparent, these rules are central in the pursuance of the objectives set out in the
Preambles to the SA, in particular "to re-establish multilateral control over safeguards", "eliminate
measures that escape such control" and "enhance rather than limit competition in international
markets".
                                                     
161ITC report at II-8.
162ITC report at I-29.WT/DS166/R
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6.1 Immediate notification and prior consultation
163. According to Article 12.1
"A Member shall immediately notify the Committee on safeguards upon (…)
(a) initiating an investigatory process relating to serious injury (…)
(b) making a finding of serious injury (…) and
(c) taking a decision to apply or extend a safeguard measure". (emphasis added)
164. According to Article 12.2,
"(…) the Member proposing to apply a safeguard measure shall provide (…) all
pertinent information, which shall includ e evidence of serious injury or threat
thereof caused by increased imports, precise description of the product involved andthe proposed measure, proposed date of introduction, expected duration and
timetable for progressive liberalisation. (…) The Council for Trade in Goods or theCommittee on Safeguards may request such additional information as they may
consider necessary from the Member proposing to apply (…) the measure"
(emphasis added).
165. Paragraph 3 of Article 12, which incorporates Article 8.1 by reference, provides further
clarification that the measure should be notified immediately when it is proposed, not after it hasbeen put into place.
166. The United States failed to notify each and every step in Article 12.1 SA in a timely manner.
It initiated the investigatory process on 1 October 1997, but notified such action to the Committee on
Safeguards only on 21 October 1997.
163  It then made findings of serious injury on 15 January 1998,
but notified the WTO only on 11 February 1998.164  Finally, it implemented the measure on
1 June 1998, but did not notify the Committee on Safeguards until 4 June 1998.165
167. However, according to the plain text and meaning of Article 12 of the SA, all these
procedural steps, findings and decision had to have been made at a date that would have allowed theCommittee on Safeguards and, possibly, the Council for Trade in Goods to request additional
information and hold a meaningful discussion in a multilateral forum.
168. In particular, the US notifications of the findings of serious injury and of the decision were
effected after the findings had been made and the measure was enacted. The plain language ofparagraph 2 makes clear that the proposed  measure has to be notified. Paragraph 2 refers to "the
Member proposing to apply or extend a safeguard measure," the "proposed  measure," and the
"proposed date of introduction." Once a measure has been implemented, it is no longer a proposed
measure, but an actual measure and the objective of allowing for an opportunity to request additional
information as contemplated in the last sentence of paragraph 2 has been thwarted.
169. Moreover, the panel in Korea - Dairy  supported these views:
                                                     
163 G/SG/N/8/USA/2
164 G/SG/N/8/USA/2
165G/SG/N/10/USA/2 and G/SG/N/11/USA/2.WT/DS166/R
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"Article 12.3 requires that the notifying Member provide an adequate opportunity
for ‘prior consultations’ with interested Me mbers, that is, consultations prior to the
actual application of the measure".166
It then recognised with respect to a measure notified after its entry into force:
" [T]his notification can only be viewed as a notification of the final decision taken
since it was notified and circulated only after the final decision was put into force;
this notification cannot be taken into account for the purpose of assessing whether
Korea complied with its obligation to notify its proposed measure since this
notification took place after the consultations, and therefore cannot remedy the flaws
in the previous notification"167.(emphasis added)
170. The US thus clearly violated Article 12 SA by systematically not notifying timely the
Committee on Safeguards under that provision.
6.2 Inadequate consultations
171. A Member proposing to a apply a safeguard measure is required by Article 8.1 to
"endeavour to maintain a substantially equivalent level of concessions".
172. This provision is reinforced by Article 12, and in particular paragraph 3 that provides that a
Member proposing a safeguard measure
"shall provide" adequate opportunity for "reaching an understanding on ways to
achieve the objective set out in paragraph 1 of Article 8."
173. The obligation on Members to engage in meaningful consultations and negotiations prior to
altering the balance of negotiated concessions, even temporarily, is fundamental to the GATT.168
For example, Article XXVIII.3 explicitly provides for such a prior procedure. This fundamental rule
is, if possible, even more central to the system of the WTO: the rejection by the WTO Members of
any sort of unilateralism in favour of multilateral, organised, non-discriminatory and transparent
rules rests at the source of this consistent approach.
174. Consequently, when, as in the case of safeguard measures taken consistently with the
provisions of the SA, a Member is given the right to unilaterally alter the balance of concessions, the
burden on the Member to engage in transparent, timely and meaningful consultations and
negotiations is not reduced, it is indeed heightened. Meaningful consultations and negotiations are a
necessary counterbalance to unilateral action for affected Members.
175. The question may arise as to how a substantially equivalent level of concessions and other
obligations can be maintained given conditions on the right to immediately withdraw concessions in
the SA. This is not a question the panel needs to answer. It is precisely the question to be addressed
in consultations and negotiations between the Members. However, it is the duty of this Panel toclarify and apply the existing provisions under the covered agreements
169, including Articles 12 and
8 of the SA. A rigorous interpretation of these rules must be made if a meaningful balance of rights
                                                     
166Korea - Dairy , para. 7.119.
167 Korea - Dairy , footnote 481
168 Panel on Newsprint
169 Article 3.2 of the DSUWT/DS166/R
Page 107
and obligations under the WTO, in particular the GATT Articles I, II, XI, XIII and XXVIII and the
SA, is maintained.
176. The process of altering the balance of negotiated concessions is well defined in
Article XXVIII of the GATT. The provisions of Article 8 of the Agreement mirror those ofArticle XXVIII. This process envisions the withdrawal of substantially equivalent concessions as the
last step in the process.
177. By imposing certain specific conditions on the right of an affected Member to withdraw
substantially equivalent concessions, paragraph 3 of Article 8 is addressing only the last step of theprocess. It does not relieve Members from the obligation to make every effort to maintain a
substantially equivalent level of concessions when imposing a measure under the Safeguards
Agreement. An affected Member would be fully within its rights to request temporary concessions
on other products to offset the concessions impaired by the safeguard measure.
178. The United States, by failing to offer a meaningful opportunity, indeed any opportunity at
all, for consultations and negotiations, has denied  the EC its rights under the SA and therefore
violated Articles 8 and 12.3 SA.
7. THE US WGS IS IN BREACH OF ARTICLE I OF GATT 1994
179. Article I of the GATT provides that
"with respect to all rules and formalities in connection with importation and
exportation any advantage, favour, privilege or immunity granted by any WTO
Member to any other country shall be accorded immediately to the like product
originating in all other WTO Members".
180. By applying the US WGS, the US is treating  the EC in a flagrantly discriminatory manner.
In the way it divides up the quota, it consciously grants an advantage to Australia, consisting of the
right to maintain exports to the US at virtually the same level as immediately previously. The EC
refers to the facts already discussed in the context of chapter 5 above. Australia’s exports increased
continuously in the last three years of the investigative period, by almost 21 per cent.
170  In other
words, if there really was an import surge causing serious injury, quod non , Australia contributed to
that substantially. In fact, the ITC did include Australian imports in all its findings on increased
imports, serious injury and causation. It appears from the ITC report that for instance in 1996, in
which according to the ITC there was such a sharp increase in the ratio of imports to consumption171,
Australian imports constituted practically the same share of US consumption as imports from theEC.
172
181. However, by taking average import shares in the period June 1993-June 1995 as a basis for
dividing up the quota, the US managed to allow Australia to maintain its exports at 1997 levels, their
highest level during the whole period of investigation173  Moreover, since the country quotas are
increased by 6 per cent each year, Australia could even start increasing its exports even further as
from the second year of the quota.
                                                     
170 ITC report at II-12.
171 ITC report at I-16.
172 ITC report at II-25, in the year ending June 1996, imports from Australia constituted 23.4 per cent
of US apparent consumption in terms of quantity and 21.7 per cent in terms of value, against respectively 26.5
per cent and 24.9 per cent for imports from the EC.
173 Australia exported 62.496 million pounds in the year ending Ju ne 1997 (ITC report at II-12). Its
quota in the first crop year thereafter was 62.425 million pounds, so practically the same.WT/DS166/R
Page 108
182. In contrast, the way the US calculated the country quotas ensured that the EC’s exports were
reduced by 16,816 t, a 41 per cent reduction.  The EC reminds the Panel that US producer Manildra
is the subsidiary company of an Australian producer of wheat gluten, which exports to the US. Both
the discriminatory effect and intent of the US WGS are therefore clear. The US WGS constitutes a
flagrant violation of Article I of the GATT.
8. CONCLUSIONS
183. In light of the above, the EC respectfully requ ests the Panel to find that the US by imposing
the US WGS has breached Articles I and XIX of the GATT 1994 and Articles 2, 4, 5, 8 and 12 of theAgreement on Safeguards.WT/DS166/R
Page 109
LIST OF EC EXHIBITS
Exhibit EC 1: ITC Report March 1998
Exhibit EC 2: Presidential Proclamation 30 May 1998
Exhibit EC 3: Image of wheat gluten
Exhibit EC 4: Wheat gluten/starch production processExhibit EC 5: Wheat kernel
Exhibit EC 6: Wheat gluten in bakery
Exhibit EC 7: Other wheat gluten applications
Exhibit EC 8: Wheat process – effluent treatment
Exhibit EC 9: US schedule of concessionsExhibit EC 10: Analysis of factors affecting US price of wheat gluten
Exhibit EC 11: US wheat starch prices
Exhibit EC 12: Statistics on wheat prices
Exhibit EC 13: Statistics on corn prices
Exhibit EC 14: US ethanol productionExhibit EC 15: Statistics on US wheat imports from CanadaWT/DS166/R
Page 110
ATTACHMENT 1-2
ORAL STATEMENT OF THE EUROPEAN COMMUNITY
(20 December 1999)
Mr. Chairman, distinguished Members of the Panel,
1. This dispute settlement procedure is about drawing a safe and sound line between:
- what is a genuine emergency action by a Member in case of demonstrated serious
injury attributable to increased imports and
- what are nothing else than disguised attempts to unilaterally withdraw concessions
granted during the multilateral tariff negotiations without undertaking an
Article XXVIII GATT procedure and without providing adequate compensation.
The US safeguard measure under scrutiny in this di spute settlement procedure belongs, in our view, to
this second category.
Exceptional nature of the safeguard instrument
2. Before entering into the detail of this case, it is important to recall the exceptional nature of
the safeguard instrument.
The fact that imports may increase is the expected effect of the entirely legitimate use of a
right provided for under the covered agreements, and in particular Articles I and II of the GATT. The
market access rights are negotiated during the multilateral tariff negotiations and constitute the core of
the multilateral trading system.
As the Appellate Body has indicated in its very recent report on Korea - Dairy
(paragraph 87),
"We should not lose sight of the fact that taking safeguard action results in
restrictions on imports arising from "fair" trade.  The application of a safeguard
measure does not depend upon "unfair" trade actions, as is the case with anti-dumping
or countervailing measures".
3. Thus, the possibility that is provided to Members to provide relief to their domestic industry
in case of unforeseen developments provoking a proven urgency and economic distress to domesticindustry must be maintained in balance with the need to preserve and protect the equivalent level of
negotiated concessions that lies at the heart of the multilateral trading system (see in the same line ofreasoning the AB report on Argentina - Footwear  at paragraph 93).
4. It is in this specific framework that the Panel on Argentina-Footwear
1 has correctly stated that
" in order to give this object and purpose [of the Safeguards Agreement] meaning, a strictinterpretation and implementation of the disciplines provided for in the Safeguard Agreement is
needed.  Otherwise, the reinforcement of discipli nes, re-establishment of multilateral control and
elimination of so-called "grey-area" measures could not be achieved (…)".
                                                     
1 Paragraph 8.88WT/DS166/R
Page 111
Standard of review and the role of this Panel
5. The role of the Panel when examining the compatibility of safeguard measures with the
covered agreements is to determine whether the Member’s authorities fully and objectively
considered the evidence before it, including an y evidence that detracts from an affirmative
determination of increased imports, serious injury or causation2. The Panel should also verify the
adequacy of the Member’s reasoning by reviewing whether the findings made and conclusions
reached are consistent with the evidence.3
6. As the Appellate Body confirmed in its very recent report on Argentina - Footwear  (at
paragraph 118), Article 11 of the DSU contains the guiding principles for Panels when pursuing suchan examination in substance. This provision clarifies that
"(…) a panel should make an objective assessment of the matter before it, including
an objective assessment of the facts of the case and the applicability of and
conformity with the relevant covered agreements (…)".
7. This is the main feature that distinguishes the exercise of a discretionary power subject to
multilateral review from arbitrariness. It sets the dividing line between a thorough examination by a
panel in accordance with Article 11 of the DSU and a travesty of justice.
8. In this context, it is worth noting that th e same Appellate Body report (see paragraph 117) has
clearly rejected any parallelism in the standard of review between this case and some obsolete
previous cases under the Tokyo Round Agreements, like the US - Salmon  case. However, it is exactly
on this latter case that the US arguments on the standard of review are based (see paragraph 61 of the
US first written submission).
9. The EC submits that the primary burden of proof that the conditions set out in Article XIX
GATT and the SA have been fulfilled rests of course on the Member adopting the safeguard measure,
since it is that Member that is bound to show in deta il in its report that it has followed the conditions
required for applying the exceptional trade defence instrument under Article XIX GATT and the SA.
10. The EC on its side has demonstrated prima facie  that an objective assessment of the facts
shows
- that the US administration failed to consider all the evidence, as it should,  and
- that the conclusions drawn from the partial evidence that was considered were either
inadequate or incorrect because they were based on a deficient, or biased orsubjective presentation of the facts.
Moreover, the EC has also demonstrated prima facie  that the measure taken was disproportionate and
was adopted in breach of substantive and procedural rules under the SA.
11. The United States attempts to confuse the important issue of the standard of review of this
Panel by advancing an over-restrictive interpretation of your powers and of your terms of reference.
For example, in paragraph 59 of its first written submission, the US would make you believe that
verifying the adequacy of the USITC reasoning by assessing whether its findings are consistent with
the evidence provided to the authority during the investigation or publicly available and entirely
accessible to it, as the EC suggests, would engage you in a de novo  review of the evidence.
                                                     
2 Korea - Dairy , paragraph 7.30 .
3 Argentina - Footwear , paragraph 8.124.WT/DS166/R
Page 112
12. The EC firmly disagrees with this approach.
In our view, a de novo  review can be defined as re-assessing the facts and drawing
conclusions therefrom as if the Panel would substitute itself to the competent
authorities. This would happen if this Panel engaged itself in re-doing the Member's
procedure, thus getting to "its" decision on the appropriateness to adopt "that" or"another" safeguard measure. This is certainly not what the EC asks you to do.
13. What the EC requests this Panel to do is to examine whether the US authorities, in their
investigation report and in the legal act applying the safeguard measure, have complied with the rules
under Article XIX GATT and the SA. As the Appellate Body has indicated in its Argentina -
Footwear  report (paragraph 95)
"[A]s such, safeguard measures may be applied only when [compliance with] all the
provisions of the Agreement on Safeguards   and Article XIX of the GATT 1994 are
clearly demonstrated."
14. In order to achieve that result, the Panel is  thus required to examine the following issues
- Have the US authorities demonstrated, as they should, that the conditions under
Article 2 SA and Article XIX GATT 1994 have been fulfilled? The EC submits that
they have not.
- Have the US authorities considered, as they should, "all pertinent issues of fact and
law" (Article 3.1 SA) including "all relevant factors of an objective  and quantifiable
nature having a bearing on the situation of that industry" (Article 4.2 (a) SA)? The EC
submits that they have not.
- Have the US authorities presented, as they should, their findings, conclusions and
determinations in a "reasoned" (i.e. rational, non contradictory and clear) way
(Article 3.1 DSU), based on "objective evidence" (i.e. based on criteria that are not
biased by subjective, political or unrelated aims) (Article 4.2 (b) SA)? The ECsubmits that they have not.
- Have the US authorities established, as they should, the "existence (i.e. a positive and
irrefutable evidence of its reality) of the causal link between increased imports of the
product concerned and serious injury" (Article  4.2 (b) SA)? The EC submits that they
have not.
- Have the US authorities applied the safeguard measure, as they should, "only to the
extent necessary" (i.e. proportionate or commensurate to) to prevent or remedy
serious injury and to facilitate adjustment (Article 5.1 SA)? Have the US authorities
provided "a clear justification" (i.e. a detailed objective and unbiased explanation)
when deciding to apply quantitative restrictions and when choosing a period different
from the last three representative years for which statistics are available? Moreover,
Have the US authorities fulfilled the other substantive and procedural obligations
under Article 5.2 of the SA and under Article I of GATT 1994? The EC submits thatthey have not.
- Have the US authorities complied with the procedural obligations under Articles 8
and 12 of the SA? The EC submits that they have not.WT/DS166/R
Page 113
15. For a full examination of the matter, the EC submits also that the Panel should not stop on the
surface of these issues by taking for granted the text of the investigation report, as the US would have
it. Rather, it must concentrate on the substance of the evidence that actually is  in the report or should
have been in the report since it was either considered during the investigation procedure or should
have been considered as pertinent evidence that was publicly available.
16. Let me provide you with a telling example. The US claims in paragraph 150 of its first
submission, "although wheat price data were submitted to the ITC, they were not presented on a
monthly basis". Implying that this Panel should not consider the effect of the wheat price on the US
market for this reason, is plainly absurd.
The US attempts to dismiss the increase in wheat prices as an unsubstantial allegation by the
EC when in fact the increase is indisputably docum ented by official US statistics  (Exhibit EC-12,
concerning statistics on wheat price which are regularly published since the 1950s, is an official
document of the US government (USDA)). Therefore,  as a matter of fact, these publicly available
statistics are very pertinent evidence that the ITC should have considered in its investigation but did
not.
17. To continue with another telling example, the Panel should not be satisfied by "a reasonable
explanation of the conclusions reached" (as the US insists in paragraph 117 of its first submission).
The "reasonable explanation" comes from the Member adopting the safeguard measure, i.e. the
interested Member. Therefore, the "reasonability" test can only be passed if the Panel, as neutral judge
of the case in a multilateral dispute settlement procedure, can form its own judgement on whether the
elements provided in the report or in the decision of the Member applying the safeguard measure canconvince it that what was decided is indeed reasonable.
18. The EC submits that without a full picture, only deference or superficiality is possible.
In order to illustrate this point, Mr. Chairman, allow me to make a final example, based on
common sense.
19. Let's imagine that today is a bright mid-summer day after a night of heavy thunderstorms.
Let's also imagine that looking from your window  you could see children playing wearing rubber
boots (to protect themselves from the humidity of the wet grass), that in the shadow the ground is
drenched and that some people walk around protecting themselves from the strong mid-summer sun
with an umbrella.
If a report was based on the evidence that the grass is wet and the ground is drenched,
children wear rubber boots and some people stroll around with their umbrellas, that report stating thatit is a rainy day could seem at first sight reasonable. But it would not be correct, since the objective,
unbiased, clear reality is that it is a sunny summer day. However, if you were to follow the over-
restrictive standard of review suggested by the US you should accept by deference to the report that it
is a rainy day and the EC would thus be prevented fr om showing that the report failed to consider the
reality, i.e. that it is a sunny day, and failed also to draw the necessary conclusions from that reality.
Well, Mr. Chairman, this outcome would be the opposite of what the WTO Members
negotiated and decided upon when they adopted the DSU and the SA.
20. As we have seen, the function of this Panel (under Article 11 of the DSU) is to make anobjective assessment of the matter before it. The US itself has supported recently the EC's present
views in another panel procedure:
"(…) nothing in the text of GATT or an y other part of the WTO Agreement supported
the notion that measures could be excluded from dispute settlement merely because aWT/DS166/R
Page 114
Member  made an argument  about the justification of a measure.  Quite the reverse:
(…) If a Member could prevent a panel from issuing rulings merely by making
arguments about its measures, then dispute settlement would grind to a halt".4
We could not agree more.
Mr. Chairman, distinguished Members of the Panel,
21. We will now present in some detail the major violations committed by the US when adopting
its safeguard measure on wheat gluten. It is not our intention to repeat each and every argument that
was already analysed in the EC's first written submission but it is appropriate to already respond to
some incorrect statements made by the US in its fi rst written submission. The EC is of course ready to
answer any question or clarify further any issue you may deem appropriate.
22. With your agreement, it is our intention to proceed now as follows: I will start with the
examination of the violation by the US of Article XIX of GATT 1994. Then, my colleague
Mr. Van Vliet will address the issues related to the findings and determinations of the US authorities
concerning increased imports, serious injury, the causal link and the violation of the MFN principle. I
will conclude the EC's statement by addressing the EC's claims concerning the violation by the US of
Articles 5, 12 and 8 of the SA.
Violation of Article XIX of GATT 1994:  "Unforeseen developments"
23. According to the Appellate Body report on Korea - Dairy at paragraph 77,
" (…) any safeguard measure imposed after the entry into force of the  WTO
Agreement  must comply with the provisions of  both the  Agreement on Safeguards
and Article XIX of the GATT 1994."
The Appellate Body has therefore definitively rejected the interpretation suggested by the US in its
defence. It has also stated that
"(…) we believe that the clause in Article XIX:1(a) – "as a result of unforeseen
developments and of the effect of the obligations incurred by a Member under this
Agreement, including tariff concessions …" – must have meaning. (paragraph 82)".
(…) [I]t seems to us that the ordinary meaning of the phrase "as a result of unforeseen
developments" requires that the developments which led to a product being imported
in such increased quantities and under such conditions as to cause or threaten to cause
serious injury to domestic producers must have been "unexpected" (paragraph 84).
(…) "
"Although we do not view the first clause in Article XIX:1(a) as establishing
independent conditions  for the application of a safeguard measure, additional to the
conditions  set forth in the second clause of that paragraph, we do believe that the first
clause describes certain circumstances  which must be demonstrated as a matter of
fact in order for a safeguard measure to be applied consistently with the provisions of
Article XIX of the GATT 1994" (paragraph 85).
24. As the Appellate Body has recognised, the very nature of a safeguard measure is to tackle an
urgent situation, which was not expected. Thus , a WTO Member wishing to impose a safeguard
                                                     
4 Panel report on Turkey - Textiles , at paragraph 7.117WT/DS166/R
Page 115
measure must prove that an "unf oreseen development" was the cause, or at least the determining
cause, of the increased imports.
As was indicated in the EC's first written submission, the United States has breached
Article XIX.1 (a). The US authorities have not "demonstrated" as a matter of fact that any unexpected
development had occurred which led to increased quantities and under such conditions as to causeserious injury to domestic producers.
25. In addition, in the present case there are no unforeseen, i.e. unexpected, developments
described in the record of the investigation, which could have led to any increased imports causing
serious injury. Furthermore, there is no indication that such unforeseen circumstances were in fact
present at all. The EC reserves the right to come back  in more detail, if need be, on this issue in its
second written submission.
I will now pass the floor to Mr. Van Vliet.
26. Mr. Chairman, as a point of methodology for this presentation, you should be aware that
when reference is made to marketing years it means a twelve months period ending 30 June of theyear concerned.
Violation of Article 2 and 4 of the SA.  unverifiable data
27. The EC believes it appropriate to continue its presentation with the examination of a US
violation of a more general nature having a great impact on the entire procedure.
In the ITC report, in almost all cases where data, which are essential for determining whether
a safeguard measure can be taken, are discussed, the reader is confronted to typing symbols « *** »that mean that those data are omitted from the text.
28. Under Article 4.2 (c) of the SA, the US is obliged  to “publish” “a detailed analysis of the case
under investigation as well as a demonstration of the relevance of the factors concerned”.
Article 3.1 of the SA imposes moreover that "the competent authorities shall publish a report
setting forth their findings and reasoned conclusions reached on all pertinent issues of fact and law".
As the Appellate Body in its Argentina - Footwear  report has indicated, Article 4 of the SA is
violated when a report does not show that the competent authorities “had considered all the relevant
facts and adequately explained how the facts supported the determinations that were made.”
5
Article 3.2 of the SA certainly allows that information, which truly must be kept confidential,
is not included in the public version of the report of a safeguard investigation without permission bythe company concerned. However, the ITC report oversteps this provision by not even providing
aggregate data.
29. The EC submits that the US refusal to disclo se pertinent information even in an aggregate
form constitutes a very serious violation of the US WTO obligations for the following reasons:
- Transparency vis-à-vis the Member whose exports suffer from the implementation of
the safeguard measure is not ensured.
- Transparency vis-à-vis the Membership of the WTO in general is also not ensured.
                                                     
5 Paragraph 121.WT/DS166/R
Page 116
- The Panel is prevented from performing its task under Article 11 of the DSU, namely
to make an objective assessment of all facts relevant in this dispute.
- Finally, the procedural obligations under Article 3 and 4 of the SA are not respected.
30. The US has explicitly recognised in its first written submission that it has "misapplied" the
provisions of Articles 3 and 4 of the SA (see paragraph 158). As the Appellate Body has clarified in
its report on Korea- Dairy  (paragraph 98) when addressing a similar issue
"We agree with the Panel that this "clear justification" has to be given by a Member
applying a safeguard measure  at the time of the decision , in its recommendations or
determinations on the application of the safeguard measure " (original emphasis).
31. Contrary to this indication from the AB, the US aims at retro-actively «healing » its violation
of the relevant provisions of the SA by submitting, in Exhibit 10 to its submission, a revised version
of parts of the ITC report containing data which it  had earlier on withheld from the public version of
the ITC report.
32. In the light of this established interpretation, the Panel should reject this belated attempt.
Otherwise Articles 3 and 4 of the SA would become entirely useless. Their violation cannot be
retrospectively "healed".
33. The Panel should therefore find that the US itself admits that by removing certain information
from the public version of the ITC-report, it has failed to live up to its obligations under Articles 3 and
4 of the SA.
Violation of Article XIX GATT 1994 and 2 of the SA:  alleged underselling
34. According to Art. XIX GATT 1994 and 2 SA incr eased imports can justify the adoption of a
safeguard measure only if they take place “under such conditions as to cause or threaten to cause
serious injury” (emphasis supplied).
35. The only factor which the ITC mentions in this respect is that prices were allegedly driven
down during 1996 and 1997 by “relatively low-priced imports”.
36. The AB has confirmed the EC's position that the fact that a product is imported “under such
conditions” as to cause serious injury or threat thereof, is one of the conditions  whose presence must
objectively be demonstrated in order to be able to apply a safeguard measure6. An investigating
authority must look at the "conditions of compet ition" between imports and domestic products, one of
them being price7. The US authorities did not fulfil such obligation. The US admits that fact, by trying
to convince you that it is not necessary for you to examine this point.
37. Thus, the US cannot contest now that it failed to fulfil such condition and thus violated
Article 2 and 4 of the SA.
38. Turning to the substance with  regard to prices, the EC has explained in detail in its 1st written
submission why the prices do not show that imports  took place “under such conditions as to cause”
serious injury to the US industry.8
                                                     
6 Korea-Dairy para. 100.
7 AB Report Argentina Footwear para. 145.
8 See in particular point 4.6.2 and 4.6.3.1 of EC’s 1st written submission.WT/DS166/R
Page 117
The ITC report indicates9 that "the US producers selling prices (…) of vital wheat gluten
generally rose from July – September 1992 through January-March 1994, and reached their peak (…)
during this latter quarter, prices then fell through April – June 1995". The Exhibit EC-10, figure 4,
shows that this drop in prices was by far the most significant during the POI. However, during the
period 1993 to 1995 imports remained stable. Thus, the findings of the ITC confirm that there cannotbe any significant correlation between price levels of vital wheat gluten on the US market and the
level of imports.
Slide No. 1
is taken from the ITC report itself. It shows that th e prices of EC imports at the end of the POI were
practically the same at they were at the beginning of the POI.
39. The US evidently cannot contest these plain facts now. In the light of this indisputable
evidence the ITC could not reasonably have reached the conclusion that the price level of imports had
a significant impact on US domestic prices.
40. The US indirectly recognises this by belatedly turning to an unpublished revised version of
the ITC report to which we referred before.41. The EC has just recalled that the AB has taken position on this issue in its recent Korea –
Dairy  report (paragraph 98), flatly rejecting any such attempt. The ITC report itself, at the time,
should have provided the relevant information. This failure cannot be "healed" retrospectively. This is
established WTO case law.
10
42. In any event, these inadmissible data do not contradict the established fact that there is no
significant correlation between the prices of wheat gluten on the US market and the level of imports.
Violation of articles 2 and 4 of the SA:  Serious injury
43. The US determination that serious injury occurred does not meet the standards of
Articles XIX of GATT 1994 and the SA. The EC has shown that the US did not adequately
investigate all relevant factors and/or did not adequately explain how the facts supported the
determinations that were made.
Thus, it is sufficient to recall here only certain points that were developed in our first written
submission.
Market shares
44. Under Article 4.2 (a) of the SA, a WTO Member, before taking a safeguard measure, must
investigate the share of the domestic market taken by increased imports. The US consumption during
the period 1995 to 1997 went up strongly. In fact, consumption rose by 18 per cent during the Period
Of Investigation (POI). To no surprise, imports foll owed this trend. Therefore, the increase of imports
in terms of domestic market share cannot support a finding of injury, let alone serious injury.
Slide No. 2
illustrates that the market share taken by imports during the period concerned does not reveal injury
nor shows any emergency situation.
                                                     
9 II-32
10 See also Panel report on Korea Dairy  paragraph. 7.24, and US-Shirts and Blouses  panel report
paragraph 6.8 .WT/DS166/R
Page 118
45. A number of other factors make clear that the US domestic industry was not suffering any
serious injury.
Sales (Domestic sales by the US industry)
46. Sales by US industry (what the US calls «domestic shipments ») were up in 1997 compared to
1996. If a larger picture is taken, even though there were variations in the domestic sales by the US
industry, the trend has remained relatively steady.11
Production (production by the US industry)
47. Exactly the same goes for US production. US production was up in 1997 compared to 199612.
If a larger picture is taken, even though there were variations in the production of the US industry, the
trend has remained relatively steady.13
Inventories
48. Also developments with respect to US producers’ inventories were satisfactory. These were
strongly going down in 1996 and 1997.
Slide No. 3
illustrates this.It also shows, by the way, that inventories went up before imports went up, so that the increase in
inventories cannot possibly have been caused by imports. In fact, this factor is consistent with the data
concerning sales and production.
49. On the basis of these consistent data the investigating authorities could not reasonably
conclude that the US industry was suffering serious injury.
Mr. Chairman, the data above illustrate in a very clear way a major point of principle. As the
Appellate Body has recalled, safeguards are emergency measures. The condition of the US industry
improved in the recent period preceding the adoption of the safeguard measure. Therefore, there wasno "emergency" warranting safeguards.
Profit and losses
50. This brings us to another factor mentioned in Article 4.2 of the SA, which the US authorities
did not properly explain in their report.
51. The finding of the ITC that profitability had gone down was based on allocation of profits by
the US producers between the co-products wheat gluten and wheat starch and derived by-products.
Obviously, the manner in which financial factors such as costs and revenues are allocated has
a tremendous impact on the profitability of the i ndividual segments within that industry. This is
certainly the case here, given that the wheat gluten/wheat starch industry relies by necessity on a
                                                     
11 ITC Report at II-16.
12 ITC Report at II-15.
13 ITC Report at II-15.WT/DS166/R
Page 119
single raw material input (wheat or wheat flour14) and utilises a single production line that results in
wheat gluten, wheat starch, and effluents suitable for producing e.g. alcohol.
In such a situation, any allocation of profitability among the output products is arbitrary if no
objective and verifiable criteria are used.
52. Contrary to the US obligations under the SA, the ITC report provides no explanation
whatsoever regarding what methodology was used by the ITC in this respect. The impression is given
that the cost allocation between co- and by-products of the wheat gluten production suggested by the
plaintiffs was accepted by the ITC with no further examination. In fact, the ITC simply states that it
has reviewed that methodology, and finds it "appr opriate". What the methodology was, or why it was
deemed appropriate by the ITC remains utterly unclear.
53. Any profitability assessment in the report that does not demonstrate objectively (i.e. on the
basis of a reasoned explanation) how the cost allocation is made is economically arbitrary. It can
therefore never be used to support allegations of injury to the industry concerned.
54. The ITC report failed exactly in this way to provide any objective evidence of injury.
Therefore, the ITC's findings on serious injury based on this factor are completely unjustified.
Import by US producers
55. The US has not contested that large parts of imports of wheat gluten from Australia were
attributable to a particular company, Manildra, which, because of the company structure, could decide
entirely freely whether to produce wheat gluten in Au stralia and bring it over to the US, or to produce
it in the US, depending on the market situation.
A considered deliberate policy of importation by a domestic company, which corresponds to
its business strategy optimising profits cannot, by definition, be considered an injury, let alone a
serious injury in order to justify a safeguard measure.
56. Concluding on injury, Mr. Chairman, despite the number of pages devoted to the subject by
the ITC, its report contains no genuine in-depth investigation on whether the US domestic industry
was really suffering serious injury, as defined by the SA ("significant overall impairment in the
position of the domestic industry"). Rather, well known facts and publicly available official data that
the ITC has either superficially reviewed or failed  to review point exactly to the opposite direction.
The ITC did not adequately investigate and consequently show that US industry was suffering a
serious injury as defined under the SA.
                                                     
14 At least one of the major US producers concerned purchases wheat flour as the raw material rather
than wheat grain. This means it loses the margin reserved to the miller, thus squeezing profits further. This fact
was not taken into account by the ITC.WT/DS166/R
Page 120
Violation of Articles 2 and 4:  Causation
57. The EC has demonstrated that there was no sharp increase in the market share taken by
imports and no serious injury that could justify the application of a safeguard measure in this case. As
the Appellate Body recalled in its report on Argentina – Footwear  (paragraph 145)
"it would be difficult indeed to demonstrat e a 'causal link' between 'increased imports'
that did not occur and 'serious injury' that did not exist".
Thus, the EC will examine the following deficiencies in the US findings and determinations in case
the Panel were to reject the EC's claims on those above-mentioned points.
58. The EC submits that the US findings and determinations on causality have no rational
justification. Indeed, as our presentation will show now, the main factors having a determinant effect
on the position of the wheat gluten domestic industry on the US market were either not examined at
all or not objectively assessed.
Inherent competitive disadvantage of US wheat processors in their competition with US corn
processors
59. The EC would like to recall a particular feature of the production process of wheat gluten. It
is not physically possible to produce wheat gluten without at the same time producing, in much bigger
quantities (approximately 5 times), its necessary co-product, wheat starch.
60. On its side, starch and its derived products are interchangeable, whether made from wheat or
corn and are used for most of the same purposes. Wheat starch, the necessary co-product of wheatgluten, has therefore to face fierce competition on the US market from corn starch. In such an
economic situation, it is stating the obvious to say that the economic effects of that competition have
necessarily a direct and very significant impact on the profitability of wheat gluten operations on the
US market.
61. It is also a fact that on the US domestic market, the US wheat starch/gluten industry is in an
inherent competitive disadvantage in comparison with corn millers and this for the following main
reasons:
- on the US market, the price of wheat is up to 34 per cent higher than the price of corn.
The differential was particularly significant in 1997.
Slide No. 4
- Moreover, the yield of starch per tonne of wheat is much lower than that of corn.
Slide No. 5
This slide also shows that the combined effect of these factors is that the US wheat
starch/wheat gluten producers face a massive 45 per cent competitive disadvantage as compared with
corn starch producers. The first column on the le ft-hand side shows how much more starch can be
produced from a tonne of corn than from a t onne of wheat. The middle column shows how much
cheaper corn is than wheat on the US market. The third column shows the combined effect of these
two factors.
62. A factor having such a bearing on the economic viability of the US wheat gluten/wheat starch
industry should have been investigated in a thorough and objective way by the US authorities. But itWT/DS166/R
Page 121
was not. This point shows again that the US wheat gluten/wheat starch industry suffered from an
inherent weakness that was totally independent from any increase in imports.
Protein premium
63. The EC has already provided detailed evidence and explanations in its 1st written submission
on the fact that variations in the US producers’ wheat gluten prices are directly affected by protein
levels of the US wheat crop, and not by imports.
Slide No. 6  (taken from Exhibit EC-10)
64. It shows an economic analysis of the very significant degree of correlation between
developments in the protein – i.e. gluten – content of US wheat and US wheat gluten prices. The
difference between US prices for high protein and standard protein wheat is what the EC calls “wheat
protein premium” or “premium”.
65. When the "premium" goes up, the underlying economic situation is that protein levels in
normal wheat are low, so that bakers’ demand for higher protein wheat – and therefore its price – goesup. As soon as the "premium" increases, the competit iveness of the natural substitute of high protein
wheat, wheat gluten, also increases. Thus, demand for wheat gluten also goes up.
66. Consequently, an increase in the "premium" entails that the price of wheat gluten also
increases. This alone accounts for instance for high prices in 1994.
67. This graph shows that the US producers’ wheat gluten price is basically dependent on the
protein level of US wheat crops, and not on quantities or price levels of imports. If one reads the ITC
report15 carefully one finds that the ITC confirms this view. The ITC in particular confirms that the
peak in wheat gluten price around 1994 was a direct result of deficiency in protein content in wheat
crops during 1993. As the graph illustrates, there is an undeniable long term correlation between the
wheat gluten prices and the protein content of wheat.
68. This long-standing correlation shown by statistics available to the ITC should have been
examined by the US authorities when they examined the causality condition. The ITC has howeverdecided unreasonably to jump to the conclusion th at the imports were the cause of falling prices
without considering the high level of protein content in the US wheat crops at the end of the POI.
The increase of capacity of the US industry
69. In the years 1993 to 1995 the US industry increased its capacity by almost 70 per cent. As the
US itself admits, most of this capacity was in place before the increase in imports occurred.
70. As a result of the US wheat starch/wheat gluten industry construction of additional capacity,by 1995 that industry’s capacity utilisation had collapsed from 78,3 per cent (in 1993) to 56,2 per
cent.
71. That is more than 20 per cent less than the level at which the ITC considered that the US
wheat gluten industry could operate "reasonably profitably".16
72. By 1995 the US wheat gluten/wheat starch industry had already constructed so much
additional capacity that it was at a utilisation level which is far from what the ITC itself considered
                                                     
15 ITC Report at I-22 bottom of page, I-23 top of page.
16 ITC Report at I-17.WT/DS166/R
Page 122
profitable. It is clear therefore, that contrary to what the US authorities have found, imports cannot be
the cause of capacity under-utilisation.
73. The ex post facto  justification provided by the US in its first written submission
(paragraph 34) can be summarised as follows: this  capacity was built in anticipation of significant
increases in domestic consumption. If there had been  no increase in imports, the US industry would
have operated at 61 per cent of its capacity, which is much closer to the level at which industry
operated profitably.
74. The EC responds that, as we have demonstrated in the previous chapter, demand of wheat
gluten is primarily dependent on the protein level of wheat crops. This level is by definition
unpredictable. No sensible operator on the wheat gluten market would program large investments 3years ahead on such an unpredictable event. The US ex post facto  explanation amounts in fact to
accepting that the US industry took a gamble without knowing the odds.
75. Moreover, the US defence assumes illogically and unrealistically that the entire domestic
consumption or, at the very minimum, the entire increase in US domestic demand should have turned
to US domestic suppliers.
76. This argument is a clear expression of the protectionist aims that are behind the US safeguard
measure. The argument in fact assumes that foreign producers could not have benefited at all from the
increased domestic demand. The US tells us that as soon as they do, a safeguard measure will be
imposed. This assumption thus necessarily implies that the US tariff concessions under the WTO
could never result in an increased market access and would become worthless.
77. This assumption is fundamentally at odds with the basic objective of the WTO agreements to
ensure the expansion of trade in goods and services as expressed in the Recital n. 1 to the MarrakechAgreement. It confirms the real objective pursued by the US authorities when they adopted their
safeguard measure, namely to go back from their tariff concession without opening an Article XXVIII
of the GATT negotiation and without offering adequate compensation.
78. In addition, the objective facts plead against the US assumption. Imports already provided
half of US domestic consumption before 1996-1997. Therefore, the US could not reasonably haveexpected that all increased consumption would be supplied by US producers
17. The assumption also
unreasonably requires that US purchasers of imported wheat gluten should have altered their long-
time commercial relationships with foreign suppliers, and shift their purchases to domestic producers
in order to cover increased sales. However, the ITC report provides no explanation of why this
obviously curious economic behaviour should have occurred.
79. The conclusion is thus clear: the ITC had no sound economic basis to attribute the under-use
of capacity of the US domestic industry to increased imports and its reasoning also on this point is
entirely unjustified.
Input costs
80. The major raw material cost in order to produce wheat starch/wheat gluten is the cost of
wheat or wheat flour (75 per cent)18.
81. The ITC failed to objectively examine the fact that the input cost went up significantly in the
exact same period during which – according to the ITC itself – serious injury allegedly occurred. The
EC has already provided statistical evidence of this with its 1st written submission19.
                                                     
17 ITC Report at II-25.
18 ITC report at page II-27WT/DS166/R
Page 123
Slide No. 7
shows that US wheat prices peaked in the period between July 1995 and June 1997.
82. You will recall that the ITC report claimed that until that period the US wheat gluten
production was profitable, and that in the period July 1995- June 1997, it turned unprofitable.
83. A reasonable and objective examination of these two facts taken together should have
prompted the ITC to justify the absence of a causal link between the increase of input costs having
such a large impact on the overall costs, and the alleged loss of profitability during that period.
84. However, the ITC put to a side this obvious conclusion on the only basis that allegations were
made orally by the plaintiffs. Oral assertions by persons interested in the outcome of an investigation
clearly do not fulfil the US obligations under Article 4.2 (b) of the SA. In any case, this cannotcorrespond to an objective assessment of the factual situation given also that the ITC failed to verify
through other sources the correctness of such interested allegations.
85. If the ITC had done so, it would have found that the allegations by the plaintiffs are factually
incorrect and are inconsistent with the reality of the market.
86. The plaintiffs alleged that wheat gluten producers would have been able to pass on these cost
increases to their consumers, since demand for wheat gluten is relatively insensitive to price
 20.
However, the ITC explicitly states that high protein wheat or wheat flour is “commercially
substitutable” for wheat gluten in baking uses21. As the EC has already explained in its 1st written
submission22 there is no reason why US bakers (by far the greatest users of wheat gluten on the US
market, purchasing over 80 per cent of the product each year) would not turn to high protein wheat or
wheat flour in case US producers’ wheat gluten prices went up. Therefore, the ITC could not have
logically accepted the plaintiffs' assumption.
Violation of Article 2 and 4 of the SA.  The exclusion of Canada:  failure to observe the principle of
parallelism
87. The US has excluded Canada from the application of its safeguard measure. It should be
recalled that the ITC acknowledges23 that during the POI Canada contributed to imports in a
substantial way.
88. It is a fact, that Canada was the third largest supplier of wheat gluten to the US. Moreover,
Canadian imports were higher both in 1996 and 1997 when compared to 1995. The US authorities had
therefore no objective reason to exclude Canada from the US safeguard measure.
89. The AB in its Argentina-Footwear report ha s unequivocally confirmed the existence of a
principle of parallelism between the determination of serious injury and causation and the imposition
of a safeguard measure:
"As we have noted, in this case, Argentina applied the safeguard measures at issue
after conducting an investigation of products being imported into Argentine territory
and the effects of those imports on Argentina's domestic industry.  In applying
                                                                                                                                                                    
19 See Exhibit EC-12.
20 ITC Report at I-19.
21 ITC Report at I-22.
22 Para. 97-100.
23 ITC Report at I-19: “(… we find that imports from Canada account for a substantial share of total
imports”).WT/DS166/R
Page 124
safeguard measures on the basis of this investigation in this case, Argentina was also
required under Article 2.2 to apply those measures to imports from all sources,
including from other MERCOSUR member States.
On the basis of this reasoning, and on the facts of this case, we find that Argentina's
investigation, which evaluated whether serious injury or the threat thereof was causedby imports from all  sources, could only lead to the imposition of safeguard measures
on imports from  all  sources.  Therefore, we conclude that Argentina's investigation,
in this case, cannot serve as a basis fo r excluding imports from other MERCOSUR
member States from the application of the safeguard measures. "
(paragraphs 112 and 113).
90. The ITC report and the US safeguard measure have breached the principle of parallelism.
91. The US attempts a defence by arguing that “its determination did not attribute injury from
NAFTA imports to third countries”.
This is factually incorrect. In determining whether its industry was suffering serious injury,
the US clearly took into account also the substantial imports from Canada as the ITC’s findings
regarding serious injury show
24.
Violation of the MOST-FAVOURED-NATION provisions under Articles 5.2 of the SA and I of the
GATT 1994
92. The EC claims that the US safeguard measure on wheat gluten was consciously construed in
such a way as to grant an advantage to Australia that is not extended, as it should, to all the other
WTO Members. The underlying substantive reason for such behaviour of the US is that one of the
main US producers and also a plaintiff in the US domestic procedure leading to the adoption of the
safeguard measure, Manildra, is owned by an Australian holding company. The EC understands that
this company holds a controlling share of Australia/US trade in wheat gluten.
93. The breach of the MFN provisions under the SA and the GATT 1994 consisted of the
following US actions.
94. On the one hand, the US failed to implemen t correctly Article 5.2 (a) of the SA when it
distributed the QR among the suppliers having a substantial interest in supplying the product
concerned. As the EC has indicated in its first written submission, Article 5.2 (a) of the SA is takenword for word from the text of Article XIII.2 (d) of GATT 1994 which deals with the "Non
discriminatory Administration of Quantitative Restrictions". It is the lex specialis that is applicable in
the case of QRs or TRQs in the context of the adoption of a safeguard measure.
95. The EC draws the attention of the Panel on the fact that the US does not contest the claims
made by the EC in its first submission, namely that the US opened consultations with none of theMembers having a substantial interest in supplying the product concerned with a view to achieving an
agreed allocation. Moreover, the US accepts that no explanation is given as to why that method
(reaching agreement) was not "reasonably practicable". As a matter of fact, my colleague Mr. Gussetti
will describe to you in a moment how the US refused to negotiate on anything.
Insofar as the US has not fulfilled its obligations under Article 5.2 (a), the equivalent of
Article III.2 (d) of the GATT 1994, it has therefore allocated the QR in clear breach of the US MFN
obligations.
                                                     
24 ITC Report at II-12-14.WT/DS166/R
Page 125
96. On the other hand, the US has breached also the provisions under Article 5.2 (b) of the SA.
Despite having a 47 per cent share of the market in the previous representative period, the EC was
allocated only a 43 per cent share of the quota. Australia, on the other hand, was allocated a share of
49 per cent, compared to its share in the previous representative period of 38 per cent. This allocationhas preserved entirely the 1997 high levels of imports from Australia despite the fact that Australia’s
exports increased continuously in the last three years of the investigative period, by almost 21 per
cent.
25
97. In the light of these arguments, the US defence according to which only Article XIII of theGATT should be applicable to this case is clearly incorrect. Article 5.2 of the SA is the lex specialisapplicable to the allocation of QRs and TRQs in the context of a safeguard measure and the US has
breached it.
98. With respect to the fundamental MFN provis ion under Article I of the GATT 1994, the EC
submits once more that the US has re-introduced sele ctive withdrawal of tariff concessions and other
obligations which clearly discriminates between WTO Members without any justification under theWTO.
This certainly constitutes a violation of Article I of the GATT 1994. The defence by the US in
its submission (paragraphs 210 to 213) thus misses the point. The misrepresentation of our arguments
does not provide any further support for the US defence. The EC will come back on this incorrect
presentation in its second written submission.
With your permission, I will now pass the floor again to Mr. Gussetti.Mr. Chairman, distinguished Members of the Panel,
Violation of Article 5.1 of the SA: the proportionality rule
99. The Korea - Dairy  panel stated26 in its report
"The first sentence of Article 5.1 does contain a very specific obligation. This
obligation is to apply a measure that is commensurate with the goals of preventing or
remedying the serious injury suffered by the domestic industry and of facilitating the
adjustment of the domestic industry. Our interpretation of this obligation is bolsteredby the last sentence of Article 5.1, which provides that Members "should choose
measures most suitable for the achievement" of the objectives of preventing or
remedying the serious injury and facilitating adjustment".
100. The Appellate Body's recent decision in that case has unambiguously confirmed this approach
(paragraph 96). The EC's presentation in paragraphs 107 to 126 of our first written submission followsexactly this pattern of interpretation.
101. However, the US contests in its first submission (at paragraph 165 and following) the very
existence of a proportionality rule in Article 5.1, which it claims it is of "EC's invention".
102. With due respect, Mr. Chairman, the US statement is incomprehensible.
                                                     
25 ITC report at II-12.
26 paragraph 7.100WT/DS166/R
Page 126
In its submission, the US relies explicitly on an (incorrect) interpretation of the Korea-Dairy
panel report. By reading that report, the US representatives must have noticed, therefore, what that
Panel indicates explicitly in the finding that we have just quoted, namely that
"This obligation is to apply a measure that is commensurate with the goals of
preventing or remedying the serious injury suffered by the domestic industry and of
facilitating the adjustment of the domestic industry".
103. The term "commensurate" is synonymous with the term "proportionate". They both
correspond to the ordinary meaning of the terms " only to the extent to" as the AB report on Korea-
Dairy has confirmed at paragraph 96. The proportionality rule is thus well present in Article 5.1 andcannot be contested.
104. Notwithstanding, the US unreasonably states in paragraph 167 of its submission that
Article 5.1 provides no support for the notion that remedy selected must be "proportional" to the
serious injury that the authorities have found.
the proportionality rule: the extent of the measure
105. Without any need to recall entirely the arguments advanced in our first written submission,
the EC would like to draw the attention of the Panel on two major points:
(a) the scope of a safeguard measure cannot go beyond what is needed in order to prevent
or remedy the serious injury that is attributable to the increased imports. Not only the
combined reading of Articles 4.2 (b) and 5.1 SA does not allow any doubt about thisinterpretation. It is also a matter of common sense: the legitimate imports from WTO
Members can not be restricted in order to remedy an injury that is not  attributable to
them.
In other words, if a causal link were established between the serious injury and the
imported products (which in our view is not the case in this procedure), the safeguard
measure should be commensurate or proportionate to that injury, i.e. to the exclusion
of factors other than increased imports. If a combination of causes creates the serious
injury but only part is attributable to increased imports, only that part could justify a
safeguard measure, whose scope should be also limited to the remedy of that part of
the injury. The Member proposing the safeguard measure must provide for ameaningful and reviewable criterion that permits the correct application of thisfundamental principle.
Reasoning otherwise, as the US suggests in  its submission and implemented in the
case of the wheat gluten, would amount to over-restrict and over-protect the domestic
industry; it would amount in fact to an unjustified withdrawal of tariff concessionsand other obligations without pursuing an Article XXVIII of the GATT negotiation
and without offering adequate compensation.
Evidence of this unjustified objective exists in the US legislation itself that is quoted
by the US in footnote 119 of its first submission. According to that footnote, in orderto be indicated as the cause of serious injury Section 2252 (b) (1) (A) of chapter 19 of
the US Code requires that increased imports must be a 'substantial cause'. The
definition of "substantial cause" (in Section 2252 (b) (1) (B)) is "a cause which is
important and not less than any other cause".WT/DS166/R
Page 127
An example is again more telling than a long story and is useful to underscore the
consequences of the US suggested approach.
Let's imagine that three main causes are creating serious injury to a domestic
industry, but that approximately half of that is due to a significant increase in imports.The other two causes (for example a natural disaster and labour unrest) make up
approximately the other half. In such an example, under the US law the increased
imports would be the substantial cause pursuant to the US Code's definition and a
safeguard measure can be taken. However, if we applied to this example the
interpretation presented by the US before this panel, with only half of the serious
injury attributable to imports the US could adopt a safeguard measure restricting
imports (i.e. market access for foreign products) in order to remedy 100  per cent of
the injury.
In the EC's view, this is not compatible with Article 5.1 SA. However, this is exactly
what the US has done in the case of the wheat gluten safeguard measure.
(b) The US complains that the EC has not addressed in its claim under Article 5.1 the fact
that the safeguard measure shall not only be commensurate to the purpose of
preventing or remedying serious injury but also facilitate industry adjustment.
The answer to this argument from the US ca n be very brief. The text of Article 5.1
clearly indicates that the two conditions must be complied with simultaneously
("prevent or remedy serious injury and to facilitate adjustment"). The US has clearly
breached the proportionality rule with respect to the first leg. Thus, the EC consideredit unnecessary to elaborate on whether it complied with the second leg. 
However, if the US argument were to be  understood as implying that the purpose of
"facilitating adjustment" under Article 5.1 could take precedence over the proportion
to be kept between imported products and the serious injury attributable to them, that
interpretation should be rejected. The consequence of such interpretation would in
fact be that a Member would be allowed to impose a safeguard measure that will
restrict foreign products more than the increased imports justify in terms of serious
injury. Again, the US suggests that a protectionist measure could be applied at no
cost, with no compensation. The EC firmly disagrees.
the proportionality rule: the form of the measure
106. With respect to the form of the measure chos en by the US, a QR, the only argument advanced
by the US is that "no textual support for its assertion that the Safeguards Agreement indicates a
preference for, or requires an explanation of, a choice of a form of measure over another"
(paragraph 172).
107. It is apparent that the provisions of the SA are "based on the basic principles of GATT
1994"27 and that the WTO Members recognise "the need to enhance rather than limit competition in
international market"28.
As the recent panel report on Turkey - Textiles  has found29:
                                                     
27 recital 4 to the SA
28 recital 3 to the SA
29 at paragraph 9.63WT/DS166/R
Page 128
"The prohibition on the use of quantitative restrictions forms one of the cornerstones
of the GATT system.  A basic principle of the GATT system is that tariffs are the
preferred and acceptable form of protection. (…) Two fundamental obligations
contained in Part II are the national treatment clause and the prohibition against
quantitative restrictions. The prohibition against quantitative restrictions is areflection that tariffs are GATT's border protection "of choice".  Quantitative
restrictions impose absolute limits on imports, while tariffs do not.  In contrast to
MFN tariffs which permit the most efficient competitor to supply imports,
quantitative restrictions usually have a trade distorting effect, their allocation can be
problematic and their administration may not be transparent."
108. Thus, it is simply untrue to assert, as the US does, that the SA does not provide for a
preference for tariff measures on quantitative restrictions. In fact, in opposition to the US suggested
interpretation, both the object and purpose of the Agreement as spelled out in its recitals and the
proportionality rule in Article 5.1 do provide for such a preference.
109. The US would like you to believe that quantitative restrictions could become the rule rather
than the exception. This is incorrect, and the ITC short arguments aimed at supporting that choice are
completely inadequate to comply with the US's obligations under the SA, as the EC's submission at
paragraphs 119 to 129 demonstrates.
the proportionality rule: the inherent inconsistency in the US approach as regards the remedy
110. The EC does not wish to revert once more on the issue of the relations between the necessary
co-products wheat starch and wheat gluten. Mr Van Vliet has already examined this point. I willtherefore only draw your attention to the fact that, no matter how many dialectical contortions the US
attempts at paragraphs 183 to 186 of its first submission, a patent contradiction persists in its position
as expressed in the ITC report.
111. On the one hand, the US authorities have excluded from their reasoning concerning causality
the effects of the inherently weak position of th e US wheat gluten/wheat starch industry on the US
domestic starch market, when determining whether a serious injury could have been caused by
imported wheat gluten.
112. On the other hand, the US authorities have included as one of their key considerations the
wheat starch market conditions in the US when considering the form, the scope and the extent of the
safeguard measure against foreign wheat gluten
30.
113. This inconsistent way of proceeding of the US authorities has doubly prejudiced the market
access conditions for EC produced wheat gluten. The EC maintains that the US cannot have the cake
and eat it.
Violation of Article 5.1 of the SA: the representative period
114. Another issue of importance is the choice of the period that the US selected as a basis for the
import quota. The Unites States insists that the EC has "ignore[d] the language and purpose of
Article 5.1, as well as the USITC's explicit findings" (US first submission at paragraph 191).
115. The EC would like to draw the attention of th e Panel to the ordinary meaning of Article 5.1,
second sentence of the SA. The "last three representative years for which statistics are available"
                                                     
30 ITC report at page I-26 on “selection of import quota” as recommended relief: “Because of the co-
product nature of wheat gluten production, the supply and price of wheat gluten is dictated in part by demandfor wheat starch”.WT/DS166/R
Page 129
means what it says, namely that the US should have based itself on the last three-year period for
which statistics were available at the time of the adoption of the measure (30 May 1998).
116. The US does not contest that 1997, 1996 and 1995 statistics were available.
117. Are these statistics "representative"? Of course they are, since they represent exactly the
pattern of trade on-going before the entry into force of the measure, as Article 5.1 requires. As the ECindicated in its first written submission, the US could point to no exceptional circumstances and no
violation of WTO obligations as evidence that the pattern of trade that is represented by the 1997-
1995 statistics was distorted.
118. The US submits that "representative" "would normally be a period in which imports did not
cause serious injury" otherwise "the import level would not remedy the serious injury and facilitateadjustment".
119. The EC responds that there is no textual or logical basis in the SA for such self-serving
interpretation. As a matter of logic, if an increase in imports were a "clear" justification for using a
representative period other than the "last three representative years for which statistics are available",
this situation would always apply, rendering the provision meaningless.
120. In fact, what Article 5.1 requires is that the "representative" period be selected in an objective
way. That being done, the Member applying the safeguard measure can then consider which measure
is best suited to remedy the serious injury generated by the imported products and to facilitate
adjustment of its domestic industry. There is a logical chain of actions that must be respected in its
order.
121. The US interpretation distorts the plain text of Article 5.1 SA, second sentence. It confuses
the definition of the representative period (an objective, factual issue) with the scope and the extent ofthe measure.
This is erroneous in law and leads to the implementation of over-restrictive safeguard
measures.
The real aim of the US "interpretation" in this case is to turn the clock back to a market
situation which was in place before the Uruguay Round, as if the multilateral tariff negotiations did
not take place, and that at no cost.
Violation of Article 5.1 of the SA: the absence of a “clear justification”
122. Contrary to the impression given by the US submission at paragraphs 196 and 197, the burden
of proof still rests on the US. It is the US that must demonstrate that 1997-1995 period was not
representative. This is not the usual burden of proof, since the text of Article 5.1 requires a "clear
justification" before departing from that rule. As the Appellate Body has stated in its report on Korea-
Dairy (paragraph 98),
"We agree with the Panel that this "clear justification" has to be given by a Member
applying a safeguard measure  at the time of the decision , in its recommendations or
determinations on the application of the safeguard measure ."
123. A self-serving and incorrect interpretation of the text of the SA is clearly not appropriate and
not enough to fulfil such an obligation.WT/DS166/R
Page 130
124. By contrast, the EC has satisfied its procedural obligations by making the US acknowledge
that 1997-1995 statistics were available, that no exceptional events occurred and no violation by the
EC of its WTO obligation distorted the trade patterns during that period.
Our prima facie  case on this issue is thus firmly established.
Before concluding this presentation, the EC woul d like to briefly draw the Panel's attention on
the EC's claims under Articles 12 and 8 of the SA.
Violation of Article 12 of the SA: the US has illegally delayed notification
125. The EC's claims under Article 12 SA are confirme d by the first written submission of the US.
126. The United States dedicates long pages to try to defend the indefensible. For instance, its
interpretation of the ordinary meaning of the term "immediately" is much closer to "may be one day"
than to the text of Article 12 SA.
127. The EC refers the Panel to the findings in the Korea Dairy panel report that condemned Korea
on this very issue: for the notifications on initiation, a delay of 14 days was found not to qualify as
“immediate”. In the present case, the US delayed its notification by 16 days. It also delayed the
notification of finding of serious injury by as much  as 26 days. In light of the Korea – Dairy standard
there can be no doubt that the US notifications breached Article 12 of the SA.
Violation of Article 12 of the SA: the US has not notified the proposed measures and actions
128. Another issue concerns the fact of whether the US has timely and properly notified the WTO
relevant Committees and the EC on the proposed measures, as is required under Article 12,
paragraphs 1 and 2. As the Korea-Dairy panel report stated
" [T]his notification can only be viewed as a notification of the final decision taken
since it was notified and circulated only after the final decision was put into force;
this notification cannot be taken into account for the purpose of assessing whetherKorea complied with its obligation to notify its proposed measure since this
notification took place after the consultations, and therefore cannot remedy the flawsin the previous notification"
31.
129. The US acted in this case exactly as Korea did in that case. As was recalled in the EC's first
written submission, the United States made findings of serious injury on 15 January 1998, but notifiedthe WTO only on 11 February 1998. It then implemented the measure on 1 June 1998, but did not
notify the Committee on Safeguards until 4 June 1998. All these notifications were thus effected ex
post facto, i.e. after the action or the measure had been adopted and not at the stage of proposed action
or measure, in clear breach of the letter and the spirit of Article 12 SA.
Violation of article 8 of the SA
130. As far the EC's claim on Article 8 SA is concerned, in a letter of 12 March 1998 by
Ambassador R. Hayes, the US informed that "the United States is prepared to consult fully with all
Members having a substantial interest as exporters of wheat gluten, including the European
Community (…). However, we believe these consultations should be held only after the Article 12.1(b) notification is supplemented with the USITC report". The report was notified to the WTO on
27 March 1998.
                                                     
31 Korea - Dairy , footnote 481WT/DS166/R
Page 131
131. An informal meeting was held on 19 - 20 May 1998, i.e. just prior to the adoption of the
measure. On 20 May, the representative of the US  Trade department, Mr. Jim Murphy, is quoted in a
report prepared by the Deputy Director-General of the Directorate General of Agriculture of the
Commission of the European Communities to have stat ed that "he was not in a position to 'negotiate'
". This confirmed the position expressed, albeit in less blunt terms, by the Deputy USTR,Mr. Peter Scher, the day before. The EC can pr ovide the relevant excerpt of that otherwise
confidential report, if necessary.
132. Despite formal claims of deference to its WTO obligations under the SA, the US
representative is thus on the record expressing the US administration's unwillingness to negotiate,
either the scope of the measure or any possible compensation. It is interesting to compare thisinformation with the statement in the US first s ubmission, paragraph 206, that "Article 8, when read
in conjunction with Article 12.3, imposes on a Member the obligation to hold consultations".
133. The facts thus confirm that the US did not comp ly with its obligation under Article 8.1 of the
SA since it never "endeavoured to maintain a substantially equivalent level of concessions". Its
representatives entered into consultations under instruction not to negotiate on anything. They thustransformed a substantial obligation into, to put it diplomatically, a dubious PR action. The Panel
should conclude therefore that the US has also breached Article 8 of the SA.
This point concludes our presentation.
Mr. Chairman, distinguished Members of the Panel, thank you for your attention.WT/DS166/R
Page 132
ATTACHMENT 1-3
EUROPEAN COMMUNITY'S REPLIES TO
QUESTIONS FROM THE PANEL
(17 January 2000)
Question N. 1
We note that the ITC Report (p. I-9) states:  "[w]e find that domestically produced wheat
gluten is "like" imported wheat gluten and that  the domestic industry consists of the domestic
producers of all forms of vital wheat gluten, including modified wheat gluten that is used in the
baking and pet food industries."  Do the parties agree that, for the purposes of this proceeding, the
domestic industry consists of the domestic pr oducers of all forms of vital wheat gluten?
Reply
Yes, the EC agrees that for the purposes of this proceeding, the domestic industry consists of
the domestic producers of all forms of vital wheat gluten.
However, since necessarily in the production of wheat gluten always co-products are produced, the
ITC also should have adequately investigated to  what extent developments related to those co-
products caused injury, which the ITC did not do. The EC refers to its joint reply to questions 8 and 9
below.
Question N. 2, 4, 14, 15, and 16
In para. 9 of its third party submission, New Zealand asserts:  "New Zealand does not contest
that the protection of such confidential informati on, including from the respondents in the safeguards
investigation, may be appropriate at the time of  the investigation.  However, New Zealand considers
that a Member cannot justify a measure as being consistent with its obligations under the WTOwithout disclosing to the panel and the parties the information on which it relies."  How do the parties
react to this statement?
Could the parties clarify whether the EU had access to the "confidential information" in
question in the domestic proceedings before the ITC? If the EC did have access, under whatconditions?
In its first written submission, the United States indicates that the ITC has now prepared a
corrigendum to the public report that provides the portion of the pricing data and certain other
information that can be disclosed, and attached it as Exhibit 10.  The United States also expressesthat it is "confident that this greater degree of disclosure will allay the EC's concerns."  How does the
EC react to this statement? What, in your view, is the status of this corrigendum in these proceedings?
What is the motivation underlying the assertion in paragraph 49 of the EC first written
submission that "[t]his requirement presupposes that the detailed analysis and the demonstration of
the relevance of factors are published and not held secret, unless confidentiality is really an issue"?
Is the EC asserting that confidentiality is not really  an issue here?
Is the EC arguing that it was/is prejudiced in any way in these WTO dispute settlement
proceedings from the ITC's treatment of confidential information in the public version of its report? If
so, in what way?WT/DS166/R
Page 133
Joint Reply
Since in the EC’s view these questions are related, it will provide a joint answer.
As an answer first to question N. 14, the EC has argued in its first written submission and oral
statement at the first substantive meeting that the failure to provide relevant data, not even in
aggregate form, in the original ITC March 1998 Report constitutes a violation of Article 4.2 (c) SA.
Under that provision, the US is obliged to publish a detailed analysis of the case, as well as a
demonstration of the relevance of the factors examined. Such a report is to be published "promptly",and must set forth findings and reasoned conclusions on all pertinent issues of fact and law.
The fact that the US now, in the context of these panel proceedings, with regard to a very
limited number of points, provides some data which were kept out of the public version of the
March 1998 ITC report, does not at all "allay the EC’s concerns". Rather, this fact proves that inparticular with regard to those data now newly disclosed in Exhibit US-10, there never was any
objection to publishing them on grounds of business "confidentiality" in the first place.
The fact that the US feels free to provide these data shows that they could and therefore
should have been given at the time of the original ITC-report, since the exception of Article 3.2 of the
SA never was an issue. The fact that the US provid es these findings stating explicitly that soon they
will be made public, proves that the US has violated Article 4 of the SA by not publishing these data"promptly" at the time.
On the issue of the status of the corrigendum , in the EC’s view, the Panel must draw the
conclusion that the fact that the US has provided the corrigendum , proves that Article 4 SA has been
violated by the US by not providing the informa tion contained in the corrigendum "promptly" at the
time of the investigation. The purpose for which the US are providing that corrigendum is evidently
inadmissible, in the sense that it could never "undo" the violation of Article 4.2 SA consisting of not
providing the relevant information in the report made public at the time1.
The EC would underline that the corrigendum only provides a very limited amount of data;
much data which should have been disclosed in the ITC's report is still not made available. In
particular, citing "confidentiality", the ITC omitted any qualitative discussion of the method by which
the industry allocated profits and losses between the various operations. This was a crucial piece of
evidence relied on by the ITC in determining both injury and causation.
Concerning the presentation of aggregate data, the following were deleted from the public
version of the ITC Report:
– Cost allocations2;
– Producers' imports and exports3;
– Profitability data4;
– Input costs, including raw material and fuel costs5;
– Employment data6;
– Value of assets, capital expenditures, and R&D expenses7;
                                                     
1 The information contained in the "corrigendum", however, can be used by the Panel as evidence.
2 ITC report at II 20
3 ITC report at II 14
4 ITC report at Annex C-4
5 ITC report at II 18-20
6 ITC report at II 16-17
7 ITC report at II 21WT/DS166/R
Page 134
– US importers' inventories8.
Most of these data sets would have had a strong bearing on any objective assessment of the
state of the industry.
In addition to consolidated data on the US industry, the ITC, through its questionnaires,
gathered a considerable amount of data about th e EC and other WTO Members' industries. By also
withholding much of this data with no justification possible based on confidentiality, the ITC has
concealed a formidable amount of information about the wheat processing industries, which would
undoubtedly have had a bearing on the analysis of the case.
In withholding relevant data, the US has relied on the basis that there are few wheat gluten
producers in the US (or Australia, etc.). Were this basis to be allowed to pass unchallenged, a Member
proposing a safeguards action, whose industry comprised only a few operators, could be allowed to
contrive an investigative report, secure in the knowledge that the data on which the action was basedcould never be scrutinised. This outcome would however evidently not comply with the explicit
requirements of the SA.
As an answer to question N. 15, the EC’s position is that confidentiality is not an issue in the
context of whether or not data in summary form, such as is the form of aggregate data, is provided in
the investigation report. Article 4 requires that any information relevant for the investigation must be
found in the published report.  The issue of whether or not such pertinent information is "confidential"is only relevant for the question whether it is provided as such or only in summary form.
Hence, the US is not allowed to withhold aggregate data, i.e. in summary form, from the
public version of the ITC report on confidentiality grounds. In part, by providing the corrigendum, the
US accepts that it could have given those data at the time, which means the US violated Article 4 ofthe SA by not doing so.
As an answer to question N. 16, the EC submits that not only it, but that potentially all WTO
Members are prejudiced by the fact that the US withholds, on almost all relevant issues indicated
above, contrary to Article 4 of the SA, substantial data from the public version of the ITC report,without there being a justification for doing so.
All WTO Members are potentially prejudiced because the absence of this information makes
the reasoning of the ITC in coming to its conclusions completely unverifiable. The EC would stress
that potentially all WTO Members can be negatively affected by safeguard measures taken by anotherWTO Member.
This can be either directly because their industry is limited in its possibility to export to the
WTO Member applying the safeguard measure, or indirectly because of diversion of trade (when
goods which were before exported by other WTO Members to the Member taking the safeguardmeasure are now exported to third WTO Members).
Thus all WTO Members have a strong interest in being provided, at the time that the measure
is taken, with all information relevant for judging its legitimacy (the only exception being information
which cannot possibly be provided without infringing on individual companies’ business secrets).
Applying Article 4.2 SA by its terms will moreover, on the one hand, enhance WTO Members’abilities to assert their rights – since they will be provided with all relevant information -, and on theother hand avoid useless litigation – since that information will also allow them to judge whether the
safeguard measure is legitimate.
                                                     
8 ITC report at II 23-24WT/DS166/R
Page 135
The EC takes this opportunity to stress the obvious fact that, consistent with the well-
established principles associated with Article XXIII of GATT 1994 and Article 3.8 of the DSU, any
prima facie violation of the obligations in the GATT 1994 and/or in the SA is considered a case of
nullification or impairment of benefits accruing directly or indirectly to WTO Members under these
Agreements.
The Appellate Body stressed in its decision on " Argentina-Footwear "9 that the competent
authority has, under Article 4, not only an obligation "to consider all the relevant facts" but also an
obligation to "adequately explains  how the facts support the determination". Since in the present case
most of the facts are unjustifiably labelled as "confidential" even in their summary form, it is
impossible to verify whether the conclusions of the ITC are supported by its reasoning. It is therefore
clear that the US authorities have failed to "adequately explain" how the facts support the
determination.
As an answer to question N. 4, at no time did the European Commission, nor any other
institution of the European Community, have access to the confidential data. Neither was the EC
given any confidential information in the course of  meetings held with USTR officials on the subject.
On a point of principle, while it is clearly a positive development that, pursuant to Article 3 of
the SA, Members must be allowed to intervene in the domestic safeguard proceedings of other
Members (provided the responsible authorities proceed in a fair and reasonable manner), this cannotexcuse the Member considering a safeguards action from discharging its full responsibilities under the
SA, and in particular Article 4 thereof, in particular by arguing that it is not obliged to investigate
relevant issues since that it has not been asked to do so during the national proceedings.
Finally, as an answer to question N. 2, the EC submits that the US has violated its obligations
under Article 4 of SA, by not publishing data which are relevant to certain essential elements of the
ITC’s reasoning, without there being any justification for not providing these data. This lack of
essential information meant that the ITC report failed to give "detailed analysis … as well as a
demonstration of relevance" required by Article 4.2 (c) SA. This cannot be "rectified" by giving data
now which should have been provided in the public version of the ITC-report at the time, i.e. byattempting to undo the wrong.
New Zealand’s point concerns a different situation, which is not the case here. That is the
case that data regarding individual companies are, with proper justification, kept confidential and not
included in the published report of a safeguard investigation. New Zealand may be correct in arguing
that, in certain circumstances, such information s hould be provided at the Panel stage, in order to
allow a Panel to review whether a safeguard investigation was correctly performed and whether the
safeguard measure was justified.
However, the issue in the case of the US wheat gluten safeguard measure concerns the
absence of data in summary form, whether in aggregate form or otherwise summarised: the
withholding of information in summary form from the public version of the ITC report was never
justified in the first place.
Providing that information now, ex post facto  and one and half year later within the closed
doors of a confidential panel procedure, does not change the fact that Article 4 SA was violated by the
US that did not "promptly" provide it in a published  report.
                                                     
9 Paragraphs 121 and 145WT/DS166/R
Page 136
Question N. 3
In the view of the parties, is the Panel able to perform an "objective assessment of the matter
before it" within the meaning of Article 11 of the DSU on the basis of the ITC Report issued in March
1998 (with the "corrigendum" submitted by the United States in these proceedings)?
Reply
According to the Appellate Body report on " Guatemala - Cement "10, the "matter" before a
panel
"(…) consists of two elements: the specific "measure" and the "claims" relating to it,
both of which must be properly identified in a panel request as required by Article 6.2
of the DSU."
Thus, in order to perform an "objective assessment of the matter before it", as required by
Article 11 of the DSU, this Panel must examine
– the measure and
– the claims relating to it as they were brought forward by the EC in its request of
establishment of the Panel11.
The measure is constituted by the US Proclamation 7103 of 30 May 1998 and the US
Memorandum of 30 May 1998.
The claims are listed in the request of establishment of the Panel and thoroughly analysed in
the written and oral submissions12 of the EC. They are entirely confirmed here.
As the EC has already indicated in its first oral statement on 20 December 1999, the role of
the Panel when examining the compatibility of safe guard measures with the covered agreements is to
determine whether the Member’s authorities fully a nd objectively considered the evidence before it,
including any evidence that detracts from an affirmative determination of increased imports, serious
injury or causation13 (Articles 2 and 4 of the SA). The Panel should also verify the adequacy of the
Member’s reasoning by reviewing whether the findings made and conclusions reached are consistentwith the evidence
14.
Moreover, compliance with all the other provisions under the GATT Articles I and XIX and
the Safeguard Agreement should also be checked, including Articles 3, 5, 8 and 12. The EC reiterates
that the US measure is incompatible with all the above-mentioned provisions. As the Appellate Bodyhas found in its " Argentina-Footwear " report,
"(…) safeguard measures may be applied only when [compliance with] all the
provisions of the Agreement on Safeguards   and Article XIX of the GATT 1994 are
clearly demonstrated".
                                                     
10 WT/DS60/AB/R, paragraph 76
11 WT/DS166/3
12 see for example paragraph 14 of the EC first oral statement
13 Korea - Dairy , paragraph 7.30.
14 Argentina - Footwear , paragraph 8.124.WT/DS166/R
Page 137
Finally, as far as the so-called "corrigendum" of the ITC-Report is concerned, as the
Appellate Body has clarified in its report on Korea- Dairy  (paragraph 98) when addressing a similar
issue
"We agree with the Panel that this "clear justification" has to be given by a Member
applying a safeguard measure  at the time of the decision , in its recommendations or
determinations on the application of the safeguard measure " (original emphasis).
Contrary to this indication from the AB, the US aims at retro-actively "healing" its violation
of the relevant provisions of the SA by submitting, in Exhibit 10 to its submission, a revised version
of parts of the ITC report containing data which it  had earlier on withheld from the public version of
the ITC report.
In the light of this established interpretation, the Panel should reject this belated attempt.
Otherwise Articles 3 and 4 of the SA would become entirely useless. Their violation cannot be
retrospectively "healed".
As a matter of principle, the EC would like to stress that it cannot be admissible for a party to
contrive that a Panel is unable to carry out its tasks under Article 11 of the DSU simply by
withholding self-proclaimed “confidential information”.
Question N.5
We note the recent statement of the Appellate Body that the phrase "as a result of unforeseen
developments and of the effect of the obligations incurred by a Member under this Agreement,
including tariff concessions" in Article XIX:1(a)  of the GATT 1994 does not establish independent
conditions for the application of a safeguard measure additional to the conditions set out in the
second clause of Article XIX:1(a), but it "describes certain circumstances which must bedemonstrated as a matter of fact in order for a safeguard measure to be applied consistently with the
provisions of Article XIX of the GATT 1994."
15 $
What could constitute such "unforeseen devel opments"?  By whom mu st such developments
be "unforeseen"?  In this case, what precisely were the circumstances constituting "unforeseendevelopments" and where are these addressed in the ITC Report?
Reply to sub-question 1
The circumstances shall be unforeseen, i.e. unexpected16. Examples of " unforeseen
developments " range from past historical events such as the sudden collapse of the Soviet Union, to
less dramatic ones like a massive shift in taste for a particular consumer good (as in the " Hatters' Fur "
case17), an unpredictable collapse of the currency of an exporting nation, or the discovery of a new
and revolutionary product which reduces in a very short period of time the use of the traditional
product (for example, long-playing records and CDs) and that is mainly imported. However, none ofsuch unexpected circumstances ever happened.
When addressing the issue of the interpretation of Article XIX.1 of the GATT, the attention of
the Panel is also drawn to the useful paragraph 94 of the AB report on " Argentina-Footwear "
                                                     
15 Appellate Body Report on Argentina – Footwear , paras. 92 ff.; Appellate Body Report on Korea –
Dairy , paras. 85 ff.
16 AB report on " Argentina-Footwear ", paragraph 91.
17 Working Party Report on Withdrawal by the United States of a Tariff Concession under Article XIX
of the GATT, GATT/CP/106, adopted on 22 October 1951. See AB report on "Argentina-Footwear" atparagraph 96WT/DS166/R
Page 138
" (…) In perceiving and applying this object and purpose to the interpretation of this
provision of the  WTO Agreement , it is essential to keep in mind that a safeguard
action is a "fair" trade remedy.  The application of a safeguard measure does not
depend upon "unfair" trade actions, as is the case with anti-dumping or countervailingmeasures.  Thus, the import restrictions that are imposed on products of exporting
Members when a safeguard action is taken must be seen, as we have said, as
extraordinary. And, when construing the pr erequisites for taking such actions, their
extraordinary nature must be taken into account."
Reply to sub-question 2
In its report on " Argentina-Footwear " the AB states that
" certain circumstances which must be demonstrated as a matter of fact  in order for a
safeguard measure to be applied consistently with the provisions of Article XIX of
the GATT 1994."
Demonstrate means "show evidence of" or "describe and explain". "As a matter of fact",
means by providing factual evidence.
The AB has also indicated that
"The first clause in Article XIX:1(a) – "as a result of unforeseen developments and of
the obligations incurred by a Member under the Agreement, including tariff
concessions … " – is a dependent clause which, in our view, is linked grammatically
to the verb phrase "is being imported" in the second clause of that paragraph.(…) In
this sense, we believe that there is a logical connection between the circumstancesdescribed in the first clause – "as a result of unforeseen developments and of the
effect of the obligations incurred by a Member under this Agreement, including tariff
concessions … " – and the conditions set forth in the second clause of
Article XIX:1(a) for the imposition of a safeguard measure."
18
It has moreover clarified19 that
""(…) safeguard measures may be applied only when [compliance with] all the
provisions of the Agreement on Safeguards   and Article XIX of the GATT 1994 are
clearly demonstrated".
It has then concluded that
" we do not believe that it is necessary to complete the analysis of the Panel relating
to the claim made by the European Communities under Article XIX of the
GATT 1994 by ruling on whether the Argentine authorities have , in their
investigation , demonstrated that the increased imports in this case occurred "as a
result of unforeseen developments and of the effect of the obligations incurred by a
Member under this Agreement, including tariff concessions … ". (emphasis added).
Therefore, in this case the burden rests on the US to show where it has demonstrated in the
ITC report or in the legal act adopting the safeguard measure that unexpected circumstances had "led
                                                     
18 at paragraph 92
19 at paragraph 95WT/DS166/R
Page 139
to a product [wheat gluten] being imported in such increased quantities and under such conditions as
to cause or threaten to cause serious injury to domestic producers"20. This is reinforced by the
language of Article 3.1 last sentence which requires the published report to contain findings on all
pertinent issues of law and fact, irrespective of whether those issues have been raised by any party.
The US has not lived up to this obligation. Its violation cannot be retrospectively healed.
Reply to sub-question 3
There is no demonstration of the existence of unforeseen, i.e. unexpected, developments
described in the record of the investigation, which could have led to any increased imports causingserious injury. Furthermore, there is no indication that such unforeseen circumstances were in fact
present at all.
Questions N. 6 and 7
In paras. 73-77 of its first written submissio n, the EC argues that the ITC failed to take
several "relevant" factors into account in its "serious injury" analysis (i.e. capital investment; new
entries/expansion; developments as to co-products, "imports as positive business strategy").  We note
that, in the summary of parties' arguments in th e relevant section of the ITC Report (pp. I-11, I-12),
while it appears that the EC raised arguments co ncerning "profitability" with respect to wheat
starch/wheat gluten, it is not clear that the EC ra ised the other factors just mentioned as "relevant" in
this context in the ITC proceedings.  Can the parties clarify whether or not the EC did raise theseissues in this context before the ITC?  If the EC did not raise them before the ITC in this context, what
considerations should guide the Panel in any examination of these factors or of their "relevance" in
this context?
Does the language of Article 4.2(a) of the Safeguards Agreement ("…the competent
authorities shall evaluate all relevant factors of an objective and quantifiable nature having a bearing
on the situation of that industry") impose an obligat ion on the competent authorities to themselves
undertake an inquiry into "all relevant factors …" even if these are not raised in the proceedings
before it?  If so, what is the nature and scope of this obligation?
Joint Reply
The language of Article 4.2 (a) SA clearly states that
“(…) the competent authorities shall evaluate all  relevant factors of an objective and
quantifiable nature having a bearing on the situation of that industry, in particular
(…)” (emphasis supplied).
Additionally, Article 3.1 SA states that
"The competent authorities shall publish a report setting forth their findings and
reasoned conclusions reached on all pertinent issues of fact and law." (emphasis
added).
This obligation to evaluate each factor of objective  and quantifiable  nature having a bearing
on the situation of the industry concerned applies to the competent authorities, regardless of whether
or not a particular factor has been raised by any party during the proceedings referred to in Article 3.1
of the SA. If the drafters of the Safeguards Agreement had wanted to make it conditional on whether
                                                     
20 AB report on Argentina- Footwear , at paragraph 91WT/DS166/R
Page 140
the necessity to evaluate the factor concerned had been claimed during those proceedings, nothing
would have been easier for them than to include language to that effect in Article 4.2 (a).
The Appellate Body shares this view:
“We agree with the Panel’s interpretation that Article 4.2 (a) of the Agreement on
Safeguards requires a demonstration that the competent authorities evaluated, at a
minimum, each of the factors listed in Article 4.2(a) as well as all other factors that
are relevant to the situation of the industry concerned.”21 (Emphasis supplied).
Therefore, under Article 4.2 (a) SA, the competent authorities must of their own initiative first
carefully identify which factors may be relevant to the situation of the industry concerned, and then,
again of their own initiative, obtain all information which is necessary to evaluate how that factor
developed. This is reinforced by the language of Article 3.1, last sentence, which requires thepublished report to contain findings on all pertinent issues of law and fact, irrespective of whether
those issues have been raised by any party.
Quite apart from the fact that Article 4.2 (a) SA simply does not make this obligation
dependent on whether an issue was raised by any party during the proceedings foreseen in Article 3 of
the SA, the aim of the SA could also be undermined if the obligation to investigate a factor having a
bearing on the situation of the industry was to be made conditional on the issue having been raised.
Article 4.2 SA requires a good faith evaluation of all relevant factors before a safeguard measure can
be taken. The aim of the SA in general is to ensure that safeguard measures can only be taken ifcertain strict conditions, which are the same for every WTO member, are met. If an interpretation
were adopted which made the obligation to investigate a relevant factor dependent on whether it was
mentioned during the national proceedings, this could create disparity between WTO Member as to
the conditions under which they can take safeguard measures. A WTO Member could choose to
provide only very short and limited means for inte rested parties to provide their views, and then
choose not to investigate relevant factors, arguing that they have not been mentioned before it.
This would clearly be an unacceptable result.In this context the EC would take the opportunity to comment on certain points made by the
US in its oral presentation on 21 December 1999 
22 with respect to the issue raised by the Panel's
questions.
The EC is not arguing, as the US has made it, that new evidence, in the sense of information
on factual developments that occurred after the investigation was closed, should play a role in
determining whether a safeguard measure was justified. (Provided that the safeguard measure was
taken shortly after the period investigated, which was not the case here: the EC refers to Item 3
“Injury”, point 4.2 of its second written submission).
The EC is arguing that the evidence on the facts occurring during the period investigated,
which was obtained by the ITC at the time, or at least should have been obtained by it, does not
support the conclusions that the ITC has reached. Contrary to what the US apparently wishes to
imply, the slides shown at the first substantive meeting are based either on information contained in
the ITC report itself, or on information which must have been available to the ITC (such as US
Department of Agriculture - USDA - information on corn and wheat prices), since it was all of US
Government's source.
                                                     
21 AB report on Argentina- Footwear , at paragraph 136.
22 Pages 2 to 5WT/DS166/R
Page 141
At this juncture, it is useful to analyse in more detail the particular claim of the US that the
EC should not be allowed to bring in monthly whea t prices during the period of investigation in
relation with its argument that – assuming that injury occurred – higher input (wheat) prices was the
main cause of it.
The ITC explicitly accepts that “particularly in 1996 and 1997” wheat prices rose. In fact, it
possessed (some) relevant data, albeit on a quarterly basis23, which must have made the price jump in
1996 and 1997 very clear to it.
Contrary to Article 4 of the SA, none of these data, not even on an aggregate basis, were
provided in the ITC-report. (The Panel will notice the great number of “***” under Table 22 and
Figure 12 on that page. Now, as its “corrigendum”24, the US tries to bring in that part of information
which it thinks is helpful to its case).
Especially in these circumstances there could be no objection whatsoever to the EC’s
reference to official USDA  statistics merely to confirm a point – the wheat price jump in 1996 and
1997 – that, as is clear from the ITC report, was known to the US at the time of the investigation onthe basis of the information provided by US producers. The reasoning of the United States would in
effect deprive other WTO Members from the right to demonstrate that it had not analysed all relevant
factors.
WTO Members must therefore, under Article 4 .2 SA, of their own initiative determine and
evaluate all relevant factors, demonstrate the causal link between increased imports and serious injury,
and demonstrate the relevance of the factors examined.
According to public international law, WTO Members must perform their WTO obligations
in good faith25.
In the case at hand, this means that the fact that during the proceedings referred to in Article 3
of the SA the interested parties made comments which put elements of the investigation into question,
and in particular gave rise to doubt as to whether (the threat of) serious injury existed and whether
increased imports were the cause thereof, is relevant in determining whether the US competentauthorities have complied with Article 4 SA.
Factors can only be deemed to have been properly “evaluated”, and their relevance can only
be deemed to have been “demonstrated” by the compet ent authorities in their report, if in that report
those authorities explain in a properly reasoned fa shion why the arguments detracting from a serious
injury and/or causation finding which have been raised during the proceedings before them, are not
valid.
The ITC has not only completely failed to in vestigate certain factors, but it failed also to
properly explain its conclusions as to other factors, especially since EC producers had during the ITCproceedings explained in detail why those factors detracted from a finding of serious injury and/or
causation.
In fact, by its question N. 6, the Panel very rightly points the finger to another unacceptable
aspect of the ITC report: it does not correctly and fully address the major points which have been
made by the EC’s exporters during the hearings. For the benefit of the Panel, the EC submits, as
Exhibits EC-16, EC-17 and EC-18, the pre-hearing brief submitted on behalf of EC producers, the
                                                     
23 see ITC report II-37 top of page
24 pages II-37 and II-37a
25 Article 26 of the Vienna Convention on the Law of Treaties.WT/DS166/R
Page 142
report of the December 1997 hearing before the ITC and the post-hearing brief submitted on behalf of
EC producers.
For instance, the point that imports by US producers themselves were a positive business
strategy since it avoids having to dispose of necessary co-products in an adverse market situation inthe US was made very explicitly in those briefs.
The EC refers to the pre-hearing brief, Exhibit EC-16, on pages 2 and explained in detail in
pages 24-27.
The point was repeated in the post-hearing brief, Exhibit EC-18, at page 2 (first bullet point),
page 3-5, and repeated on page 32 footnote 84. In the post-hearing brief, the statement made by
Mr. Stout, president of the Manildra Milling Corporation, that Manildra had been an importer of
wheat gluten (from Australia) for many, many years and that it therefore would go on importing in the
future as well is cited literally.
However, as the Panel has rightly observed, the ITC conveniently failed to mention that this
issue had been brought up by EC exporters, and of course did not provide any explanation whatsoever
as to why, in its view, this factor does not detract from a finding of serious injury.
Also, the argument on capacity expansion was explicitly brought forward on behalf of EC
exporters. The EC refers to page 5 of the pre-hear ing report (Exhibit EC16), where it was explicitly
argued that “decisions to invest and to ex pand capacity are a reflection of industry health”.
Questions N. 8 and 9
Article 4.2(b) of the Safeguards Agreement states :  "When factors other than increased
imports are causing injury to the domestic industr y at the same time, su ch injury shall not be
attributed to increased imports."  We note that the term used in this sentence is "injury" rather than
"serious injury".  What is the meaning and relevance, if any, of this distinction?
What is the legal basis in the Safeguards Agreement for a causation analysis that examines
whether or not certain factors are "a more importa nt cause of serious injury than increased imports"?
What guidance, if any, can be found on this issue in past GATT/WTO practice?
Joint Reply
The Panel's question N. 8 correctly draws the attention to the fact that while the explicit
condition under Article XIX of the GATT and Article 2.1 of the SA is that a "serious injury" must be
caused by increased imports if a Member wishes to apply a safeguard measure, Article 4.2 (b), lastsentence, refers only to "injury". "Serious injury" is  defined in Article 4.1 of the SA as "a significant
overall impairment in the position of a domestic industry".
In the EC's view, the reason for such a different wording resides in the fact that a Member is
only allowed to impose a safeguard measure if its in vestigation demonstrates, by the evaluation of all
the relevant factors of an objective and quantifiable nature having a bearing on the situation of the
industry concerned, that "increased imports" caused "serious injury" (i.e. an "overall impairment in
the position of a domestic industry") per se , i.e. taken alone. This can only be achieved by
demonstrating, again in the investigation report,
– that other factors which contributed to the injury did not cause by themselves the "serious
injury", andWT/DS166/R
Page 143
– that after the factors other than increased imports which (also) cause injury have been
removed from the analysis, still increased imports, alone, cause serious  injury.
In such a case, however, the specific provisions contained in the SA impose that the safeguard
measure can only remedy the serious injury caused by imports, to the exclusion of other factors co-
causing injury (Article 5.1 SA).
If a number of events, one of which is the increased imports, amount together to a "significant
overall impairment of the position of the do mestic industry" but none of them can cause per se  a
"significant overall impairment" but only "injury", the Member concerned is not allowed to
implement a safeguard measure.
As an answer to question N.9, in the only pr evious report concerning a safeguard measure
under the GATT 1947, the " Hatter's Fur " case between Czechoslovakia and the US, a Working party
confirmed such a reading. It stated26 the following
"The United States contention that the dom estic production of plain felt hat bodies was
"to some extent" affected by the incr eased imports of velours does not bear
examination. (…) The actual development of the domestic United States production of
women's fur felt hat bodies from 1947 to the end of 1950 was such that there was no
serious  injury caused to it by the increasing imports of velours.  The Czechoslovak
representative referred to a graph drawn by  him from the United States data showing
the actual development of the United States  production.  What in fact happened was
that the change in fashion created a new market and the demand was such that in 1949
and in the first half of 1950 the exporters and also the domestic producers were unable
to fulfil all the orders they received for the special finishes.  The market for plain felt
hat bodies remained stationary;  the domestic production of these types was estimated
in thousand dozens by the Czechoslovak representative at 487 in 1947, 614 in 1948,541 in 1949 and 550 in 1950.  The action taken by the United States Government
operated not to protect the domestic industry from a threat of injury but to protect an
attempt by the domestic producers to capture and monopolize the new market by killing
the import trade and to accumulate profits which previously never came their way.  The
application of Article XIX in this respect was improper." (emphasis added)
In this very relevant precedent (quoted also by the AB in its report on " Argentina -
Footwear "), the working party follows the correct logi c of evaluating whether increased imports have
caused "serious injury" per se . The fact that they contributed to injury caused by other factors is not
enough to render the safeguard measure compatible with the GATT (now GATT/WTO provisions).
The EC is in fact convinced that the present wording of Article 4.2 (b) was inspired by such
previous report.
With the above-mentioned elements in mind, there can be no doubt that the US legislation
(US Trade Act of 1974, Sections 201 and following, as amended) mandating the US authorities toexamine whether or not increased imports are only a "substantial" cause" and whether or not certain
factors are "a more important cause of serious injury than increased imports" has no basis whatsoever
in WTO law.
Indeed, such US internal statutory provision establishes a rule of preponderance which is
clearly in conflict with the SA, both Article 4.2 (b) and 5.1. In case of concurring causes of injury, the
US law prevents the investigating authorities from verifying the only important issue, i.e. whether
                                                     
26 October 1951, at paragraph 22 (b), page 12WT/DS166/R
Page 144
increased imports are  per se the cause of "significant overall impairment of the position of the
domestic industry". The US investigating authorities are limited by the US law to investigating a
different issue, i.e. whether there is a single cause "more important" than increased imports.
This is incompatible with Article 4.2 SA, because it confuses "injury" with "serious injury",
and produces in any case as a consequence a disproportionate extent of the safeguard measure, also in
breach of Article 5.1 of the SA. This WTO-incompatible way of evaluating the causes of injury was
followed by the US investigating authorities in the case of wheat gluten. The safeguard measure taken
as a result of such investigation is clearly disproportionate.
Question N.10
What is the legal relationship between Article 5.2 of the Safeguards Agreement and Article I
of the GATT 1994?  What legal principles and/or past GATT/WTO practice give guidance in this
context?
Reply
According to the Appellate Body report on " Bananas " at footnote 138
"In addition to Article I (the fundamental MFN provision of the GATT), Articles III:7,
IV(b), V:2 and V:5, IX:1 and XIII:1 are also MFN-type obligations in the GATT1994."
According to the Panel report on " Bananas - Complaint by the United States "
27
"Article XIII's general requirement of non-discrimination is modified in one respect
by Article XIII:2(d), which provides for the possibility to allocate tariff quota sharesto supplying countries.  Any such country specific allocation must, however, "aim at
a distribution of trade ... approaching as closely as possible the shares which
Members might be expected to obtain in the absence of such restrictions" (chapeau of
Article XIII:2(d)).
Article XIII:2(d) further specifies the treatment that, in case of country-specific
allocation of tariff quota shares, must be given to Members with "a substantial
interest in supplying the product concerned".  For those Members, the Member
proposing to impose restrictions may seek agreement with them as provided in
Article XIII:2(d), first sentence.  If that is not reasonably practicable, then it must
allot shares in the quota (or tariff quota) to them on the basis of the criteria specifiedin Article XIII:2(d), second sentence.
(…) [i]n the absence of agreements with all Members having a substantial interest in
supplying the product, the Member applying the restriction must allocate shares in
accordance with the rules of Article XIII:2(d), second sentence".
Finally, according to the Panel report on " EC - Bananas - Recourse to Article 21.5 by
Ecuador "
28
"We have taken appropriate account of the EC's admonition that we should not
interpret Article XIII so as to reduce [the Lomé waiver or] Article I to inutility."
                                                     
27 DS27, at paragraphs 7.70 to 7.72
28 at 6.32WT/DS166/R
Page 145
Article 5.2 (a) of the SA is the reproduction word by word of Article XIII.2 (d) of the GATT
1994. Article 5.2 (b) is a provision specific to the SA that allows a Member applying a safeguard
measure to derogate from the general rules under Article XIII and 5.2 (a). This exceptional possibility
is however subject to imperative procedural requirements that must be accurately followed.
Thus, in the EC's view, Article 5.2 of the SA is the lex specialis  applicable when the
allocation of a quota is considered. The interpretation of 5.2 (a) should logically follow the
interpretation given to Article XIII.2 (d) by previous panel and Appellate Body reports.
In the case of the US safeguard measure on wheat gluten, the US has indicated in its oral
statement on 21 December 1999 that
" Article 5.2(a) does not establish a duty to consult"29
As the plain text of Article 5.2 (a) and the interpretations of Article XIII.2 (d) demonstrate,
this assumption is doubly incorrect. On the one hand, these provisions impose an obligation to "seekto reach agreement". This is much more than a me re obligation to consult. In any case, without a
consultation in good faith on a proposed agreement, th e EC fails to see how the US could claim it has
fulfilled this obligation. On the other hand, an obligation of providing reasons as to why this method
was not "reasonably practicable" is also imposed. In this respect again, the US did not live up to its
WTO obligations.
" [t]he reality is that GATT Article I is not implicated because the US measure is a
quota and not a tariff."
30
This statement is incorrect. As the above mentioned panel and AB reports31 show, Article I, as
the "fundamental" MFN obligation, is not set aside by the existence of Article XIII (or in the case of a
safeguard measure, by the corresponding provisions in Article 5.2 of the SA). Article XIII (and
Article 5.2 SA) is limited to the specific issue of  how the allocation of a quota or a tariff quota is
implemented by the Member adopting such a measure. Article I is in general applicable "to any
advantage, favour, privilege or immunity granted". In the case of the safeguard measure on wheatgluten, the EC has demonstrated that the US has pr otected Australian exports to the US and so not
accorded the same treatment to like products imported from the EC.
This protection goes beyond the WTO-inconsistent distribution of the WTO-inconsistent
quota on wheat gluten. For example, a considered policy of importation of wheat gluten from
Australia by Manildra, the Australian owned US-based company and petitioner, which corresponds to
its business strategy of optimising profits cannot, by definition, be considered an injury, let alone aserious injury, for the purposes of justifying a safeguard measure. However, the US authorities did notconsider this element when assessing the injury allegedly resulting from increased imports.
While Manildra was complaining of capacity  under-utilisation to the US investigating
authorities it was at the same time increasing its im ports into the US from Australia. In spite of this
contradictory behaviour, the US authorities examined and accepted the complaint while ignoring theimports.
These and other facts already submitted to the Panel have the effect to constitute de facto
substantial "advantages", "favours" and "privileges" granted to Australian exports of wheat gluten not
immediately and unconditionally accorded to EC's imports of wheat gluten into the US.
                                                     
29 at page 8
30 Ibidem
31 The AB report on " EC - Poultry " - DS 69 further demonstrates the inconsistency of the US
assertions.WT/DS166/R
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"The EC cites Article 5.2(b), but that Article is irrelevant because the United States
did not take action under Article 5.2(b)."32
Article 5.2 (b) is certainly not irrelevant in this context, since it is the only provision that
could justify, under strict procedural conditions, a deviation from the requirements of Article 5.2 (a).As a result of the above quotation, the US confirms th at it has not followed such a procedure, as the
EC has claimed before the Panel.
Since it did not follow the procedures under Article 5.2 (b), the US has no explanation left as
to how it can justify that despite having a 47 per cent share of the market in the previousrepresentative period, the EC was allocated only a 43 per cent share of the quota. Australia, on the
other hand, was allocated a share of 49 per cent, compared to its share in the previous representative
period of 38 per cent. More importantly, this allocation has preserved entirely the 1997 record levels
of imports from Australia despite the fact that Australia’s exports increased continuously in the last
three years of the investigative period, by almost 21 per cent33. In fact, the ITC report34 clearly
indicates the ITC's intent to target “the disproportional growth and impact of imports of wheat gluten
from the European Union”.
Regardless of whether the US has proved that the EC wheat gluten exports' increase was
disproportionate, quod non , without recourse to Article 5.2 (b) procedures, which are specifically
designed to address well-documented cases of “disproportionate increase”, the result obtained by the
US authorities could be achieved in a WTO-consistent manner.
Outside the scope of this exceptional provision, the SA does not provide for the protection of
the market share of third countries. Article 2 ex pressly requires equal treatment for imports from all
sources. The SA is intended to allow for relief and facilitate adjustment to be provided to the domestic
industry, and only the domestic industry. Relief can be provided only to the extent necessary to
alleviate injury and facilitate adjustment to the domestic  industry. The US argued in its first oral
statement35 that the years 1996 and 1997 were not "representative" because imports from the EC
"distorted the relative distribution of market shares among foreign suppliers."
The redistribution of market shares through the quota allocation, therefore, is not justified on
the basis of alleviating any injury to the domestic in jury, but on the intent to restore Australia's market
share relative to the United States.
"the disproportional growth and impact of imports of wheat gluten from the European
Union."
As explained above, without recourse to Article 5.2 (b) procedures, which are specifically
designed to deal with such alleged "disproportionate increase", this result cannot be achieved in a
WTO-consistent manner.
Questions N. 11 and 24
Can the parties indicate whether consultations took place on 24 April 1998 as the United
States is suggesting, and, if so, whether the parties discussed the measure proposed in the
United States notification of 24 March 1998?
                                                     
32 US oral statement on 20 December 1999, at page 12
33 ITC report at II-12.
34 at I-21
35 Pages 11and 12WT/DS166/R
Page 147
Does the EC agree with the United States that consultations within the meaning of
Article 12.3 of the Safeguards Agreement were held on 24 April 1998 regarding the proposed wheat
gluten safeguard measure ?
Joint Reply
Consultations under Article 12.3 SA took place between the parties on 24 April 1998 and
22 May 1998 in Geneva.  During the consultations the US explained the recommendations of the ITC
and referred to the power of the US president to  adopt any of the recommended measures or none of
them. These consultations only therefore dealt with information provided by the US in thenotifications under Article 12.1(b) SA.
The EC does not agree that these consultations were consultations on the "proposed measure"
since at the time of the consultations the US had not yet notified any proposal either to the EC as a
Member having a substantial interest as exporter of the product concerned or to the WTO.
Internal recommendations, in particular if they are subject to full discretion by the deciding
authority, cannot constitute such "proposed measures". In this respect, Article 12 SA establishes a
sequence of events starting with the notification of Article 12.1 (c), providing information to the
Committee on Safeguards and the Council of Trade in Goods under Article 12.2 and consultations
under Article 12.3 SA on the proposed measure.
Only after "taking a decision to apply a safeguard measure" and its notification under
Article 12.1(c), a Member is considered "proposing to apply" a safeguard measures since Article 12.2
first sentence explicitly refers to this notification.
Clearly, a Member which only notifies a finding of serious injury under Article 12.1(b) does
not yet "propose to apply a safeguard measure". Furthermore, consultations under Art. 12.3 on the
proposed measure can only be held once a decision to take a safeguard measure has been made and
notified (Article 12.3 SA refers again to a Member "proposing a safeguard measure").
In this case, the Article 12.1(c) notification of the US President’s decision to apply safeguard
measures was made after the two rounds of consultations were held.WT/DS166/R
Page 148
Question N. 12
On page 34 of its oral statement, the EC refers to an "informal meeting" held on 19-
20 May 1999.  Do the parties consider that this meeting constituted "consultations" within the
meaning of Article 12.3 of the Safeguards Agreement?
Reply
The EC confirms that these consultations were not consultation held within the meaning of
Article 12.3 of the SA.Question N. 13
With respect to production, capacity and capacity utilization, what is the meaning and
relevance of the following statement at p. II-14 of the ITC Report:  "ADM, Manildra and Midwest
reported that dryer capacity defines the limit on production capacity for wheat gluten."
Reply
Since this is an ITC-statement, the EC consider s it appropriate that in the first instance the US
itself explains its meaning and relevance; however, the EC reserves the right to revert to this point at
the second substantive meeting.
Question N. 17
We note that the EC did not refer to Article 3 of the Safeguards Agreement in its panel
request.  In what way and on what legal basis is the EC referring to Article 3 of the SafeguardsAgreement in these proceedings?
Reply
As the Appellate Body stated in paragraph 74 of its report on "Argentina-Footwear""We note that the very terms of Article 4.2(c) of the  Agreement on Safeguards
 expressly incorporate the provisions of Article 3.  Thus, we find it difficult to see
how a panel could examine whether a Member had complied with Article 4.2(c)
without also referring to the provisions of Article 3 of the Agreement on Safeguards .
More particularly, given the express language of Article 4.2(c), we do not see how a
panel could ignore the publication requirement set out in Article 3.1 when examining
the publication requirement in Article 4.2(c) of the  Agreement on Safeguards .  And,
generally, we fail to see how the Panel could have interpreted the requirements of
Article 4.2(c)  without  taking into account in some way the provisions of Article 3.
What is more, we fail to see how any panel could be expected to make an "objective
assessment of the matter", as required by Article 11 of the DSU, if it could only refer
in its reasoning to the specific provisions cited by the parties in their claims."
The EC refers to Article 3 exactly in this manner and to the effect indicated by the AB.
Question N. 18
At p. I-13 of its Report, the ITC states that it "received usable financial data on wheat gluten
operations from three of the four domestic produce rs of wheat gluten….The three firms accounted forWT/DS166/R
Page 149
the substantial majority of domestic production of wheat gluten."  Why precisely does the EC object to
this degree of data coverage and on what legal basis?
Reply
Indeed, the EC objects to the fact that the ITC collected only insufficient financial data on US
producers’ wheat gluten operations36. There are at least two cumulative issues here.
First of all, one of the only four firms constituting the US wheat starch/wheat gluten industry
only entered the market in June 1996. Obviously it therefore only reported financial data for the last
year of the PoI.
New entrants in a market due to start-up difficulties practically always are unprofitable in the
first year of their operations. This new entry in the last year of the PoI therefore must have had a
negative impact on the overall US wheat starch/wheat gluten producers’ situation as reported by theITC. It gives the impression of a negative trend in 1996 and 1997 compared with 1995, although the
new entrant simply was not there in 1995.
The second issue is that ADM, according to the ITC itself, “did not provide usable financial
data on its US wheat gluten operations, but rather provided combined data on its US and Canadian
wheat gluten and wheat starch operations37. There is no explanation in the ITC report as to why ADM
could not provide separate data on its US operations, nor does the report detail any efforts made bythe ITC to obtain US specific data from ADM. Ther efore, with regard to ADM, one of the three main
operators, the US authorities failed to comply with  their obligation under Article 4.2 (a) of the SA to
obtain relevant data.
Questions N. 19, 20, 21 and 22
In paragraph 165 of its first written submission, the EC argues that paragraph 3 of Article 12
"provides further clarification that the measure s hould be notified immediately when it is proposed,
not after it has been put into place".  Does the EC consider that both the proposed measure and the
final measure have to be notified?
If a proposed measure is altered before it is imposed, must the modification be notified prior
to imposition of the measure?
In paragraph 166 of its first written submission, the EC submits that the United States failed
to notify each and every step in Article 12.1 Safeguards Agreement in a timely manner. In paragraph
200 of its first written submission, the United States is arguing that the EC's interpretation of Article
12 Safeguards Agreement suggests that a Member is obliged first to issue "preliminary" findings of
serious injury that the Committee would then ex amine and ratify.  Does the EC agree with this
interpretation of its argument?
The United States argues that it notified the proposed measure and that consultations were
held. The United States refers to its notification pursuant to Article 12.1 (b) of the Safeguards
Agreement of 24 March 1998 (United States Exhibit 6). Could the EC explain why it does not
consider this notification to be a notification of the proposed measure ?
                                                     
36 See in particular paragraph 65 of its first written submission.
37 ITC report at I-17 and at II-17, footnote 45WT/DS166/R
Page 150
Joint Reply
The provisions under Article 12 of the SA aim at ensuring the achievement of two
fundamental objectives:
(a) that meaningful and timely consultations are opened with the exporting Members in
order "to endeavour to maintain a substantially equivalent level of concessions and
other obligations to that existing under GATT 1994";
(b) that transparency is ensured vis-à-vis the Membership of the WTO in general. This is
not a mere formality. It is a response to the very concrete preoccupation that other
(non-exporting) Members could indirectly suffer from the imposition of a safeguard
measure because of diversion of trade into their territories that could be caused by the
restricted access to the market of the Member adopting the safeguard measure.
In order to achieve these fundamental objectives, good faith, timeliness  and transparency  are
the three musts of the required notifications and consultations under Article 12 of the SA. This
explains in particular the repeated reference in paragraphs 2 and 3 to "proposed" measures or Member
"proposing" the measure.
Any meaningful and good faith consultation must take place in time and before the measure is
adopted, on the basis of timely notified texts, at each and every step of the procedure. If suchconsultations and notifications are reduced to pure formalities, the objective pursued by WTO
Members through the agreement in Marrakech on the text of Article 12 of the SA are irreparably lost.
The same consideration can be made with respect to the term "immediately" in Article 12.1. This is
also the core of the findings of the " Korea-Dairy " panel that were not overturned by the AB recent
report
38. In this case, Korea notified a proposed measure under Article 12.1(c) on 21 January 1997,
held consultations under Article 12.3 thereafter, and finally notified the final measures under
Article 12.1 (c) on 24 March 1997.
In the light of the above, the EC can answer the panel's questions as follows:
(19) Article 12 imposes explicitly (and thus undisputedly) an obligation to notify
"proposed" measures, i.e. after a decision to apply them is taken and before they are
applied. For transparency reasons, the final adopted measure should also be notifiedto the WTO "immediately" upon "taking a decision to apply (…) a safeguard
measure". In the present case, the US made its first notification under Art. 12.1 (c) on8 June 1998, i.e. after the measure was applied on 1 June 1998.
(20) Yes. This is confirmed by the precedent in Korea-Dairy . Korea notified a proposed
measure under Art. 12.1 (c) on 1 January 1997, which was different from the final
measure notified on 24 March 1997.
(21) The US position in paragraph 200 of its first written submission appears much more
an attempt to re-negotiate Article 12's wording than a reading of its plain text or of the
corresponding EC's claims. The US comment in paragraph 200 refers to paragraph
168 of the EC's first written submission which is made up, in its two thirds, by a
paraphrase of Article 12.2 of the SA. The plain text of Article 12 imposes the
notification of the "proposed" measures. The final measure must also be notified.
                                                     
38 See paragraph 169 of the EC first written submission.WT/DS166/R
Page 151
(22) First, the format of the US notification on 24 March 1998 does not allow the
information contained therein to be regarded as "proposed measures."
As it appears from the text of the notification39, the US notified the ITC report (also
containing certain recommendations on the remedy) under Article 12.1 (b), i.e. "uponmaking a finding of serious injury caused by increased imports". It is clear from the
legal basis referred to by the US for this notification that it cannot contain "proposed
measures". Such a proposal must be based on Article 12.1 (c) (taking a decision to
apply a measure). By not doing so, the US implied that the statements contained in
this notification on the ITC recommendations could not be considered "proposedmeasures" in the meaning of Articles 12.2 and 12.3 SA.
Second, the information referred to in the Article 12.1 (b) notifications only contained
recommendations by the ITC to the US President.
However, to qualify as "proposed measures" in the meaning of Article 12.2 and 12.3
SA, measures must be proposed by a WTO Member to the WTO Committee on
Safeguards and the Council of Trade in Goods, not by one governmental authority to
another within the institutional framework of the same WTO Member. The fact that
in the Article 12.1 (b) notifications the heading for the ITC's statements on the
possible remedies states "proposed measures" does not affect their nature as purely
internal, non-binding recommendations which did not constitute a proposal of the
WTO Member "United States of America" to the WTO.
Third, under US implementing legislation the US President has full discretion
whether or not to follow the ITC recommendation.
This was even stressed by the US during the consultations under Article 12.3 SA on
the content of the Article 12.1(b) notifications on 24 April 1998. Therefore, it was
entirely uncertain before measures were actually applied, whether or not, and in
which form, measures would be imposed. Consequently, it was not possible to
achieve the purposes of Article 12.3, in particular the objective set out in Article 8.1SA on trade compensation. Assuming arguendo  that an understanding on ways to
achieve the objective set out in Article 8.1 is proposed (and the US did not propose
anything in the case of wheat gluten) WTO Members cannot agree on re-balancingtheir concessions unless they are certain which concessions and to what extent they
will be withdrawn.
As a conclusion, it is clear that the procedures laid down in US legislation as applied
in this case, cannot permit meaningful consultations on the remedy as provided for in
Article 12.3 SA. To this extent, the US practice is in violation of the SA.
Questions N. 23 and 25
The United States is suggesting in paragraphs 205 and 208 of its first written submission that
the EC is claiming that Article 8 of the Safeguards  Agreement requires that substantially equivalent
concessions be provided before a Member, in casu the United States, can take a safeguard action. Is
this a correct reflection of the EC's argument u nder Article 8 of the Safeguards Agreement  ?
Could the EC expand on the relationship between Article XXVIII of the GATT 1994 and
Article 8 of the Safeguards Agreement ?
                                                     
39 Cf. title and the third paragraph of page 1 of the WTO doc. G/SG/N/8/USA/2/rev. 1WT/DS166/R
Page 152
Joint Reply
The Appellate Body has reminded in its recent " Korea-Dairy "40 report that
"We should not lose sight of the fact that taking safeguard action results in
restrictions on imports arising from "fair" trade.  The application of a safeguard
measure does not depend upon "unfair" trade actions, as is the case with anti-dumping
or countervailing measures".
In its " Argentina - Footwear " report at paragraph 93 the AB has significantly added that
"The remedy that Article XIX:1(a) allows in this situation is temporarily to "suspend
the obligation in whole or in part or to withdraw or modify the concession".  Thus,
Article XIX is clearly, and in every way, an extraordinary remedy."
Such an extraordinary remedy "in every way" to the detriment of "fair" trade cannot be
interpreted, as the US does, as a three years window of opportunity to go back from its GATT
concessions at no cost, without genuinely and effectively offer adequate compensation capable of
maintaining "a substantially equivalent level of concessions and other obligations to that existing
under GATT 1994 between it and the exporting Members which would be affected by such a
measure" (Article 8.1 of the SA). This is the textual and substantial meaning both of Article 8.1 and of
Article 12.3 of the SA ("with a view (…) to re aching an understanding on ways to achieve the
objective set out in paragraph 1 of Article 8").
Such a genuine endeavour to reach an understanding on the ways to maintain a substantially
equivalent level of concessions or other obligations is not fulfilled by a mere convening of an
informal meeting were the Member wishing to adopt the measure politely listens to the exporting
Member's complaints.
The adopting Member, in casu  the US, must demonstrate to the Panel that it has actively  and
concretely offered  an adequate  compensation and that that compensation was positively rejected or at
least was not accepted by the exporting Member concerned. The US cannot prove this in this case for
the simple reason that it never endeavoured in good faith to "maintain a substantially equivalent levelof concessions or other obligations". In fact, the US officials were not in a position to negotiate at all.
Articles 8.1 and 12.3 of the SA have been draf ted with Article XXVIII of the GATT 1994, and in
particular Article XXVIII.2, and with the findings of the Panel on " Newsprint " in mind. Any
compensation should of course, as is the case when Article XXVIII is applicable, be offered on a
MFN basis.
                                                     
40 Paragraph 87WT/DS166/R
Page 153
ATTACHMENT 1-4
SECOND WRITTEN SUBMISSION OF THE EUROPEAN COMMUNITY
(17 January 2000)
1. Introduction
1. This second submission serves mainly two functions:
- to rebut certain statements and affirmations by the US which were expressed during
the first substantive meeting with the Panel and
- to recall the main claims and arguments of the EC in this case.Of course, the other points of law and procedure which were advanced by the EC during the
first stages of this dispute settlement procedure (including the answers to the questions from the
panel) should also be considered entirely confirmed here. This is true in particular for the EC's claims
and arguments concerning the violation by the US safeguard measure on wheat gluten of Article I of
the GATT 1994 and Articles 12 and 8 of the SA.
2. The EC will thus proceed as follows: a numbe r of items will be listed, under which some of
its major claims and arguments will be recalled and summarised, and through which rebuttals of USarguments will be made.
2. Item N. 1: Standard of review of this Panel
3. As the Appellate Body confirmed in its very recent report on Argentina - Footwear  (at
paragraph 118), Article 11 of the DSU contains the guiding principles for Panels when pursuing an
examination of a case in its substance:
"(…) a panel should make an objective assessment of the matter before it, including
an objective assessment of the facts of the case and the applicability of and
conformity with the relevant covered agreements (…)".
4. In the case of this dispute settlement procedure, the Appellate Body has also set out the
Panel's task in clear words
1
"So far as fact-finding by panels is concerned, their activities are always constrained
by the mandate of Article 11 of the DSU:  the applicable standard is neither de novo
review as such, nor "total deference", but rather the "objective assessment of the
facts".  Many panels have in the past refused to undertake de novo  review, wisely,
since under current practice and systems, they are in any case poorly suited to engagein such a review.  On the other hand, "total deference to the findings of the national
authorities", it has been well said, "could not ensure an 'objective assessment' as
foreseen by Article 11 of the DSU".
5. This is exactly what the EC requests this Panel to do. In particular, the Panel will need to
verify whether the US has fulfilled its obligations under the SA and the GATT 1994 before resortingto its safeguard measure on wheat gluten. As the EC has already indicated in its first oral statement, in
order to achieve that result, the Panel is thus required to examine the following issues:
                                                     
1 AB report on " Hormones ", DS 26/48, paragraph 117.WT/DS166/R
Page 154
- Have the US authorities demonstrated, as they should, that the conditions under
Article 2 SA and Article XIX GATT 1994 have been fulfilled? The EC submits that
they have not.
- Have the US authorities considered, as they should, "all pertinent issues of fact and
law" (Article 3.1 SA) including "all relevant factors of an objective  and quantifiable
nature having a bearing on the situation of that industry" (Article 4.2 (a) SA)? The EC
submits that they have not.
- Have the US authorities presented, as they should, their findings, conclusions and
determinations in a "reasoned" (i.e. rational, non- contradictory and clear) way
(Article 3.1 DSU), based on "objective evidence" (i.e. based on criteria that are not
biased by subjective, political or unrelated aims) (Article 4.2 (b) SA)? The EC
submits that they have not.
- Have the US authorities established, as they should, the "existence (i.e. a positive and
irrefutable evidence of its reality) of the causal link between increased imports of the
product concerned and serious injury" (Article  4.2 (b) SA)? Have the US authorities
ensured that injury caused by other factors was not attributed to increased imports?
The EC submits that they have not.
- Have the US authorities applied the safeguard measure, as they should, "only to the
extent necessary" (i.e. proportionate or commensurate to) to prevent or remedy
serious injury and to facilitate adjustment (Article 5.1 SA )? Have the US authorities
provided "a clear justification" (i.e. a detailed objective and unbiased explanation)
when deciding to apply quantitative restrictions and when choosing a period different
from the last three representative years for which statistics are available? Moreover,have the US authorities fulfilled the other substantive and procedural obligations
under Article 5.2 of the SA and under Article I of GATT 1994? The EC submits that
they have not.
- Have the US authorities complied with the procedural obligations under Articles 8
and 12 of the SA? The EC submits that they have not.
6. In order to examine the matter according to the standard required by WTO law, the EC
submits again that the Panel cannot be content with a superficial glance at the issues, taking at face
value the text of the investigation report, as the US  would have it. Rather, it must concentrate on the
substance of the evidence that actually is
 in the report or should have been  in the report since it was
either considered during the investigation procedure, or should have been considered as pertinentevidence that was publicly available, or had be en submitted to the ITC during the investigation
procedure.
7. The US has tried to push the Panel off-track on this crucial issue by making the following
incorrect assertions:
(a) US assertion: some previous panel reports on anti-dumping should serve as a basis for setting
the standard of review of this Panel.2 
As the AB report on " Argentina-Footwear"3  has indicated, this approach is incorrect. The
particular legal nature of anti-dumping measures as compared with safeguard measure4 , the
                                                     
2 Paragraph 61 of the US first written submission, pages 7 and 8 of the US first oral statement on
20 December 1999.
3 Paragraph 117.
4 AB report on " Korea-Dairy ", at paragraph 87.WT/DS166/R
Page 155
existence of provisions specific to the SA which are not reproduced in the WTO Agreement
on Implementation of Article VI of the GATT 1994 and the self-standing obligations flowing
from Article 11 of the DSU exclude such a cross-reference.
(b) US assertion: the Safeguards Agreement does not impose an obligation on competent
authorities to explain why they found some factors irrelevant and thus did not rely on them.5
This is also incorrect. As the Appellate Body stressed in " Argentina-Footwear"6, the
Safeguard Agreement imposes on the competent authority not only an obligation to evaluate
all the relevant facts but requires the authority to “ adequately explain  how the facts support
the determination”. Therefore the SA does impose an explicit obligation to justify how a
certain result is achieved in the investigation. The US authorities are obliged to "publish a
report setting forth their findings and reasoned conclusions reached on all pertinent issues of
fact and law" (Article 3.1 SA).
In order to determine what is pertinent and what is not, the US should have indicated in a
"reasoned" (i.e. expressed as a coherently argued case) the standard for determining which
facts should be considered pertinent. In light of such standard, the US should have logically
indicated why it believed that certain other facts were not pertinent. Without such an
explanation, the Panel would have no room for independent judgement and only deference to
national authorities would in fact be possible.  Thus, the US suggested interpretation of this
Panel's standard of review would have the result that there could be no real "objectiveassessment of the facts" as Article 11 of the DSU requires. 
Article 4.2 SA goes further. It imposes upon the US the obligation to "evaluate all relevant
factors of an objective and quantifiable nature having a bearing on the situation of that
industry, in particular (…)".
The US authorities should have provided "a detailed analysis of this broad and thorough
examination that includes all the elements, including those that are susceptible to lead to a
decision not to adopt a safeguard measure7, as well as a demonstration of the factors
examined" (Article 4.2 (c) SA). , In fact, the US authorities have breached these rules by
systematically suppressing, downplaying or othe rwise misrepresenting in their report relevant
objective facts which indicated that there was no ground to proceed to the adoption of any
safeguard measure on wheat gluten.
(c) US assertion: the national investigative author ities are limited by the evidence and the views
presented before them and have no duty themselves to search "somewhere" for any other
information.8
This assertion should be rejected as erroneous and in order to avoid setting a troubling
precedent. Firstly, it is clear from the text of both Articles 3 and 4 of the SA that there is apositive obligation for national investigative authorities to look into "all  pertinent issues of
fact and law" and "all relevant factors of an objective and quantifiable nature having a bearing
on the situation" of the industry concerned. Any suggestion that the national authorities are
limited by the scope of the complaint which init iated the domestic procedure or by specific
rebuttal arguments made during the domestic procedure is without foundation in WTO law. 
                                                     
5 Paragraph 58 of the US first written submission.
6 Paragraphs 121 and 145.
7 See Korea-dairy 7.55 ("or detracts from").
8 Pages 4 and 5 of the US oral statement on 21 December 1999.WT/DS166/R
Page 156
Secondly, the EC has shown that what the US competent authorities have ignored or
suppressed or downplayed or otherwise misrepresented in this case, are pertinent and publicly
available data whose source is the US government itself. In other words, the US authorities
had themselves gathered those facts and put them in the public domain. They cannot pretend
now that they were not aware of them or that they could not examine and consider them. 
Thirdly, the US investigative authorities have in any event failed even by the standard of
evidence postulated by the US above. The ITC disregarded pertinent information and data
provided by the industry during the procedure before it, as will be shown in examining Items
N. 3 and 4 below.
The troubling aspect of the US interpretation is th at the US is in effect suggesting to the Panel
that in the international trade relations between the US and the other WTO Members there
could be a reversed hierarchy of norms, according to which the US internal domestic practices
(based on its domestic law) would prevail over US WTO obligations under the SA. The ECdisagrees with this approach, which would undermine a fundamental principle of the WTO
legal system as expressed in Article XVI.4 of the Marrakech Agreement.
9  T h e  W T O
obligations on a Member to discharge its duties under the SA cannot be diminished by the
implementation procedures instituted by that Member.
(d) US assertion: the US claims in paragraph 158 of its first written submission that it has only
misapplied its own policy concerning reporting of aggregate data.10  It denies that it has
misapplied the provisions of Articles 3 and 4 of the SA.
In paragraph 1 58 of its first written submission, the US has declared that
"(…) the policy guidelines were not met as to some of the pricing data that were withheld
from disclosure.  Consequently, the USITC has now prepared a corrigendum to the publicreport that provides the portion of the pricing data and certain other information that can be
disclosed (attached as Exhibit 10 to this submission)."
The obligation flowing from Articles 3 and 4 to publish all relevant factors of an objective
and quantifiable nature having a bearing on the industry concerned is binding on the US
regardless of its internal domestic legislation. By the statement above, the US has accepted
that it has violated its WTO obligations. Its attempt to heal the breach retrospectively is
legally impossible, since the obligation refers to timely publication ("promptly"). Its attempt
to make the Panel abstain from looking into this issue on the pretext that it concerns only
"USITC own policy" has no merit under the WTO and cannot limit in any way the scope ofthe Panel's review pursuant to Article 11 of the DSU.
3. Item N. 2: the US has breached Article XIX of the GATT 1994 ("Unforeseen
developments")
8. As the EC recalled in its oral statement on 20 December 1999, the burden rests on the US to
show where it has demonstrated in the ITC report or in the legal act adopting the safeguard measure
that unexpected circumstances had "led to a product [wheat gluten] being imported in such increased
quantities and under such conditions as to cause or threaten to cause serious injury to domestic
producers."11
                                                     
9 "Each Member shall ensure the conformity of its laws, regulations and administrative procedures with
its obligations as provided in the annexed Agreements"
10 Pages 5 and 6 of the US oral statement on 21 December 1999.
11 AB report on Argentina- Footwear , at paragraph 91.WT/DS166/R
Page 157
9. The AB has further indicated that
"The first clause in Article XIX:1(a) – "as a result of unforeseen developments and of
the obligations incurred by a Member under the Agreement, including tariff
concessions … " – is a dependent clause which, in our view, is linked grammatically
to the verb phrase "is being imported" in the second clause of that paragraph.(…) Inthis sense, we believe that there is a logical connection between the circumstances
described in the first clause – "as a result of unforeseen developments and of the
effect of the obligations incurred by a Member under this Agreement, including tariff
concessions …" – and the conditions set forth in the second clause of
Article XIX:1(a) for the imposition of a safeguard measure.".
12
10. It has moreover clarified13  that
"(…) safeguard measures may be applied only when [compliance with] all the
provisions of the Agreement on Safeguards  and Article XIX of the GATT 1994 are
clearly demonstrated."
11. The EC maintains that there are no unforeseen, i.e. unexpected, developments described in the
record of the investigation on wheat gluten, which could have led to any increased imports causing
serious injury. Furthermore, there is no indication that such unforeseen circumstances were in fact
present at all.
12. The US claims in its oral statement on 20 December 199914  that the EC allegedly agrees with
the US "that the US wheat gluten producers did not foresee the import surge when they added
production capacity during 1993 to 1995 in anticipation of a large increase of domestic demand."
13. The EC responds that such a claim is entirely incorrect.
The US approach to the issue is not in line  with the interpretation by the AB of the
"unforeseen developments" requirement. As indicated above, the AB stated that the Member applying
the safeguard measure, in casu  the US, should have demonstrated in its investigation report that
unexpected circumstances "led to a product [wheat gluten] being imported in such increasedquantities and under such conditions as to cause or threaten to cause serious injury to domestic
producers."
Thus, the ITC report should have shown the existence of an (unexpected) circumstance that
caused ("led to", in the AB's words) increased imports "under such conditions as to cause (…) serious
injury". The US authorities cannot fulfil their obligations under Article XIX by referring to an alleged
"sudden" nature or size of the increased imports themselves. It is the sudden nature of what might
have prompted the "increased imports" that is the relevant issue under Article XIX of the GATT.
14. In the present case nothing "unexpected" of that sort has happened: indeed, the
uncompetitiveness of the US wheat gluten/wheat star ch industry was evident well before 1993, during
the whole investigative period and in any case before 1996 and 1997, given its intrinsic weakness vis-
à-vis its US competitors on the US starch market. It was aggravated by the higher input costs of
wheat. Furthermore, the corn sector, given its competitive advantage, accrued the benefits from US
government support policy in relation to ethanol and sugar to the exclusion of the wheat sector.  Theill-considered gamble taken by some US domestic companies, a wilful business strategy, of
                                                     
12 At paragraph 92.
13 At paragraph 95.
14 At page 2.WT/DS166/R
Page 158
substantially increasing their production capacity during the investigative period led to a (predictable)
deterioration in their position.
4. Item no. 3: the ITC did not show that “serious injury” occurred
15. The EC will not, here, repeat the arguments it has made earlier on in this procedure. It will
limit itself to the following points.
4.1 Profitability
16. The EC reiterates that it is impossible for any WTO Member to verify, on the basis of the ITC
report, whether, as the ITC asserts, the wheat gluten aspect of US wheat gluten/wheat starch
producers' operations became unprofitable in 1996 and 1997. The EC reserves the right to come back
to this issue in the light of the US answer to Panel question no. 26.
4.2 The reversing “upwards” of the industry’s situation during last year of the POI
17. Both in its first written submission15  and in its oral statement at the first substantive
meeting16, the EC stressed that many factors improved at the end of the period of investigation. The
Panel has rightly, in its question no. 27 to the US, noted that the ITC does not explain at all in its
report why – in spite of those recent improvements - serious injury in the sense of Article 4.1 (a) of
the SA was still found to have occurred at the end of that period.
The EC reserves the right to come back to this question in the light of the US reply to
question no. 27. Nevertheless, the EC would already at this stage draw the Panel’s attention to the
following points regarding this issue.
18. The Appellate Body has recently stressed that Articles XIX.1 (a) and 2 of the SA are in the
present tense: "such product is being imported  in such increased quantities" as to cause or threaten to
cause serious injury. It has explicitly stated that therefore competent authorities need to examine the
most recent situation: "We believe that the relevant investigation period should not only end in the
very recent past, it should be the recent past".17   Especially in view of the fact that by the time the
safeguard measure entered into force—1 June 1998—some of the factors indicating the financialcondition of the industry had already started moving in a positive direction two years before, the fact
that the ITC report contains no data whatsoever on the year preceding the measure’s entry into force
does not comply with that standard.
19. In this respect, it is also noteworthy that the US invoked in its first oral statement the AB
statement that Article 2.1 of the SA "requires that the increase in imports must have been recent
enough, sudden enough, sharp enough, and significant enough, both quantitatively and qualitatively,
to cause or threaten to cause serious injury.
18   In the last year of the PoI, 1997, the market share of
imports increased by a mere 1.3 per cent compared with 1996.19   The US industry’s sales, production,
and inventory situation were improving. There simply was not a situation of recent sharp significantincrease in imports causing injury warranting a safeguard measure.
20. EC producers moreover explicitly pointed out to the ITC the fact that positive developments
occurred in 1997.
20
                                                     
15 See in particular paras. 57-71.
16 Paragraphs 45-48.
17 AB report on " Argentina -Footwear " paragraph 130 and footnote 130.
18 Ibidem  at paragraph 131.
19 ITC II-25, 58.9 per cent compared to 60.2 per cent.
20 Exhibit EC-16 at p. 37.WT/DS166/R
Page 159
21. All this taken together means that the ITC report does not adequately demonstrate that
imports were occurring ("is being imported" - Article XIX of the GATT 1994 and 2.1 SA) in such
increased quantities and under such conditions as to cause serious injury at the time the safeguard
measure was taken.
5. Item N. 4: the ITC’s failure to correctly address the causation issue
5.1 Introductory remarks
22. Regarding the issue of causation it is important to refer back to two general issues, on which
the Panel asked very pertinent questions.
5.1.1 The ITC’s investigative obligations
23. The first one, even though it is general, is especially important with regard to the way in
which the ITC disposed of the causation issue in its investigation and report. At issue is the duty of
the ITC under Article 4.2 of the SA to investigate correctly, in good faith, all pertinent matters.21
Nevertheless, because the adequacy of the ITC investigation is central to the case before this Panel,the EC considers that the essence of its points about the failure of the ITC investigation to meet the
standard in Article 4.2 of the SA bear repeating.
24. This duty to investigate includes obtaining and reviewing evidence on all relevant factors,
including those which might detract from a serious injury and causation finding, and providing a
solidly reasoned explanation of the findings in a publicly available report which includes all relevant
information (with the sole exception of legitimate business secrets of individual companies for which
a summary of the confidential information must be provided).
As required under Art. 4 2 of the SA, this must be done on the ITC’s own initiative.
However, the record shows that several pertinent (and as a matter of fact crucial) issues, which had
moreover been raised before the ITC, were not dealt with in the report.  This is evidence of the failureof the ITC to live up to the obligations imposed by the SA.  In the following sections, the EC refers in
particular to information which was provided to the ITC during its proceedings, and which was madeavailable to the Panel pursuant to its questio ns on that point (Exhibits EC-16 to EC-18).
5.1.2 Article 4.2 (b) of the SA.
25. In its reply to the Panel's questions N. 8 and 9, the EC has already explained what the
standard for causation analysis under the SA is. The section below will show that the US has not met
this standard.
5.2 Input cost increases/alleged possibility to pass those on
26. As the EC has explained, wheat prices jumped in 1996 and 1997. The ITC states that,
moreover, fuel costs (partially weather related in 1997) increased and depreciation rose because of
increased capital expenditures.
22
The US alleges that these increased costs in 1996 and 1997 were not the cause of any injury
to the industry, since – absent imports – no matter how  high the increase in input costs, they could
have been passed on to buyers since "demand [for wheat gluten] is not sensitive  to price changes in
                                                     
21 See also the EC's answer to Panel questions Nos. 6 and 7.
22 ITC report at II-18.WT/DS166/R
Page 160
wheat gluten because wheat gluten represents only a small cost of producing downstream products
and generally lacks substitutes.23  This sweeping statement implying zero elasticity of wheat gluten
demand to wheat gluten price is inconsistent with the evidence on record before the ITC. The ITC
offers no reasonable explanation for this inconsistency.
27. Leaving aside the point that general economic logic dictates that almost no commodity exists
for which demand is completely insensitive to price, the US omits to mention that the ITC itself
acknowledged in its report that wheat gluten competes with high-protein wheat and wheat flour.24
In fact, the ITC had stated: " Demand for wheat gluten is closely tied to the protein content of
each year’s wheat crop.  Should the quantity and quality of wheat protein naturally occurring in the
wheat supply be low, then bakers consume more wheat gluten to supplement the lack of protein in
wheat.".25
This raises the question: how, if the ITC acknowledges that high-protein wheat can substitute
for wheat gluten in bread baking (which constitute s 80 per cent of US wheat gluten consumption), can
it assert that demand for wheat gluten is insensitive to price changes?
28. As with other issues, the reasons why the allegation by US producers that – absent imports -
they would have been able to pass on to cons umers increased input costs of any magnitude is
incorrect, were also pointed out explicitly and extensively to the ITC26  during the investigation, and
nevertheless completely ignored by it.
29. Without any explanation or discussion, the ITC ignored the evidence detracting from its
findings and accepted the US industry's statements without any supporting  evidence  (In fact, it relied
on two oral statements by the petitioners requesting safeguard measures). For the benefit of the Panel,
the EC mentions some of the points which were made to the ITC:
- one cannot expect to pass on all increased cost in a competitive market like the US
wheat gluten market, in particular since structural changes in the US wheat gluten
industry (e.g. significantly increased wheat gluten capacity and new entrants27  have
intensified intra-industry competition since 1994"28
- competition with high-protein content wheat flour 29;
- difficulty in passing on increased input costs immediately due to long-term sales
contracts.30
30. In the light of the US insistence in paragraph 148 of its first written submission that it couldrely on oral statements by the two petitioners at the hearing that historically they had been able to pass
on higher input cost, the following is particularly relevant.
Midwest, one of those two petitioners claiming, before the ITC, that it could pass on
increased input cost without any limits, had stated exactly the opposite in a submission
31  filed in 1993
                                                     
23 Paragraph 149 of the US first written submission, emphasis supplied.
24 ITC report at I-22.
25 ITC report at II-9, emphasis supplied. See also at II-27.
26 Pre-hearing brief, Exhibit EC-16, pages 27-35.
27 On the point of the influence of new entrants on profitability of the industry as a whole, the EC refers
the Panel to its answer to question 18.
28 Pre-hearing brief, Exhibit EC-16, page 27.
29 Ibidem, page 28.
30 Ibidem, page 31.WT/DS166/R
Page 161
with the US Securities and Exchange Commission: "Vital wheat gluten’s contribution to the
Company’s profitability during fiscal 1993 (July ‘92- June ’93) was negatively impacted due
primarily to the increased cost of wheat (…).32
Why would Midwest state this to the SEC if it was able to pass on increased input cost
without problems? The EC points the Panel’s attention to the fact that this statement was clearly
pointed out to the ITC during its proceedings, but was ignored by the ITC.
5.3 Protein premium
5.3.1 Introduction
31. This brings the EC to the protein premium issue.  The EC has shown that it is the protein level
in wheat which is the most important factor determining how wheat gluten prices develop.33
32. Indeed, one of the most serious failures of analysis by the ITC concerns its misrepresentation
of the reasons for wheat gluten price movements over the period of investigation, and its failure to
investigate this issue adequately. According to all price data, from whatever source, there was an
extremely sharp increase, and then decrease, in price in the period surrounding the first half of 1994.34  
The ITC itself explicitly attributes the increase to  the shortage of high-protein (i.e. high gluten
content) wheat on the market in that period.35
5.3.2 The ITC’s statements
33. For the period of the alleged injury to the US industry, 1996-97, the price of wheat gluten was
lower than in 1994. The ITC states on this issue, literally:  "In 1996 and 1997, however, unit selling
values declined, notwithstanding increased demand and higher raw material costs. We find that thisunusual development is explained by the dramatic increase in relatively low-priced imports during
this period, which had the effect of driving down wheat gluten prices.
36   This statement creates the
impression of prices being forced to come down during a certain period due to increased imports.Thus, the ITC attributes an alleged US producers’ selling price decrease to increased levels of
imports, disregarding the developments in protein level in wheat during the PoI.
5.3.3 The information from the ITC
34. The Figure below shows actual US producers' wheat gluten selling price movements. They
are derived from the data unjustifiably omitted from the ITC's 1998 March report (wherein table 18 onpage II-33 was left blank). The US has now belatedly provided these data in the so-called
"corrigendum".
37
Whilst the EC has already pointed out that the withholding of this information from the public
version of the ITC’s report constitutes a violation of Article 4 of the SA which cannot be undone since
that report had to be published "promptly"38  and was not, the EC has also accepted that it is evidence
before the Panel and therefore can be used.
                                                                                                                                                                    
31 Known as a "10-K form".
32 Pre-hearing brief, Exhibit EC-16 at p. 29, repeated in the post-hearing brief, Exhibit EC-18 at p. 11.
33 See EC’s 1st written submission, Exhibit EC-10.
34  As always except where specifically otherwise indicated, the EC is using “ITC-years”. For example,
the period running from e.g. 1 July 1993-30 June 1994 is called “1994”.
35 E.g. ITC II-32, footnote 84.
36 ITC I-18, emphasis supplied.
37 US Exhibit 10, page II-37a.
38 In the EC's joint reply to questions 2, 4, 14, 15 and 16.WT/DS166/R
Page 162
35. The EC notes that, although deleted from the public version of the March 1998 report, the
data here presented are the same data which the ITC possessed when it considered the changes in
price of the US product. The quarterly wheat glut en price data made available only now by the US
reveal a telling pattern of wheat gluten price movements which is contrary to the US statement thatwheat gluten prices fell in 1996 and 1997 because of wheat gluten imports.
36. As a last point before discussing the evidence which have only now been produced by the US,
the EC underlines that those data entirely confirm the data which the EC has already submitted to the
Panel.
39
                                                     
39 Exhibit EC-10, in particular Figure 2.ITC reporting year 
Quarter 1993 
1st 2nd 3rd 4th1994 
1st 2nd 3rd 4th1995 
1st 2nd 3rd 4th
Price $ $0,66 $0,64 $0,67 $0,69 $0,65 $0,70 $0,97 $0,94 $0,76 $0,69 $0,66 $0,62
ITC reporting year 
Quarter 1996 
1st 2nd 3rd 4th1997 
1st 2nd 3rd 4th
Price $ $0,63 $0,63 $0,67 $0,66 $0,65 $0,63 $0,59 $0,56Wheat gluten: weighted average net delivered US 
selling pri ces $ (ITC, December 1999, p. V-17 and US corrigendum)
$0,00$0,20$0,40$0,60$0,80$1,00$1,20
1993 1st
2nd
3rd
4th
1994 1st
2nd
3rd
4th
1995 1st
2nd
3rd
4th
1996 1st
2nd
3rd
4th
1997 1st
2nd
3rd
4th
ITC reporting years (July of previous year to June of current year)WT/DS166/R
Page 163
37. The above graph shows, in the first place, that during the "reporting year" 1994 (the 12-month
period ending June 1994), the price of wheat gluten jumped sharply. This was the year for which the
ITC explicitly acknowledges that low protein content in the wheat crop drove up prices. During the1995 reporting year however, US producers’ selling prices fell sharply. The EC underlines that during
that same year imports increased only very slightly compared to 1994.40   Quarterly wheat gluten
prices increased in 1996 from the level of prices in the last quarter of 1995. (Once again, for clarity,
all these years refer to ITC reporting years.) In fact, also in the first and second quarters of 1997quarterly wheat gluten prices were higher than at the end of 1995.  Therefore, wheat gluten prices
were above last  quarter 1995 prices for six consecutive quarters.
5.3.4 The conclusions which necessarily  flow from that information
38. There are three important conclusions to be drawn from these data, which all come from the
ITC itself.
39. The first is that, looking at the 1994 part of the Figure, protein premium is the most important
factor in deciding wheat gluten prices.  In its report, the ITC acknowledged that the sharp price
increase in 1994 (36 per cent higher in the last quarter of 1994 than in the last quarter of 1993) was
caused by a shortage of high-protein wheat.41
40. The second is that, looking at the 1995 part of the Figure, it is not increased imports that drive
down prices. After all, during the price fall in 1995 (34 per cent lower in the last quarter of 1995 as
compared with the last quarter of 1994), imports hardly increased (2.9 per cent)42 compared with the
previous year.43
41. And the third is that, looking at in particular the 1996 but also the 1997 part of the graph, itwas certainly not increased imports which "drove down" prices during those years.  Prices were lower
at the end of 1995 than for the whole of the 1996 period. In fact, compared to the last quarter of 1995,
US producers’ selling prices improved throughout th e first three quarters of 1996—the year in which
the strongest increase in imports occurred—and were still higher during the 2nd quarter of 1997 than
during the last quarter of 1995.
5.3.5 The US defence in its 21 December 1999 Oral Statement is unconvincing
42. In its oral statement on 21 December 1999, pages 4 to 5, the US argues that it was increased
imports which caused low prices at the end of the PoI because "something must have been happeningon the supply side."
43. The EC responds that something was indeed happening on the supply side during the last
three years of the PoI. However, in contrast to what the US asserts, what was happening on the supply
side in 1996 and 1997 (and for that matter in 1995), as compared with 1994, was the following:
- supplies of high-protein wheat were good;- the offer of high protein wheat was therefore high, and
                                                     
40 See ITC II-12 and 13.
41 ITC II-9 and II-32 footnote 84.
42 ITC report p. II-12 and 13, 127.912 thousand pounds compared with 124.188 pounds.
43 See in particular ITC p. II-13.WT/DS166/R
Page 164
- consequently, the protein premium (difference between price of high-protein wheat
and low-protein wheat) was low, in particular when compared with record high levels
at the end of 1994.
The EC refers in this context to the eviden ce contained in Exhibit EC-10, in particular
Figure 3 thereof.
44. In the latter period of the PoI, bakers in the US44 were thus able to force wheat gluten
suppliers to keep their prices down, by confr onting them—in price negotiations—with the concrete
alternative that they (the bakers) could also turn to relatively cheap high-protein wheat as a substitute
for wheat gluten in baking.
45. The US wheat gluten producers had no choice but to price wheat gluten at the low level
determined by the protein premium. This depressing effect on prices affected equally domestic and
imported wheat gluten.
Given this market reality, the declarations made by the two petitioner wheat gluten producers
before the ITC that they could pass on costs to their main purchasers (the bakers) are evidently
incorrect (and inconsistent with earlier declarations before the US Securities and Exchange
Commission).45
More seriously, the US authorities should never have relied on oral statements which were
inconsistent with earlier written statements wit hout duly and thoroughly investigating developments
in prices of high and low protein wheat in the US market.
46. Thus, the US statement made before the Panel on 21 December 1999 does not refute the EC's
basic claim based on statistical evidence that there is an obvious correlation between protein premiumlevels and the price of wheat gluten. What it does is distort the EC's argument by quoting the EC as
having stated that "demand" rose
46 , implying a shift in the demand curve to the right. In fact, the EC's
statement47  (based on the terminology used in the ITC's report) was that consumption—or more
precisely, apparent consumption—rose, at a time when wheat gluten prices were lower than in 1994.After all, since the wheat gluten price was kept relatively low by the pressure resulting from the lowprotein premium, bakers could—and did—turn to whea t gluten when that was more profitable than
buying high protein wheat. Other users, including pet food producers, also could purchase more wheat
gluten at the relatively lower prices.
47. The conclusion to be drawn from the above with regard to causality are the following.
Wheat gluten prices were low during the last three years of the PoI compared with 1994 as a
result of the protein premium factor.
At the same time, input costs (wheat price, fuel and depreciation)48  were rising.
Thus, US wheat gluten producers were caught in a cost-price squeeze caused by domestic
factors. That was the main reason for any difficulties which US wheat gluten producers might have
had.
                                                     
44 Bakery makes 80 per cent of consumption of wheat gluten in the US.
45 See paragraph 30 of this submission.
46 Page 6 of the US oral statement of 21 December 1999.
47 Paragraph 44 of the EC's first oral statement.
48 ITC report at II-18.WT/DS166/R
Page 165
5.3.6 The complete failure of the ITC to investigate the protein premium issue
48. In its findings on the description of the wheat gluten market, the ITC recognises the primary
importance of the baking industry as the main outlet for wheat gluten.49  According to the information
considered by the ITC, baking accounts for four-fifths of the wheat gluten market.50  Th e I TC was
also aware of the basic fact, understood by all wheat gluten processors, including the petitioner
companies in the present case, that the protein (i.e. gluten) quality of wheat harvested in a year has a
direct effect on conditions for sale of wheat gluten.51
49. However, the ITC did not attribute any price movement subsequent to 1994 to the availabilityof high-protein wheat. Despite its evident relevance, the ITC did not give any data on the price of
wheat in its report, nor especially data on the relative prices of high-protein and low-protein wheat.
50. The ITC did not provide any evidence that it performed any statistical analysis whatsoever
showing a causal link between imports and price. Indeed, there is no correlation between the two.
The ITC has only shown a marginal coincidence in time of an increase in imports and
developments in price levels in one sole year, the last, of the PoI. However, during the third and
fourth year of the POI price levels moved opposite to import levels. In effect, in the third year, prices
declined sharply but imports remained practically stable. In the fourth year, imports increased but
prices went up.
This clearly shows that the level of imports did not determine the level of prices. Thus, the US
has not shown any causal link  between the level of imports and the level of prices. It has also not
provided an explanation anywhere in its report on why the fact that prices fell strongly in 1995 eventhough imports remained stable was not a reason to detract it from its—incorrect—conclusion that it
was imports which "drove down" prices in 1996/7. It finally did not explain how it came to theconclusion that increased imports "drove down" prices in 1996 while they were actually rising.
51. The ITC's analysis has been inadequate in no t considering the influence of high-protein wheat
on the wheat gluten market. Given the importance of high-protein wheat availability on wheat gluten
market, and that evidence of this importance was made available to the ITC—the EC will return tothis below—this failure to conduct an analysis by the ITC is unacceptable. By omitting consideration
of the effect of the availability of high protein wheat on the wheat gluten market, the ITC's findings on
the cause of the price movements, attributed to increased imports, are unsound.
5.3.7 As to the ITC’s allegation that it did not need to investigate the protein premium
issue since nobody had claimed it was a more important cause of injury
52. At the end of point 135 of its first written submission, the US in fact admits that the ITC did
not investigate whether developments in wheat protein content were not the real cause of lower wheat
gluten prices during the end of the PoI. By asserting that nobody had claimed during the investigation
procedure that the protein premium factor was a "more important cause of the serious injury" the US
implies that under US domestic law it was not necessary for the ITC to investigate it. This is evidently
not in line with Article 4.2 of the SA.
53. As a general matter, the EC refers in this co ntext to its answers to questions 7 and 6 of the
Panel. It is clear from the ITC report itself that the ITC was aware that wheat protein content
influenced wheat gluten prices. The ITC should therefore have investigated properly whether
                                                     
49 ITC I-9-10.
50 E.g. ITC II-5 and II-9.
51 IdemWT/DS166/R
Page 166
developments in wheat protein content were not the real reason that price levels were what they were
during 1996 and 1997. Nevertheless, by its own admission, it failed to do so.
54. Moreover, the issue was explicitly raised many times on behalf of EC industry during the
hearings.
- “Petitioners’ regression model ignores other significant supply and demand actors
that also affect vital wheat gluten prices, including the protein content of wheat.
(emphasis supplied)52;
- In the discussion on the influence of protein levels in wheat on prices of wheat gluten,
the concept of “protein premium” was also specifically explained.53
55. If the evidence from the respondents was not sufficient for the ITC, it should have heeded the
views of one of the petitioner companies: in a letter from Manildra which was read out by the ECindustry before the ITC Commissioners, this petitioner recognised the following:
"While I understand the situation is drastically different within the community, the
market in the US appears to be headed fo r further decreases for July forward due to
softening demand resulting from weakening high protein premiums and capacity
increases  in the US and production increases in Australia" (emphasis supplied).54
5.3.8 Conclusion on protein premium
56. The ITC has, as it admits, completely failed to  investigate a major factor having an objective
and quantifiable bearing on the situation of the US wheat starch/wheat gluten industry, i.e. how
protein premiums developed during the POI. This failure prevented the US authorities from correctly
assessing whether any causal link existed between increased imports and the alleged serious injury
(i.e. "a significant overall impairment in the position of the domestic industry"). If the US had
considered the protein premium factor, it could not have reached the conclusion that increased imports
were the cause of serious injury. This is contrary to the US obligations under Article 4.2, and in
particular Article 4.2 (a) of the SA.
57. In the light of the above and in any case, the ITC has also illogically failed to exclude the
influence of the protein premium factor on wheat gluten prices, and thus on the US industry’s
situation, since it did not collect any information on that issue. This constitutes a second violation of
Article 4.2, and in particular Article 4.2 (b), second sentence, of the SA.
5.4 Creation of overcapacity
5.4.1 Introduction
58. It is clear from the facts on the record that one of the most important reasons why the US
industry had problems at the end of the PoI – assuming arguendo  that they indeed did have problems
– was that they had manoeuvred themselves into an impossible position by creating enormous
overcapacity in the beginning of the POI. The EC has already dealt with this issue in its first written
submission55 and oral statement at the first substantive meeting.56  It will only add a few remarks.
                                                     
52 Page 24 of the post-hearing brief, Exhibit EC-18.
53 Page 31 of the post-hearing brief, Exhibit EC-18 under “A” and in footnote 81.
54 Exhibit EC-17 p. 149-150.
55 Paragraphs 63 and further and 96.
56 Paragraphs. 69-79.WT/DS166/R
Page 167
59. The US position on this point seems to boils down to stating that, first of all, the US industry
had correctly predicted an increase in demand and consumption, and secondly, that it is somehow
"unfair" that - the EC quotes from the statement made by the US on 20 December 1999 - "imports
increased at a rate greater than the growth in demand.57 . This is an indefensible position.
5.4.2 The inherent unpredictability of wheat gluten demand
60. Contrary to what the US implies, it is impossible to predict in the long-term with precision
what the demand for wheat gluten will be on the US market, since demand for wheat gluten is
primarily dependent in the US on the protein level of wheat crops.58
Interestingly enough, the ITC itself explicitly says so in its report:  "Demand for wheat gluten
is closely tied to the protein content of each year’s wheat crop.  Should the quantity and quality of
protein naturally occurring in the wheat supply be low, then bakers consume more wheat gluten to
supplement the lack of protein in the wheat"..59
61. The assertion by the ITC that "industry projections of continued growth in demand and
consumption were largely correct"60 (emphasis supplied) is thus contradicted by its own explicit
finding in the factual, second, part of the report, that demand for wheat gluten will be strongly
dependent on the protein content of each year’s wheat crop. There cannot be any precise "projections"
of how wheat gluten demand will develop.
62. That the assertion by the ITC that US industry "predicted" future demand and consumption
correctly is unjustified, becomes all the more clear if one reads, again in the factual part of the ITC
report, that among the factors contributing to increase in US wheat gluten consumption from 1996 to
1997 was "anticipatory behaviour of purchasers and importers in response to the section 301 action
taken by the domestic industry in January 1997".61  Is the ITC telling us that US producers could
predict this as well when they increased capacity massively from 1993-1995?
5.4.3 US producers themselves thought the capacity increase was irrational
63. Moreover, contrary to what the US would want the Panel to believe, even US producers
themselves thought this capacity increase early on in the POI was irrational and unwarranted. In the
pre-hearing brief62, counsel for the EC industry explicitly quoted newspaper information, stating that
"Midwest expressed concern in 1992 when the Heartland capacity expansion was announced,
indicating that the expansion was not warranted based on existing US capacity being sufficient to
meet market needs."
5.4.4 Capacity increase drives up intra-industry competition and thus drives down
prices
64. Also in this context, the earlier quote from a Manildra letter which was read out to the ITC
Commissioners during its hearing, and handed over to them is relevant. Not only does Manildra state
that protein premium influences price. It also explicitly states that capacity increases drive down
prices: "While I understand the situation is drastically different within the community, the market in
the US appears to be headed for further decreases for July forward due to softening demand resulting
                                                     
57 Page 2, in fine.
58 See also paragraph 74 of EC first oral statement on 20 December 1999.
59 ITC report at II-9.
60 ITC report at I-17.
61 ITC report at II-9.
62 Exhibit EC-16 at page 31.WT/DS166/R
Page 168
from weakening high protein premiums and capacity  increases in the US and production increases in
Australia." (emphasis supplied).63
5.4.5 The problems inflicted by US industry upon themselves by the capacity increase
were extensively pointed out to ITC.
65. The EC stresses that the fact that it was irrational construction of enormous overcapacity
which caused additional problems for the industry, was a point which was explicitly pointed out by
EC industry to the ITC during the hearings, and nevertheless disregarded by the ITC without adequate
justification.
In the pre-hearing brief, one of the arguments made by counsel for the EC industry on this
point was the following: "Capacity increases that re sult in excess capacity will result in more intense
competition, particularly if the capacity expansion is capital intensive, since there is pressure to price
at a level to cover variable costs, and a portion of fixed costs".64
5.4.6 No basis for assumption that the US industry alone would supply increased
consumption
66. Regarding the other aspect of the US position on overcapacity – i.e. the completely
unreasonable assumption that in spite of the fact that in the GATT/WTO negotiations a tariff
concession on wheat gluten has been exchanged with other WTO Member, all increased domesticconsumption should be supplied by domestic producers – the EC refers to its earlier statements.
65
In summary:
(i) it is economically completely illogical to  assume that all increased consumption will
be supplied by US industry alone where imports historically provided about 50 per
cent of consumption;
(ii) under WTO rules, it is impossible to base oneself on the assumption that all increased
consumption will be supplied by domestic industry alone in the situation that a tariffbinding has been granted – due to the MFN clause - to all other WTO Members.
5.4.7 Overcapacity was not properly excluded from the causation analysis
67. As a final point on overcapacity the EC woul d like to comment on point 127 of the US first
written submission. The US explicitly admits that an "other factor"- overcapacity - in the sense of
Article 4.2 (b) SA, caused (self-inflicted) injury wh en it uses the words: "[T]o the extent that one
other factor – namely, additions to US capacity – contributed to the decline in capacity utilisation
(…)". The US continues by stating that the ITC demonstrated that additions to US capacity "was a
less important factor" in causing injury "than imports".
68. As the EC has explained in its answer to question 9, this is not enough. In order to comply
with its obligations under Article 4.2 (b), second sentence, of the SA, the US should have excluded
the injury caused by overcapacity from its determinations on injury and causation. In order to do that,
it should have determined whether, if capacity ha d remained the same since 1993, there still would
have been a "significant overall impairment in the position of the industry".
                                                     
63 Exhibit EC-17, at pages 149-150.
64 Exhibit EC-16, at pages 30-31.
65 EC’s first written submission, at page 21 and fu rther; EC’s oral statement at paragraph 69 and
further.WT/DS166/R
Page 169
Performing this analysis is simple: one merely has to divide production in 1997 by capacity in
1993. Doing so results in a capacity utilisation level of 75 per cent.66  In other words: if capacity had
not increased during the PoI, the US industry would have been at almost exactly the same level of
capacity utilisation in 1997 as it was in 1993 (78.3 per cent)67 when, according to the ITC, everything
was fine.
5.4.8 Conclusion on overcapacity
69. Assuming US industry was in difficulty in 1996 and 1997, overcapacity was certainly one of
the main reasons. As explained in particular under the previous paragraph, the ITC should not haveattributed to increased imports any (easily quantifiable) injury caused by this factor. By not
conforming to this rule in their determination of serious injury and causation, the US authorities
breached Article 4.2 (b), in particular the second sentence thereof, of the SA.
5.5 Situation in co-products markets
70. The EC has explained why the situation in the co-products (especially wheat starch and
alcohol/ethanol) markets was an additional cause of any impairment in its position that the US
industry might have suffered in the relevant period.
5.5.1 The information provided by the EC wa s or should have been available to the
ITC at the time
71. The US defence on this issue starts with implying that Exhibits EC-10 through 14 should be
disregarded by the Panel since this information wa s not submitted to the ITC by EC industry during
the ITC’s hearings.
68
The EC would stress once more that all these exhibits are based on official US government
data, in some cases even the ITC report. For the rest, the ITC could have easily obtained the
information (and should have obtained it; the EC will come back to this in a moment).
It would also like to stress that under WTO rule s, the US government is one entity. It would
be absurd if the US were allowed to defend itse lf by saying that the US ITC did not possess the
relevant data, although the US Department of Agriculture did.
72. Moreover, much, if not all, of this information should have been available to the ITC already
from the replies to its questionnaires (e.g. regarding wheat and wheat flour purchase prices and wheatstarch selling prices see ITC II-37).
5.5.2 The US misinterprets and misapplies Article. 4 2 of the SA
73. The US also claims, as a more general point, that the adequacy of the analysis performed by
an investigative authority is to be judged "on the basis of the evidence collected and considered by
that authority" (emphasis supplied), i.e. only on the basis of what the ITC actually obtained and not onwhat it should have obtained.
It cites the " Korea-Dairy " Panel report claiming that that report would support its position.
However, in the paragraph quoted by the US
69, that Panel clearly – and rightly stated:
                                                     
66 ITC Report at I-17, 121.792 pounds divided by 162.856 pounds.
67 ITC report at p. II-15.
68 Paragraph 138 of the US first written submission.
69 7.30.WT/DS166/R
Page 170
"For us, an objective assessment entails an examination of whether the KTC had
examined all facts in its possession or wh ich it should have obtained in accordance
with Article 4. 2 of the SA (including facts which might detract from an affirmative
determination (…).70 (emphasis supplied).71
74. Moreover, extensive arguments were made on this point before the ITC. For example,
"changes in co-product markets have a substantially larger impact on the US industry than do imports
of wheat gluten" was the title of a part of the EC industry’s pre-hearing brief comprising 15 pages72,
and a similar part in the post-hearing brief comprised 9 pages.73   The EC refers the Panel to these
pages, but will cite a few of the arguments that were made, often based on information provided by
US producers themselves:
- the integrated nature of the production process means that production decisions must
also be made on an integrated basis;
- "from a common sense perspective, how can co-products that absorb 90 per cent of
the raw material used to produce wheat gluten not have an effect on wheat gluten
output and profitability?”;
- “the weakness in the wheat starch market is further reflected by the fact that end of
period inventories for wheat starch have doubled from 1995 to 1997, while end of
period inventories for wheat gluten have declined”;
- “with the exception of 1994, over the entire 1993-1997 period, Midwest’s alcohol
sales exceeded its wheat gluten and wheat starch sales combined.
75. Furthermore, the ITC itself acknowledged that "there is evidence that Midwest reduced wheat
gluten production in 1995, for reasons related in part to conditions in the alcohol market".74 (emphasis
supplied).
76. In the light of these points, how can the US assert that the ITC was not under the obligation,
pursuant to Article 4.2 (a) and 4.2 (b) SA, to investigate the situation in the co-product market further
and acquire the necessary information?
5.5.3 The data on profitability are not verifiable
77. This failure to comply with its Article 4.2 SA obligations is worsened by the fact that the
method by which US producers constructed their profitability data regarding wheat gluten remainstotally unclear. It is unacceptable, and contrary to Article 4.2 of the SA, that a Member can take a
safeguard measure even though it does not investigate the situation on the co-product market, and the
method by which the petitioning industry allocates costs among its co-products in its profitability
calculation is not explained.
                                                     
70 Not overturned by the AB and rather supported by AB in " Argentina-Footwear " at paragraph 136
where AB states that authority must “at a minimum (…)” investigate also “all other factors (…) relevant” than
those explicitly listed in Article 4.2 (b).
71 See also the EC’s reply to questions N. 6 and 7 from this Panel.
72 Exhibit EC-16, at pages 13-27.
73 Exhibit EC-18, at pages 14-22.
74 ITC report at I-17.WT/DS166/R
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5.5.4 Alcohol prices do not only affect Midwest but all US wheat starch/ wheat gluten
in what they obtain for their wheat starch slurry waste
78. Finally, the US also either misses the point or misrepresents some of the arguments which
have been made on this issue by the EC. For instance, in paragraph 144 of its first written submission,the US puts forward the incorrect reasoning that since only Midwest internally processes a significant
amount of wheat starch slurry into alcohol-related products, conditions in the alcohol market would
not affect other US wheat starch/wheat gluten producers.75
However, in describing the production processes in general (i.e. not only those of one
company) the ITC itself explicitly states that "[A]ny remaining starch slurry is sent to either a waste
processing plant or to a distillery for utilisation in the production of ethanol or food-grade alcohol".76
79. This makes clear that it does not make much difference whether a wheat starch/gluten
producer itself processes the wheat starch slurry waste into alcohol-related products; even if it sellsstarch slurry to a processor, its income will nevert heless be negatively affected by lower prices in the
alcohol market.  The waste slurry has a value on the US market which is dependent from alcohol price
levels.  If those are high, wheat starch/wheat gluten producers may obtain much income from wheat
starch slurry waste; if they are low, they might be forced to pay waste processors to dispose of it.
5.6 No coincidence in time
80. Finally, the EC would reiterate three points regarding the argument already made
77 by the EC
that the ITC could not reasonably have concluded that increased imports caused injury, since the
movements in injury factors did not coincide with the increase in imports.
81. Firstly, as was stated above, on the basis of ITC-evidence exclusively, prices went down
sharply in 1995 before imports increased.
82. Secondly, as was also stated above, again on the basis of ITC-evidence exclusively, the 1995
fall in prices was reversed in 1996, when prices even went up slightly, although imports increased.
83. Thirdly and finally, the EC calls to the Panel's attention to the fact that evidence was provided
on this point to the ITC but was completely ignored.
For instance, the EC industry's pre-hearing brief explicitly noted, with data, that Midwest’s
wheat gluten sales revenue had already dropped sharply in 1995 compared with 1994.  This happenedbefore imports increased. Moreover, the decline in 1995 was much greater than in 1996, the year in
which the largest increase in imports during the PoI took place.78  Again, although these facts were
available to the ITC, it did not analyse them in any way in its report, thus failing to comply with its
obligations under Article 4.2 of the SA.
                                                     
75 The US appears to mis-construe the ITC report  at page I-17 in asserting that Midwest alone
processes starch into alcohol. The US (and indeed the ITC) may be confusing starch produced as the main
product of wheat processing where it is extracted from starch slurry, and the starch slurry waste  resulting from
this starch extraction. Both the starch slurry (main product) and the waste slurry (waste or by-product) can be
used as raw material for distilling.
76 ITC report at II-5.
77 See in particular paragraphs. 79 et seq.  of the EC’s first written submission.
78 Exhibit EC-16, at page 20.WT/DS166/R
Page 172
6. Item N. 5: the US did not respect the proportionality rule
84. A fundamental principle of the SA is that a safeguard measure must be proportionate to the
serious injury caused by increased imports.
This principle derives from the exceptional nature79 of safeguard measures which are
designed to restrict "fair" trade.80  A safeguard measure permits exceptionally a "lawful" breach of
Article II of the GATT 1994 without the need to  pursue the otherwise necessary procedures under
Article XXVIII.  Its "lawfulness" is however directly dependent not only to the full respect of all the
requirements under the GATT and the SA but is warranted only if the measure is strictly limited to
what is necessary to remedy the serious injury caused by the increased imports and to the possibility
of adjustment of the domestic industry.
85. In other words, when adopting a safeguard measure a Member cannot abuse this temporary
withdrawal of tariff concessions bound in its GAT T Schedule as a pretext for surreptitiously
implementing protectionist policies.  Making imports from other Members bear the burden ofadjustment of the domestic industry to factors other than "increased imports" would surely be an act
of protectionism, in violation of Articles I, II and XI of GATT 1994.
86. This principle finds its concrete application in two provisions of the SA, Articles 4.2 and 5.1.87. According to Article 4.2 (b) last sentence, wh en considering whether "serious injury" was
caused by "increased imports" (the only possibility that allows a Member to impose a safeguardmeasure), the investigating authorities shall not attr ibute to increased imports injury caused by other
factors, which are causing injury at the same time.
88. This provision has two important consequences: on the one hand, the investigating authorities
cannot attribute the cause of serious injury to increased imports if the increased imports are a co-causeof such serious injury but do not reach per se , i.e. in isolation, the threshold of "overall impairment in
the position of the domestic industry".  In order to  reach such a conclusion the competent authorities
are obliged to scrutinise each and every ("all") objective and quantifiable factor having a bearing on
the situation of the industry concerned.  They must provide a reasoned demonstration that they
verified and weighted each factor in order to reach their findings.
On the other hand, a combination of causal factors (one of which being increased imports),
none of which could be indicated with certainty to create alone, or in isolation, overall impairment in
the position of the domestic industry concerned, does not allow that Member to take any safeguard
measure.
89. Article 5.1 of the SA is the second textual application of the principle of proportionality and
provides that a Member shall apply safeguard measures "only to the extent necessary to prevent or
remedy serious injury and to facilitate adjustment".
90. This provision has numerous consequences on the action of the Member wishing to apply a
safeguard measure.
- The measure must be limited to the serious injury caused by imports.  Assuming
arguendo  that a Member has correctly attributed the cause of the serious injury to
increased imports (and this hypothesis is certainly not correct in the case of the US's
safeguard measure on wheat gluten), the corresponding safeguard measure must be
                                                     
79 AB report on " Argentina - Footwear " at paragraph 93.
80 AB report on " Korea - Dairy " at paragraph 87.WT/DS166/R
Page 173
commensurate or proportionate to that injury, to the exclusion of any injury caused by
other factors. 
It is thus out of the question that a Member,  in casu the US, could be allowed to
remedy the intrinsic uncompetitiveness of its domestic wheat gluten/wheat starchindustry relative to the corn milling industry, or to remedy the increase in input costs,
or to overcome fluctuations in price due to fluctuations in the protein premiums, or to
compensate for failed business strategies such as over-expansion of production
capacity by the adoption of a safeguard measure. 
Lawful trade from other Members cannot be made to bear the burden in patent breach
of Articles II and XI of the GATT 1994 and the provisions of the SA.
- The safeguard measure must be limited "only to the extent necessary" to remedy the
serious injury and to facilitate adjustment (only
 to the competitive pressure coming
from increased import). 
The objective of adjustment has to be taken together and at the same level   as that to
remedy the injury.  It cannot justify any measure that would go beyond the remedying
of the serious injury caused by increased imports on the pretext of adjustment.  This
approach would breach the principle of proportionality and violate Article 5.1.
- the form of the safeguard measure must be the least restrictive possible ("only to the
extent necessary"). The Member is in fact bound to choose measures most suitable for
the achievement of these objectives (Article 5.1, third sentence). 
The "suitability" should not be judged, as the US authorities seemed to believe when
they adopted their safeguard measure on wheat gluten, upon the subjective
appreciation by the Member applying the measure on what best suits that Member'sinterests or its domestic industry. The "suitability" must be judged upon the objective
standard of "only to the extent necessary" to "remedy of serious injury" together with"facilitat[ion] to adjustment" to the injury caused by increased imports only. 
 In the WTO system, there can be no doubt that quantitative restrictions are the mostrestrictive measures possible.
81  They thus constitute an extrema  ratio , applicable only
when positive demonstration by the applying Member is given as to the unsuitability
of the other tariff-based measures (tariff increases or tariff-rate quotas). Thatdemonstration must of course be complete and non-contradictory.
91. The application of the above-mentioned principles and criteria, which are set out explicitly in
the SA, to the case of the US safeguard measure on wheat gluten shows without any possible doubt
that the US has not implemented the proportionality principle, thus breaching Articles 4.2 and 5.1 ofthe SA.
92. The EC's first written submission
82 and the EC's first oral statement on 20 December 199983
have shown that the US has omitted, under-estimated or misrepresented a number of relevant factors
of an objective and quantifiable nature having a bearing on the situation of the domestic industry.
                                                     
81 see  panel report on " Turkey - Textiles ", at paragraph 9.6.
82 Sub-chapter 4.5.2.
83 paragraphs 57 to 86.WT/DS166/R
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These factors clearly pointed in the direction opposite to the existence of a causal link
between increased imports and "serious injury". In particular, those factors excluded that increased
imports alone could be the determining cause of the "overall impairment in the position of the
domestic industry".
93. In any case, the US authorities' report does not provide a single explanation of where and how
it weighed these factors (and according to what crit eria) in order to come to the conclusion that
increased imports were the cause of the alleged serious injury after having deducted the injury caused
by (the well documented) other factors.
94. This way of proceeding constitutes a breach of Article 4.2 (a) SA. It is also a clear violation
of the principle of proportionality in-built in Article 4.2 (b) and (c).
95. The EC's first written submission84 and the EC's first oral statement on 20 December 1999.85
have also clearly shown that the US has repeatedly breached Article 5.1's principle of proportionality
on all accounts. This was done in spite of this explicit and specific provision of the SA86:
- The US did not justify the suitability of the form of the measure taken, which is the
most restrictive possible. Rather, the short generic explanation indicated that the
investigating authorities relied on that form to remedy injury and facilitate adjustment
with respect to factors other than increased  imports. The EC recalls here that the US
authorities have included as one of their key considerations the wheat starch market
conditions in the US when considering the form, the scope and the extent of the
safeguard measure against foreign wheat gluten.87 . This was done in contradictory
fashion at the very moment when the same authorities considered (unreasonably) thestarch market irrelevant for their determinations on causation.
- The US justified the recourse to a quantitative restriction by stating that “a high tariff
would be inequitable in that it is likely to  further drive [other foreign] suppliers from
the U.S. market”. This explanation for rejecting a tariff is not only inconsistent with
Article I of the GATT 1994 and Article 2.2 of the Safeguards Agreement. It also
shows that the choice of a QR was based on factors other than the need to remedyserious injury and to facilitate adjustment of the US industry. That is in contravention
of Article 5.1, first sentence, of the SA. It also constitutes unauthorised circumventionof the provisions of Article 5.2 (b).
- The US determined the serious injury and consequently determined the extent of its
safeguard measure without deducting the injury caused by other relevant and well-
documented factors as the inherent competitive weakness of the US wheat gluten
industry vis-à-vis its corn starch competitors, the increase in input costs, the voluntary
unconsidered increase in production capacity of the US industry with no relation to
the share of the increase in domestic consumption that the US industry couldreasonably obtain and, finally, the level of wheat premiums. In short, the US has
taken the opportunity of the complaint of its wheat gluten industry to go back from its
tariff commitments bound in its GATT Schedule without any coverage in the SA.
                                                     
84 Section 5
85 Paragraph 60 et seq
86 Which has no corresponding equivalent in similar context in other covered agreements.
87 ITC report at page I-26 on “selection of import quota” as recommended relief:  “Because of the co-
product nature of wheat gluten production, the supply and price of wheat gluten is dictated in part by demandfor wheat starch”.WT/DS166/R
Page 175
96. In its oral statement on 21 December 1999, the US has attempted a defence as follows
"[T]he EC’s position is directly contrary  to the Appellate Body’s findings in Korea –
Dairy.   The Appellate Body specifically found, and I quote “a Member is not  obliged
to justify in its recommendation or determination a measure in the form of aquantitative restriction which is consistent with the average of imports in the last
three representative years for which statistics are available.”  (AB Report at para. 99).
The United States imposed a safeguard measure in the form of a QR set above  the
level of imports in the last three representative years.  Thus, the Appellate Body has
held that the United States was  not required to justify the measure. The EC’s
arguments that the United States has the burden of proof to justify the level of the
measure it imposed is incorrect."
97. The Appellate Body's report on " Korea-Dairy " does not support the US argument.
Paragraph 99 of that report deals with the obligation under Article 5.1, second sentence, of providing
a "clear justification" when a Member departs from the allocation of a quantitative restriction based
on the last three representative years for which statistics are available.
In this case, however, the quota was not based on the last three representative years but on a
1993-1995 period. Hence, a "clear justification" for such a different level was required and the US
failed to comply with this obligation.
98. Additionally, the above quoted US statement is unrelated to the issue of whether Article 5.1,
first and third  sentence, requires the Member upon adoption of its safeguard measure
- to have recourse to quantitative restrictions only as an extrema ratio  and
- to justify the "suitability" of such measure on the objective factors involved through
consideration of the three elements in Article 5.1, first sentence, i.e. "only to the
extent necessary" "to remedy serious injury" from increased imports only "and
facilitate adjustment".
99. The US has clearly violated such obligation.
7. Item N. 6: when allocating the quantitativ e restriction on wheat gluten, the US has
manipulated the reference period in such a way as to reduce unjustifiably the level of imports
from the EC and to affect trade shares amon g importing Members (in particular between the
EC and Australia)
100. Article 5.1, second sentence, of the SA provides that if quantitative restrictions are used,
"such a measure shall not reduce the quantity of imports below the level of a recent period which shall
be the average of imports in the last three representative years for which statistics are available unless
a clear justification is given (…)".
101. The US confirmed again in its oral statement on 21 December 199988 that it was  not obliged
to provide any such "clear justification" in th e ITC report or in the act adopting the safeguard
measure.
102. As was explained in the EC's first oral statement on 20 December 199989, the ordinary
meaning of the terms in Article 5.1, second sentence of the SA "last three representative years for
                                                     
88 Page 9
89 At paragraphs 114 and following.WT/DS166/R
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which statistics are available" means what it says, namely that the US should have based itself on the
last three-year period for which statistics were available at the time of the adoption of the measure
(30 May 1998).
103. The US does not contest that 1997, 1996 and 1995 statistics on imports of wheat gluten were
available.
104. These statistics are "representative" of the trade concerned.  As was already abundantly
recalled, the trade involved in a safeguard measure is a fair and legitimate trade and its possible
increase is the consequence of entirely legitimate use of market access rights deriving from tradeconcessions under the GATT Schedules. For a period to be considered not "representative", the
Member wishing to implement a quantitative restriction must show the existence of exceptionalcircumstances. The US authorities themselves agree with this interpretation and excluded the
existence of any "anomalous circumstances that render any of those years [1995 to 1997]
unrepresentative of imports"
90 of wheat gluten in the US.91
105. Moreover, violations of WTO obligations can be advanced as evidence that the pattern oftrade that is represented by the last three representative years for which statistics are available was
distorted. The EC has recalled in its first written submission the Panel report on "EC - Bananas -
Recourse to Article 21.5 by Ecuador"
92 which stated that
"If data from a period are out of date or imports distorted because the relevant market
is restricted, then using that period as a representative period cannot achieve the aim
of the chapeau.  Thus, under GATT practice it is necessary that the "previous
representative period" for purposes of Article XIII:2(d) be the most recent period not
distorted by restrictions."
106. This is clearly not the situation in the case of the US safeguard measure on wheat gluten.
107. The logic of this provision and of the entire procedure established by the WTO Contracting
Parties under Article 5 of the SA is very transparent.
If a Member chooses lawfully to implement a quantitative restriction (which is not the case of
the US measure), it has to determine the quantity of im ports in an objective way, i.e. with reference to
very recent ("last") statistics available. Such statistics are in principle representative of the legitimate
trade in the product concerned unless an exceptional event or a violation of WTO rules has distorted
the trade. The Member departing from the available statistics for the last three years must prove the
existence of such exceptional event or violation.
108. The level of the restriction established in th is objective way may then be adjusted downwards
in an MFN fashion provided that "a clear justification is given that a different level is necessary to
prevent or remedy injury".
                                                     
90 ITC report at page I-28.
91 The ITC report thus contradicts the latest defence of the US at page 11, in fine , of its oral statement
.on 20 December 1999. What counts in this proceedings is, of course, what can be found in the investigation
report and not the  ex post  justification trying to rewrite the facts a posteriori.
92 Report by the Panel on European Communities – Regime for the Importation, Sale and Distribution
of Bananas – Recourse to Article 21.5 by Ecuador , WT/DS27/RW/ECU, 12 April 1999, at paragraph 6.39. That
Panel referred expressly to the previous panel reports on " EEC - Apples from Chile " and " Japan - Agricultural
Products " that decided along the same lines.WT/DS166/R
Page 177
109. If the Member adopting the safeguard measure wishes in addition to distinguish among
supplying countries, and thus depart from the specific MFN rule applicable to the allocation of quotas,
it must also follow the specific procedures under Article 5.2 (b).
110. In the case of the safeguard measure on wheat gluten, the US has manipulated the
representative period in order to achieve both a reduction of the quantities that could be imported
(thus over-protecting its industry) and a selective allocation among major suppliers (in particular to
the detriment of the EC and to the benefit of Australia)93 without following the procedural and
substantive rules under Article 5.1, second sentence, and 5.2 (b).
111. In this context, it is a gratuitous remark for Australia to state that it "recognises[d] that the
[US] measure had to be imposed on imports from all sources and not just from the EC"94 when the US
measure had the remarkable effect of reducing Australia's 1997 record level of exports to the US of
62.496 million pounds by no less than 0,0011 per cent.95
112. According to an established principle of WTO law, an interpreter cannot attribute to aprovision in a covered agreement a meaning that will transform such a provision, in whole or in part,
in a redundancy or inutility. The principle ut magis valeat quam pereat  has been again recalled and
applied by the AB in its " Argentina-Footwear"
96 report.
113. If an increase in imports were ipso facto  a "clear" justification for using a representative
period other than the "last three representative years for which statistics are available", this situationwould always apply, rendering useless and redundant the provision as it stands.
114. The US claims now in its oral statement on 20 December 199997 that it "clearly justified this
choice of a period in its findings that setting a quota level at the average of 1995 to 1997 would not
remedy the serious injury". However, the text of the ITC report98 states only that "the continued
imports at or above this level would not remedy the serious injury to the domestic industry.
Accordingly, we believe that a different quantity is "clearly justified" in this case".  Such a
justification not only is not "clear", it constitutes no justification at all. It is a petitio principii .  It
amounts to saying that, "I like blue eyes because I like them". The US has thus breached Article 5.1,
second sentence, of the SA.
115. The US comes also with an additional defence according to which "the last three
representative for which statistics are available" should mean a "period 'representative' of conditions
in which the industry can survive".99
116. Nothing of the sort can be read in Article 5.1, second sentence, of the SA: the term"representative" is grammatically linked to "average of imports". There is no reference whatsoever in
that provision to the conditions under which the industry can survive. Even more interestingly, the US
                                                     
93 The findings of the ITC at page I-28 should also be considered in the light of the findings at I-26, last
paragraph, were a tariff safeguard measure was excluded  on the grounds of protection of other Members trade.
The ITC clearly sees its role as protecting the market share of other importers against the EC. However, the
purpose of a safeguard action is solely to protect a domestic  industry from injury. A safeguard measure has to be
applied to all imports irrespective of source. Article 5.2(b) establishes the strict conditions under which a
country may be discriminated against in the application of a quantitative restriction. The manipulation of the"representative period" is not a lawful substitute for that exceptional procedure.
94 Australia oral statement as third party on 21 December 1999, at paragraph 2.
95 ITC report at II-12
96 Paragraph 88
97 At page 11
98 At I-28
99 First oral statement on 20 December 1999, at page 11.WT/DS166/R
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defence is contradicted by the ITC report100 that clearly refers to years "[un]representative of imports"
and not to the conditions of survival of the industry.
117. The EC thus fully maintains that the US has breached Article 5.1, second sentence, of the SA.
8. Item N. 7: the US has breached the principl e of parallelism with respect to imports from
Canada.
118. According to the Appellate Body report on " Argentina-Footwear"101,
"We conclude that Argentina, on the facts of this case, cannot justify the imposition
of its safeguard measures only on non-MERCOSUR third country sources of supply
on the basis of an investigation that found serious injury or threat thereof caused by
imports from all sources, including impor ts from other MERCOSUR member States."
119. During its oral statement on 21 December 1999, Canada stated as third party the following:102
"The U.S. wheat gluten case is radically different from the Argentina – Footwear  case
(…). The USITC report clearly shows that while the United States conducted a global
investigation and examined imports from all sources, its determination did not
attribute injury from NAFTA imports to third countries.  After the USITC made an
affirmative injury determination, it conducted a separate analysis of imports from
Canada and Mexico.  Its separate examination demonstrated clearly that Canadian
imports declined significantly during the period of investigation, while overallimports increased.
103  The USITC rightly concluded that imports from Canada did not
contribute importantly to the serious injury.  Based on this conclusion, the
United States exempted imports from Canada from the safeguard measure".
120. The US defence before the Panel on 20 December 1999 followed substantially the same line
of argument.104
121. It is the EC's position that, contrary to the in correct assertions of both the US and Canada, the
facts of the Footwear  case are, with respect to the application of the principle of parallelism, identical
to those of the US safeguard measure on wheat gluten.
As in the Footwear  case, the US's investigation "found serious injury or threat thereof caused
by imports from all sources, including imports from" NAFTA countries including Canada but then
imposed its safeguard measure on wheat gluten only on non-NAFTA countries, thus excluding
Canada.
122. As is apparent from the Canadian statement, the ITC made "an affirmative determination of
injury". In WTO terms, this means that the ITC considered the imports from all sources, including
Canada and arrived at the (erroneous) conclusion that the increased imports were the cause of "seriousinjury" affecting the US wheat gluten industry. As Canada states explicitly, it is "after" such
"affirmative determination" that the ITC "conducted a separate analysis of imports from Canada and
Mexico" (i.e. the US NAFTA partners) from which the ITC "concluded that imports from Canada did
not contribute importantly to the serious injury".
                                                     
100 At I-28
101 Paragraph 114
102 Pages 4 and 5.
103 [original footnote] USITC Report, submitted as U.S. Exhibit 4, p. I-19.
104 At pages 12, in fine , and 13WT/DS166/R
Page 179
123. The procedure followed by the ITC, as described by Canada, is clearly not in line with
Article 4.2 of the SA, breaches Article 2.1 and 5.2 of the SA and does not correctly apply the
fundamental MFN provision under Article 2.2 of the SA.
124. Nothing in Article 4.2 allows a Member to conduct a separate examination of serious injury
based on the origin of the imported products concerned. Quite the opposite, the Appellate Body has
interpreted the SA105 as implying that, in the case of measures imposed by a WTO Member which is
also a member of a customs union, Article 4.2 re quires the Member concerned to verify whether
"increased imports" caused serious injury, by pursuin g one of the following options (which implement
the principle of parallelism)
- either all  imports taken together, are considered the cause of an "overall impairment
in the position of the domestic industry" or,
- in the alternative, imports from the countries constituting the customs union are
excluded from the scope of the investigation.
125. If such a causal link is established, then the issue of the application of the safeguard measure
consistent with the principle of parallelism is relevant.106
Under the first option, the safeguard measure will have to be applied also vis-à-vis the
products originating from the other members of the customs union.
Under the second option, the products originating from the other members of the customs
union will not be subject to the measure.
126. In this clear legal framework, a determination of serious injury caused by imports from all
sources followed by a second investigation on injury caused by increased imports from NAFTA
members only finds no basis whatsoever in the SA and is clearly WTO-incompatible.
127. It is worth noting that the application of safeguard measures107 is covered by Article 5 of the
SA.  Article 5.2 (b) of the SA allows for a differen tiated allocation of the QR (or a TRQ), in partial
breach of the MFN requirements, provided that the Member applying the measure follows the  very
detailed and specific procedure thereof. A differen tiated treatment in allocation is however not equal
to exclusion from the application of the safeguard measure.
128. However, the US has stated108 that
" The EC cites Article 5.2(b), but that Article is irrelevant because the United States
did not take action under Article 5.2(b)."
Thus, the US had no legal basis or any justificati on whatsoever that would allow its authorities to
breach the principle of parallelism.
9. Conclusions
129. In the light of the above and of all the claims and arguments made before the Panel in its first
written submission, during the first substantive meeting on 20 and 21 December 1999 and when
                                                     
105 AB report on " Argentina-Footwear " at paragraphs 106 to108.
106 See, confirming this approach, the AB report on " Argentina-Footwear " at paragraphs 111 and
following.
107 This is the title of that provision.
108 US first oral statement on 20 December 1999, at page 12.WT/DS166/R
Page 180
answering to the questions from the Panel, the EC requests the Panel to find that, the US has breached
Articles I and XIX of the GATT 1994 and Articles  2.1, 4, 5, 8 and 12 of the Agreement on Safeguards
by adopting its safeguard measures on wheat gluten.
It further requests the Panel that it recommends the DSB that the US WTO-incompatible safeguard
measure be withdrawn without delay.
__________WT/DS166/R
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ATTACHMENT 1-5
COMMUNICATION OF THE EUROPEAN COMMUNITY CONCERNING
PROPOSED PROCEDURES REGARDING PRIVATE
CONFIDENTIAL INFORMATION
(26 January 2000)
As requested, the EC has examined the proposed procedures for the treatment of business
confidential information in these proceedings.
As a general comment, it is for the Panel to determine whether such procedure is at all
required in the present case.  The EC reserves the right to come back on this issue, if necessary.
As far as the proposed text is concerned, the EC has the following comments.With regard to point V.3, the EC notes that the proposed procedures do not contain, neither in
point I nor in point II, any explicit criteria which the Panel could apply if there were a disagreementbetween the parties to the dispute whether information designated as business confidential
information by one of the parties is "reasonably entitled to such treatment".  The EC therefore
suggests to amend the definition and the term "Busine ss confidential information in point II as follows
(changes indicated in "strikeout" and "underline"):
"Private confidential information" means an y information that has been designated as
private information by the party submitting it and
 that is not otherwise available in
the public domain and whose release to interested private parties would seriously
prejudice the interests of the private party or parties who originally supplied the
information to the party submitting it to the Panel.
In points V.6 and IX.1, the EC would request the Panel to specify that these rules do not
amount to an amendment or a waiver to the existing working procedures with regard to the schedule
and the requirement for early submission of factual evidence.  Moreover, these rules should not be
implemented in such a way as to affect the fairness of the procedure or due process.
With regard to point II, "capital city office", the EC indicates "buildings and grounds of the
European Commission in Brussels, Belgium".
Finally, the EC would like to indicate that a determination of a document as "private
confidential" cannot in any way prejudice a substantial obligation under the WTO Agreement, whereapplicable, to make the information publicly available at the time provided for under that Agreement.
__________WT/DS166/R
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ATTACHMENT 1-6
EUROPEAN COMMUNITY'S ORAL STATEMENT,
SECOND MEETING
(1 February 2000)
Mr. Chairman, Distinguished Members of the Panel,
1. As we approach the end of this procedure, the European Communities would like to take this
opportunity to address once more the most important  points of law and fact that are concerned with
the violation of several provisions of the GATT 1994 and the Agreement on Safeguards (SA) by the
US safeguard measure on wheat gluten.
2. It is stating the obvious to affirm that the role  of the complainant, in this case the EC, is to
clarify the issue before the Panel while the defendant, in casu  the US, sometimes attempts to raise a
smoke screen or a cloud of dust in order to hide, for as long as it is possible, its misdoing. This tactical
scenario was certainly repeated during this procedure.
3. We feel confident however, that the Panel will make sure that the US will not achieve its
objective of confusing the issues on which your examination is required. As our presentation will
confirm, the US has not succeeded in hiding the prima facie  violation of Articles I and XIX of the
GATT 1994 and Articles 2.1, 4, 5, 8 and 12 of the SA that the EC has demonstrated.
4. In the EC's view, the US safeguard measure on wheat gluten is exemplary of omission and
misrepresentation of facts and arguments by a WTO Member during its investigation procedure. It is
also paradigmatic of protectionist and discriminatory measures, taken in breach of fundamental
principles of the GATT/WTO such as the maintenance of the balance of concessions agreed during
multilateral tariff negotiations and the Most-Fav oured-Nation treatment. These WTO-inconsistent
actions have the effect of seriously distorting the multilateral trading system.
5. The fact that New Zealand, as a third party not involved in the trade of wheat gluten,
considers it necessary to come forward and to draw your attention to the same matters is further
evidence of this very serious, and indeed justified, concern.
6. The EC will proceed in its statement as follows: after re-examining briefly the standard of
review of this Panel and the requirements under Article XIX of the GATT 1994, my colleagueMr. Van Vliet will guide you once more through the facts of this case concerning confidentiality,
injury and causation and the omissions in the US authorities' investigation. I will then conclude this
presentation by recalling other outstanding issues of this case.
7. The EC confirms entirely what it said during the previous stages of this procedure, and will
only focus on some issues today, with a vi ew also to rebut points made by the US.
Of course, we are happy to answer any additional question that you may have.
1. STANDARD OF REVIEW
8. On the standard of review of this Pane l, the EC would like to add the following.WT/DS166/R
Page 183
9. According to Article XVI.4 of the Marrakech Agreement establishing the World Trade
Organisation,
"[E]ach member shall ensure the conformity of its laws, regulations and
administrative procedures with its obligations as provided in the annexed
Agreements".
10. The US, regardless of how it tries to present its defence, cannot justify a limitation of the
terms of reference of this Panel as set out in WTO document WT/DS166/3 of 4 June 1999 and
Articles 6.2, 7 and 11 of the DSU by referring to the way in which its internal administrative
procedures are organised, or how its domestic aut horities view their role in the US domestic legal
system.
11. Since the entry into force of the WTO Agreement, when a Panel examines whether a WTO
Member is in compliance with any WTO rule, there cannot be any doubt that the WTO obligations of
that Member must take precedence over its domestic procedures.
12. It is stating the obvious to affirm that the US domestic procedural rules, or their interpretation,
cannot limit the tasks of this Panel whose function is to assist the DSB by performing "an objectiveassessment of the matter before it". The mission of the Panel cannot consist of a mere “rubber-
stamping” of an investigation report.
13. It is also plain from our position that the EC is not asking the Panel to conduct an
investigation of any kind. Like any WTO Member in a similar situation, the EC has to indicate to the
Panel the information that the ITC should have properly considered but did not, and the importance of
that information to the findings and conclusions made by the US authorities.
14. This is entirely consistent with what the Appellate Body considered the correct way of
proceeding in its " Argentina - Footwear " report, at paragraph 121, third sentence:
"Rather, the panel examined whether, as required by Article 4 of the Agreement on
Safeguards, the Argentine authorities had considered all relevant facts and had
adequately explained  how the facts supported the determinations that were
made".(emphasis added)
15. As a matter of fact, the objective evidence, which the US authorities have omitted or
misinterpreted or downplayed in their investigation and that the EC has submitted to your attention,
was prepared by the US authorities themselves before or during the investigation procedure and was
in the public domain.
2. THE US SAFEGUARD MEASURE ON WHEAT GLUTEN IS INCONSISTENT WITH
ARTICLE XIX.1 OF THE GATT 1994
16. With regard to the violation of Article XIX.1 of the GATT 1994, the latest exchange of
written submissions has, in the EC's view, contributed to definitively clarifying that issue.
That provision requires that a safeguard measure be implemented only if the Member
concerned demonstrates in the report of its investigation, among other things, that the
increase in imports was the result of "unforeseen developments and of the effect of
the obligations by a contracting party under this [i.e. the GATT 1994] Agreement".
17. The US claims now that, after all, it had demonstrated in the ITC report that "unforeseen
developments", i.e. unexpected circumstances, led to  the increase in imports. To that effect, the US
points in particular to page I-24 of the ITC report.WT/DS166/R
Page 184
18. What the US is doing now is nothing less than an ex post facto  reconstruction of an
examination of unforeseen developments that the US in fact never performed before adopting the
safeguard measure.
19. This is, again, a violation of the obligation under Article 4.2 (c) SA, which refers to Article 3,
to provide the relevant explanations and proper analysis in the report published before the measure istaken. In the " Argentina - Footwear " report, the AB stated
1 that
"(…) we do believe that the first clause [of Article XIX.1 of the GATT 1994]
describes certain circumstances  which must be demonstrated as a matter of fact in
order for a safeguard measure to be applied  (…)" (italics in original, emphasis added).
By its findings, the AB has indicated that the "demonstration" must logically precede the
"application" of the safeguard measure. To achieve that result, it could therefore take place only in the
investigation report.
20. The EC also notes that the US argument2, that US producers when they increased production
capacity did not "foresee" an increase in imports, is simply irrelevant for the issue of whether
"unforeseen developments" are present. It is not the increase in imports which needs to be unforeseen,but the developments leading to it.
3
21. The EC will now demonstrate that also the s ubstance of the US argument is without merit.
I would like to suggest that you, Mr Chairman and Members of the Panel, take Exhibit EC-1,
the March 1998 ITC report, and reach page I-24.
22. The US would like you to believe that a speculative estimate, made in early 1998, by the ITC
on what could be the possible effects of additional capacity being "brought on line" in the EC in 1999
constitutes the unexpected (i.e. sudden) circumstances that led to the increase in EC imports in 1996.
23. Moreover, the EC does not deny that there was an increase of capacity of the EC industry in
order "to meet demand for wheat starch in the EC market"4, as the US itself recognises. However, the
US has also stressed earlier that a long time is required from the start of construction until the entry
into operation of a wheat gluten facility:
"Although it emphasizes that Heartland entered the market in 1996, (…) the EC omits
that construction of the plant began in 1993, long before the import surge and serious
injury. Similarly, the EC stresses upgrades of Midwest’s Atchison plant in 1996 and
1997, but omits to mention that this was part of a staged series of upgrades that began
in 1992, and continued in 1994 and 1995, before the import surge. Thus, the EC’s
position relies on selective use of evidence while ignoring evidence to the contrary".5
24. Therefore, for the same reasons invoked by the US in its defence, the US must recognise now
that any increase in capacity of the EC industry dur ing the later part of the PoI could not constitute an
"unforeseen development", i.e. an unexpected circumstance that led to increased imports.
                                                     
1 At paragraph 92. See also paragraph 95 where the AB states that "(…) safeguard measures may be
applied only when all the provisions of the Agreement on Safeguards , and Article XIX of the GATT 1994 are
clearly demonstrated" (italics in original, emphasis added).
2 US answer to question 5 paragraph 19.
3 See also EC second written submission, paragraph 13.
4 US second written submission, paragraph 16.
5 US first written submission, paragraph 115.WT/DS166/R
Page 185
25. Mr. Chairman, nothing unexpected, no unforeseen developments occurred that led to the 1996
increase in imports. In fact, already on 6 July 1992, in a testimony before the Section 301 Committee
of the USTR, Mr. Ladd Seaberg, President of the Wheat Gluten Industry Council and President and
CEO of Midwest Grain Products, Inc., stated the following
"In Italy a new 22 million pound plant is on stream already and another 35 million
pound plant is under construction. In France, a new plant with 33 M pound capacity is
under construction and in Holland an expansion for 33 million pounds is also under
way. Then a new plant in East Germany with a capacity of 77 million pounds will be
ready by 1994".6
This shows that both the US industry and the US Government were fully aware during the
Uruguay Round negotiations and as early as the 6th day of the PoI of the future developments in the
EC industry. The testimony also stresses7 that
"The USDA conservatively estimates that EC gluten production could reach 300,000
tons by 1995, roughly double its present capacity(…)".
Therefore, the events which are now invoked by the US cannot be characterised as
"unforeseen developments".8  They do not pass the AB test according to which compliance with
Article XIX of the GATT 1994 "requires that developments which led to a product being imported in
such increased quantities (…) must have been unexpected "9 (emphasis added).
26. Furthermore, Mr Chairman, the US surreptitiously suggests that something "unexpected"
could also stem from the EC's support to its domestic wheat starch production.
27. First of all, the EC draws the attention of the Panel to the fact that the ITC report at page I-24,
footnote 119, states that
"the effect of these programmes has not been examined by the Commission"
(Emphasis supplied).
28. We fail thus to see how this issue can now be invoked in a credible way by the US authorities.
29. Secondly, the reality is that there was no change in the EC policies on this matter since the
conclusion of the Uruguay Round negotiations.
30. Given this objective situation, does the US imply by its argument that it recognises that it
abused the safeguard mechanism because earlier on it realised that it could not successfully challenge
these WTO-consistent EC policies under the WTO SCM agreement? The EC recalls that before filing
the petition which led to the safeguard measure, the US industry had first filed a petition under
Section 301 of the US Trade Act which led to an investigation which later had to be dropped byUSTR.
10
                                                     
6 Pages 3 and 4. The EC is of course ready to provide the Panel with a copy of the entire document if it
so wishes.
7 Page 17.
8 The US specialised press covered extensively thes e issues. See, for example, World paper magazine,
July 1994, at page 42.
9 "Korea - Dairy " report, at 84.
10 See p. II-9 footnote 34 of the ITC report. See also p. 7-8 of EC industry’s post-hearing brief, Exhibit
EC-18.WT/DS166/R
Page 186
31. Finally, does the US imply that the implementation of a WTO-consistent policy whose terms
are published in English in the Official Journal of the EC, which were very well known during the
Uruguay Round multilateral negotiation by all WTO Members including the US, and are also well
known by all operators around the world could constitute an "unforeseen development" leading to an
increase in imports four years after that publication?
32. In summary, Mr. Chairman, Members of the Panel, the last attempt by the US to convince
you that it complied with Article XIX of the GATT 1994 is no better than the previous ones. It is now
firmly established that the US has not lived up to its obligations under that provision.
I will, with your permission, now pass the floor to Mr. Van Vliet.
Thank you. Mr. Chairman, Distinguished Members of the Panel, I will focus on the issues of
confidentiality, injury and causation.
3. CONFIDENTIALITY
33. The EC will come back to the issue of confid entiality when dealing with "profitability" under
“injury”, but would like to make the following general points. The plain wording of Article 4 of the
SA, which refers to Article 3 of the SA, requires the "prompt" publication of a report analysing thecase, demonstrating the relevance of the factors examined, and containing reasoned conclusions on
"all pertinent issues" of fact and law.
34. The ITC report with all its 3-asterisk "***" and with the refusal to provide data in non-
confidential form, i.e. by aggregate data or other methods, does not pass that test. This, evidently, is
not affected by the US attempt11 to misrepresent the EC's claim on this matter as meaning that an
investigative authority is obliged to publish every piece of non-confidential data which it receives.
The EC never made such an absurd statement.
35. Also contrary to what the US asserts12, the EC does suggest (well-known) ways in which the
ITC could have disclosed the relevant elements of confidential information whilst keeping it
confidential. Aggregate data is the first obvious way. Alternatively, the developments in performance
of an individual company can be described by giving percentages (for example, company Y’s sales
were x per cent higher in 1997 than in 1996) or by showing trends in indexed form (e.g. 1996: 100,1997: 110 etc.).
36. Finally, on this point, the EC has to correct a misrepresentation by the US in its second
submission.
13  As the EC's joint reply to questions No. 2,4,14,15 and 16 of the Panel shows14, the EC
has provided a long list of omissions of data in the ITC report, which all constitute a breach of
Article 4 of the SA, and has thus not limited its clai m to the omission of data concerning sales prices,
as the US would have it now.
4. INJURY
37. It is worth repeating, very briefly, that many factors indicated that the state of the US industry
was in fact improving at the end of the PoI.
For instance, in its answer to question 27, the US states that production was only 4.5 per cent
less at end than at the beginning a nd was rising in comparison with 1996.
                                                     
11 Para.21 2nd US written submission.
12 US answer to question 15, para. 49.
13 US second submission at para. 22.
14 See in particular the answer to question No. 14.WT/DS166/R
Page 187
Capacity utilisation was (therefore) also going up.
Also, existing inventories were being sold. Contrary to what the US implies15, the selling out
of inventories is a positive and not a negative sign. For instance, for 1997 compared to 1996, it means
that US producers were not only producing and selling more, but also receiving income out of selling
out their inventories.
38. At the same time, compared with 1996, the market share of imports was hardly increasing in
1997. At the end of the PoI, there was therefore, as the EC explained especially in its second written
submission, no major import surge, nor any evident sign of serious injury deriving from imports thatcould justify adopting a safeguard measure.
In this context, your attention is drawn to the fact that the AB emphasised
16 that
"the title of Article XIX is "Emergency Action on Imports of Particular Products".
39. This brings us to another main issue concerning injury. The EC has explained to you earlier,
at length, why the absence of data in the ITC report makes the actual situation of the US wheat
starch/wheat gluten industry, especially with regard to profitability, unverifiable which is in breach of
Article 4 of SA. The way costs were allocated is not explained at all in spite of protests by the ECindustry’s counsel during the investigation.
17
40. At your request, the US has now provided some further explanations.18
All these explanations should, and as a matter of fact could, have been given in the ITC report
at the time of its release, especially since “profits  and losses” are explicitly mentioned in 4.2 (a) SA.
41. Therefore, it is now too late for the US to attempt to answer the still unresolved following
fundamental questions:
How was the cost allocated exactly, on the basis of production, sales or any other
basis?
Which are the “commercial realities” that were allegedly "reflected" in the
differences in the way the various US companies allocated cost?
42. In any case, notwithstanding the explicit request by the Panel, an explanation of exact method
by which the companies arrived at their figures is still missing and the “explanations” given now donot provide any concrete clarification.
5. FAILURE OF THE US TO CORRECTLY ADDRESS THE CAUSATION ISSUE
43. The ITC did not fulfil its duty under Article 4.2 of the SA to correctly investigate all pertinent
matters. As required under this provision, this should have been done on the ITC’s own initiative, and
the fact, if proved, that the parties did not bring them to its attention, as suggested by the US, can beno excuse.
19
                                                     
15 In paragraph 33 of the US second written submission
16 "Argentina - Footwear " report, at paragraph 93
17 Referred to in the ITC report at I-12.
18 US answer to question No. 26.
19 US answer to question 7, para. 25.WT/DS166/R
Page 188
44. In this respect the " United States - Salmon " case on Anti-dumping cited by the US is not
relevant in this case. It is not all other "possible" factors which need to be addressed (as stated in that
report),but "all relevant factors of an objective and quantifiable nature having a bearing on the
situation of the [domestic] industry", which is evidently a different standard. The US authorities didnot live up to this obligation.
45. The violation of Article 4.2 (a) is all the more serious since many points were specifically
raised before the ITC.
20
5.1 Input costs went up strongly during the later part of the PoI
46. There is no discussion that wheat is the largest part of industry raw material costs and its price
will therefore be determinative of the wheat starch/wheat gluten industry performance.
US wheat prices rose very strongly at the end of the PoI, thus impacting negatively on the US
industry's situation.
47. In the EC's view, the US arguments on this point, especially in its second written
submission21, are without merit.
For example, regardless of the fact that the EC is entitled to provide monthly wheat prices
taken from official USDA statistics to confirm this point, the US’ procedural objections against these
data cannot detract from the fact that the ITC itself, already in original report22 acknowledges that
these input prices rose. This is corroborated by the US "corrigendum" at II-37a.23
48. The US also invokes that some US producers buy wheat flour as raw material in order to
claim that EC data on raw material costs "are not probative".
This is a remarkable argument: are we to assume that even though wheat prices jumped, by a
stroke of magic US wheat starch/wheat gluten producers were still able to buy the flour made from
that wheat at low prices?
Even the ITC24 disagrees with the US present position:
"purchase prices of wheat and wheat flour generally rose during the entire
period."(emphasis added)
5.2 Increased costs could not be passed on in prices at the end of the PoI
49. The ITC “reasoned away”, in its report, the very real negative effects of higher wheat costs,
energy prices and depreciation costs on industry financial performance by assuming that all these
costs would have been passed on to buyers, had it not been for increased imports.
50. The fallacy of the ITC’s assumptions about passing on input costs was however pointed out
explicitly and extensively to the ITC during its investigation and explained in EC’s submission. It is
                                                     
20 See Exhibits EC-16 to EC-18
21 In particular paras. 11-12.
22 II-37.
23 Exhibit US-10.
24 IbidemWT/DS166/R
Page 189
worth noting that the US contradicts now those assumptions by stating in its second written
submission25 that if domestic producers raise their prices
"(…) they would be foregoing some increase in sales, and consequently in production
and capacity utilization".
51. The EC recalls that wheat gluten demand is sensitive to the price of wheat gluten because, as
acknowledged also by the ITC, high protein whea t/wheat flour and wheat gluten are substitutes in
bread baking (which accounts for 80 per cent of apparent US wheat gluten consumption).
Bakers have a clear choice: either to use wheat gluten to increase the protein content of low
protein wheat/wheat flour or to purchase high pr otein wheat/wheat flour and thereby substantially
reduce the amount of wheat gluten they need. The use of high protein wheat/wheat flour thereforesignificantly reduces demand for wheat gluten. This is the point the EC always made before the Panel,
which is different from the incorrect representation of our position.
26
The bakers' choice is of course based on profitability: they will choose one or the other – high
protein wheat/wheat flour or wheat gluten – depending on their relative price. The mere possibility of
using high protein wheat when the protein levels of wheat/wheat flour rise has thus inevitably adepressing effect on the price of wheat gluten. The EC has already explained in its second written
submission, at paragraphs 44 to 46, how this particular market works.
52. The EC has also shown
27 that over 86 per cent of the variation in  quarterly US wheat gluten
prices over the PoI was explained by the protein content of wheat as measured by wheat protein
premiums. No other single factor, including imports of wheat gluten, had any statistically significant
effect on wheat gluten prices.
53. The reason that protein premiums determine wheat gluten prices has just been explained : high
protein wheat is the only substitute for wheat gluten in bread baking.  All producers/sellers and buyers
of wheat gluten face this fundamental reality of the US wheat gluten market.
54. Also the ITC was aware of this: it explicitly acknowledges28 that crops particularly low in
protein content (which generated high protein pr emiums) drove up wheat gluten prices around 1994.
55. However, the US authorities did not investigate the protein premium developments, especially
for the period 1996-1997. This would have required examination of price differences between high
protein and low protein wheat on the basis of publ icly available data. But the ITC unreasonably did
not even request such data.
56. Therefore, in the causation section of the ITC-report29, the US authorities did not consider, as
they should have, whether it was not in fact hi gh protein content of wheat crops (so low protein
premium) which was keeping prices relatively low.
5.3 The movements of prices compared with level of imports show that prices moved
independently from imports
                                                     
25 Paragraph 64.
26 See paragraph 48 of the US second written submission: "The EC implies that high gluten wheat flour
has a sufficiently high gluten content so as not to require the addition of wheat gluten to enhance the gluten
level".
27 Exhibit EC-10.
28 I-22 to 23.
29 I-16 to 18.WT/DS166/R
Page 190
57. It was in particular the failure to investigate the wheat protein premium issue which resulted
in the incorrect and unjustified assertion by the ITC that increased imports "drove down" prices.
58. As its only defence, the US asserts now that "trends speak for themselves"30, thus implying
that it did not need to inquire that issue, and that  it draw firm conclusions from the mere coincidence
in time during some quarters of the POI of slightly lowering prices and slightly increasing importsAlthough the EC has already explained in some de tail in its written submissions and earlier oral
statement that coincidence in time is not automatically proof of a causal link, some brief additional
considerations are appropriate.
59. In its " Argentina-Footwear " report
31, the AB agreed with the Panel that in an analysis of
causation
"it is the relationship  between the movements  in imports (volume and market share)
and the movements in injury factors that must be central to a causation analysis and
determination."
The term "relationship" is of course not equal to "coincidence", as the US would have it. In
support of its finding, the AB approvingly cited the " Argentina-Footwear " panel statement according
to which a coincidence in time of such movements cannot by itself prove causation.
60. The ITC’s determination is contrary to these principles.
In 1994, wheat gluten prices jumped because of the low protein content of wheat crops, while
imports remained practically stable.
In 1995, wheat gluten prices fell from 1994 levels as the protein levels of the wheat crop
rose32, although imports remained practically stable.
In 1996, the wheat gluten price went up from the last quarter 1995 level (and remained higher
than that level up until the first two quarters of 1997) even though imports were also increasing.
61. All these movements show that there was no rela tionship between the level of imports and the
wheat gluten price. Imports did not "drive down" wheat gluten prices. At the very least, the ITC
should have investigated and explained why the protein premium which, as it acknowledges,
controlled prices early on in the POI was not relevant later on. It completely failed to do so.
5.4 Industry Cost-Price Squeeze
62. Three defining events impacted the US wheat gluten/wheat starch industry over the PoI:
- wheat gluten prices jumped on the US market to very high levels in 1994 because of
the low protein content of wheat;
- wheat gluten prices declined on the US market in 1995, and – although they increased
somewhat in the first three quarters of 1996 – remained low in 1996 and 1997,
because of the improving protein content of wheat as reflected by declining protein
premiums;
                                                     
30 US second written submission, at paragraph 27
31 Paragraph 144
32 See Exhibit EC-10 Figure 3.WT/DS166/R
Page 191
- the costs of producing wheat gluten in the US rose in particular since wheat prices
increased significantly.
63. Declining wheat gluten prices and rising i nput costs caught US wheat gluten/wheat starch
producers in a cost-price squeeze.  Higher costs and lower wheat gluten prices, not imports, were the
causes of any deterioration of the US industry financial performance after 1994.
Prices were low due to low protein premium. Furthermore they were influenced by increased
intra-industry competition, which brings the EC to the over-capacity issue.
64. The ITC claimed that the US industry would have been able to capture all of the growth in the
US wheat gluten apparent consumption in 1996 and 1997, if imports had remained stable at 1995
levels.
This claim is based on the assertion that the industry had expanded production capacity in
expectation of increased consumption over the PoI. However, the decision by the US industry to over-
expand capacity cannot be explained in any way except that it was a bad business decision.
65. There is no a priori  reason why US producers would have captured all of the increase in
apparent consumption of wheat gluten in 1996 and 1997. US purchasers of imported wheat glutenwould have to alter their commercial relations with suppliers and shift to domestic producers to cover
increased sales. The ITC provides no explanation of why this curious economic behaviour should
have occurred. In fact, the US now contradictorily asserts in its second written submission
33 that
"[T]his analysis did not assume that the domestic industry would capture all of the
increase in domestic demand in 1997 from earlier levels".
66. The US wheat gluten/wheat starch industry found itself with substantial and costly newly
installed production capacity at the time when on the one hand wheat gluten prices were decliningfrom the peak levels in 1994, caused by the improving protein content of wheat, and on the other hand
production (in particular input) costs were rising. Because of the cost-price squeeze, US wheat
gluten/wheat starch producers were unable to take advantage of their expanded production capacity.
67. It is therefore the combination of excessively increased capacity and particularly high input
costs which led to any difficulties that the US industry might have had during the latter part of thePoI.
68. Being aware of the existence of all these "relevant factors", it is not understandable how the
US authorities could reach the unreasonable conclusion that increased imports were the sole cause, in
isolation, of the alleged "serious injury" to the US wheat gluten/wheat starch industry.
69. Now, in its answer to question No. 2, the US admits that the ITC never analysed whether the
US industry, could have been profitable at 61 per cent of capacity utilisation when considered in
combination with the high wheat prices during last two years of the PoI. In other words: the US
authorities never analysed whether the cause of the (alleged) unprofitability was imports, or the
combination of over-capacity, high input cost, and difficulties in co-product markets, to which we will
turn in a second.
70. Thus, the US authorities did not fulfil the requirements under Article 4.2 of the SA, in
particular under (b), which prohibits the attribution of injury caused by other factors to increased
imports.
                                                     
33 Paragraph 63.WT/DS166/R
Page 192
5.5 Co-products
71. The EC will not explain again in detail why developments in the necessary co-products of
wheat gluten influence the profitability and business decisions of wheat starch/wheat gluten
producers. Its analysis will be limited today to the following points concerning mainly starch (foralcohol, we refer you to our earlier statements).
72. The EC has proved by reference to the ITC's own data that in comparison with corn starch
producers, the competitive position of the wheat starch operations of US wheat starch/wheat gluten
producers deteriorated during the PoI. This is the opposite of what the US incorrectly asserts.34
73. Since wheat starch and wheat gluten are necessarily produced due to one and the same
production process, not only was wheat gluten production capacity irrationally increased by US wheat
starch/wheat gluten producers, but so was by necessity wheat starch production capacity (by 93 per
cent).35
74. This worsened the competitive conditions between wheat starch and corn starch for US wheat
starch/wheat gluten producers, because it increased the amount of wheat starch that they had to sell incompetition with – cheaper – corn starch.
75. The situation deteriorated even more because input costs – wheat (flour) – also increased.
Like with wheat gluten, these increased costs could not be passed on into wheat starch prices because
of the weak competitive position in comparison with corn starch.
76. The above combination of factors led to decreasing sales and doubling inventories of wheat
starch during the later part of the PoI.
36
77. Both the ITC’s analysis37 and US defence38 on this point are totally inadequate. It is in fact
limited to noting that wheat starch selling prices showed a gradual increase over the PoI.
78. However, the mere fact that there was some increase in wheat starch prices does not mean at
all that this increase was sufficient to offset the negative impact of the strongly increased input prices.
79. The additional argument developed by the US39, that the fact that wheat prices are higher than
corn prices will result in prices of the so-called "A" wheat starch being higher than corn starch prices,
is devoid of economic logic.
The fact that the price of wheat is higher than that of corn does not mean that prices of
products derived from wheat are higher than prices of products derived  from corn. Economic logic
dictates that it is demand for the derived products that determines their price. This is of course true
also for the so-called “A” wheat starch.
                                                     
34 In particular paragraph 44 of second US written submission.
35 See Table C-2 at C-5 of ITC-report.
36 See Table C-6 at C-5 of ITC-report. Note in particular how sales (“US shipments”) strongly dropped
in 1996 compared to 1995 and inventories more than doubled in 1997 compared with 1995.
37 I-16-17.
38 Paragraph 43-44 of the second US written submission.
39 US second written submission, at paragraph 44.WT/DS166/R
Page 193
6. THE US SAFEGUARD MEASURE ON WHEAT GLUTEN IS A PROTECTIONIST
MEASURE IN DISGUISE
80. The EC has explained that the US safeguard measure on wheat gluten is in fact a protectionist
measure in disguise, that is a measure that goes far beyond the exceptional remedies which a WTO
member is allowed to adopt in case of proved serious injury caused by increased imports.
The US has gone back from the concessions bound in its GATT Schedule beyond what it
could possibly be allowed to under the SA and without any justification for doing so. The EC has
brought to the Panel's attention in the earlier stages of this dispute settlement procedure numerous
elements supporting its claim. They can be summarised as follows:
6.1 The US has breached the proportionality principle under Articles 4.2 of the SA
81. Making imports from other Members bear the burden of adjustment of the domestic industry
to factors other than "increased imports" would surely be an act of protectionism, in violation of
Articles I and XIX of GATT 1994 and of all the procedural and substantive requirements under theSA.
82. According to Article 4.2 (b) last sentence, wh en considering whether "serious injury" was
caused by "increased imports" (the only possibility that allows a Member to impose a safeguard
measure), the investigating authorities shall not attribute to increased imports injury caused by other
factors, which are causing injury at the same time.
83. As was indicated in the EC's second written submission, this provision has the important
consequence that an investigative authority can only find that “serious injury” is caused by increased
imports if it is found that the increased imports alone cause “significant overall impairment”, evenafter taking all injury caused by other factors out of the analysis.
84. The analysis that my colleague Mr. Van Vliet has just made before you this morning provides
the clearest possible confirmation that the US au thorities did not comply with the proportionality
principle. The effect of this WTO-inconsistent action is that the US authorities have attributed with no
justification to increased imports the cause of an alleged serious injury of US domestic wheatgluten/wheat starch industry.
85. In fact, the US authorities, when examining the alleged "significant overall impairment in the
position of the domestic industry", have completely disregarded the effects that the other co-causes
were producing. An objective examination of "all factors having an objective and quantifiable bearing
on the situation of" the wheat gluten/wheat starch industry would inevitably have led to theconclusion that none of the causes was sufficient, taken in isolation, to create such serious injury.
86. The "preponderance test" applied by the US pursuant to its internal legislation is inconsistent
with the principle of proportionality set out in article 4.2 of the SA.
Its application to the wheat gluten safeguard procedure has produced the effect of prompting
the implementation of a safeguard measure in a situation where the US was not in a position todemonstrate objectively that the alleged "significant overall impairment in the position of the
domestic" wheat gluten/wheat starch industry could have been caused by "increased imports" taken in
isolation, i.e. after having deducted the effects of the other co-causes.
6.2 The US has breached the proportionality principle under Article 5.1, first and third
sentence, of the SAWT/DS166/R
Page 194
87. Article 5.1 of the SA is the second textual application of the principle of proportionality and
provides that a Member shall apply safeguard measures "only to the extent necessary to prevent or
remedy serious injury and to facilitate adjustment".
88. Even if one were to assume arguendo  that a Member has correctly attributed the cause of the
serious injury to increased imports (and this hypothesis is certainly not correct in the case of the US's
safeguard measure on wheat gluten), the corresponding safeguard measure must be commensurate or
proportionate to that injury, to the exclusion of any injury caused by other factors.
89. The EC repeats once more that using the pretext of a safeguard measure in order to remedy
the intrinsic uncompetitiveness of the US domestic industry ( in casu  the wheat gluten/wheat starch
industry) relative to other domestic competing industry, like the corn milling industry, constitutes aviolation of the SA.
90. Neither can a WTO Member abuse a safeguard measure, in order to remedy situations
unrelated to increased imports such as increase in i nput costs, or fluctuations in price due to variations
of protein premiums, or failed business strategies such as over-expansion of production capacity.
However, this is exactly what the US did.
91. The issue of principle that commands this case is that lawful trade from other WTO Members
cannot be made to bear the burden of factors allegedly causing injury, which are unrelated to imports.
This would be in patent breach of Articles I a nd XIX of the GATT 1994 and the provisions of the SA.
92. In its second written submission, (paragraphs 64 and 65) the US has attempted a defence by
stating that
“(…)The remedy analysis assumed that domestic producers, relieved from pressure
from low-priced imports, would prefer to raise their prices above their operating
costs, even though this meant that they w ould be foregoing some increase in sales,
and consequently in production and capacity utilization. (…) Because this estimate
assumes that the U.S. industry will sell at a price that covers its operating costs, it
seeks to ensure that the U.S. industry will op erate at a level at which it will achieve a
reasonable profit".
93. The EC responds that by this statement the US is effectively admitting that its safeguard
measure on wheat gluten serves exclusively to keep imports out of the US market in order to allow
US producers to surmount purely internal problems.
94. In fact, to adopt a safeguard measure whose main effect consists in keeping prices "above
operating costs" in a situation where those costs are directly dependent on
- insufficient capacity utilisation due to its irrational increase,
- developments in wheat prices and input costs in general, and
- the burden of disposing of wheat starch in a high competitive market determined by
corn starch low prices
effectively amounts to shifting the burden of the inherent uncompetitiveness of the US industry onto
imported wheat gluten.
95. There is a WTO-consistent and transparent way open to the US if it wants to reduce imports
in order to help its industry deal with internal competitive difficulties. It could start GATT
Article XXVIII negotiations in order to raise the tariff protection for its domestic wheat gluten.WT/DS166/R
Page 195
However, this implies that it must offer first an adequate compensation. The US cannot expect to
achieve that result "for free" by abusing the safeguard mechanism.
96. If the factors leading to the situation in which the US industry found itself in the later period
of the PoI were still to prevail at the end of the three years of the current safeguard measure, the US
industry's situation will be unchanged. Therefore, the current reduction in import levels is not at alljustified by an emergency situation and reasonable doubts could be raised as to whether it could
effectively be removed in 2001.
97. The ex post facto  explanation provided now by the US is thus a confirmation that the US
safeguard measure goes beyond what is necessary in order to remedy injury allegedly caused by
increased imports and to facilitate adjustment of the industry to that injury only.
6.3 Article 5.1 did not allow the US to choose a quantitative restriction without having
demonstrated that that was the leas t trade restrictive measure possible
98. The principle of proportionality under Article 5.1 did not allow the US to choose a
quantitative restriction without having demonstrated that the applied measure was the least traderestrictive measure possible.
99. The EC would like to recall once more that the explanation provided by the ITC (I-26) for
choosing a quantitative restriction refers only to the wheat starch market and to the alleged need to
avoid "inequitable" distribution of burden between suppliers from third countries.
There is no explanation on the only relevant issu e, i.e. the "suitable" remedy for the alleged
serious injury to the US wheat gluten industry caused by increased imports only and the need to
facilitate adjustment of that industry to increased imports only.
The ITC's unrelated statements or " petitiones principii " do not reach the minimum standard of
"reasoned conclusions" required under the SA.
100. As a concrete consequence of these violations of the SA, imports of wheat gluten from the EC
suffer in a disproportionate manner from the restriction of trade with the US. Or, in other words, the
protection provided to the US domestic industry is exaggerated and exceeds what is permissible underthe SA.
101. Please allow me to react briefly to a misinterpretation of the SA by the US.
In the EC's view, the comparison between Article 6 SA and Article 5.1 which is made in its
second written submission is incorrect
40 and thus provides no support for the US defence. The first
provision imposes tariffs as provisional safeguard measures because that allows refund in case nodefinitive measure is taken. By contrast, Article 5.1 imposes a proportionality obligation. It provides
for the possibility of adopting definitive safeguards also in the form of a quantitative restriction, but
only if the investigation report demonstrates that this is indispensable in order "to remedy serious
injury and to facilitate adjustment" to increased imports.
6.4 The US has applied the safeguard measure on wheat gluten inco nsistently with the
findings of the US authorities about injury and causation.
102. The US authorities have excluded from their reasoning concerning causality the effects of the
inherently weak position of the US wheat gluten /wheat starch industry on the US domestic starch
                                                     
40 US second submission, paragraph 69.WT/DS166/R
Page 196
market, thus incorrectly determining that a serious injury was caused solely by the imported wheat
gluten.
103. However, the US authorities have included as one of their key considerations the wheat starch
market conditions in the US when considering the form, the scope and the extent of the safeguard
measure against foreign wheat gluten.
104. This inconsistent way of proceeding of the US authorities has doubly prejudiced the market
access conditions for EC produced wheat gluten by first indicating imports as the sole cause of serious
injury and then increasing the restrictions flowing from the safeguard measure in order to remedy
other causes.
105. This constitutes further evidence that the US abused the safeguard instrument when it adopted
the safeguard measure on wheat gluten.
6.5 The US has manipulated the "representative period"
106. The EC reiterates here briefly its position of principle on the interpretation of Article 5.1,
second sentence, of the SA.
107. If a Member chooses to implement a quantitative restriction, it has to determine the quantity
of imports in an objective way, i.e. with reference to the most recent ("last") statistics available.
108. Such statistics are representative of the legitimate trade in the product concerned unless an
exceptional event or a violation of WTO rules has distorted the trade. The Member departing from the
available statistics for the last three years must prove the existence of such exceptional event or
violation.
109. As was mentioned in our second written submission41, the " Bananas - Recourse to
Article 21.5 by Ecuador " panel report and the ITC itself have confirmed the correctness of the EC's
position.
110. When the objective level of imports is set, it may be adjusted in a MFN fashion provided that
"a clear justification is given that a different level is necessary to prevent or remedy injury".
111. A "clear" justification corresponds to a reinforced  burden of proof upon the Member using
that possibility. It is not the " US - Shirts and Blouses "42 standard according to which
"the party who asserts a fact, whether the claimant or the respondent, is responsible
for providing proof thereof".
It is a much higher, more demanding standar d. Generic explanations or statements do not
fulfil that standard.
112. Therefore, a correct implementation of Article 5 of the SA imposes that the two successive
and separate steps that we have just examined are not confused.
113. The US has not followed this correct line of action. Rather, it has argued even in its second
written submission that it was entitled to invent  a new rule and read in Article 5.1, second sentence,
the possibility of choosing another representative period of its choice.
                                                     
41 Paragraphs 104 and 105.
42At page 15.WT/DS166/R
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114. The practical consequence of such action is that the quantities of imports allowed into the US
are unjustifiably lower than the level at which they  should have been set. In other words, the US
domestic industry on wheat gluten is over-protected by the US measure, which is a protectionist
measure in disguise. This corresponds to a violation of Article 5.1 of the SA.
7. THE US SAFEGUARD MEASURE ON WHEAT GLUTEN IS A DISCRIMINATORY
MEASURE
115. The EC has also indicated that the US safeguard measure on wheat gluten is in fact a
discriminatory measure, i.e. a measure that was designed with the aim of treating in a differentiated
fashion imports from different origins. This discrimination is however inconsistent with Articles I of
the GATT 1994 and 2.1, 4.2 and 5.2 of the SA.
116. The EC has brought to the Panel's attention in the earlier stages of this dispute settlement
procedure numerous elements supporting its claim. The answers by the US and Canada to the
questions from the Panel have shed new interesting light on this issue.
117. Discrimination between products based on their origin constitutes a breach of the fundamental
principle of MFN treatment.
118. According to Article 4.2 (a) SA
"In the investigation to determine whether increased imports have caused (…) serious
injury to a domestic industry under the terms of this Agreement, the competent
authorities shall evaluate all relevant factors (…), in particular the rate and amount of
the increase in imports of the product concerned in absolute and relative terms, the
share of the domestic market taken by increased imports (…).
119. According to Article 4.2 (b) SA
"The determination referred to in subparagraph (a) shall not be made unless this
investigation demonstrates (…) the existence of a causal link between increased
imports of the product concerned and the serious injury (…). When factors other than
increased imports are causing injury (…), such injury shall not be attributed to
increased imports".
120. The US43 and Canada44 have confirmed in their latest submissions that the US authorities
have performed the injury and causation investigation in two steps.
121. They have first (unjustifiably) attributed alleged "serious injury" to increased imports
regardless of their origin.
122. However, the US authorities have then performed a second causation investigation and have
excluded Canada because its imports allegedly did not contribute "substantially" to the injury.
123. Finally, they have implemented the allocation of the quantitative restriction in order to
reallocate shares among foreign suppliers (ITC I-21 and I-26, in fine ).
124. The text of Article 4.2 (a) and (b) on its face obliges all the Members, including the US, to
consider "imports" or "increased imports" as a whole, without discrimination among such imports
based on the origin of the product.
                                                     
43 US answer to question No. 29, at paragraph 93
44 Canada's answer to questions from the Panel and the EC, at paragraph 2.WT/DS166/R
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125. Indeed, in view of the clear text of the SA, a departure from such a fundamental principle of
the GATT/WTO cannot be based on unjustified statements such as that "nothing (…) proscribes"
deviating from that rule, as the US asserts in its answer to question No. 29 .
126. Notwithstanding, this is exactly how the US authorities operated. The US latest defence is
moreover in conflict with the ITC's statement at I-18 of its report:
“Nothing in Article 4 of the Agreement, which defines key terms and sets out the
factors to be considered in determining whether imports are a substantial cause of
serious injury (...) suggests that a country should look at anything else than all
imports when determining whether imports have increased, and whether increasedimports cause or threaten serious injury to a domestic industry.”(emphasis added).
127. The EC therefore concludes that the unequivocal text of Article 4.2 of the SA and of Article I
of the GATT clearly prohibit that the US perform a two step injury and causation analysis, and
include Canadian imports when determining whether “serious injury” has occurred but exclude
Canada from the scope of the safeguard measure.
128. The facts also contradict that possibility since imports from the EC, Australia as well as
Canada increased in 1996, and the level of imports from all these sources into the US in 1997 were in
any case higher than in 1995 (ITC II-10, Table 1).
129. The US has admitted that it ignored these facts and isolated imports originating in the EC in
its investigation.
45 The US has no justification under the SA or under any other WTO agreement for
having breached the principle of parallelism and the fundamental principle of the MFN treatment.
130. As is apparent, Article 2.1 SA, and in particular its footnote, does not support at all the US'
(and Canada's) case.
131. Free trade areas such as the NAFTA are not even mentioned in that text.
132. The generic reservation contained in footnote 1 to Article 2.1, concerning the interpretation of
the relationship between article XXIV of the GATT 1994 and Article XIX of the same agreement, has
evidently no bearing on the interpretation of Article 4.2 of the Safeguards Agreement. This is all the
more so in light of the General Interpretative note to Annex 1A to the WTO Agreement.
133. The uneven allocation of shares of the quantitative restriction in favour of Australia and to the
detriment of the EC is another plain example of discriminatory treatment without justification.
134. The US has explicitly stated before you that "The EC cites Article 5.2(b), but that Article is
irrelevant because the United States di d not take action under Article 5.2(b)".46
135. Since, by its own spontaneous admission, it did not follow the procedures under
Article 5.2(b), the US has no explanation left as to how it can justify that despite having a 47 per cent
share of the market in the previous representative period, the EC was allocated only a 43 per cent
share of the quota. Australia, on the other hand, was allocated a share of 49 per cent, compared to its
share in the previous representative period of 38 per cent. More importantly, this allocation has
preserved entirely the 1997 record levels of imports from Australia despite the fact that Australia’sexports increased continuously in the last three years of the investigative period, by almost 21 per
                                                     
45 See US answer to question 29 at para. 92: " In its analysis the Commission found that the serious
injury sustained by the domestic wheat gluten industry was attributable to a surge in imports from the EU in1996 and 1997, accompanied by sustained underselling by EU producers."
46 US oral statement on 20 December 1999, at page 12WT/DS166/R
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cent.47  In fact, the ITC report48 clearly indicates the ITC's intent to target the allegedly
“disproportional growth and impact of imports of wheat gluten from the European Union”.
136. Finally, the manipulation of the "representative period" by the US authorities, that was
examined above, has provided de facto  a better treatment of wheat gluten of Australian origin when
compared to wheat gluten of EC origin. That manipul ation is therefore not only a breach of Article 5.1
of the SA but also of Article I of the GATT 1994.
137. In summary, the EC reiterates that the US safeguard measure on wheat gluten is inconsistent
with Article I of the GATT 1994 and Articles 2.1, 4.2 and 5 of the SA.
138. Before concluding this oral statement, the EC would draw the attention of the panel to the fact
that the US has not contested that during the mee tings held between the US and the EC prior to the
entry into force of the safeguard measure, the US officials were instructed "not to negotiate on
anything". For the rest, the documents cited by the US49 only confirm the fact that the EC never
considered these consultations as covering either proposed measures or trade compensation. The
breach of Articles 12 and 8 of the SA has thus been definitively established.
Mr. Chairman and distinguished Members of the Panel, thank you for your attention.
__________
                                                     
47 ITC report at II-12.
48 At I-21
49 US Exhibits 11 and 12.WT/DS166/R
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ATTACHMENT 1-7
EUROPEAN COMMUNITY'S COMMENTS
ON US EXHIBIT 13
(2 February 2000)
The table submitted by the US as US Exhibit 13 at the last minute on 1 February 2000, at the
end of the session with the panel, is misleading.  The US intention was to show that the allocation of
the quota adopted as a safeguard measure on wheat gl uten is not discriminating against the EC or in
favour of Australia and Canada.
The EC has the following comments concerning that table:
• The table is based on "crop years" which means 1 July of one year to 30 June  of the following
year.
• The "quota year" is based on the Proclamation by the US President, i.e. 1 June of one year to
31 May of the following year.
• Therefore, there is a one month overlap between the two referenced years.
• The management of the quota (which was decided by the US) is based on a "first come – first
served" system, which means that the quota will remain open until the quantities are filled.  As
soon as the quantities are completely used, no more imports are allowed for the remaining part of
the quota year.
• Given that, unlike for Australia and Canada, the over-restrictive size of the quota allocated to the
EC has substantially reduced the room of manoe uvre of the importers from the EC, experience of
the first two "quota years" shows that a substantial part or even the totality of the share of the
quota allocated to the EC is filled in a very short period of time, at the beginning of the quotayear, i.e. during the month of June.  This is possible because wheat gluten can be easily stored in
warehouses in the US territory and shipped to US customers according to sales contracts over theremaining part of the "quota year".
• The market share of the EC imports in "crop year" 1999 (i.e. July 1998-June 1999) which is
shown in the US Exhibit 13 includes not only part of the quantities for the quota year 1998/1999
but also practically all the quantities which may be imported from the EC until 31 May 2000,
which pertain to "quota year" 1999/2000 (i.e. June 1999-May 2000).  Evidence of this is providedby statistics concerning June 1999:  97 per cent of the total quantities granted to the EC for the
"quota year" 1999/2000 were imported within that first month.
• Therefore, the statistics based on "crop years" provided by the US in its Exhibit 13 create a
major statistical distortion that renders them totally unusable for the purpose pursued by
the US.  In fact, at least the 1999 "crop year" includes a volume of imports which is
equivalent to almost two "quota years".
• The real import shares of the EC, Australia and Canada can only be appreciated if import shares
are calculated on the basis of "quota years".  The table annexed to this document provides such
correct statistics.
• If we now take the US Exhibit 13 for the "crop year" 1995, the Panel can easily appreciate that
Australia had a share of 40.5 per cent of the imports into the US.  However, it was provided
49 per cent of the quota.
• In the meantime, the exclusion of Canada from the scope of the quota has resulted in a spectacular
gain in market share, as the EC has relentlessly repeated as from the start of this procedure.  The
US Exhibit 13 and the EC statistics show that Canada more than doubled its exports whenWT/DS166/R
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compared with the last year preceding the entry into force of the safeguard measure on wheat
gluten.
COMPARISON IMPORTS "CROP YEAR" VS. "QUOTA YEAR"
IN METRIC TONS
Crop year
01 July 98-30 June 99Quota year
01 June 98-31 May 99
Volume % Volume %
Total imports 96,636.5 100.00 77,576.9 100.00
EC* 46,587.8 48.21 30,867.4 39.79
Australia 31,345.8 32.44 28,341.4 36.53
Canada 13,179.9 13.64 12,753.1 16.44
IMPORTS ACCORDING TO US CUSTOMS IN METRIC TONS
Imports by: EC Australia Canada
June 98 5,397.9 2,194.6 621.1
Crop year 1998/99
July 98 5,461.7 3,169.7 669.4
August 98 6,729.4 2,131.2 638.8
September 98 7,166.0 2,828.4 928.3
October 98 5,517.2 2,508.1 1,475.6
November 98 595.1 2,239.0 900.0
December 98 0.0 3,354.3 1,195.3
January 99 0.0 2,107.1 1,240.5
February 99 0.0 2,866.9 1,212.7
March 99 0.0 3,104.6 1,195.9
April 99 0.0 1,680.6 1,320.0
May 99 0.0 156.9 1,355.4
June 99 21,118.2 5,199.0 1,047.9
TOTAL 46,587.75 31,345.8 13,179.9
*The quantity for the quota year 1998/99 i.e. 30,867.4 tons is exceptionally higher than the
EC quota by 5,402 tons due to mismanagement of the quota by the US customs.
__________WT/DS166/R
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ATTACHMENT 1-8
RESPONSES OF THE EUROPEAN COMMUNITY
TO THE ADDITIONAL QUESTIONS FROM THE PANEL
(4 February 2000)
Questions No. 2 (EC) and 3 (EC and US)
Q2. “Please comment on the US statement on page 9 of its oral statement at the second
substantive Panel meeting that "the relevant question is whether the USITC demonstrated in its
investigation that unforeseen developments occurred, not whether the USITC made a specific
determination regarding unforeseen developments…."”
Q3. “In connection with question 2 above, could the parties please indicate to the Panel what, if
any, they consider the difference between "demonstrating" such unforeseen developments in an
"investigation" – the terms used by the Appellate Body at para. 98 of the Argentina – Footwear report
– and "making a specific determination" re garding such unforeseen developments.”
Joint Reply
In the " Argentina - Footwear " report, the AB stated that
"(…) we do believe that the first clause [of Article XIX.1 of the GATT 1994]
describes certain circumstances  which must be demonstrated as a matter of fact in
order for a safeguard measure to be applied  (…)" (italics in original, emphasis added).
By its findings, the AB has indicated that the "demonstration as a matter of fact" must
logically and chronologically precede the "application " of the safeguard measure.  To achieve that
result, it can therefore take place only in the investigation report.  Moreover, it necessitates anexamination in fact that can take no other form than a reasoned development in writing. This is
entirely missing in the ITC report.
Moreover, in the same report, the AB has reminded that:"This suggests that Article XIX continues in full force and effect, and, in fact,
establishes certain prerequisites for the imposition of safeguard measures."
Finally, in the "Korea-Dairy" report, at paragraph 84, the AB has also indicated that
"(…) it seems to us that the ordinary meaning of the phrase ‘as a result of unforeseen
developments’ requires that the developments which led to  a product being imported
in such increased quantities and under such conditions as to cause (…) serious injury
to domestic producers must have been ‘unexpected’".
In the light of these interpretations, the US should have demonstrated in the ITC report the
existence of ‘unforeseen developments’. In order to be demonstrated, that "prerequisite" should have
been examined by the investigative authorities which should have analysed whether the circumstances
"that led to a product to be imported in such increased quantities (…)" were "unexpected".WT/DS166/R
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This inevitably implies that it is not possible to try to reconstruct ex post facto  a justification
on the existence of a "prerequisite" that was patently neglected during the investigation.
Paragraph 98 of the " Argentina – Footwear " report contains the conclusions of the AB on this
issue. To no surprise, its careful wording, including the terms "in their investigation" constitutes theconsistent and logical confirmation of the interpretation of Article XIX that the same AB had adopted
in the above-mentioned paragraphs of the same decision and of the contextual " Korea – Dairy "
decision.
The EC would like to repeat once more that, in substance, the ex post facto  explanations by
the US do not stand up to serious scrutiny, as th e EC’s second oral submission has demonstrated.
Question No. 4 (US)
“How does the United States respond to the statements of the European Community at
para. 25 of its oral statement to the second substantive Panel meeting concerning "unforeseen
developments"?”
Comments by the EC
The EC recalls the co-product nature of wheat gluten and wheat starch: when 5 kg of wheat
starch a re produced, necessarily 1 kg of wheat gluten is produced.  Therefore, it is not unexpected
that any increase in wheat starch capacity of pr oduction automatically leads to an increase in wheat
gluten production capacity.  Moreover, the statement referred to by the EC was made by the President
of the Wheat Gluten Association and specifically referred to increases in wheat gluten capacity.
Questions No 5 (EC) and 6 (EC and US)
Q5. “How does the EC respond to the US statemen t in its first written submission (para. 79) that
"…the EC advances no reason why a rise in imports relative to consumption should be given greater
weight than the absolute rise in imports and their rise relative to production"?”
Q6. “In connection with question 5 above, please comment on the relevance of the fact that
Article 2.1 SA refers to the increase in imports re lative to domestic production only. (We note that the
Anti-Dumping Agreement (article  3.2) and the SCM Agreement (artic le 15.2) refer to the amount of
imports relative both to production and consumption). “
Joint Reply
Under the Safeguards Agreement, in order to be able to take a safeguard measure, it is
required that the domestic authorities demonstrate that imports increased in absolute or relative terms
(Art. XIX and Art. 2.1of the SA). However, this is not sufficient to justify the imposition of a
safeguard measure.
Safeguard measures can only be taken if increased imports cause serious injury to a domestic
industry, i.e. a "significant overall impairment" in its position. The relevant requirements for such a
"serious injury" determination are contained in Article 4.2 (a) of the SA.
Article 4.2 SA explicitly requires an evaluation of the increase in imports "in absolute and
relative terms" as well as "the share of the domestic market taken by increased imports" (in terms of
consumption).WT/DS166/R
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The same injury factors are referred to in Article 3.2 of the Anti-Dumping Agreement and
Article 15.2 of the SCM Agreement ("a significant increase in dumped [subsidised] imports, either in
absolute terms or relative to production or consumption (…)"). This shows that these three injury
factors are identical in the three provisions of the various agreements.
Therefore, in order to establish whether a "significant overall impairment" has occurred, it is
not sufficient to demonstrate that imports have increased only in absolute terms or relative to domestic
production. The investigative authority has also to examine the share of the domestic market taken by
increased imports.
In this case, the EC in paragraph 60 of its 1st written submission has demonstrated that the
ITC’s examination was deficient because it did not consider that domestic consumption increased
strongly during the PoI. Had the ITC done so, it would have found that the share of the domestic
market taken by increased imports was not indicative of serious injury.
Consequently, what the EC argued was not that increase in terms of consumption must be
given greater weight than other injury factors but that it has to be appropriately considered in the
injury determination, which the ITC did not.
Question No. 8 (EC and US)
“Could Article XXIV of the GATT 1994 provide an "exception" or "derogation" to provisions
of the Safeguards Agreement?  Please give the legal basis for your response.”
Reply
The EC would like to recall that it is in the context of the issue of whether Article XXIV of
the GATT 1994 could justify that Argentina exclude the Members of the MERCOSUR customs unionfrom its safeguard measure on footwear, that the issue of the correct implementation of the principle
of parallelism was examined by the AB.
In that framework, the AB stated the following (paragraph 109)
"we also are not persuaded that an analysis of Article XXIV of the GATT 1994 was
relevant to the specific issue that was before the Panel. This issue, as the Panel itself
observed, is whether Argentina, after including imports from all sources in its
investigation of "increased imports" of footwear products into its territory and the
consequent effects of such imports on its domestic footwear industry, was justified inexcluding other MERCOSUR member States from the application of the safeguard
measures."
The situation in the present panel procedure is id entical to that examined by the AB, with the
sole exception that NAFTA is not a customs union but a free-trade area, which is not covered in
Article 2.1 and footnote 1 of the SA.
In fact, the US has conducted an examination of injury and causation under Article 4.2
"including imports from all sources in its investiga tion of "increased imports" of [wheat gluten] into
its territory and the consequent effects of such imports on its domestic [wheat gluten] industry" but
then, using as a pretext a second injury examination discriminating the imported products by their
origin, it has excluded Canada "from the application of the safeguard measures".
The AB had also indicated thatWT/DS166/R
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"According to Articles 2.1 and 4.1(c), therefore, all of the relevant aspects of a
safeguard investigation must be conducted by the Member that ultimately applies the
safeguard measure, on the basis of increased imports entering its territory and causing
or threatening to cause serious injury to the domestic industry within its territory."
The statement of the AB can not be reconciled with any discrimination between increased
imports covered by the investigation made on the basis of the origin of the products. However, the US
has recognised that it did just that in its investigation procedure.
The AB concluded in its report that"On the basis of this reasoning, and on the facts of this case, we find that Argentina's
investigation, which evaluated whether serious injury or the threat thereof was caused
by imports from all  sources, could only lead to the imposition of safeguard measures
on imports from  all  sources."
The EC submits that this Panel has no reason to take a different decision in the present case
that is identical, in its substance, to the ca se that was examined by the AB. Like in the " Argentina –
Footwear " case, Article XXIV of the GATT provides no coverage for the WTO-inconsistent action of
a WTO Member, like the US, aimed at breaching the principle of parallelism.
Questions No. 9 (US) and 15 (US)
Q9. “How do you react to the argument made  by the European Communities concerning
"discrimination" at paras. 115-137 of its oral statement at the second substantive Panel meeting,
particularly with respect to GATT Article I?”
Q15.  “We note that Section 311(a) of the NAFT A Implementation Act provides for certain actions
to be taken after the Commission makes an affirmative determination in an investigation underSection 202 of the Trade Act.  Please clarify what elements comprise an "affirmative determination"
under section 202 of the US Trade Act.  Is it a determination that the domestic industry is "seriously
injured"? Or is it a determination that the domestic industry is "seriously injured" and that this
"serious injury" is caused by imports?  Please cite the relevant portions of your legislation.”
Joint comments by the EC
The principle of parallelism is clear and simple:
- either imports from a certain origin are integrated  from the start in the safeguard investigation
on whether increased imports have caused serious injury, in which case the measure taken
must apply to all imports, or
- imports from a certain origin are excluded from the start from such investigation, in which
case the principle of parallelism would allow exclusion of those imports from the measure.The US is however prevented by its own legisl ation of following the principle set by the
Appellate Body, and has therefore failed to do so in this case.
Indeed, section 202(b)(1)(A) of the US Trade Act of 1974 requires that the ITC shall
determine “(…) whether an article is being imported into the United States in such increased
quantities as to be a substantial cause of serious injury, or the threat thereof (…),” without making anyreference to the origin of the product. (See also the similar language in Section 201 (a) of that Act). ItWT/DS166/R
Page 206
is clear from the ITC report that the affirmative determination made by the ITC under Sec. 202
consisted of finding that serious injury occurred due to the effect of all imports of wheat gluten taken
together (i.e. not excluding imports from Canada). The ITC explicitly states this on several occasions1
Since Canadian exports are excluded from the safeguard measure pursuant to section 311(a) of theNAFTA Implementation Act, this is a clear breach of the principle of parallelism, and violates inparticular Art. 4.2 SA and Art. I of GATT 1994.
Question No. 10 (EC and US)
Q10. “Is the causation analysis under Article 4.2 SA  to be conducted in terms of imports as a
"necessary" or "sufficient" condition (or both) for serious injury?”
Reply
An increase in imports is a “necessary” condition for taking safeguard measures.  However,
the mere coincidence in time between increased imports  and “serious injury” is not “sufficient” for to
prove causation because, inter alia , Art. 3 SA requires an explanation i.e. "findings and conclusions"
on the existence of a causal link2  Pursuant to Article 4.2 of the SA, the investigation must
"demonstrate, on the basis of objective evidence, the existence of “the causal link" (not: “a” causal
link) between increased imports and serious injury. Injury caused by other factors must not be
attributed to increased imports.3
This means that increased imports in isolation, i.e. taken alone, must be demonstrated to cause
"serious injury". They must be “sufficient” by them selves to cause “serious injury”. It is not enough
under the Safeguards Agreement that increased imports are a “necessary” element among a number offactors which together cause “serious injury”. Another interpretation would deprive the words “the
causal link” (emphasis supplied) in Art. 4.2(b) SA, as well as the entire second sentence of thatprovision, of any meaning.
The application in this case by the US of the test contained in section 202(b)(1)(B) of the US
Trade Act of 1974 violates Art. 4.2(b) of the SA. The ITC has failed to investigate whether theincreased imports alone caused injury which can be qualified as “serious”.
                                                     
1 See e.g. p. I-18: “We find no basis in the statute for the disaggregated analysis that Shoalhaven
avocates.” “That Article [5.2 of the Safeguards Agreement] does not provide authority for examining onlycertain imports in determining whether increased imports are a substantial cause of serious injury or the threat of
serious injury to the domestic industry.” See also page I-10: “Because Section 202 is a global safeguard law, the
Commission considers imports from all sources in determining whether imports have increased.” (Emphasis
supplied).
2 See Panel Report Argentina- Footwear  at para. 8.238.
3 The EC refers in this respect to the report of the Panel on Canada-Countervailing Duties on Grain
Corn from the US. Adopted by the Committee on Subsidies and Countervailing Measures on March 26, 1992,
BISD 39S/411. (The EC is aware that the AB has stressed that the reasoning of Panels under pre-WTO
Agreements cannot always be applied to WTO rules ( Argentina-Footwear at para. 117). However, since the test
under Art. 6 para. 4 second sentence of the Tokyo Round Subsidies Agreement is very similar to the one underArt. 4.2(b) of the Safeguards Agreement, the citation is relevant). “(…)[T]he Panel noted that the CITacknowledged the existence of factors other than subsidi zed imports having an effect on the price of Canadian
grain corn, but made no effort to ensure that the injuries caused by other factors were not attributed to the
subsidized imports.” Similarly, in the US-wheat gluten case,  the US failed to ensure that the effect on prices of
in particular intra-industry competition due to overcapacity and of the availability of low-priced high-proteinwheat was not attributed  to increased imports.WT/DS166/R
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Question No. 13 (EC)
“How do you react to the statement by the Unit ed States at para. 53 of its oral statement at
the second substantive Panel meeting that "there is no provision in Article 12 that requires or
suggests that a Member is obliged to notify its proposed measure under Article 12.1(c)"?”
Reply
The EC recalls that it has argued in its joint answer to the Panel’s questions No. 11, 12 and 22
raised during the first substantive meeting, that one of the reasons why the US notification under
Art. 12.1 (b) cannot be considered a notification of "proposed measures", was that its heading (andtherefore its legal basis) was "Article 12.1 (b) notification upon making a finding of serious injury or
threat thereof caused by increased imports".
First of all, the EC’s claim that a notification of "proposed measures" must not be made under
Article 12.1 (c) is based on the relation between the wording of Articles 12.1 (b) and 12.1 (c). While
the former provision is concerned with "finding of serious injury (…)", only the latter Article 12.1 (c)
requires a notification "upon a decision to apply or extend a measure".
Second, since both Articles 12.2 and 12.3 refer to notifications under Articles 12.1 (b) and
12.1 (c) as being made by a "Member proposing to apply or extend a safeguard measure", the
notification under 12.1 (c) can only be a notification of a "proposed measure", not the notification of a
measure which is already being applied, as the US argues.
Third, reference is made to the format for notifications adopted by the Committee on
Safeguards (G/SG/W/1, 23 February 1995). The headings contained in the format for "Notifications
under Article 12.1 (b) and (c)" pertain only to three distinct categories of information:
1. Evidence of serious injury and increase in imports, and description of the product
concerned.
2. Information concerning the proposed measures only: description, date of introduction
and expected duration and timetable of liberalisation and date of mid-term review.
3. Information on measures to be extended.This list of categories of information to be notified clearly shows that information pertaining
to the "proposed measure" must be made available in a notification under Article 12.1 (c).
If information on the "proposed measures" were notified under Article 12.1 (b), there would
be no information left to be notified under Article 12.1 (c) (with the exception of extension of
measures) rendering this provision meaningless.
In conclusion, the EC maintains its argument that the US notification under Article 12.1 (b)
was not a prior notification of the "proposed measures" both with regard to the format as well as to the
substance of the notification.
For the rest, the EC refers the Panel to the EC’s answer to the Panel’s question No. 22.
Question No. 14 (EC)
“Please comment on the statement by the United Stat es at para. 57 of its oral statement at the
second substantive Panel meeting that "…the EC's view makes it very unlikely that a governmentWT/DS166/R
Page 208
would ever modify its measure because under the EC 's reading a Member would have to re-notify the
new proposal and start the consultation process again.  That is because if the Member decided to
change its proposed measure, the new measure woul d then be its proposed measure. This could lead
to an endless round of consultations and notifications…". “
Reply
According to the second preambular sentence of the SA, the WTO Members recognise the
need to
"re-establish multilateral control over safeguards and eliminate measures that escape
such control"
One of the key provisions, which are designed to achieve such an objective, is Article 12 of
the SA. By imposing an obligation of notification of each successive step of the procedure leading to
the adoption of a safeguard measure, it provides the opportunity to all Members in the relevant WTO
Committees to scrutinise the action of the Member wishing to adopt the safeguard measure. It alsoprovides the opportunity to hold "prior" consultations. Last but not least, it provides in Article 12.3
the possibility of
"(…) reviewing the information provided  under paragraph 2, exchanging views on
the measure and reaching an understanding on ways to achieve the objective set out
in paragraph 1 of Article 8".
In summary, the overall objective of Article 12 is to ensure transparency through formal and
timely notification before any definitive decision is taken and to constitute the legal and factual
framework within which the maintenance of "a substantially equivalent level of concessions or other
obligations to that existing under GATT 1994 between ["the member proposing to apply a safeguard
measure"] and the exporting Members" will be achieved.
In this legal framework, the EC is of the view that the US arguments quoted by the Panel are
at best irrelevant.
A measure which is modified in its substance after the notifications, consultations and
negotiations referred above have taken place is no longer the measure on which the WTO Members
were given an opportunity to scrutinise, comment and consult. If any modification were allowed
without resubmitting the proposed measure to the transparency procedures under Article 12, the door
would be open to any possible abuse and arbitrariness. In fact, Article 12 would consequently become
a nullity or inutility in substance and its content would be reduced to an empty shell of meaningless
formalities.
The EC urges the Panel to reject this interp retation which is implied in the US suggested
approach to this issue.
__________WT/DS166/R
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ATTACHMENT 1-9
LETTER FROM THE EUROPEAN COMMUNITY CONCERNING THE
UNITED STATES RESPONSE TO THE PANEL'S REQUEST FOR INFORMATION
(11 February 2000)
The EC has examined the US response to the Panel of 8 February 2000. It reacts to the Panel's
request to submit documents and data that the US withheld from the published version of its
investigation report on the excuse that they were business confidential in nature.
We have attached to this communication the EC's interpretation of the existing legal
requirements under the Agreement on Safeguards, based inter alia  on earlier adopted panel or
Appellate Body reports on this matter. As the attached document shows, the course of action
suggested by the United States in this procedure finds no justification under any covered agreement.
Rather, it constitutes a breach of the procedural and substantive obligations of the US under the
relevant WTO rules that should in no way be warranted by this Panel.
The EC wishes to draw the attention of the Panel to the fact that, by its 8 February
communication, the US suggests in substance that the documents and data requested by the Panel besubmitted only to the Panel " in camera ", thus by excluding the complainant, i.e. the EC, from the
access to that information.
The course of action suggested by the United States is fundamentally at odds with the
adversarial nature of the dispute settlement procedures. In addition, it would irreparably damage thefairness of this dispute settlement procedure, since the Panellists and the officials of the WTO
Secretariat assisting the Panel would have access to ex parte  communications, in flagrant breach of
Article 18.1 of the DSU and of the Rules of Con duct on the appointment of Panellists. Should the
Panel accept the US suggested course of action, the EC’s fundamental rights in these proceedings
would be inevitably prejudiced.
It is worth noting that the US position expressed in its 8 February communication contradicts
a US’ statement on the same issue before the Appellate Body in the " Canada-Aircraft " procedure
(139): "(…) the US argues that the application of procedures for protecting business confidential
information promotes important objectives because Members’ rights and obligations under thecovered agreements can only be preserved if due process is accorded to both the complaining party
and the responding party".
The EC submits that the United States cannot rely on any WTO-consistent basis for its refusal
to disclose documents and data requested by the Panel to the EC. Its statement that the EC maydisclose such documents and data "in the private sector" is entirely gratuitous. It is based on a biased
assumption according to which the EC will act in bad faith by violating binding obligations such as
Article 18 of the DSU and the specific rules on private confidential information that this Panel has
adopted.
While assumptions of this nature do not de serve any comment beyond the legal examination
of the relevant WTO provisions that are referred to in the attachment to this communication, theynevertheless raise the issue as to whether the US is "engage[d] in these procedures in good faith in an
effort to resolve the dispute", as Article 3.10 of the DSU explicitly requires.WT/DS166/R
Page 210
In this respect, the EC would like to underline that the second substantive meeting with the
Panel has already taken place 10 days ago and that the US should not be allowed to use delaying
tactics in order to postpone the withdrawal of its WTO-inconsistent safeguard measure on wheat
gluten. It is barely necessary to recall here that the EC industry is suffering severely from the
unjustified, protectionist and discriminatory US safeguard measure, which is still in place.
For the reasons that are set out in detail in the attachment, the EC requests that the Panel rules
that the US has refused to provide access to the documents and data requested by the Panel on 1
February 2000 in accordance with the procedures governing private confidential information adopted
by the Panel on the same date. The EC requests that the Panel infer from such refusal that the non-disclosed data and documents provide confirmation that the US safeguard measure on wheat gluten
violates, inter alia , Articles XIX of the GATT 1994 and Articles 2.1 and 4 of the SA.
I am providing a copy of this letter and of its attachment to the mission of the United States.
__________WT/DS166/R
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ATTACHMENT 1-10
COMMENTS OF THE EUROPEAN COMMUNITY ON THE UNITED STATES
RESPONSE TO THE PANEL'S REQUEST FOR INFORMATION
(11 February 2000)
Article 3.2 of the Agreement on Safeguard offers no excuse to the US to refuse to the
European Communities access to allegedly confidential documents in the context of this dispute
settlement procedure
Article 3 of the SA is entitled "Investigation". It deals with the rules that must be applied by
the investigating authorities during the investigation procedures.
Article 3.2 SA deals in particular with rules concerning the treatment of confidential
information during such investigations. As such, they are binding and applicable by the investigating
authorities in that context. This is also true for Article 3.2, second sentence, SA.
However, nothing in Article 3.2 SA, including its second sentence, precludes the US from
disclosing allegedly confidential information in an entirely separate procedural framework, i.e. in a
dispute settlement procedure governed by the rules of the DSU.
As the Panel is aware, the DSU1  provides explicitly for rules on good faith and
confidentiality. It is these rules that apply to the present dispute settlement proceedings, not Article
3.2 SA. This Panel has, moreover, appropriately adapted the rules on confidentiality under the DSU tothe specificities of the confidential treatment of private information in this case by adopting its 1
February 2000 rules. The EC stresses that both the provisions of the DSU itself and the PCI procedure
adopted by the Panel provide all necessary guarante es for confidential treatment of the information
which is now refused by the US. The Appellate Body stressed this in various paragraphs of its reports
on "Brazil-Aircraft"
2  and " Canada-Aircraft ".
In addition, it is stating the obvious to recall that any breach of a Members' obligations under
or pursuant to the DSU on the confidential treatment of information disclosed during a dispute
settlement procedure can itself be subject to WTO dispute settlement and all that entails.
As far as the complainant in this case is concerned, the EC, Article 287 of the Treaty
establishing the European Community imposes strict obligations of confidentiality upon officials and
agents, that also extend to the time after they gi ve up their functions within the EC Institutions. This
fundamental provision is compounded by the rules on confidentiality contained in the EC Staff
Regulations and the related disciplinary powers, which are applicable in case of violation of suchrules. As the Panel will no doubt recall, the EC has indicated as "approved persons" exclusively those
EC  officials who are responsible for the present di spute settlement procedure and their superiors, also
EC officials.
Moreover, nothing in Article 3.2 SA permits the US to hide behind the US industry's refusal
to disclose exclusively  to the EC the allegedly confidential documents or data requested by the Panel.
Article 3.2, second sentence, SA provides that the party submitting the allegedly confidential data or
documents can refuse their disclosure in the framework of the investigation procedure. Such refusal is
                                                     
1 Articles 13, 14, 17 para. 6, 18 and Appendix 3 para. 3 of the DSU.
2 Paragraph 119-125.WT/DS166/R
Page 212
however unqualified: either the documents are disclo sed to all participants to the investigation
procedure or they are not.  No good faith interpretation of Article 3.2 can allow a Member, in casu  the
US, to disclose data and documents to the Panel but not to the other WTO Member, that is the other
party to the dispute settlement procedure, even if both the Panel and the Members are all  subject to the
same rules on treatment of private confidential information within the same  dispute settlement
procedure.
Finally, contrary to the assertions of the US, the way a WTO Member’s domestic legislation
is drafted or its internal proceedings are organise d cannot diminish that Member's obligations under
the DSU to provide the necessary PCI when requested by the Panel. Article XVI.4 of the MarrakechAgreement is explicit in this respect.
Pursuant to Article 13.1 of the DSU, the US is under the obligation to "respond promptly and
fully to any request by a panel for such informatio n as the panel considers necessary and appropriate".
A refusal to abide by this unequivocal obligation must lead the Panel to make the adverse
inferences that logically must follow from such refusal.
In any case, the violation by the US safeguard measure on wheat gluten of Article 4 SA
cannot be retrospectively "healed" by providing PCI during the present dispute settlement procedure
The EC would like to recall once more that the US safeguard measure on wheat gluten
violates Article 4.2 SA because the published versi on of the ITC report did not contain many of the
essential facts, on which the findings of the US authorities were allegedly based, not even in
aggregate, summary or otherwise non-confidenti al form (e.g. indexed data). The WTO Members,
including the EC, had thus no possibility to understand and consider the determinations made and the
actions taken by the US. Timely transparency was unlawfully denied.
Furthermore, the findings were not adequately reasoned. In particular, either no reasons or
manifestly inadequate reasons were given as to why certain factors did not detract from the findings
that "serious injury" occurred and that it was caused by increased imports (taken alone).
The EC could not agree more with the US when it states in its 8 February document at
paragraph 28 that "If the USITC’s public report does not satisfy the requirements of Article 4,", which
the EC submits is clearly the case, "the Panel should hold the United States to have violated the
Agreement".
For these reasons, the EC considers that the Panel should already find a violation of the
aforementioned Articles due to the deficiencies shor tly referred to above, which were extensively
dealt with in the EC submissions.
In particular, the EC has – in its letter of 26 January commenting on the proposed PCI
procedures – repeated that a violation of (in particular) Article 4 of the SA by failing to provide the
relevant information in the public report at the time of its publication cannot be healed by providing
that information during Panel proceedings.
__________WT/DS166/R
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ATTACHMENT 1-11
FINAL COMMENTS OF THE EUROPEAN COMMUNITY ON THE
UNITED STATES LETTER TO THE PANEL OF 22 FEBRUARY 2000
(23 February 2000)
The EC has examined the US letter to the Panel sent on 22 February 2000, i.e. eleven days
after the receipt of the EC's reaction to the US 8 February letter. The EC submits that the US
additional argument contained in this letter fails to  address the compelling legal issues raised by the
EC in its 11 February letter and attachment, in particular with regard to the fundamental right of anyWTO Member to a dispute settlement procedure adversarial in nature, where fairness, due process and
equality of arms are the cornerstones of the Panels' action.
As was indicated in a different context in the EC's second written submission on 17 January
2000, paragraph 71,
"It would also like to stress that under WTO rules, the US government is one  entity.
It would be absurd if the US were allowed to defend itself by saying that the US ITC
did not possess the relevant data, although the US Department of Agriculture did."
The 22 February 2000 letter is a further attempt to create artificial distinction between the US
Government and US authorities, which has no basis under WTO law. The US is the other party to this
dispute. The Panel's request to submit documents is addressed to the US, no matter which internal US
body or authority materially holds them.
Almost four weeks have already passed after the end of the second substantive meeting with
the Panel. The EC respectfully insists that this debate  be put swiftly to an end and that the Panel infer
from the US persistent refusal to submit the requested data and documents that it provides
confirmation that the US safeguard measure on wheat gluten violates, inter alia , Articles XIX of the
GATT 1994 and Articles 2.1 and 4 of the SA.
I am providing a copy of this letter to the mission of the United States.
__________WT/DS166/R
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ATTACHMENT 1-12
COMMUNICATION OF THE EUROPEAN COMMUNITY CONCERNING
NEWLY PROPOSED PROCEDURES GOVERNING PRIVATE
CONFIDENTIAL INFORMATION
(28 February 2000)
We acknowledge receipt of your communication of 24 February 2000.
On 1 February 2000, the parties to this dispute received a communication from the Panel
setting out the "Procedures Governing Private Confidential Information" which it had adopted. As the
communication states, the Procedures "supplement the working procedures already adopted by the
Panel" and were adopted after "having given the parties the opportunity to comment on its "Proposed
Procedures Governing Business Confidential Info rmation and having considered the communications
received from the European Communities and the United States in this regard (…)". In that
communication, the Panel has also indicated to both Parties that "the Panel believes that the
procedures in effect in this case are adequate to protect the confidentiality of information submitted toit".
The EC continues to be ready to apply fully these procedures that have become binding upon
the Parties and the Panel by virtue of the Panel’s own decision of 1 February 2000.
Given this context, the EC fails to see any valid reasons which could justify consideration of
the proposed procedure on the same subject matter communicated by the Panel on 24 February 2000.
The refusal of the United States to accept the rulin g of the Panel (after it had already been handed
down to the parties to the dispute) and the refusa l to submit the requested information can certainly
not be a sufficient reason to re-open the issue at this stage. As the Appellate Body has stated in itsreport of 24 February 2000 in “United States – Tax Treatment fo r ‘Foreign Sales Corporations’”,
doc. WT/DS108/AB/R, paragraph 166, “the [...] principle of good faith requires that responding
Members seasonably and promptly bring claimed procedural deficiencies to the attention of [...] the
Panel, so that corrections, if needed, can be made to resolve disputes”.
Since the Panel has already ruled on the matter, the persistence of "no convergence of views"
on that ruling is no longer relevant. The EC stresses that it is the US which refuses to provide the
information requested by the Panel in spite of the fact that appropriate procedures to protect their
confidentiality were duly adopted by the Panel.
The EC considers, moreover, that the speculations by the US, contained in its letter of
8 February 2000 and the attachment therewith, according to which "the Panel procedures provide that
the Panel will make this confidential business inform ation available to (…) others in the EC or in the
private sector who may be designated in the future by the EC as its 'representatives'" or according to
which "the Panel, pertinent WTO employees, twenty-two EC officials and unspecified other persons
possibly to be designated by the EC in the future might  keep the information confidential (…)” are
unfounded and cannot constitute a valid reason for putting into question the procedure established bythe Panel.WT/DS166/R
Page 215
In any case, a procedure like the one now proposed which has the effect of seriously
unbalancing the position of the Parties involved in a dispute settlement procedure are in conflict with
the fundamental requirements of procedural fairness and the equality of arms of the parties to the
dispute. A procedure, such as the proposed procedure contained in the 24 February communication by
the Panel, whose effects would be to put one of the parties to the dispute settlement procedure in theimpossibility of having adequate time and fully using its expertise in order to analyse documents
submitted by the other Party, which had of course prior unlimited access to them, is by definition in
breach of such fundamental principles.
Furthermore, the EC submits that a PCI proce dure, which is meant to manage parts of a
dispute settlement procedure, cannot go as far as imposing an obligation upon a WTO Member to take
actions which would conflict with its domestic constitutional or institutional rules. In casu , EC
officials are under a statutory obligation to inform their superiors and cannot therefore undertake to
refrain from that. The EC would note in passing that the Appellate Body stressed that the existing
provisions in the DSU concerning the confidential treatment of documents or data guarantee already acorrect and fair dispute settlement procedure.
__________WT/DS166/R
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ATTACHMENT 1-13
COMMUNICATION OF THE EUROPEAN COMMUNITY ON THE UNITED STATES
COMMUNICATION CONCERNING NEWLY PROPOSED PROCEDURES
GOVERNING PRIVATE CONFIDENTIAL INFORMATION
(29 February 2000)
The content of the US comments on a new PCI procedure proposed by the Panel on
24 February 2000 has just been brought to our attention.
The US advances in its letter the following new argument:"In particular, the United States wishes to know whether the European Communities
is in a position to comply with the Panel’s condition that “These individuals would beunder an obligation not to disclose the information, or to allow it to be disclosed, to
any person.”  In similar circumstances the EC has not been able to warrant that those
EC representatives to whom confidential business information was disclosed would
not disseminate such information to other EC officials (see WT/DS27/ARB,
para. 2.5)."
The EC respectfully submits that the US comments are factually and legally incorrect.
Firstly, the present circumstances are not similar but unprecedented. Indeed, the EC has no
knowledge of a WTO Member having opposed a working procedure of a Panel only after it was
adopted and on grounds that had never been raised before those procedures had been adopted.
However, the US is doing just that in this case.
Secondly, the reference to the WTO doc. WT/D S27/ARB, paragraph 2.5, does not support the
latest affirmations by the US. As a matter of fact, the BCI procedure referred to in that document was
based on personal commitments from agents and panellists rather than on undertakings from the WTO
Members, the parties to the arbitration procedure. While that approach was not acceptable as a matter
of principle, the EC has already accepted in this case the PCI procedures adopted by this Panel, whichwere communicated to the Parties on 1 February 2000, because they are based on a legally correct
approach. Moreover, the Arbitration decision referred  to in the US letter confirms the longstanding
position of the EC before this Panel:
"the European Communities raised further objections concerning practicality, the
impossibility of limiting reporting obligations to superiors within the European
Communities and concerns that the inviolability of the EC Mission in Geneva had
been put into question."
The EC takes this opportunity to re-iterate that the EC institutional system is based on strict
confidential treatment of data and information according to Article 287 of the Treaty Establishing theEuropean Communities. Moreover, Article 21 of the Staff Regulations of Officials of the European
Communities provides that "[a]n official, whatever his rank, shall assist and tender advice to his
superiors". Finally, Article 17 of the Staff Regulations of Officials of the European Communities
provides that "[a]n official shall exercise the greatest discretion with regard to all facts and
information coming to his knowledge in the course of or in connection with the performance of his
duties; he shall not in any manner whatsoever disclose to any unauthorized person any document or
information not already made public. He shall continue to be bound by this obligation after leavingthe service."WT/DS166/R
Page 217
ATTACHMENT 1-14
ORAL STATEMENT OF THE EUROPEAN COMMUNITY
AT THE ADDITIONAL MEETING OF THE PANEL WITH THE PARTIES
(18 May 2000)
1. INTRODUCTION
Dear Chairman, Members of the Panel,
1. The European Communities would like, as a first point, to welcome you, Mr. Chairman, in
these proceedings and wish you good work. We are aware that it is not easy to join an on-going
process, in particular when issues which involve the scrutiny of complex technical aspects are also
under examination.
The EC repeats here that it is fully prepared to assist you and the other Members of the Panel,
in any way it can, in the follow up of these proceedings. We have brought from Brussels a full-
fledged delegation (that we have already introduced to you) in order to respond, immediately ifpossible, to any additional question you may have. Everybody's time is precious these days, and we
thus want to make sure that the Panel has the mo st ample opportunity to hear from us, directly, any
clarification it may still need at this stage.
2. This being said, the EC should also state as from the beginning of this meeting what is the
EC's understanding of the stage in which this procedure presently is.
The communication by the Chairman of the DSB, Mr. Harbinson, that the former Chairman of
the Panel had resigned was sent to the Parties to the dispute on the 11 April 2000 and was received by
the EC the day after, 12 April 2000. According to the timetable circulated by the Panel at the
beginning of the procedure, the interim report should have been circulated to the parties on
13 April 2000.
Earlier, the US and the EC had received on 1 March 2000 from the Panel a draft descriptive
part on which the Parties were asked to make comments. Comments from Parties were made availableto the Panel on 15 March 2000, i.e. according to the original schedule. The US took even the liberty of
submitting an unsolicited response to the EC's comments on the descriptive part of the report, which
was filed with the Panel on 17 March 2000.
The resignation of the former Chairman has interrupted the procedure. The appointment of a
new Chairman of the Panel, as a consequence of the resignation of the former Chairman, cannot and
does not entail, in law and in fact, that the procedures that were accomplished before the event could
be considered in any way as null or irregular. We all must therefore resume the Panel procedure from
where it was suspended, which means just before the release of the interim report and the interim
review stage but after the point in time in which factual issues have been definitively established.
3. Let me say immediately, Mr. Chairman, that the EC is not interested in re-opening before you
issues which are closed by now, in particular to come back on the doubtful attitudes that the US has
put in place during the days that preceded Mr. Karsz's resignation. However, the EC is determined to
have this procedure finalised within the new time table that the Panel has adopted on 2 May 2000: weWT/DS166/R
Page 218
thus explicitly ask you, Mr Chairman and Members of the Panel, not to allow the US to engage in
delaying tactics.
4. Turning now to the substance of the case, the EC has taken note of the Panel's wish that we
present a summary of the EC's case. We understand this request as suggesting to introduce, oncemore, the main claims contained in the EC's complaint that are part of the written record of this Panel.
We are of course pleased to go along with your request. It is nevertheless evident that the EC will not
repeat all the arguments it made during the proceedings up until now. It will just briefly summarise
the main points it has made. For the rest, the EC confirms all the arguments it has made earlier on
during these proceedings, including the ones that – for the sake of brevity – it will not explicitly referback to again today.
2. STANDARD OF REVIEW
5. The EC reiterates that the US domestic proced ural rules, or their interpretation, cannot limit
the tasks of this Panel whose function is to assist the DSB by performing "an objective assessment of
the matter before it". The mission of the Panel cannot consist of a mere “rubber-stamping” of an
investigation report, as the US would have it.
Like any WTO Member in a similar situation, the EC has indicated to the Panel the information
that the ITC should have properly considered but did not, and the importance of that information to
the findings and conclusions made by the US authorities.
6. As was noted, this is entirely consistent with what the Appellate Body considered the correct
way of proceeding in its " Argentina - Footwear " report, at paragraph 121, third sentence:
"Rather, the panel examined whether, as required by Article 4 of the Agreement on
Safeguards, the Argentine authorities had considered all relevant facts and had
adequately explained  how the facts supported the determinations that were
made".(emphasis added)
Finally, as a matter of fact, the objective evidence, which the US authorities have omitted or
misinterpreted or downplayed in their investigation and that the EC has submitted to your attention,was prepared by the US authorities themselves before or during the investigation procedure and was
in the public domain.
7. The EC refers the Panel back to, in particular, paragraph 3 of its first written submission,
paragraphs 5-20 of its oral statement, its answer to question 3 of the Panel (17 January 2000);paragraphs 3-7 of the EC’s second written subm ission and paragraphs 8-19 of its second oral
statement.
3. THE US HAS BREACHED ARTICLE  XIX OF THE GATT 1994 ("UNFORESEEN
DEVELOPMENTS")
8. According to the Appellate Body report on Korea - Dairy at paragraph 77,
" (…) any safeguard measure imposed after the entry into force of the  WTO
Agreement must comply with the provisions of  both the  Agreement on Safeguards
and Article XIX of the GATT 1994."
The Appellate Body has also stated thatWT/DS166/R
Page 219
 (…) [I]t seems to us that the ordinary meaning of the phrase "as a result of
unforeseen developments" requires that the developments which led to a product
being imported in such increased quantities and under such conditions as to cause or
threaten to cause serious injury to domestic producers must have been "unexpected"
(paragraph 84). (…) "
"Although we do not view the first clause in Article XIX:1(a) as establishing
independent conditions for the application of a safeguard measure, additional to the
conditions set forth in the second clause of that paragraph, we do believe that the
first clause describes certain circumstances  which must be demonstrated as a matter
of fact in order for a safeguard measure to be applied consistently with the provisions
of Article XIX of the GATT 1994" (paragraph 85).
9. The arguments that were exchanged during the earlier part of the panel procedure have shown
beyond any possible doubt that nowhere in the ITC report has the US analysed and demonstrated as a
matter of fact which facts constituted "unforeseen developments" which led to wheat gluten being
imported in such increased quantities … as to cause serious injury to US domestic wheat glutenproducers.
In fact, even the belated attempt in the US second written submission to find an ex post  facto
reconstruction of the ITC report in order to include the "unforeseen developments" element has
completely failed. The EC has brought evidence th at not only no unforeseen development led to the
increase in imports. Rather, all the events had been foreseen by the US authorities and by the US
domestic industry itself.
10. We refer in any case the Panel to, in particular, the EC's second oral statement, paragraphs 16
to 32, that was read on 1 February 2000, and to the joint replies 2 and 3 to additional questions from
the Panel of 4 February 2000.
4. CONFIDENTIALITY
11. The plain wording of Art. 4.2 (c) of the SA, which refers to Art. 3 of the SA, requires the
prompt publication of a report analysing the case, demonstrating the relevance of the factors
examined, and containing reasoned conclusions on « all pertinent issues » of fact and law.
12. The EC has explained in detail in its various submissions that the ITC report with all its« *** » and with the refusal to provide even data in summary form, i.e. aggregate data or other
methods, does not pass that test. The EC has also ex plained that there are well-known ways by which
the ITC could have disclosed the relevant factual elements of confidential information whilstpreserving confidentiality. For instance, this could have been done by providing aggregate data or by
giving percentages describing developments in a company’s performance.
13. The EC would like to stress, as it has done before, that the report required under Art. 4 of the
SA has to be published « promptly ». The fact that the US violated that Article by not publishing,before it took the wheat gluten safeguard measure, a report which meets the standards of the SA, can
therefore not be «cured » years after the fact. The US finally came forward with certain, very limited,
information as an Annex to one of its submissions in  this case, information which up until that time it
had always kept secret, making it impossible for any WTO Member to review it. This only proves that
a violation of Art. 4 of the SA has occurred, since by providing the information the US shows that it
could – and therefore should - have made that information public from the very beginning.WT/DS166/R
Page 220
14. Regarding this point, the EC refers the Pa nel back, in particular, to its first written
submission, paragraph 49, its first oral statement paragraphs 27-33, its answer to questions 2, 4, 14, 15
and 16 of the Panel (17 January 2000), and to paragraphs 33-36 of its 2nd oral statement.
5. THE ITC DID NOT SHOW THAT “SERIOUS INJURY” OCCURRED
15. The EC has explained at length during the Panel proceedings that the ITC report does not
show that the US wheat starch/whe at gluten industry was suffering serious injury at the end of the
PoI. In fact many factors indicated that its situation was actually improving during that period. For
instance, capacity utilisation,1 production,2 and sales out of inventories3 were going up at the end of
the PoI. Also, the market share of imports in 1997 was hardly increasing in comparison with 1996 so
that there was no major import surge at the end of the PoI justifying a safeguard measure.4 (Always
note that an “ITC-year” runs from 1 July to 30 June, e.g. “1997” runs from 1 July 1996 to
30 June 1997). With regard to profitability of the US industry, the EC has explained that the complete
failure of the ITC to explain the way that industry allocated costs between its various co-productsmakes this factor wholly unverifiable.
16. On this point of serious injury, the EC refers back, in particular, to its first written submission,
pages  19-29, its first oral statement paragraphs. 43-56, its 2
nd written submission paragraphs 15-21
and to paragraphs 37-42 of its 2nd oral statement.
6. THE ITC’S FAILURE TO CORRECTLY ADDRESS THE CAUSATION ISSUE
17. The ITC did not fulfil its duty under art. 4.2 of the SA to correctly investigate, in good faith,
all pertinent matters. As required under Art. 4.2 of the SA this must be done of the ITC’s own
initiative. There is even less excuse for the fact that the ITC failed to investigate them since many
points have been specifically raised before the ITC, as the EC has shown.5
18. The EC has explained at length in its earlier submissions why the US authorities have notaddressed the causation issue correctly in various respects. The EC would only like to remind the
Panel of some essential points.
19. US wheat prices rose very strongly at the end of the PoI, thus impacting negatively on the US
industry’s situation. The ITC just assumed, based on oral statements of the two companies requesting
the safeguard measure, that this input cost increase could have been passed on by the US industry
without limits to its buyers, had it not been fo r the influence of imports. Even though it acknowledged
in its report that the protein content of wheat crops – which varies from harvest to harvest and year toyear – determines the demand for wheat gluten and thus its price, the ITC did not investigate at all
whether it was not in fact high protein content of  wheat crops which was keeping wheat gluten prices
low. In this respect, the EC has shown that the price of wheat gluten in the US moved independently
from movements in the level of imports. The EC has provided clear evidence that the US wheat gluten
price simply followed the developments in the prot ein content of wheat rather than being determined
by the level of imports.
6 The EC has also shown that the protein content of wheat was good in the last
years of the PoI, keeping wheat gluten prices low.
20. Moreover, the EC has shown that the US industry has put itself into trouble by creating
tremendous overcapacity. Capacity utilisation in 1997 wo uld have been at 74.8 per cent in 1997 if the
                                                     
1 Para. 63 of the EC’s first written submission.
2 Para. 62 of the EC’s first written submission.
3 Para. 71 of the EC’s first written submission.
4 Para. 70 of the EC’s first written submission, see also para. 38 of the EC’s 2nd oral statement.
5 See in particular Exhibits EC-16 to 18 to its second written submission.
6 See Exhibit EC-10 to the EC’s first written submission, Figure 4.WT/DS166/R
Page 221
US industry had not irrationally added enormous overcapacity during the PoI.7 The US authorities
however included these self-created difficulties  of the US industry in determining whether that
industry was suffering serious injury. This means that that they  attributed injury caused by other
factors to increased imports. They thus violated Art. 4.2(b) of the SA.
21. Finally, the EC has shown that the situation in other co-products of wheat gluten such as
wheat starch (which forms a basis for alcohol and ethanol), deteriorated during the PoI.
22. Regarding wheat starch, it is important to note that since wheat starch is a necessary co-
product of the wheat gluten production process, the irrational increase by US producers of theircapacity also led to increased wheat starch capacity. This worsened, for the US wheat starch/wheat
gluten producers, the competitive conditions for US wheat starch. The situation deteriorated evenmore because the cost of production of wheat starch increased during the PoI: for wheat starch input
cost – the price of wheat (flour) - increased. Moreover, the fact that the US industry has heavilyinvested to increase its production capacity has had a negative impact on production costs and profits.Like what happened for wheat gluten, these increased costs could not be passed on into wheat starch
prices because of the very disadvantageous competitive position in comparison with corn starch. (The
price of the raw material – corn – is significantly lower in the US, and the technical yield is much
higher).
8
23. Regarding the wheat starch which can be ma de into ethanol and food-grade alcohol, the EC
has provided evidence that at the end of the PoI there was a weakness in that market.9
24. Although Art. 4 of the SA imposes on each WTO Member not to attribute to increasedimports difficulties caused by such other factors (we recap them once more: strongly increased input
prices, self-created overcapacity and difficulties in the co-product markets), the US has failed to doso.
25. Finally, regarding causation, in the «Argentina-Footwear » report, the AB agreed with the
Panel that in an analysis of causation «it is the relationship between the movements  in imports
(volume and market share) and the movements  in injury factors that must be central to a causation
analysis and determination. » The ITC determination is contrary to these principles. For instance,wheat gluten prices developed independently from imports, and in particular went up in 1996 from the
last quarter 1995 level even though imports were also increasing. Another example is that inventories
were going down – i.e. were being sold in both 1996 and 1997, the years in which imports increased.
26. On the point of absence of a causal link, the EC refers back, in particular, to its first written
submission, pages 29-40, its first oral statement paragraphs 57-86, its answer to questions 6, 7, 8 and
9 of the Panel (17 January 2000), its 2
nd written submission paragraphs. 22-83, its 2nd oral statement
paragraphs 43-79,and to its reply to question 10 of the Panel after the 2nd substantive meeting.
                                                     
7 See graph on p. 24 of EC’s first written submission.
8 See paras. 86-92 of the EC’s first written submission.
9 See paras. 93-95 of the EC’s first written submission, Exhibit EC-14, and paras. 78-79 of the EC’s
second written submission.WT/DS166/R
Page 222
7. THE US SAFEGUARD MEASURE ON WHEAT GLUTEN IS A PROTECTIONIST
MEASURE IN DISGUISE
27. The EC has explained that the US safeguard measure on wheat gluten is in fact a protectionist
measure in disguise, that is a measure that goes far beyond the exceptional remedies which a WTO
member is allowed to adopt in case of proved serious injury caused by increased imports.
28. The US has gone back from the concessions bound in its GATT Schedule beyond what it
could possibly be allowed to under the SA and without any justification for doing so. The EC has
brought to the Panel's attention in the earlier stages of this dispute settlement procedure numerouselements supporting its claim. They can be summarised as follows:
1. The US has breached the proportionality principle under Articles 4.2 of the SA.
The facts and evidence provided by the EC have shown that the US authorities did not
comply with the proportionality principle. The effe ct of this WTO-inconsistent action is that the US
authorities have attributed with no justification to  increased imports the cause of an alleged serious
injury of US domestic wheat gluten/wheat starch industry.
In fact, the US authorities, when examining the alleged "significant overall impairment in the
position of the domestic industry", have completely disregarded the effects that the other co-causes
were producing. An objective examination of "all factors having an objective and quantifiable bearingon the situation of" the wheat gluten/wheat starch industry would inevitably have led to the
conclusion that none of the causes was sufficient, taken in isolation, to create such serious injury.
The "preponderance test" applied by the US pursuant to its internal legislation is inconsistent
with the principle of proportionality set out in Article 4.2 of the SA.
Its application to the wheat gluten safeguard procedure has produced the effect of prompting
the implementation of a safeguard measure in a situation where the US was not in a position to
demonstrate objectively that the alleged "significant overall impairment in the position of the
domestic" wheat gluten/wheat starch industry could have been caused by "increased imports" taken inisolation, i.e. after having deducted the effects of the other co-causes.
The EC refers the Panel back to, in particular, chapter 4.6.3 of its first written submission,
paragraphs 105 and following of its first oral statement, chapter 5 of its second written submission,
answers to questions 8 and 9 from the Panel (17 January 2000), answer to question 10 from the Panel(4 February 2000).
2. The US has breached the proportionality principle under Article 5.1, first and third
sentence, of the SA
Article 5.1 of the SA is the second textual application of the principle of proportionality and
provides that a Member shall apply safeguard measures "only to the extent necessary to prevent or
remedy serious injury and to facilitate adjustment".
Even if one were to assume arguendo  that a Member has correctly attributed the cause of the
serious injury to increased imports (and this hypothesis is certainly not correct in the case of the US's
safeguard measure on wheat gluten), the corresponding safeguard measure must be commensurate or
proportionate to that injury, to the exclusion of any injury caused by other factors.
The EC repeats once more that using the pretext of a safeguard measure in order to remedy
the intrinsic uncompetitiveness of the US domestic industry ( in casu  the wheat gluten/wheat starchWT/DS166/R
Page 223
industry) relative to other domestic competing industry, like the corn milling industry, constitutes a
violation of the SA.
Neither can a WTO Member abuse a safeguard measure, in order to remedy situations
unrelated to increased imports such as increase in i nput costs, or fluctuations in price due to variations
of protein premiums, or failed business strategies such as over-expansion of production capacity.
However, this is exactly what the US did.The EC refers the Panel back to, in particular, chapter 5 of its first written submission,
paragraphs 99 and following of its first oral statement, chapter 6 of its second written submission,
chapter 6.2 of its second oral statement and joint answer to questions 8 and 9 of the Panel
(17 January 2000).
3. Article 5.1 did not allow the US to choose a quantitative restriction without having
demonstrated that that was the leas t trade restrictive measure possible
The principle of proportionality under Article 5.1 did not allow the US to choose a
quantitative restriction without having demonstrated that the applied measure was the least trade
restrictive measure possible.
The EC would like to recall once more that the explanation provided by the ITC (I-26) for
choosing a quantitative restriction refers only to the wheat starch market and to the alleged need to
avoid "inequitable" distribution of burden between suppliers from third countries.
There is no explanation on the only relevant issu e, i.e. the "suitable" remedy for the alleged
serious injury to the US wheat gluten industry caused by increased imports only and the need tofacilitate adjustment of that industry to increased imports only.
The ITC's unrelated statements or " petitiones principii " do not reach the minimum standard of
"reasoned conclusions" required under the SA.
The EC refers the Panel back to, in particular, chapter 5 of its first written submission,
paragraphs 99 and following of its first oral statement, chapter 6 of its second written submission and
chapter 6.3 of its second oral statement.
4. The US has applied the safeguard measure on wheat gluten inco nsistently with the
findings of the US authoritie s about injury and causation
The US authorities have excluded from their reasoning concerning causality the effects of the
inherently weak position of the US wheat gluten /wheat starch industry on the US domestic starch
market, thus incorrectly determining that a serious injury was caused solely by the imported wheat
gluten
However, the US authorities have included as one of their key considerations the wheat starch
market conditions in the US when considering the form, the scope and the extent of the safeguard
measure against foreign wheat gluten.
This inconsistent way of proceeding of the US authorities has doubly prejudiced the market
access conditions for EC produced wheat gluten by first indicating imports as the sole cause of serious
injury and then increasing the restrictions flowing from the safeguard measure in order to remedy
other causes.WT/DS166/R
Page 224
The EC refers the Panel back to chapter 4.6.3.6 of its first written submission, paragraphs 110
and following of its first oral statement and chapter 6.4 of its second oral statement.
5. The US has manipulated the "representative period"
If a Member chooses to implement a quantitative restriction, it has to determine the quantity
of imports in an objective way, i.e. with reference to the most recent ("last") statistics available.
Such statistics are representative of the legitimate trade in the product concerned unless an
exceptional event or a violation of WTO rules has distorted the trade. The Member departing from the
available statistics for the last three years must prove the existence of such exceptional event or
violation.
When the objective level of imports is set, it may be adjusted  in a MFN fashion provided that
"a clear justification is given that a different level is necessary to prevent or remedy injury".
A "clear" justification corresponds to a reinforced  burden of proof upon the Member using
that possibility. It is a much higher, more demandi ng standard. Generic explanations or statements do
not fulfil that standard.
The US has not followed this correct line of action. Rather, it has argued even in its second
written submission that it was entitled to invent  a new rule and read in Article 5.1, second sentence,
the possibility of choosing another representative period of its choice.
The practical consequence of such action is that the quantities of imports allowed into the US
are unjustifiably lower than the level at which they  should have been set. In other words, the US
domestic industry on wheat gluten is over-protected by the US measure, which is a protectionistmeasure in disguise.
The EC refers the Panel back to, in particular, chapter 5.2 of its first written submission,
paragraphs 114 and following of its first oral statement, chapter 7 of its second written submission,
chapter 6.5 of its second oral statement and answer to question 10 from the Panel (17 January 2000).
8. THE US SAFEGUARD MEASURE ON WHEAT GLUTEN IS A DISCRIMINATORY
MEASURE
29. The EC has also indicated that the US safeguard measure on wheat gluten is in fact a
discriminatory measure, i.e. a measure that was designed with the aim of treating in a differentiated
fashion imports from different origins. This discrimination is inconsistent with Articles I of the GATT
1994 and 2.1, 4.2 and 5.2 of the SA.
1. The US and Canada have confirmed in their latest submissions that  the US authorities
have performed the injury and causation investigation in two steps.
They have first (unjustifiably) attributed alleged "serious injury" to increased imports
regardless of their origin.
However, the US authorities have then performed a second causation investigation and have
excluded Canada because its imports allegedly did not contribute "substantially" to the injury.
Finally, they have implemented the allocation of the quantitative restriction in order to
reallocate shares among foreign suppliers (ITC I-21 and I-26, in fine ) without following the
appropriate procedures under Article 5.2 (b), as the US itself has explicitly recognised.WT/DS166/R
Page 225
The EC states (and requests the panel to rule) that the unequivocal text of Article 4.2 of the
SA and of Article I of the GATT clearly prohibit th at the US perform a two step injury and causation
analysis, and include Canadian imports when determining whether “serious injury” has occurred but
exclude Canada from the scope of the safeguard measure. In this case, the facts amply confirm this
conclusion in law since since imports from the EC, Australia as well as Canada increased in 1996, andthe level of imports from all these sources into the US in 1997 were in any case higher than in 1995.
The US has no justification under the SA or under any other WTO agreement for having
breached the principle of parallelism and the fundamental principle of the MFN treatment.
Free trade areas such as the NAFTA are not even mentioned in that text.
The generic reservation contained in footnote 1 to Article 2.1, concerning the interpretation of
the relationship between Article XXIV of the GA TT 1994 and Article XIX of the same agreement,
has evidently no bearing on the interpretation of Article 4.2 of the Safeguards Agreement. This is all
the more so in light of the General Interpretative note to Annex 1A to the WTO Agreement.
The EC refers the Panel back to, in particular, paragraphs 55 and 60 of its first written
submission, paragraphs 87 and following of its first oral statement, chapter 8 of its second written
submission, chapter 7 of its second oral statement, answer to question 8 from the panel
(4 February 2000) and the comments of the European Communities on US Exhibit 13
(13 February 2000) including the attached table.
2. The uneven allocation of shares of the quant itative restriction in favour of Australia and
to the detriment of the EC is another plain example of discriminatory treatment without
justification.
Since, by its own spontaneous admission, it did not follow the procedures under
Article 5.2(b), the US has no explanation left as to how it can justify that despite having a 47 per cent
share of the market in the previous representative period, the EC was allocated only a 43 per cent
share of the quota. Australia, on the other hand, was allocated a share of 49 per cent, compared to its
share in the previous representative period of 38 per cent. More importantly, this allocation haspreserved entirely the 1997 record levels of imports from Australia despite the fact that Australia’s
exports increased continuously in the last three years of the investigative period, by almost 21 per
cent.
The EC refers the Panel back to, in particular, chapters 5 and 7 of its first written submission,
paragraphs 92 and following of its first oral stat ement, its answer to question no. 10 of the Panel
(17 January 2000), paragraph 100-117 of its second written submission, chapter 7 of its second oral
statement and the comments of the European Communities on US Exhibit 13 (13 February 2000)
including the attached table.
3. Finally, the manipulation of the "representat ive period" by the US authorities, that was
examined above, has provided de facto  a better treatment of wheat gluten of Australian origin
when compared to wheat gluten of EC origin. That manipulation is therefore not only a breach
of Article 5.1 of the SA but also of Article I of the GATT 1994.
The EC refers the Panel back to, in particular, chapter 7 of its first written submission,
paragraphs 100-117 of its 2
nd written submission, and part 7 of its second oral statement.
9. THE US HAS BREACHED A NUMBER OF PROCEDURAL RULES UNDER
ARTICLES 8 AND 12 OF THE SA.WT/DS166/R
Page 226
30. Without need be to repeat once more the arguments and the evidence which are already on the
record of this proceedings and that demonstrate that the US has repeatedly breached these important
provisions, the EC would like to draw the attention of the Panel to the fact that the US attitude not
only substantially nullifies or impairs benefits expected by the EC upon signing up to the SA. Were
the US practice allow to stand, the substantial and procedural interests of all Members of the WTO,
which are related to transparency and to the predictability and stability of the multilateral trading
system, would be severely jeopardised.
The EC refers the Panel back to, in particular, chapter 6 of its first written submission,
paragraphs 125-133 of its first oral statement, its answers to questions 11 and 24, 2, and 19-22 of thePanel (17 January 2000), and its answers to questions 13 and 14 of the Panel (4 February 2000).
31. This concludes the EC's brief summary of the most important claims and arguments it has
presented during this panel procedure. We are ready as from now to provide any further clarification
you may need.
Mr. Chairman, Members of the Panel, thank you for your attention.
__________WT/DS166/R
Page 227
ATTACHMENT 1-15
ANSWER OF THE EUROPEAN COMMUNITY
TO THE ADDITIONAL QUESTION FROM THE PANEL
(22 May 2000)
Question No. 1 to the EC
“1. Before the USITC, did the EU producers rais e “protein premiums” as a factor that the
USITC should take into account ? If so, did the EU  producers raise it as a factor relevant to the
entire period of investigation, or only to certain specific years, i.e. 1993-1994? Please
substantiate your answer on the basis of  evidence already on the Panel record.”
Reply
1. The «protein premium » factor was on many occasions during the ITC procedure mentioned
by EC producers as a factor that the USITC should take into account.
(The EC stresses that the issue might even have been mentioned more often than appears from
Exhibits EC-16-18. The EC nor its industry can ve rify this since under USITC procedures the EC
producers are not allowed to receive a complete text of the briefs filed on their behalf by their
representatives before the ITC ; everything which is alleged to refer to business confidential
information must be removed from the version provided to the industry by its counsel).
2. For the sake of brevity, the EC will not discuss all occasions at which the protein premium
was mentioned by the EC industry. It refers to wh at was stated in paragraphs 54-55 of the EC’s 2nd
written submission, and adds the following three observations.
3. First of all, the protein premium factor was mentioned by EC industry from the very
beginning of the procedure, and throughout the procedure before the ITC.
In the documents already in the possession of the panel, protein premium is mentioned for the
first time by the EC industry in its pre-injury-hearing brief p. 2 and 3, including footnote 54, wherethe protein content of wheat is mentioned as a factor influencing wheat gluten prices. Also, there the
concept of protein premium is explained as follows: « A good indicator of protein content is the
premium paid for 13 per cent hard red winter wh eat over ordinary hard red winter wheat. »
4. Other examples where protein premium was mentioned by the EC industry also later on
during the ITC proceedings, including during the injury  hearing before the ITC and in the post-injury-
hearing brief, are cited in the footnote to this sentence.
1
                                                     
1  The EC refers in particular to:
- the injury hearing report (Exhibit EC-17) p. 149-150 (citing a letter by Manildra stating that
protein premium is an important factor in determining wheat gluten prices: literally the
Manildra representative writes: “the market in the US appears to be headed for further
decreases for July forward due to softening demand resulting from weakening high proteinpremiums (…).)
- page 154 lines 12-16 of that same report of the 16 December 1997 ITC hearing where
Mr Klett, who spoke on behalf of the EC producers, made the following statement before theWT/DS166/R
Page 228
5. Secondly, the « protein premium » factor was cl early mentioned as one relevant to the entire
period of investigation. For instance, in the EC industry’s  pre-injury-hearing brief p. 13 it was
explicitly stated that « The simplistic assertion [of the US Wheat Gluten Industry Council requesting
the safeguard measure] that only imports can explain recent industry trends ignores contemporaneous
supply-side and demand-side changes in the US market during this same time-period (e.g. (…)
changes in the protein content of wheat) (…) » (Emphasis supplied).
6. Also during the hearing before the ITC, the so-called «regression analysis » contained in
Petitioners’ brief – which served to justify the request for the safeguard measure and thus attributed
relatively low wheat gluten prices during the latter part of the PoI to increased imports - was criticisedas follows : «First, the regression analysis contained in Petitioner’s brief is seriously flawed in that it
includes only flour costs as an explanatory variable for changes in vital wheat gluten price. The
analysis totally ignores other supply and demand factors that are recognised as affecting price in this
industry, including protein content of wheat (….) ».
2 (emphasis supplied).
7. This criticism was repeated for the third time in the post-injury-hearing brief.3
8. Moreover, a representative of a US customer who shared the EC producers’ criticism of theITC’s analysis, Mr Neighbor
4, made the point as a general one, covering the entire PoI. For instance,
he stated : «If gluten prices get too high or the premiums between high gluten and patent flour get too
low, people will substitute types of flour and use less gluten if gluten prices are too high. » And : « If
the premiums between high gluten flour and patent flour are low enough, then you use less glutenagain. It’s a combination of price of gluten and the premium spread between the two types of flour ».
9. Also Mr Veerman, speaking on behalf of EC producers before the ITC, stated in very general
terms : (hearing report Exhibit EC-17 page 174 line 20 – page 175 line 6) : «Once again, wheat gluten
as a whole is a global market. It is dictated by supply and demand. It varies from year to year. If the
crop is high quality, the wheat itself, there is less demand, but there is more production.  (…)»
(emphasis supplied)
10. Thirdly, contrary to what the US alleges5, the EC producers did submit all necessary data. The
exact relevant information on protein premium, covering the entire PoI, was provided to the USITC,
both in the form of a graph and in statistical form. For ease of reference, the EC annexes the relevant
three pages, which were annexed to the post-injury-hearing brief. (Exhibit EC-20)6 These pages
provide all relevant information for the whole period. In particular, they give not only the proof that
protein premium was at an all time-high in 1994 (using the « ITC-year »), but also that it was
(relatively) low thereafter, which explained the level of US wheat gluten prices during the latter partof the PoI.
                                                                                                                                                                    
ITC: “I think that one important issue going back to the 1993-1994 period, if you see exhibit 1
(…) it came out that the price spike during that period was due to low protein content of
wheat, as well as a shortage situation”1. (emphasis added)
- the EC industry’s post-injury-hearing brief (Exhibit EC-18) page 21, including footnote 57;
“Using the first half of 1994 as the base period to measure price suppression is disingenuous,as this was the period when prices were high due to the low-protein content of wheat.”.
2 Exhibit EC-17, p. 138, lines 1-10.
3 P. 24 point a, “Petitioners’ regression model ignores other significant supply and demand factors that
also affect vital wheat gluten price, including the protein content of wheat”.
4 Exhibit EC-17, p. 170 line 11 – p. 172 line 5.
5 US statement at 3d meeting of Panel with the Parties, para. 20.
6 In Exhibit EC-18 they are respectively the 5th page, and the 5th-4th before last page of the pages
containing evidence.WT/DS166/R
Page 229
11. In spite of this detailed evidence covering the entire PoI, the USITC did not give any
explanation whatsoever of how it arrived at its (implicit) assumption that it was not low protein
premium which kept US wheat gluten prices relativel y low during the latter part of the PoI. It thus
violated the SA, and in particular Art. 4 thereof.
12. By way of a final general observation, the EC  would like to note the following. Throughout
this procedure7, the EC has underlined that under the Safeguards Agreement (“SA”)8, the competent
authorities of a WTO Member have an obligation to evaluate, of their own initiative, each factor of an
objective and quantifiable  nature having a bearing  on the situation of the industry concerned.
They are under this obligation, regardless of whether or not a particular factor has been raised
by any party during the proceedings referred to in Article 3.1 of the SA. Especially since, as the EC
has shown9, the ITC was aware of the fact that the «protein premium » - i.e. the price differential
between low- and high protein wheat - influen ces wheat gluten prices, the USITC should have
obtained all relevant information which is necessary to evaluate how that factor developed throughoutthe entire Period of Investigation (« PoI »). Also, the USITC should have included reasoned
conclusions analysing that information in its report. The fact that it failed to do so
10 constitutes a
violation of the SA. However, as the EC has also underlined during these proceedings and in this
answer, this violation is all the more evident since the «protein premium » factor was at many
occasions during the ITC procedure mentioned by EC producers.
__________
                                                     
7 See in particular the EC’s answer to questions no. 6 and 7 of the Panel, 17 January 2000. See also
paras. 43-45 of the EC’s 2nd oral statement.
8 See in particular Article 4.2 (a) SA, which provides that “the competent authorities shall evaluate all
relevant factors of an objective and quantifiable nature having a bearing on the situation of that industry, inparticular (…)” (emphasis supplied). See also AB report on Argentina-Footwear , at paragraph 136, “Art. 4.2(a)
of the Agreement on Safeguards requires a demonstration that the competent authorities evaluated, at a
minimum, each of the factors listed in Article 4.2(a) as we ll as all other factors that are relevant to the situation
of the industry concerned.” (Emphasis supplied).
9See e.g. para. 32 of the EC’s second written submission.
10 In particular the latter, since, as the EC has shown, all the relevant evidence was provided to the ITC
by the EC producers.WT/DS166/R
Page 230
ATTACHMENT 2-1
FIRST WRITTEN SUBMISSION OF THE UNITED STATES
(6 December 1999)
TABLE OF CONTENTS
Page
I.  INTRODUCTION............................................................................................................... .......................... 231
II.  PROCEDURAL BACKGROUND..................................................................................................... ........ 231
III.FACTUAL B ACKGROUND ......................................................................................................... ............. 232
A. THE INVESTIGATION ............................................................................................................................... 232
1. Serious Injury Caused by Increased Imports 234
2. Alternative Causes of Injury 235
B. THE REMEDY ............................................................................................................................... ........... 236
C. NOTIFICATIONS AND CONSULTATION ...................................................................................................... 238
1. Notifications 238
2. Consultation 239
IV.  LEGAL ARGUMENT ............................................................................................................ ................... 239
A. THE STANDARD OF REVIEW IN DISPUTES UNDER THE AGREEMENT ON SAFEGUARDS ............................... 239
1. The Applicable Standard is Now Well-Established.............................................................................. . 239
2. The EC Misapplies th e Standard of Review ..................................................................................... ..... 240
B. THE EC FAILS TO MEET ITS BURDEN OF PROOF ........................................................................................ 241
C. THE EC ERRONEOUSLY ASSERTS THAT "UNFORESEEN DEVELOPMENTS " ARE A
PRECONDITION TO THE APPLICATION OF A SAFEGUARD MEASURE .......................................................... 242
D. THE EC'S CLAIMS UNDER THE AGREEMENT ON SAFEGUARDS .................................................................. 243
1. Contrary to the EC's Claims, the USITC Report Satisfies the Requirements of Articles 2.1 and 4....... 243
(i) Factors Enumerated in the Safeguards Agreement 244
(ii) Factors not Enumerated in the Safeguards Agreement 252(iii) Other Asserted Causal Factors 255
(iv) The EC's Objections Concerning Non-Disclosure of Confidential Information are not
Well-Founded 262
2. The Temporary Import Quota is Neither Being A pplied to an Extent Greater than Necessary nor
Improperly Allocated ........................................................................................................... ....................... 263
(i) The Wheat Gluten Safeguard is not Excessive 263
(ii) The EC has Failed to Demonstrate that the US Safeguard Measure Improperly Allocates Import Quota
Shares Among Supplying Countries 271
3. The United States Satisfied its Obli gations Under Articles 8 and 12.................................................... 272
(i) The United States made timely Notifications to the Committee on Safeguards and
provided Adequate Opportunity for Consultations as required under Article 12 272
(ii) The United States Satisfied its  Obligations under Article 8 274
E. THE EC 'S GATT ARTICLE I CLAIM IS WITHOUT MERIT ............................................................................... 275
V.  CONCLUSION ................................................................................................................. ........................... 276
UNITED STATES LIST OF EXHIBITS................................................................................................. ........ 276WT/DS166/R
Page 231
I. INTRODUCTION
1. In 1998 the United States established a safeguard measure on imports of wheat gluten after
concluding that increased imports were causing serious injury to the domestic wheat gluten industry.
The decision to take action came after the US International Trade Commission (“USITC”) conducted
an exhaustive and transparent investigation of th e impact increased imports of wheat gluten were
having on the domestic industry.
2. The USITC conducted its investigation in conformity with the procedural requirements of
Article 3 of the Agreement on Safeguards  (“Safeguards Agreement”).  Thus, the USITC held public
hearings in which producers from the European Union (EU) were permitted active participation.   TheEC and EU producers were afforded ample opportuni ty to present evidence and submit their views
during the USITC’s investigation.  Indeed, the EC itse lf participated in those proceedings.  Moreover,
the USITC addressed the specific claims raised by the EC and its producers in its published report,
which set forth the USITC’s findings and reasoned conclusions on the issues of fact and law relevant
to this case.  In keeping with the mandate of Article 3, the public version of the USITC publishedreport properly did not disclose confidential information.
3. In addition to satisfying the procedural requirements of Article 3, the USITC investigation
also conformed to the substantive obligations of Article 4 of the Safeguards Agreement.  After
examining the injury factors specifically enumerated in Article 4.2, as well as other relevant factors,
the USITC properly concluded that the domestic wheat gluten industry was being seriously injured as
a result of increased imports.
4. Following publication of the USITC’s findings and recommendation, and after consulting
with potentially affected exporting Members, the United States established a safeguard measure on
imports of wheat gluten.  The US measure consists of a quantitative restriction on wheat gluten
imports for 3 years and 1 day, with the quantity of imports increasing progressively over the period.The quantitative restriction is carefully calibrated to ensure that the US safeguard measure is applied
only to the extent necessary to remedy the serious injury suffered by the domestic wheat gluten
industry and facilitate its adjustment to import competition.  The United States notified its
investigation, findings, and safeguard measure to the Committee on Safeguards.
5. At the heart of this proceeding, is the EC’s effort to convince this Panel to overturn the
carefully reasoned and amply articulated evidentiary findings and economic conclusions of the
USITC.  The EC stakes its case on many of the very same arguments that it, or EU producers,
presented and lost before the Commission.  The Panel should decline the EC’s call for the Panel to
substitute its judgment for that of the US competent authorities.  The temporary US restriction onwheat gluten imports is based on the USITC’s painstaking review and findings regarding all of the
evidence and arguments presented to it, including those of the EC.  It is fully consistent with all
applicable provisions of the Safegu ards Agreement, Article XIX of the General Agreement on Tariffs
and Trade 1994, and all other relevant WTO obligations.  Th e Panel should reject the EC’s arguments
to the contrary.
II. PROCEDURAL BACKGROUND
6. The EC requested consultations with the United States on 17 March 1999, pursuant to
Article 4 of the Understanding on Rules and Procedures Governing the Settlement of Disputes
(“DSU”), Article XXII:1 of the General Agreement on Tariffs and Trade 1994  (“GATT”), Article 14
of the Safeguards Agreement and Article 19 of the Agreement on Agriculture .  The EC’s consultation
request alleged that the US safeguard – embodi ed in Proclamation 7103, with an accompanying
memorandum from the President of the United States –   was inconsistent with Articles 2, 4, 5, 8 andWT/DS166/R
Page 232
12 of the Safeguard Agreement, Article 4.2 of the Agreement on Agriculture, and Articles I and XIX
of the GATT.
7. Consultations were held in Geneva on 3 May 1999, but failed to settle the dispute.
8. The EC requested establishment of a panel on 3 June 1999, one year after the measure had
taken effect, pursuant to Article XXIII of GATT 1994, Articles 4 and 6 of DSU, Article 19 of the
Agreement on Agriculture, and Article 14 of the Safeguards Agreement.  In its panel request, the EC
re-stated the WTO violations alleged in its earlier request for consultations, except that the EC
specified its allegation under Article 2 pertains to Article 2.1 of the Safeguards Agreement.
9. The Dispute Settlement Body established a panel to review the EC’s allegations on
26 July1999.  Both Australia and Canada reserved third party rights.
III. FACTUAL BACKGROUND
10. After receiving a petition on 19 September 1997 from the domestic wheat gluten industry, the
USITC instituted an investigation to determine whether increased wheat gluten imports were a
substantial cause of serious injury, or threat of serious injury, to the domestic wheat gluten industry.
The USITC conducted its investigation in conformity with both the procedural and substantive
requirements of the Safeguards Agreement.  After reviewing the economic data, and taking into
account the views of all interested parties (including the EC), the USITC properly concluded that the
domestic industry was seriously injured.
11. Following the USITC’s findings, the United States considered whether to apply a safeguard
measure.  As part of its deliberative process, the United States consulted with Members that would be
affected by a proposed safeguard, including the EC.  The United States ultimately determined to
impose a safeguard measure on imports of wheat gluten.  The measure consists of a quantitativerestriction, with specific country allocations, over a period of three years and one day, with the
quantity gradually increasing over that period.
12. Both the USITC investigation and the measure adopted by the United States satisfy US
obligations under the Safeguards Agreement.
A. 
THE INVESTIGATION
13. The USITC investigation meets the procedural requirements set out in the Safeguards
Agreement.  Following is a brief description of the procedures the Commission observed in its wheat
gluten investigation.
14. After receiving the domestic industry’s petition, the USITC sent out detailed questionnaires to
domestic producers and importers/purchasers of wheat gluten.  The USITC obtained data on industry
financial performance through these questionnaires.1  The USITC requested that producers provide
detailed financial information in four different forms–on the overall operations of the establishmentsin which they produce wheat gluten, on their combined operations on wheat gluten and wheat starch,
on their wheat gluten operations, and on their wheat starch operations.  Each of the firms was asked to
provide data on net sales, cost of goods sold, selling, general, and administrative expenses, and other
income and expenses for each type of operation.   The USITC also requested that each firm provide
information on capital expenditure, research and development expenditures, property, plant, and
equipment, and book value for overall establishment operations, wheat gluten operations, and wheat
                                                     
1 A copy of the USITC’s “producers’ questionnaire” is attached as US Exhibit 1.WT/DS166/R
Page 233
starch operation.  The USITC requested firms that do not maintain separate records for wheat gluten
to explain their allocation methodology and provide worksheets with their calculations.
15. After providing prior notice seeking the views of interested parties, the USITC then held
extensive public hearings at which interested parties presented relevant views and evidence.  Both theEU wheat gluten producers and the EC itself partic ipated in these proceedings, and their views were
given full consideration.
16. Once the hearings were completed, the USITC carefully considered all of the evidence, as
well as the views of interested parties, and arrived at a determination.  The USITC published a reportsetting out detailed findings and conclusions on all of the pertinent issues relating its determination.
This report was notified to the Committee on Safeguards, and it was made available to the public.
17. In addition to satisfying all of the procedural obligations set out in the Safeguards Agreement,
the USITC investigation also satisfied the Agreement’s substantive obligations.  In particular, theUSITC examined all of the factors enumerated in Article 4.2, and it published a detailed analysis
demonstrating the relevance of the factors it examined.
18. The USITC report documents the state of the domestic industry.  The USITC found that the
domestic wheat gluten industry was profitable during the first three years of the Commission’s period
of investigation (POI).  While there were some annual fluctuations, domestic production and sales
increased, and imports remained basically constant -- 128 million pounds in 1993; 124 million poundsin 1994; 128 million pounds in 1995.  In anticipation of an increase in domestic demand, the industry
made significant capital investments to increase its production capacity and modernize its facilities,
and these projects were largely completed in 1995.
19. The USITC also found that the domestic producers had anticipated correctly that domestic
demand would  increase during the next two years.  Domestic consumption increased, and was 15 per
cent higher in 1997 than it had been in 1995.  However, despite this significant increase in demand,
the industry was unable to profit from this increase.  Rather, economic indicators turned sharply
negative in 1996 and 1997.   In particular, the industry operated at a loss in 1996 and 1997, production
and sales declined, and virtually all other factors pertaining to industry performance were negative.Although there was a modest upturn in some indicators in 1997, those indicators were still far below
previous levels.
20. Correlating with this decline in industry performance, the USITC report found that imports of
wheat gluten increased dramatically from their steady 1993-1995 level of 128 million pounds to 156million pounds in 1996, and still further to 177 million pounds in 1997.    Thus, imports increased
38 per cent from 1995 to 1997.  Instead of increasing, domestic shipments were sharply lower in 1996
and 1997 than in 1993-1995 because of a surge in low-priced imports and the idling of both old and
new capacity.
21. The USITC report concluded that imports had increased significantly, both in absolute terms
and relative to domestic production.  After reviewing evidence relating to the factors enumerated in
Section 4.2 of the Safeguards Agreement, as well  as other relevant evidence, the USITC concluded
that the industry was seriously injured, given that virtually all such factors were negative.   The
Commission then considered whether the serious inju ry was attributable to increased imports.  The
USITC concluded there was a direct correlation between the dramatic increase in wheat gluten
imports and the significant decline in domestic wheat gluten industry performance in 1996 and 1997.In the face of rising domestic demand and consumption, domestic production, shipments, capacity
utilization, unit prices, industry financial performance, and worker productivity all declined during the
period of greatest import penetration.  The USITC further determined that increased imports were aWT/DS166/R
Page 234
cause greater than any other cause, and that none of the other suggested possible causes -- changes in
market conditions for co-product wheat starch, ongoing imports of wheat gluten by domestic
producers,  competition among domestic wheat gluten producers, and rising raw material costs -- were
as great a cause of serious injury to the domestic industry as increased imports.
(i) Serious Injury Caused by Increased Imports
22. Increased Imports: The USITC found that wheat gluten imports increased in absolute terms
during the POI.  From 1993 to 1997 wheat gluten imports rose from 128 million pounds to
177 million pounds.  Virtually all of this increase occurred during the last two years of the period
examined, when imports surged from 128 million pounds in 1995 to 156 million pounds in 1996, and177 million pounds in 1997.  Between 1995 to 1997 imports increased by nearly 40 per cent  Imports
also increased when compared with domestic production: the ratio of imports to domestic production
rose from 100.6 per cent in 1993 to 145.4 per cent  in 19972.
2
23. Import Share: The USITC found that the ratio of imports from all sources to US production
rose steadily during the POI, but imports from the EC surged to record levels.  In fact, the ratio of EC
imports more than doubled relative to US production while the ratio of imports from other sources
fluctuated within a narrower range.  Thus, during the POI the ratio of imports to domestic production
initially fell from 100.6 per cent in 1993 to 88.2 per cent in 1994, then rose steadily to 145.4 per cent
in  1997.   For the EC, however, the ratio declined  initially from 34.4 per cent in 1993 to 29.6 per cent
in 1994, and then climbed precipitously from 37.8 per cent in 1995 to 62.6 per cent in 1996 and
74.8 per cent in 1997.3
24. Sales:  With respect to changes in the level of sales – i.e. domestic shipments –  the USITC
found that domestic shipments followed a similar trend as production, initially rising and then falling
—  they were at their lowest levels in 1995 and 1997.4
25. Production: The USITC found that industry prod uction of wheat gluten overall decreased by
4.5 per cent during the POI.  Production initially rose from 128 million pounds in 1993 to 143 million
pounds in 1995 then fell sharply to 112 million pounds in 1996 and increased to 122 million pounds
in 1997.5
26. Capacity Utilization: The USITC found that capacity utilization in the industry fell
significantly during the POI, from 78.3 per cent in 1993 to as low as 42.0 per cent in 1996 before
rising slightly to 44.5 per cent in 1997.  While some of the decrease can be explained by the fact that
the industry had increased capacity during the POI in anticipation of significant increases in domestic
consumption, this fact alone cannot account for the d ecline.  Most of the increase in capacity was in
place by June 1995, before  the surge in imports that occurred in crop years 1996 and 1997, and
capacity utilization fell sharply to its lowest leve ls in these two years, from 56.2 per cent in 1995 to
42.0 per cent in 1996 and 44.5 per cent in 1997.  Had there been no increase in imports from 1993
levels, the industry likely could have operated at 61per cent of capacity in 1997, a level at which the
industry could have operated profitably.6
27. Profit and Loss:  The USITC found that during the POI the domestic industry was unable to
operate at a reasonable level of profit in 1996-1997, during the import surge.  While domestic
operations were profitable during the first three years of the investigative period, the industry operated
at a loss in 1996 and 1997.  Profitability reflected the trend in average unit value prices, which
                                                     
2 USITC Report at I-10; II-9.  US Exhibit 4.
3 US Exhibit 4 at II-14-15.
4 US Exhibit 4 at I-13.
5 US Exhibit 4 at I-12-13.
6 US Exhibit 4 at I-12.WT/DS166/R
Page 235
initially rose and then fell.  Average unit values peaked in 1994 and then declined and were at their
lowest level in 1997; the decline in average unit values coincided with a rise in average unit costs.7
28. Employment: The USITC found that statistics  on employment and underemployment in the
industry provided further evidence of economic decline.  While the average number of production and
related workers increased during the POI, this does not represent the complete picture.  In reality,
while the number of hours worked increased from 1993 to 1997, productivity decreased sharply.8
29. Other Factors:  In addition to the factors enumerated in Article 4.2(a) of the Safeguards
Agreement, the USITC also evaluated other releva nt factors, including wages, inventories, new
entries/expansion, and price.  These factors are discussed in detail in paragraphs 110-124 of the US
submission.
(ii) Alternative Causes of Injury
30. In its investigation the USITC specifically ex amined possible alternative causes of serious
injury suggested by certain interested parties, including: (1) changes in co-product markets, (2)
domestic producers’ importation of wheat gluten, (3) competition among domestic producers, (4)
increased capacity, and (5) rising raw materials costs (wheat gluten and wheat flour).  After thorough
examination of these factors, the USITC concluded, based on the evidence, that increased imports
were both an important cause of serious injury and a cause that was greater than any of the alternative
causes suggested.  A summary of the USITC’s findin gs on these suggested alternative causes follows.
31. Co-products.9  While finding that wheat gluten production decisions are affected by market
conditions in the wheat starch market, the USITC concluded that changes in the co-product markets
were not a more important cause of serious injury than imports.  The USITC arrived at this conclusion
after examining US selling prices of wheat starch, which is the major co-product of wheat gluten
production.  The USITC noted that, in contrast to the domestic selling price of wheat gluten, thedomestic selling price of wheat starch showed a gradual increase over the POI.  Weighted-average
wheat starch prices were at their highest level of the investigative period in 1997.  Thus, there was no
decline in wheat starch prices that either paralleled the sharp decline since 1994 of domestic wheat
gluten prices or explained the sharp decline in the financial performance of domestic wheat gluten
producers.
32. Addressing importer arguments about the impact of competition in the US market between
corn starch and wheat starch and its impact on wheat gluten production, the USITC found the relative
stability, and gradual increase, in domestic wheat starch prices suggested that competition between
corn starch and wheat starch was not likely to have had much if any effect on wheat glutenproduction.   The USITC also considered evidence cited by importers that one domestic producer had
reduced its wheat gluten production in 1995 for reasons related in part to conditions in the alcohol
market, and importers' claim that this explained that firm's poor financial performance.  The USITC
found that such action by the one producer in 1995 explains only part of the problem faced by one
producer and could not be extrapolated to account for the problems facing all domestic producers, norcould not it explain the significant deterioration in 1996 and 1997 of the other three domestic
producers, who accounted for the majority of domestic production.  Indeed, the evidence did not even
fully explain the declining financial performance of that one producer in  its wheat gluten operations.
                                                     
7 US Exhibit 4 at I-13.
8 US Exhibit 4 at I-13-14.
9 US Exhibit 4 at 16-17.WT/DS166/R
Page 236
33. Imported wheat gluten.10  The USITC also found that domestic producers’ importation of
wheat gluten was not a more important cause of the serious injury.  The USITC found that imports by
domestic purchasers remained relatively steady during the POI.  Thus, US producers were not
responsible for the surge in imports that occurred in 1996 and 1997.  In addition, the USITC noted
that the US market depended on a certain level of imports to meet domestic demand.  In all but oneyear of the POI – 1996 – US apparent consumption of wheat gluten exceeded US producers’ capacity
to produce wheat gluten.
34. Competition and increased capacity.
11  The USITC also considered whether domestic
competition and the increase in domestic capacity were more important causes of serious injury than
increased imports, and found that they were not.  With respect to competition, the USITC found that
the domestic wheat gluten market is very competitive, and producers have ample excess capacity to
meet higher demand.  Moreover, wheat gluten is a commodity product that sells primarily on the basis
of price, and wheat gluten from different sources is highly interchangeable.  The USITC found that
the domestic industry added substantial new capacity.  However, the USITC found that the bulk of theincreased capacity was added early in the POI in an ticipation of continued strong growth in domestic
demand and consumption and before the surge in imports.  The USITC found that industry projections
of continued growth in demand and consumption were largely correct, as apparent consumption
increased nearly 18 per cent between 1993 and 1997.  The USITC found that, but for the surge in
imports, the industry would have operated at 61 per cent of capacity in 1997, which is much closer to
previous capacity levels at which the industry was able to operate profitably.  Thus, the USITC was
able to conclude that neither domestic competition nor increased domestic capacity was a moreimportant cause of serious injury than increased imports.
35. Raw materials costs.
12  The USITC examined and rejected the claim that rising prices of
wheat and wheat flour, the major inputs into wheat gluten/wheat starch production, was a more
important cause of serious injury than increased imports.  Raw material costs did increase during thePOI, particularly in 1996 and 1997.  However, the USITC found the evidence indicates that wheat
gluten producers typically are able to pass on the cost increases to their customers, because demand
for wheat gluten is relatively insensitive to pr ice changes.  In 1996 and 1997, however, unit selling
values declined despite increased demand and higher raw material costs.  The USITC concluded that
this unusual development was explained by the dramatic increase in relatively low-priced importsduring the POI, which had the effect of driving down wheat gluten prices.
36. After making an affirmative injury determination, the USITC conducted a separate analysis of
imports from Canada and Mexico to determine whether they accounted for a substantial share of total
imports and contributed importantly to the serious injury.  The USITC made a negative finding withrespect to imports from Mexico, noting that there were no reported imports during the POI.  With
respect to Canadian imports, the USITC concluded that such imports accounted for a “substantial
share” of total imports in that Canada was the third largest supplier of wheat gluten imports to the
United States.  However, Canadian imports declined significantly during the POI while overall
imports increased.  By 1997, Canada accounted for only 8.9 per cent of total imports.  Moreover, theUSITC report found that Canadian imports generall y oversold the US market during the POI.  Thus,
the USITC concluded that Canadian imports were not contributing importantly to the serious injury
suffered by the domestic industry.  Accordingly, the USITC recommended that Canadian imports be
excluded from the proposed safeguard measure.
13
                                                     
10 US Exhibit 4 at I-17.
11 US Exhibit 4 at I-17.
12 US Exhibit 4 at I-17.
13 US Exhibit 4 at I-19, I-29.WT/DS166/R
Page 237
B. THE REMEDY
37. Under US law, if the USITC determines that increased imports are a substantial cause of
serious injury or the threat thereof to the domestic industry, it is required to recommend to the
President the action that will address the serious injury , or threat thereof, to the domestic industry and
be most effective in facilitating the efforts of the domestic industry to make a positive adjustment toimport competition.
14  The President, after taking into account the USITC’s recommendation and
certain other factors, including the national economic interest, makes the final decision.
38. In response to the USITC’s affirmative injury determination and remedy recommendation, the
President carefully considered what action, if any, to take in response.
39. Ultimately, the President adopted a safeguard measure on imports of wheat gluten.  The
President’s Proclamation15 and accompanying Memorandum16 and the USITC’s recommendation and
accompanying explanation17 together define the US measure in terms of product coverage, form,
duration, and level, and provide a reasoned explanation as to how US authorities determined that themeasure was taken only to the extent necessary to remedy serious injury and facilitate the industry’s
adjustment.
40. The specific measure the President imposed consists of a quantitative restriction to remain in
place for three years and one day.  The quota was set at 57,521,000 kg. (126.812 million pounds) for
the first year, with annual increases of 6 per cent , and it was allocated on a country basis. Australia,
and the European Community received separate allocations, and the third category was for “othercountries”.
18  In the Proclamation, the President explained that the first year quota level was set at a
level equal to the average quantity of wheat gluten that entered the United States during the last three
representative years of imports  -- 1992-95 (July 1-June 30 crop years).  The Proclamation further
detailed that the country allocations were based on country shares in those same three years19 and that
Canada and Mexico were excluded from the measure.  There were no reported imports from Mexico,and Canada was a relatively small and declining supplier.
20
41. The President adopted a  measure that was substantially the same as that recommended by the
USITC, except that the measure imposed was less shorter in duration than that recommended:  The
USITC had proposed a 4-year measure; the safeguard that the President put in place last for just over3 years.  The USITC report details the United States' reasoning and explanations for its adoption of
the wheat gluten safeguard measure.
42. The USITC report first described the competitive conditions affecting wheat gluten, including
domestic and world market conditions for wheat gluten, demand conditions, and supply conditions.
21
The USITC also closely examined the adjustment plan provided by the domestic wheat gluten
industry and company commitments contained therein.22  The USITC examined the different forms of
                                                     
14 Section 202(e)(1) of the Trade Act of 1974.
15 Proclamation 7103 of 30 May 1998, To Facilitate Positive Adjustment to Competition From Imports
of Wheat Gluten.  US Exhibit 2.
16 Memorandum of 30 May 1998, Action Under Section 203 of the Trade Act of 1974 Concerning
Wheat Gluten , published in the Federal Register  of June 3, 1998 (63 Fed. Reg. 30359).  US Exhibit 3.
17 US Exhibit 4 at I-3-4, I-21-31.
18 US Exhibit 2 at 1; and Annex to US Exhibit 2 at 1.
19 US Exhibit 3 at 1.
20 US Exhibit 2 at 1; and Annex to US Exhibit 2 at 1.
21 US Exhibit 4 at I-22-25.
22 US Exhibit 4 at I-25-26.WT/DS166/R
Page 238
remedy available, including tariffs, tariff-rate quotas, and quotas, and explained why in this instance it
was recommending a quota instead of a tariff or tariff-rate quota.23
43. The USITC also explained why it was recommendi ng a quota at an initial level of 126 million
pounds, a 6 per cent annual escalator, a duration of four years, country allocations, and the respectivechoices for recent representative periods.
24  For example, the USITC found, based on its economic
analysis, that a quota that restores imports to approximately the market share prevailing in 1993-95
would allow the domestic industry to return to reasonable operating profits.25  It found that a quota of
four years duration would allow the industry sufficient time to make substantial progress in
developing the new products described in the adjustment plan and in adjusting to importcompetition.
26  In recommending a 6 per cent growth rate in the quota in the second and third years,
the USITC noted that this would be higher than the 4.2 per cent growth rate in imports over the period
of investigation.  The USITC found that this would allow for a reasonable rate of growth in imports
and further encourage the industry to adjust to import competition.27
44. The USITC found that the quota it was recommending would not exceed the amountnecessary to remedy the serious injury it found to ex ist, and that imports would continue to supply a
large share of the US market and be an important competitive force in the US market.
28
C. NOTIFICATIONS AND CONSULTATION
(i) Notifications
45. In addition to the substantive requirements, the United States also satisfied the procedural
requirements under Article 12 of the Safeguards Agreement.  Pursuant to Article 12.1(a) of the
Agreement, the United States notified the Safeguards Committee of the investigation initiated by the
USITC to examine the domestic industry’s serious injury claim on 17 October 1997.29  T h e
notification informed interested parties of their right to submit written briefs, the dates of USITC
hearings and other pertinent information.  The United States filed its notification with the Committeepromptly after the USITC instituted its investigation.  The domestic industry filed its petition on
19 September 1997, and the USITC completed its evaluation and announced institution of the
investigation on 1 October 1997.
30
46. On 15 January 1998, the USITC voted unanimously that wheat gluten was being importedinto the United States in such increased quantities as  to be a substantial cause of serious injury to the
domestic industry.  The United States provided a 12.1(b) notification to the Committee on
11 February 1998 notifying Members of the unanimous vote.
31  The USITC published its report and
remedy recommendation on 18 March 1998, and the report was provided to the Committee, as part of
the United States supplemental Article 12.1(b) notification, on 24 March 1998.32
                                                     
23 US Exhibit 4 at I-26-27.
24 US Exhibit 4 at I-27-29.
25 US Exhibit 4 at I-28.
26 US Exhibit 4 at I-28.
27 US Exhibit 4 at I-29.
28 US Exhibit 4 at I-28.
29 G/SG/N/6/USA/4 (circulated 21 October 1997).  US Exhibit 5.
30 See US Exhibit 4 at Appendix A.
31 G/SG/N/8/USA/2 (circulated 12 February 1998).  US Exhibit 6.
32 G/SG/N/8/USA/2/Rev.1 (circulated 27 March 1998).  US Exhibit 6.WT/DS166/R
Page 239
47. The United States imposed a safeguard measure with respect to wheat gluten on 1 June 1998,
and provided notification to the Committee on 4 June 1998 pursuant to Article 12.1(c) and Article 9
of the Safeguards Agreement.33
(ii) Consultation
48. The United States also satisfied its consultation obligations under the Safeguards Agreement.
On 24 April 1998, the United States consulted with the EC and other interested parties having a
substantial interest as exporters of wheat gluten.
IV. LEGAL ARGUMENT
49. The EC raises legal claims under both the Safeguards Agreement and GATT 1994.  The
United States respectfully submits that the EC's claims are unfounded, and as such they should be
rejected by the Panel.
50. The United States' submission begins with a di scussion of some of the general legal problems
arising from the EC's submission:  First, the United States reviews the applicable standard of review
and identifies critical areas where the EC fails to apply the proper standard.  Second, the United States
articulates the burden of proof standard and argues that in many instances the EC fails to meet its
burden to present a prima facie  case.  Third, based on the findings of prior panels, the United States
discounts the EC's claim that a finding of “unfor eseen developments” is a necessary prerequisite to
taking a safeguard action.
51. Next, the United States addresses the EC's legal claims under the Safeguards Agreement:
First, the United States demonstrates that the EC's  claims of violation under Articles 2 and 4 are
without merit because the USITC investigation and report satisfy the requirements of the Safeguards
Agreement.  The United States sets out for the Panel the findings and conclusions reached by the
USITC in its report regarding the relevant economic factors examined by the USITC – factorsenumerated in the Safeguards Agreement and those relevant factors that were not enumerated.
Second, the United States addresses the EC's erro neous claim that the safeguard measure violates
Article 5's remedy requirements.  Third, the United States describes the actions it has taken in
fulfilment of Article 12's consultation requirements.  Moreover, the United States rebuts the EC's
assertion that under Article 8 a Member taking a safeguard must provide compensation to affectedexporting Members.
52. Finally, the United States argues that the EC's discrimination claim under GATT Article I is
without legal merit.
A. 
THE STANDARD OF REVIEW IN DISPUTES UNDER THE AGREEMENT ON SAFEGUARDS
1. The Applicable Standard is Now Well-Established
53. In examining disputes under the Safeguards Agreement, it is now well-established that panels
are not authorized to review de novo   the determination made by the domestic investigating authority.
Instead, pursuant to Article 11 of the Understanding on Rules and Procedures Governing the
Settlement of Disputes (“DSU”), a panel must conduct an objective assessment of the matter before it,
taking into account: whether the importing Member examined the relevant facts, as specified in
Article 4.2(a) of the Safeguards Agreement; whethe r the importing Member adequately explained its
findings and conclusions, and whether the facts support the determination; and consequently, whether
                                                     
33 G/SG/N/10/USA/2, G/SG/N/11/USA/2 (circulated 8 June 1998).  US Exhibit 7.WT/DS166/R
Page 240
the determination made is consistent with importing Member’s obligations under the Safeguards
Agreement.
54. The United States recalls that in the two previous disputes concerning safeguards, Korea –
Definitive Safeguard Measure on Imports of Certain Dairy Products  (“Korea -- Dairy”) and
Argentina -- Safeguard Measures on Imports of Footwear  (“Argentina -- Footwear”) , the Panels
specifically rejected the notion of engaging in a de novo  review.34  Rather, as articulated by the Panel
in Argentina – Footwear,
our review will be limited to an objective assessment, pursuant to Article 11 of the
DSU, of whether the domestic authority has considered all relevant facts, including
an examination of each factor listed in Article 4.2(a), of whether the published report
on the investigation contains adequate explanation of how the facts support the
determination made, and consequently of whether the determination made is
consistent with Argentina’s obligations under the Safeguards Agreement.35
55. The United States respectfully submits that the above-quoted standard is the appropriatestandard of review to be applied in this dispute.
2. The EC Misapplies the Standard of Review
56. While the EC purports to embrace the standard of review espoused in Argentina -- Footwear
and Korea -- Dairy , the EC’s arguments are inconsistent with that standard.  In its first submission,
the EC advances arguments that it claims undermine the conclusions reached by the USITC.  The EC
fails to demonstrate, however, why the USITC’s expl anation of its decision was inadequate.  Instead,
the EC attempts to persuade this Panel to engage in a de novo  investigation of the underlying facts and
to substitute the EC’s  judgment for that of the national investigating authority.  By urging this
approach, the EC effectively repudiates the standard of review it claims to endorse.
57. Moreover, to bolster its position, the EC devotes it self at length to complaints that the USITC
failed to address factors that are not enumerated in the Safeguards Agreement.  As such, the EC
illegitimately attempts to expand obligations beyond those provided for in the Safeguards Agreement.
DSU Article 3.2 recognizes that the "[r]ecommendations and rulings of the DSB cannot add to ordiminish the rights and obligations provided in the covered agreements."  Accordingly, the Panel
should reject the EC's manufacture of additional obligations not found in the Safeguards Agreement.
58. In addition, the United States notes that Article 4.2(c) of the Safeguards Agreement requires
competent authorities to publish an analysis of the case that demonstrates the relevance  of the factors
examined.  Consequently, the Safeguards Agreement does not impose an obligation on the competent
authority to explain why it found some factors irrelevant and thus did not rely on them.
                                                     
34 Korea – Definitive Safeguard Measure on Imports of Certain Dairy Products, WT/DS98/R,
21 June 1999 (“Korea -- Dairy”) at ¶ 7.30; Argentina -- Safeguard Measures on Imports of Footwear,WT/DS121/R, 25 June 1999 (“Argentina -- Footwear”) at ¶ 8.117.
35 Argentina -- Footwear   at ¶ 8.124; Similarly, the Korea – Dairy Panel ( at ¶ 7.30) concluded that:
the Panel’s function is to assess objectively the review conducted by the national investigating
authority, . . . an objective assessment entails an examination of whether the [Korean national authority] hadexamined all facts in its possession or which it should have obtained in accordance with Article 4 of theAgreement on Safeguards (including facts which might detract from an affirmative determination in accordance
with the last sentence of Article 4.2 of the Agreement on Safeguards), whether adequate explanation had been
provided of how the facts as a whole supported the determination made, and, consequently, whether thedetermination made was consistent with the international obligations of Korea.WT/DS166/R
Page 241
59. Further, the EC misrepresents the Argentina -- Footwear  panel report as finding that, in
addition to the standard of review set forth above, the “panel should also verify the adequacy of the
[competent authority’s] reasoning by reviewing whether the findings made by the USITC are
consistent with the evidence.36  This argument effectively calls on the panel to undertake a de novo
review of the evidence before the USITC.  In fact, the Footwear  Panel did not impose any test beyond
the standard of review identified above.  While a competent authority obviously could not adequately
explain its findings by citing evidence that plainly contradicts them, the Footwear  Panel specifically
rejected the proposition that it was to undertake a verification of the competent authorities’ findings
based on a review of the entire evidence.37  Accordingly, the Safeguards Agreement does not burden
the Panel with the obligation to verify through an independent review of the evidence each finding
made by the competent authority.
60. Rather, as the Korea -- Dairy  notes, the function of a panel is to assess whether the importing
Member examined all relevant facts in accordance with Article 4.2 and whether it provided anadequate explanation as to how those facts as a whole supported the determination made.
38  The Dairy
Panel emphasized  that "the Panel should examine the analysis performed by the national authorities
at the time of the investigation on the basis of the various national authorities’ determinations and the
evidence it has collected."  Accordingly, the Panel’ s review is limited to the record that the ITC
gathered in its investigation.  By seeking to introd uce to this Panel evidence that was not before the
USITC, the EC repudiates its stated rejection of de novo review.
61. The question for this Panel is the adequacy of the USITC’s determination as it was made at
the time, not whether the Panel itself would have reached a contrary conclusion based on the facts
advanced by a complaining Member.  Faced with the similar circumstances, the Diary  Panel endorsed
the approach taken in United States -- Imposition of Anti-D umping Duties on Imports of Fresh and
Chilled Atlantic Salmon from Norway  that a panel examine whether the competent authority made a
“reasonable explanation of how the facts as a whole supported the determination made.39 The Dairy
Panel's articulation of the standard of review comports with Article 3.1's requirement that a Member
provide “ reasoned  conclusions reached on all issues of law and fact.”  (Emphasis added).  As will be
seen below, by regularly ignoring the USITC’s explanation of its conclusions, the EC fails to meet its
burden of showing that those conclusions were unreasonable.
B. THE EC FAILS TO MEET ITS BURDEN OF PROOF
62. The EC fails to meet its burden of proof with respect to many of its asserted claims.   Instead,
in large measure the EC relies on unfounded assertions advanced without supporting evidence or legal
grounding.  Moreover, the EC neglects to address the specific findings made by the USITC, favoringinstead the EC’s own view of  how the USITC should have conducted its investigation.
63. In United States -- Measures Affecting Imports of Woven Wool Shirts and Blouses from India
(“US -- Woven Wool Shirts”)  the Appellate Body noted that “a party claiming a violation of a
provision of the WTO Agreement by another Member must assert and prove its claim.”
40  The Korea
-- Dairy panel also had occasion to address questions on the burden of proof, and it found that “[a]s a
                                                     
36 EC First Submission at  ¶ 3 (emphasis added).
37 The Panel concluded that “[i]f we were to cond uct our own assessment of the underlying evidence as
contained in the entire record of Argentina’s investigation, we believe that we would effectively be engaging ina de novo  review, which we and both parties agree would be inappropriate.”  Argentina -- Footwear  at ¶ 8.126.
38 Korea -- Dairy at ¶ 7.55.
39 Korea – Dairy  at 7.57, quoting US - Salmon at ¶ 492.
40 United States – Measures Affecting Imports of Woven Wool Shirts and Blouses from India,
WT/DS33/AB/R ("US – Woven Wool Shirts") at ¶ IV, 25 April 1997.WT/DS166/R
Page 242
matter of law the burden of proof rests with the Eu ropean Communities, as complainant, and does not
shift during the panel process.41  Moreover, the Dairy  Panel noted that in the first instance it is for the
EC to submit a prima facie  case of violation of the Safeguards Agreement.42  T h e  Dairy Panel
interpreted this to mean that it was for Korea – as the defending party – to rebut the European
Communities’ evidence and arguments, once the EC had made its prima facie case, by submitting itsown evidence and arguments in support of its asser tion that it had respected the requirements of the
Safeguards Agreement at the time of its determination.
43  The Dairy Panel then concluded that “[a]t
the end of this process, it is for the Panel to weigh and assess the evidence and arguments submitted
by both parties in order to reach conclusions on whether the EC claims are well-founded.44
64. As will be discussed below, in many instances the EC fails to offer legally sufficient evidenceand arguments to establish its prima facie  case.  To the extent that the EC offers any claims that are
both legally germane and accompanied by sufficient argumentation, the United States has satisfied its
own burden to rebut those claims.  Accordingly, th e United States respectfully requests the Panel to
conclude, upon weighing the arguments and evidence presented by both parties, that the EC has failedto meet its burden to show that its claims of violations of the Safeguards Agreement are well-founded.
C. 
THE EC ERRONEOUSLY ASSERTS THAT "UNFORESEEN DEVELOPMENTS " ARE A PRECONDITION
TO THE APPLICATION OF A SAFEGUARD MEASURE
65. The EC once again asserts that Article XIX:1(a) of GATT 1994 requires a Member, before
applying a safeguard measure, to show that the increase in imports results from “unforeseendevelopments.”  In each of the two previous dispute settlement proceedings it has initiated to-date
challenging safeguards measures -- Korea -- Dairy and Argentina -- Footwear  – the EC advanced
similar arguments.  In each case those arguments were rejected.
66. A brief review of the findings of both Panels on this question is instructive.  After  reflecting
on this issue, the Korea -- Dairy Panel concluded:
7.41 We recall that the purpose of Article XIX was (and still is) to allow an
importing Member to deviate temporarily from its obligations under Articles II and
XI of GATT (i.e. to suspend its concessions or other obligations) in situations ofincreased imports causing serious injury to the relevant domestic industry.  We
consider that the first paragraph of Article XIX provides only for that: an importing
Member is "free", in situations where "any product is being imported into the territory
of that Member in such increased quantities and under such conditions as to cause or
threaten serious injury to domestic producers in that territory of like or directlycompetitive products" to deviate temporarily from Articles II and XI of GATT.
7.42 We consider that the prior section of the sentence, "If, as a result of
unforeseen developments and of the effect of the obligations incurred by a
contracting party under this Agreement, including tariff concessions…" does not addconditions for any measure to be applied pursuant to Article XIX but rather serves as
an explanation of why an Article XIX measure may be needed, taking into account
the fact that at the time (1947) the CONTRACTING PARTIES had just agreed (for
                                                     
41 Korea -- Dairy at ¶ 7.24.
42 Korea -- Dairy  at ¶ 7.24.  As the Appellate Body has noted, a prima facie case is “one which, in the
absence of effective refutation by the defending party, requires a panel, as a matter of law, to rule in favour of
the complaining party presenting the prima facie case.”  European Communities -- Measures Concerning Meat
and Meat Products,  WT/DS26 and 48/AB/R ¶ 104 (13 February 1998).
43 Korea – Dairy  at ¶ 7.24.
44 Korea – Dairy at ¶ 7.24.WT/DS166/R
Page 243
the first time) on multilateral tariff bindings and on a general prohibition against
quotas.
7.43 For us, the ordinary meaning of the terms "as a result of unforeseen
developments and of the effect of the obligations incurred by a contracting partyunder this Agreement" leads us to conclude that this proposition only describes
generally the situations where the binding nature of the obligations contained in
Articles II and XI of GATT may need to be set aside (for a certain period).   . . .
67. The Argentina – Footwear  Panel was equally unpersuaded by the EC’s argument, finding:
8.58 Given the reasoning developed by the panel and the Appellate Body in the
Brazil - Desiccated Coconut  case, it is our view that Article XIX of GATT and the
Safeguards Agreement must a fortiori  be read as representing an  inseparable package
of rights and disciplines which have to be considered in conjunction.  Therefore, weconclude that Article XIX of GATT cannot be understood to represent the total rights
and obligations of WTO Members, but that rather the Safeguards Agreement as
applying the disciplines of Article XIX of GATT, reflects the latest statement of
WTO Members concerning their rights and obligations concerning safeguards.  Thus
the Safeguards Agreement should be understood as defining, clarifying, and in some
cases modifying  the whole package of rights and obligations of Members with respect
to safeguard measures as they currently exist.  By the same token, and in the light ofthe principle of effective treaty interpretation, the express omission  of the criterion of
unforeseen developments in the new agreement (which otherwise transposes, reflects
and refines in great detail the essential conditions for the imposition of safeguard
measures provided for in Article XIX of GATT) must, in our view, have meaning.
68. The United States respectfully requests this Panel similarly to conclude that “unforeseen
developments” is not a condition that a Member must satisfy before imposing a safeguard measure.
D. 
THE EC'S CLAIMS UNDER THE AGREEMENT ON SAFEGUARDS
69. The EC asserts the USITC investigation and published report violate Articles 2 and 4 of the
Safeguards Agreement.  As demonstrated below, the EC's claims are without merit.  The USITC
conducted its investigation in conformity with the requirements of Article 4.  Thus, the USITC
evaluated the relevant factors having a bearing on the situation of the domestic industry, including
those factors enumerated in the Safeguards Agr eement and certain factors not expressly enumerated
therein.
1. Contrary to the EC's Claims, the USITC Report Satisfies the Requirements of
Articles 2.1 and 4
70. The arguments advanced by the EC in support of its claims under Articles 2.1 and 4 of the
Safeguards Agreement demonstrate a fundamental misapplication of the standard of review in thiscase and misrepresents the USITC report in critical areas.  Further, the EC’s factor-by-factor review
of the evidence largely obscures, even when it purports to address, the USITC’s actual reasoning on
injury and causation.  The USITC’s determination was based on the whole record, including an
examination of all relevant factors.  The EC fails to address the overall basis for the USITC’s
determination; instead, the EC isolates individual factors and examines them without reference to the
other factors.  The EC’s arguments concerning individual factors do not address the basis for the
USITC’s determination and hence do not provide grounds for challenging that determination underthe Safeguards Agreement.  In particular, the EC’s approach of picking and choosing pieces ofWT/DS166/R
Page 244
evidence which it argues support a contrary conclusion does not satisfy its burden to show that the
USITC was unreasonable in reaching the conclusion that it did.
71. The EC's factor-by-factor approach suggests implicitly that each factor must equally support a
finding of serious injury and causation.  As the Korea -- Dairy Panel noted, however, “[t]he relative
importance of particular factors including those listed ... is for each Member to assess in the light of
the circumstances of each case.’45  Thus, the Panel recognized that “the importing Member may
decide ... that some of these factors carry more or less weight."46
72. Moreover, many of the EC’s arguments assume that there is only one appropriate method foraddressing the factors relevant to injury and causation.  As prior panels have recognized, this
assumption is contrary both to the appropriate standard of review and to the text of Article 4.  In fact,
the Korea -- Dairy Panel explicitly found that an importing member “remains free to choose an
appropriate method of assessing whether the state of its domestic industry was caused by imports . . .
or by other factors, but it must be in a position to demonstrate that it did address the relevantissues."
47  The United States is in a position to demonstrate that it did indeed address the relevant
factors.  In keeping with the requirements of Article 4.2(a), the USITC evaluated all of the factors
specifically enumerated therein.  The USITC also evaluated the additional factors brought to its
attention by the parties before it, encompassing factors now cited by the EC.48
73. The EC does not argue that the USITC's findings, as such, would not support a conclusion
that, as a result of the increased imports, the domestic industry suffered “serious injury” as defined inArticle 4.1(a) of the Agreement -- i.e., “a significan t overall impairment in the position of a domestic
industry.”  Instead, the EC argues that the competent authority should have found the facts differently.
The EC's arguments fail to establish a prima facie  case of violation of the Safeguards Agreement, and
they ignore the applicable standard of review.  Accordingly, the United States respectfully submits the
Panel should reject the EC's claims under Ar ticles 2 and 4 of the Safeguards Agreement.
74. In keeping with the applicable standard of review, the United States sets out below the
USITC's findings and conclusions – as detailed in the USITC report – with respect to the factors set
out in Article 4.2(a), and other relevant factors not enumerated therein.
(i) Factors Enumerated in the Safeguards Agreement
75. Article 4.2(a) requires competent authorities in the conduct of safeguards investigations to
evaluate “all relevant factors of an objective and quantifiable nature having a bearing on the situation
of that industry.”  In particular, Article 4.2(a) enumerates the following factors: (1) the rate and
amount of the increase in imports of the product concerned in absolute and relative terms, (2) theshare of the domestic market taken by increased imports, (3) changes in the level of sales, (4)
production, (5) productivity, (6) capacity utilization, (7) profits and losses, and (8) employment.
76. The USITC evaluated all of these factors and more, and the EC does not allege otherwise.
Rather, the EC takes exception to the weight the USITC gave to each factor and the conclusions theUSITC drew from the available evidence.  As previously noted, however, the relative weight accorded
each factor is within the discretion of the competent authorities so long  as it reaches a reasoned
conclusion.  Moreover, to argue that a particular factor does not by itself support a serious injury
                                                     
45 Korea -- Dairy at ¶ 7.59, quoting US -- Woollen Shirts and Blouses, at  ¶ 7.52.
46 Korea -- Dairy at ¶ 7.56, quoting US -- Woollen Shirts and Blouses at ¶ 7.26.
47 Korea -- Dairy at  ¶ 7.31. See also  id. at ¶ 7.59, quoting US -- Woollen Shirts and Blouses  at ¶ 7.52.
The Argentina -- Footwear  panel made the same observation particularly with respect to the factor of increased
imports, noting, “In our view, each situation is different,  and the Agreement certainly does not identify a unique
pattern of importation that satisfies the ‘increased imports’ requirement.”   Argentina -- Footwear  at ¶ 8.165.
48 See US Exhibit 4 at I-10 to I-18.WT/DS166/R
Page 245
finding does not refute the overall finding.  In fact, in its report the USITC  noted  that “virtually all”,
but not all, factors were negative.49   Thus, the EC has failed to meet its burden to show that the
USITC determination is unreasonable under the circumstances.
Increased Imports
77. The USITC concluded that the criterion of increased imports was satisfied based on the
absolute increase in imports from 128 million pounds in 1993 to 177 million pounds in 1997, as well
as the relative increase compared to domestic production -- the ratio of imports to production
increased from 100.6 per cent in 1993 to 145.4 per cent  in 1997.50  In addition to these comparisons,
the USITC also analyzed the trends in imports, noting that virtually all of the increase in imports
occurred in the last two years of the period, during which imports increased from 128 million pounds
in 1995 to 156 million pounds in 1996 to 177 million pounds in 1997.51   During the investigation the
EU producers conceded that imports had increased.52  Thus, the USITC’s conclusion was not only
well-founded, it was undisputed.
78. Nor is that conclusion disputed here; indeed, the EC acknowledges that imports increased by
38 per cent during the 1993-1997 period.  The EC’s point of contention lies in its claim that US
demand also increased by 18 per cent and that import market shares “only” went up by 9 percentage
points during the period.  The EC argues that th e USITC was wrong in allegedly downplaying  these
two other trends.53   Nowhere does the EC explain, however, why the USITC was required to give
precedence to these trends.  Nor does the EC address why, even if the USITC did, these trends do notthemselves demonstrate that imports increased over the period in question.
79. In particular, the EC advances no reason why a rise in imports relative to consumption should
be given greater weight than the absolute rise in imports and their rise relative to production.
Article 2.1 requires a finding that the product u nder consideration is being imported in “increased
quantities, absolute or relative to production.”  Article 4.2(a) lists both “the rate and amount of the
increase in imports of the product concerned in absolute and relative terms” and “the share of the
domestic market taken by increased imports” as relevant factors.  It does not specify that either factor
is to be given greater weight.  The EC advances no basis in the Agreement for concluding that the
dramatic 38 per cent increase in imports on the US industry must be regarded as negated by the muchsmaller 18 per cent increase in US demand.
80. Moreover, contrary to the EC’s contentions, the USITC did not downplay the trends in
demand and in relative market shares, but rather considered them at length in its determination.
54  As
the USITC concluded, the increase in the share of US consumption taken by imports from 50.1 percent in 1995 to 60.2 per cent in 1997 was a sharp increase.
55  Again, the EC advances no reason why
this finding would not support the determination that the USITC reached.
81. Instead, the EC presents a different analysis of the evidence that simply fails to address the
USITC’s findings concerning the critical change in the market in 1996 and 1997 and that employs amethodology that the EC itself rejects.  The EC’s submission contends that since import market shares
were approximately nine percentage points higher at the end of the five year period than at the
                                                     
49 US Exhibit 4 at I-12.
50 US Exhibit 4 at I-10.
51 US Exhibit 4 at I-10.
52 US Exhibit 4 at I-10; see also  Transcript of hearing before the USITC on 16 December 1997.  US
Exhibit 8.
53 EC First Submission at ¶ 60.
54 US Exhibit 4 at I-16, I-22 to I-23.
55 US Exhibit 4 at I-16.WT/DS166/R
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beginning, it is appropriate to divide that figure by five, from which the EC derives the conclusion
that imports increased by less than 2 per cent per year.56   This calculation is misleading, since, as the
USITC found, the increase in import market shares took place in the last two years of the period.
Moreover, this analysis is based on a comparison of  indicators at the beginning of the five year period
(1993) with those at the end of the period (1997) despite the fact that in its submission the ECcriticizes reliance on end-point comparisons.
57  T h e  Argentina -- Footwear Panel raised similar
questions concerning such a methodology.58  In short, the EC’ s proposed alternative analysis is
contrary to its own arguments and certainly is not required by the Agreement.
82. In connection with its claim that imports did not increase (or at least not as much as the
USITC found), the EC also asserts that the United States breached its obligations under Article XIX
of GATT and Article 2 of the Safeguards Agreement in that the United States allegedly violated “the
principle of parallelism” recognized by the Argentina -- Footwear  Panel.59  In support of its claim, the
EC cites to what it deems to be relevant language in the Footwear  Panel’s discussion of a customs
union’s application of a safeguard measure.  The EC provides no arguments as to why the citedlanguage would be relevant in this case, stating only that “[e]ven if NAFTA is not a customs union,
the EC does not see any reason why this specific principle should not apply equally to free-trade
areas..
60
83. The United States submits the fact that the EC “does not see any reason” cannot constitute the
“evidence and arguments” the Korea -- Dairy Panel recognized as essential for a complaining party to
offer in order to meet its burden of proof.  The EC’s statement is nothing more than a mere assertion,and as the Appellate Body  stated in  US -- Woven Wool Shirts , “we find it difficult, indeed, to see how
any system of judicial settlement could work if it incorporated the proposition that the mere assertion
of a claim might amount to proof."
61  Indeed, the inadequacy of the EC’s statement is highlighted by
the fact that the Footwear  Panel, in response to arguments raised by Argentina on NAFTA and the US
wheat gluten safeguard in particular, recognized “that MERCOSUR is a customs union, whereasNAFTA is a free-trade agreement, . . . "
62  Moreover, the Panel went on to state its view that the
provisions of Article 2.1 on which it relied concerned exclusively customs unions .
84. Despite the fact that the language cited by the EC is ambiguous as to whether it applies in this
case, the United States’ nonetheless submits that its actions are consistent with the SafeguardsAgreement.  While the United States conducted a global investigation and examined imports from all
sources, its determination did not attribute inju ry from NAFTA imports to third countries.  The
circumstances examined by the Footwear Panel were wholly different.  In that case, Argentina
examined imports from all sources, including from Brazil.  Argentina concluded that all of those
imports were causing serious injury, but it then fashioned a remedy that excluded Brazilian imports.
85. The United States’ investigation simply cannot be compared to Argentina’s.  In the words of
the EC, “the US wheat gluten case is radically different to [Argentina’s]."
63  The USITC”s finding
make clear that, unlike in  Argentina -- Footwear , the injury determination was not based on effects
                                                     
56 EC First Submission at ¶ 60.  Even taken at face value, the EC’s calculations are wrong.  Given five
years of data, there can only be four increases from a previous year, and so such an annualized average would be
divided by four rather than five.
57 EC First Submission at ¶ 55.
58 The Panel noted that “an end-point- to-end-point comparison, without consideration of intervening
trends, is very unlikely to provide a full evaluation of all relevant factors as required.”  Argentina – Footwear at
¶ 8.217.
59 EC First Submission at ¶ 55.
60 EC First Submission at ¶ 55.
61 US -- Woven Wool Shirts at  ¶ IV.
62 Argentina – Footwear  at ¶  8.100.
63 Argentina  – Footwear at ¶ 5.123.WT/DS166/R
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ascribable to Canadian imports.  The USITC found that imports from Canada did not contribute
importantly to the serious injury caused by imports because Canadian imports declined significantly
during the period of investigation, while overall imports increased.64  The USITC further found that
the 1996-1997 import surge was largely caused by the massive increase in EU wheat gluten
capacity.65  Moreover, the USITC also found that Canadi an imports generally oversold the US market
during this period.66  By contrast, in Argentina -- Footwear , there were no such finding or
determination as to the imports from Mercosur.67
86. The USITC’s methodology in examining NAFTA imports is consistent with the Safeguards
Agreement.  Indeed, the EC itself provides the rationale for the methodology employed; In itssubmission to the Argentina -- Footwear Panel, the EC expressed its view that an importing Member
could – and indeed should  – investigate all imports into its territory in order to “put together a
complete file."
68  The EC then specifically noted that “the United States made separate determinations
concerning imports from NAFTA members and concluded that imports from that source and, inparticular, Canada did not cause injury.  If Argentina had applied the same procedure as the UnitedStates in the wheat gluten case, then Argentina woul d not have been able to come to the conclusion it
did..
69  The United States agrees with the EC on both counts.
87. Accordingly, the United States respectfully submits that the EC's claim with respect to
increased imports is unfounded.
Sales
88. The USITC report shows that the USITC examined the evidence regarding changes in the
level of US sales in determining that the domestic industry was seriously injured.   The USITC report
found that domestic industry shipments initially rose and then fell, and were at their lowest levels in
1996 and 1997.70  The cited record data show that domestic producer shipments  were 121.4 million
pounds in 1993, 132.4 million pounds in 1994, 127.5 million pounds in 1995, but then declined to
108.7 million pounds in 1996, while increasing to 117.2 million pounds in 1997.71
89. Despite the data showing the lows in shipments in the last two years of the period, the EC
nevertheless  points to the fact that domestic shipments increased  in 1997 from their 1996 levels, andargues that this shows the industry is not suffering serious injury.
72   However, as the USITC correctly
observed, 1997 shipments, despite the slight improvement from 1996, were still lower than figures for
any year, 1993-95, that preceded the import surge.  This represented a fall of 8 per cent from the
levels only two years earlier.  The USITC recognized that industry performance in some factors
improved in 1997 over the disastrous performance of 1996 but concluded that such improvementswere isolated and did not change the conclusion that the industry was seriously injured.
73  The EC has
advanced no reason why these findings may not under the Safeguards Agreement support an injury
determination. As the USITC stated, it evaluates such recent data in a broader context, and an upturn
                                                     
64 US Exhibit 4 at I-19.
65 US Exhibit 4 at I-22, I-29
66 US Exhibit 4 at I-29.
67 Argentina -- Footwear at ¶ 8.102.
68 Argentina – Footwear at ¶ 5.130.
69 Argentina -- Footwear at ¶ 5.131.
70 US Exhibit 4 at I-13.
71 US Exhibit 4 at II-16, Table 6.
72 EC First Submission at ¶ 61.
73 US Exhibit 4 at I-14WT/DS166/R
Page 248
in one factor in the most recent year does not by itself mean that serious injury does not exist.74  The
recent  Argentina -- Footwear  panel decision reached an identical conclusion.75
90. In addition, the EC quotes a statement in the USITC Report showing that the domestic
shipments quantity in the last quarter of the last year of the period (1997) was higher than the quantityin the first quarter of the first year of the period (1993) and argues that this refutes the serious injury
finding.
76  This contention is contrary to the Argentina -- Footwear  panel decision in not one but two
respects. First, the EC again relies on an end-point comparison while ignoring the intervening trends.
Second, it again takes a recent upturn (involving only a single quarter, not even a year) out of context
to argue that the upturn by itself disproves serious injury.  Thus, the EC’s contentions simply do notbear on the applicable standard of review.
Production
91. In its determination, the USITC found that domestic production had declined, and that this
decline supported the finding of serious injury.  The USITC found that production increased early in
the period from 128 million pounds in 1993 to 143 million pounds in 1995, but then fell sharply to
112 million pounds in 1996, while increasing somewhat to 122 million pounds in 1997.
77
92. Nevertheless, the EC now seeks to minimize these facts.  It emphasizes that production fell in
only one year (1996) and characterizes the decline as “a normal fluctuation,” contending that the
reason for this 1996 decline was that demand had been especially high in 1994 because of aweather-induced deficiency in protein content in wheat crops in 1993.
78  These contentions are not
supported by the facts and ignore the USITC’s determination.  Certainly the USITC was reasonable in
not regarding the production decline as a normal fluctuation; the EC provides no reason for
concluding otherwise. As the USITC concluded, the decline in 1996 was a sharp decline of 21.4 per
cent from 1995.  Even after the modest increase in 1997, production was still 15 per cent below thepeak in 1995, just before the import surge, and, as the USITC noted, 4.5 per cent below the previous
lowest level in the five-year period.
79
93. The EC’s suggested explanation for the sharp 1996 decline also does not withstand scrutiny,
ignoring as it does the USITC’s findings on trends in demand.  The EC claims that demand had beenabnormally high in 1994 because of a wheat protein deficiency, so under this theory demand
presumably would decline significantly after the deficiency problem went away, especially in 1996,
thereby causing the sharp decline in production.  However, US demand (as measured by total US
apparent consumption) declined only slightly in 1995 (0.4 per cent), and then actually increased in
1996 and 1997 above the “especially high” 1994 levels.
80  Thus, the EC’s explanation fails to explain
anything.
94. The EC’s purported explanation simply disregards that a major aspect of the USITC’s
analysis concerned why domestic production and other key indicators were declining (to their lowest
levels ) in 1996-1997 just as domestic demand was increasing (to its highest levels).81   The industry
was unable to increase production and take advantage of the increased demand in 1996-1997 during
the period of greatest import penetration.  The EC’s arguments not only fail to account for the facts
                                                     
74 US Exhibit 4 at I-12.
75 Argentina – Footwear at ¶ 8.214.
76 EC First Submission at ¶ 61, quoting  US Exhibit 4 at II-32.
77 US Exhibit 4 at I-12 to I-13.
78 EC First Submission at ¶ 62.
79 US Exhibit 4 at I-12 to I-13.
80 US Exhibit 4 at II-25, Table 17.
81 US Exhibit 4 at I-16WT/DS166/R
Page 249
but also fail to put forward any basis for concludi ng that the USITC acted improperly in finding that
the decline in production supported a determination of serious injury.
Productivity
95. The USITC examined data regarding worker productivity, found that it was at its highest level
in 1994, and its lowest level in 1997, and concluded that this decline was attributable to the decline in
capacity utilization, and was a negative factor supporting the serious injury finding.82  W h i l e
admitting that the USITC did evaluate worker productivity, the EC claims that the USITC erred in
failing to take into account capital investment, and in failing to separately analyze the productivity ofcapital.
83  The EC does not suggest why an analysis of worker productivity does not satisfy the
requirement of Article 4.2(a) to consider productivity.
96. In any event, the USITC did not fail to take into account capital investment.  The USITC
assembled and analyzed data regarding the capital investments in the industry, especially the capitalprojects adding production capacity.
84  The USITC analyzed  the effect of these new capital projects
on capacity utilization rates.85  As noted, during the import surge, production declined sharply by
21.4 per cent in 1996, and while it increased somewhat in 1997, it was still 15 per cent below 1995
levels.
97. It is simple mathematics that if production declines (as it did in 1996-1997 from 1995  levels),
while the amount of capital in the industry increases (as it did from the capital projects addingcapacity), the productivity of capital will correspondingly decline.   Thus, since the USITC did
analyze worker productivity, and did also analyze the capital projects adding capacity and the effects
of those capital projects on industry performance, the EC’s complaint that the USITC did not do an
explicit calculation of “capital productivity” and therefore did not adequately examine productivity, is
without merit.  In any event, since the productivity of capital demonstrably declined in 1996-1997, theEC’s complaint is only that the USITC did not separately enumerate declining capital productivity as
another negative factor supporting the serious injury finding, rather than that further analysis might
have argued against the serious injury finding.
Capacity Utilization
98. The USITC found that capacity utilization fell significantly, from 78.3 per cent in 1993 to
42.0 per cent in 1996, then rose slightly to 44.5 per cent in 1997.  The USITC further noted that some
of the decline was attributable to an increase in capacity to produce wheat gluten in anticipation of an
expected increase in demand.  Most of this capacity increase was in place by June 1995, beforeimports increased.
86
99. The EC argues that, given the increased production capacity, the decline in capacity
utilization was almost entirely attributable to the capacity increase and was not connected with the
import surge.87  While this was obviously true for the period up to June 1995, as the USITC stated, it
was, as the USITC also found, demonstrably not true for the crop years 1996 and 1997.  The bulk of
the decline in capacity utilization after 1995 was attributable to the decline in production associated
with the import surge, not to the increase in capacity.
                                                     
82 US Exhibit 4 at I-14.
83 EC First Submission at ¶ 73.
84 US Exhibit 4 at II-21 and Table 12.
85 US Exhibit 4 at I-12.
86 US Exhibit 4 at I-12.
87 EC First Submission at ¶¶  63-64.WT/DS166/R
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100. Capacity utilization dropped sharply in 1996, the first year of the import surge, from 56.2 per
cent in 1995 to 42.0 per cent.  While it improved slightly in 1997 to 44.5 per cent, utilization was still
well below the 1995 level.  As noted above, production also fell sharply in 1996, and while it
increased somewhat in 1997, it was still 15 per cent below the pre-import 1995 levels.  However, with
the increase in production capacity largely but not entirely completed in 1995, the remaining increasein capacity was much smaller, only about 8 per cent from 1995 to 1997.
88 Thus, the decline in
capacity utilization after 1995 is far more attributable to the 15 per cent decline in production
(associated with the surge in imports) than it is to the modest 8 per cent increase in capacity.  As the
USITC concluded, the capacity utilization rate would have been much higher in 1996-1997 if there
had been no surge in imports.  The USITC found (notwithstanding the improvement from 1996) thatcapacity utilization in 1997 would likely have been at 61 per cent of capacity rather than at the 44.5
per cent that it turned out to be.
89 .The EC nowhere provides a basis for concluding that this finding is
not reasonable.  Once again, the EC’s arguments on this factor ignore the significant difference that
the USITC found to exist between the 1996-97 time frame and earlier periods covered by the
investigation.
101. The EC contends that “the US authorities fail  to explain why an industry allegedly suffering
‘serious injury’ would be increasing its production capacities when it is already operating at
substantially less than full capacity."90  These criticisms do not detract from or even address the
USITC’s specific findings.  First, as the USITC found, industry demand projections turned out to be
largely correct, as the US demand did increase significantly in 1996-1997, but that demand was
satisfied by imports, which domestic producers did not anticipate.91  Second, as the USITC stated and
the EC admits, the vast bulk of the increased capacity was added by June 1995, before the import
surge, and thus before the industry was suffering from serious injury.92   The EC fails to show why
reliance on the fall in capacity utilization in 1996 and 1997 was unreasonable.
Profits and Losses
102. The USITC found that the industry operated at a profit during 1993-1995, and then operated
at a loss in 1996 and 1997 during the period in which the surge in imports occurred. The EC does not
contend that these findings may not support an injury determination.  Rather, it faults the USITC’s
collection of information on this issue, once again, however, without alleging any basis for findingthat the USITC’s investigation or determination are in violation of the Agreement.
103. The USITC received usable financial data from three of the four domestic producers of wheat
gluten.  As the USITC explained in a footnote on page I-13 of its report, the fourth firm, ADM,
provided only combined data on its US and Canadian wheat gluten and wheat starch operations.  TheUSITC noted that the three firms that provided data accounted for a substantial majority of domestic
production of wheat gluten.  The USITC found that each of the firms produced wheat gluten and
wheat starch in a joint production process, as well  as other by-products or related products.  The
USITC stated that it carefully considered respondents’ arguments about how the domestic industry
allocated financial data, and based on a careful review of the allocation methodologies found theallocations to be appropriate.
                                                     
88 US Exhibit 4 at C-4, Table C-1.  Furthermore,  the trend after 1995 in utilization rate corresponded
precisely to the trend in production (sharp decline in 1996, modest increase in 1997, but still well below 1995
levels), but by contrast did not correspond at all to the trend in capacity (small increase in 1996, even smaller
increase in 1997).
89 US Exhibit 4 at I-12.
90 EC First Submission at ¶ 64.
91 US Exhibit 4 at I-17.
92 US Exhibit 4 at I-12; EC First Submission at  ¶ 63WT/DS166/R
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104. The USITC also found that profitability reflected the trend in average unit value prices, which
likewise initially rose and then fell.  Average unit values, like profitability, peaked in 1994 and then
declined and were at their lowest level in 1997.93  Since all producers, including ADM, provided unit
value data, the parallelism between unit value and profitability data tends to confirm that the
profitability information that the USITC received was representative of the experience of allproducers.
105. In paragraphs 65-67, the EC complains that the USITC had full period data from only two
domestic producers, since one entered the market in 1996 and ADM was unable to provide separate
data.  The EC does not explain, however, how such information limitations might render the USITC’s
determination in violation of the Safeguards Agreem ent.  Certainly the fact that the USITC did not
obtain information from one producer for a period before it became a producer points to no
inadequacy in the USITC’s investigation.  Likewise , the EC cannot claim that the USITC erred in not
including in its profitability figures for the United States industry information from one producer that
also included profitability information on its Canadian operations.  The Agreement does not assumethat an investigation will obtain perfect data coverage, since Article 4.1(c) provides specifically that a
“domestic industry” may be understood to consist of “those whose collective output of the like or
directly competitive products constitutes a major proportion  of the total domestic production of those
products.”  (Emphasis added).  The Safeguards Agreement does not require 100 per cent data
coverage.  Even if the USITC had been able to obtain information on all factors from only two out of
the three producers for part of the period and three out of the four producers for the latter two years,
its data coverage would have satisfied the requirements of the Agreement.  Here, however, it receivedusable data from all producers except with respect to a particular factor; i.e., profitability.  Particularly
where other information confirms the representativeness of that information for the industry as a
whole, no basis exists for finding the USITC determination in violation of the Agreement.
106. The EC’s complaint that the USITC report is inadequately explained, because the USITC did
not reveal the particular means that producers used to allocate financial data between wheat gluten
and related production, is based on its apparent misunderstanding of this Panel’s role.  As discussed
above, past panels have recognized that it is not a panel’s function to verify each piece of information
used by a competent authority.  Likewise, an authority’s determination cannot be found to be in
violation of the Agreement because it does not disclose information that is by its nature confidential.Here the EC does not dispute that the cost allocation methodology used by each producer constituted
sensitive business confidential information.  The USITC’s report shows that it took careful
precautions to assure the accuracy and probative worth of the information provided.
107. As the USITC made clear in its report, it did not leave the allocation of financial data solely in
the hands of domestic wheat gluten producers.  The USITC requested domestic producers that do not
maintain separate records for wheat gluten to explain their allocation methodology and provide
worksheets with their calculations.  Respondents in the investigation had access to the questionnaire
responses of domestic wheat gluten producers, including their allocation methodologies, under
protective order, and had an opportunity to bring to the USITC’s attention any concerns about theirallocation methodologies.  The USITC specifically addressed the allocation issue in its report.  It
noted the arguments made by respondents about allocations made by domestic producers in providing
financial data on their wheat gluten operations, stated that it had carefully reviewed the allocation
methodologies, and made a judgment that the allocations were appropriate.
94  The EC provides no
argument that the Agreement requires more.
                                                     
93 US Exhibit 4 at I-13.
94 US Exhibit 4 at I-13.WT/DS166/R
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Employment
108. As required by Article 4.2(a), the USITC reviewed the data related to employment in the
industry, noting that there had been some recent layoffs and there was underemployment in the
industry (average number of hours worked per worker declined), but the overall number of employeesand hours worked increased.  The USITC also noted that the industry was capital-intensive and
employed very few production workers. Ultimately, when summarizing the principal factors
supporting the finding of serious injury, the USITC did not not place affirmative reliance on the
employment data.
95
109. The EC’s argument that the evidence on employment does not support a serious injuryfinding completely ignores the fact that the USITC did not cite employment in the list of factors  in
support of that finding.  The EC does not contend th at without relying on this factor the USITC could
not have properly reached an injury finding.  Indee d, the EC itself appears to agree that labour should
be regarded as a relatively minor factor in this capital-intensive industry.
96  In any event, the mixed
picture provided by the data regarding employment (which included layoffs and underemployment)
certainly could not be characterized as favorable, and does not refute the serious injury finding.
(ii) Factors not Enumerated in the Safeguards Agreement
110. In addition to the factors specifically enumerated in Article 4.2(a), the EC also raised
objections concerning factors not enumerated in Article 4.2(a), specifically concerning wages,
inventories, new entries/expansion, and price.   The EC's arguments concerning both the authority'sfindings as to these factors, and the weight that should be accorded those factors, do not detract from
the USITC's determination.
Wages
111. The USITC reviewed data regarding wages, and without characterizing wages as a positive or
negative factor, stated in finding serious injury that “hourly wages had been relatively flat."
979
112. The EC contends that the evidence regard ing wages shows that there was no connection
between imports and wages, and that there was no serious injury at all.  Once again, the EC hasmisread the USITC’s report.  The USITC determin ation did not cite any connection between wages
and imports.  Furthermore, the EC  incorrectly states that hourly wages increased three times during
the period, when the USITC report shows only two increases (from 1993 to 1994, and from 1996 to
1997), as well as declines from 1994 to 1996.
98  In making its finding, the USITC properly considered
the evidence regarding wages, and characterized them as relatively flat.  The EC’s arguments are notcontrary and in any event cannot transform this evidence into a refutation of serious injury.
                                                     
95 US Exhibit 4 at I-13 to I-14.
96 EC First Submission at ¶ 73.
97 US Exhibit 4 at I-14.
98 EC First Submission at  ¶ 70; US Exhibit 4 at II-17.WT/DS166/R
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Inventories
113. In finding serious injury, the USITC examined the level of inventories, stating that they more
than doubled during the period, and that the ratio of inventories to domestic shipments likewise
doubled.99  The EC contends that inventories do not support a serious injury finding, because, it
claims, the entire increase took place in 1995 before the import surge, and inventories declined in
1996-1997 from the 1995 level.100
114. However, a review of the inventory data shows that, while inventories were at their highest
level in 1995, inventories and the ratio of inventories to shipments were considerably higher duringthe import surge in 1996-1997 than they were at the beginning of the period.  Inventories were 4.5
million pounds in 1993, 7.1 million pounds in 1994, 13.9 million pounds in 1995, 11.5 million pounds
in 1996 and 9.1 million pounds in 1997.
101  Thus, despite the reduction in inventories in 1997, they
were still twice as much as they had been in 1993 at the beginning of the period.  Similarly, the ratio
of inventories to shipments was 3.7 per cent in 1993; 5.4 per cent in 1994; 10.9 per cent in 1995;10.6 per cent in 1996; and 7.8 per cent in 1997.  Once again the ratio was over twice as great as it had
been in 1993.  Thus, the USITC was correct in noting that end of period inventories had more than
doubled.   While the initial rise in inventories occurred in 1995, and inventories declined in 1996 and
1997, inventories in those last two years were still at much higher levels than at the beginning of the
period. Any review of the state of the industry as of 1996-1997 would have to characterize the
abnormally high level of inventories (particularly in relation to shipments) as a negative factor, and
the USITC properly did so in finding serious injury.   In any event, inventory levels are dependent onthe relationship between production and shipments, both of which declined during the period.  The
USITC properly gave more weight to these factors than to inventories.
102
New Entries/Expansion
115. The EC claims that the facts that there was a new entrant into the market and that there were
plant expansions during the period show that there was no serious injury.103   As a legal matter, the EC
does not suggest why this fact should be persuasive, much less dispositive.  On the evidence, the EC
leaves out key facts.  Although it emphasizes that Heartland entered the market in 1996, urging that it
would be “incomprehensible” to enter the market at a time the industry was being seriously injured,the EC omits that construction of the plant began in 1993, long before the import surge and serious
injury.
104  Similarly, the EC stresses upgrades of Midwest’s Atchison plant in 1996 and 1997, but
omits to mention that this was part of a staged series of upgrades that began in 1992, and continued in
1994 and 1995, before the import surge.105  Thus, the EC’s position relies on selective use of evidence
while ignoring evidence to the contrary.  Furthermore, the USITC did fully investigate and analyzethe facts regarding industry entry, expansion and modernization.  As it found, many of these  projects
were designed to enable the domestic producers to increase efficiency and lower their costs so they
could compete with imports.
106  The EC does not dispute these findings.107
                                                     
99 USITC Report I-13.
100 EC Submission at  ¶ 71.
101 US Exhibit 4 at II-16, Table 7
102 The USITC did not specifically cite inventories as a factor supporting its causation determination.
US Exhibit 4 at I-16.
103 EC First Submission at   ¶ ¶ 74-75.
104 US Exhibit 4 at II-8.
105 US Exhibit 4 at II-6.  The EC also fails to mention that an ADM plant opened and then closed
during the period.  US Exhibit 4 at II-8.
106 US Exhibit 4 at I-24 to I-25.WT/DS166/R
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Price
116. Notwithstanding the USITC’s lengthy and detailed causation analysis, the EC, in
paragraph 82 of its submission, asserts that the USITC did not fulfill its obligation to publish adetailed analysis of the case or a demonstration of the relevance of the factors examined.  It then goes
on to suggest, in paragraph 82, that pricing is the only  relevant condition to evaluate and to assert that
the USITC’s finding on EU pricing was inconsistent with the evidence in the USITC’s record.
117. The EC is wrong on both counts. As discussed above, the obligation to provide a detailed
analysis of the case entails that a competent authority provide a reasonable explanation of the
conclusions reached.  It does not entail, as the EC appears to contend, that the authority provide in
advance a pointed response to every argument that a member might make in a WTO panel proceeding
following a determination.
118. Nor does the Agreement fairly lend itself to giving pricing analysis the dispositive position
that the EC would give it.  The Agreement in fact  nowhere mentions price.  Although Article 4.2(a)
lists numerous “relevant factors of an objective and quantifiable nature having a bearing on the
situation of [the domestic industry],” price does not appear in that enumeration.    The EC does not
explain why the phrase “under such conditions” in Article 2.1 should be regarded as referring to price
at all, much less why it would give to price a relevance greater than the enumerated factors in
Article 4.2(a).   As has been shown above, the USITC reasonably found the factors listed inArticle 4.2(a) to support its conclusion here.
119. As the panel in Korea–Dairy made clear, pricing is not the only factor to be considered in this
analysis–
Although the prices of the imported products will most often be a relevant factor indicating
how the imports do, in fact, cause serious injury to the domestic industry, we note that there is
no explicit requirement in Article 2 that the importing Member perform a price analysis of the
imported products and the prices of the like or directly competitive products in the market of
the importing country. [Footnote omitted.]
108
120. To the extent that the EC is inferring that th e phrase “under such conditions” in Article 2 of
the Agreement indicates an additional criterion or analytical requirement, the Korea--Dairy panel
reached the opposite conclusion:
We consider that the phrase “and under such conditions” does not provide for an additional
criterion or analytical requirement to be performed before an importing Member may impose
a safeguard measure.109
121. At any rate, the USITC fully considered the evidence on price in this case and found that itsupported an affirmative finding.  The EC’s arguments to the contrary simply misconstrue the
authority’s report.  In noting the relationship between increasing imports and declining EU wheat
gluten prices, the USITC stated as follows–
The ratio of imports to consumption then increased sharply to 58.9 per cent  in 1996 and 60.2
per cent in 1997.  The record reflects that most of this increase consisted of imports from the
                                                                                                                                                                    
107 The other factors that the EC discusses concerning the injury finding and alleges were inadequately
investigated -- co-products and imports by domestic producers -- will be addressed in the following sectionconcerning causation factors.
108 Korea -- Dairy  at   ¶ 7.51.
109 Korea -- Dairy   at  ¶ 7.52.WT/DS166/R
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EU.  The record also shows that imports from  the EU consistently undersold domestic wheat
gluten.  This surge in relatively low-priced imports in 1996 and 1997 coincided with the
decline in industry performance. [Emphasis added, footnotes omitted.]110
122. As is made clear by the sentences that precede the sentence containing the phrase“consistently undersold,” the phrase refers to underselling during 1996 and 1997 when the surge in
imports occurred and industry performance was declining.  In fact, in that period, EC imports
undersold US wheat gluten in every quarter during th at period by margins of 3.4 per cent to 16.7 per
cent, except for one quarter when there was no margin of difference.
111
123. The evidence in the USITC record that the EC cites as contradicting the USITC finding infact supports the USITC’s conclusion.  All six of the quarters in which the EU wheat gluten oversold
the US product occurred during 1993, 1994, and 1995, before  the surge in EU imports.
112  Thus, the
shift to a consistent pattern of underselling coincided with the surge in EU and total imports.
124. As the USITC also found, profitability reflected the trend in average unit value prices, which
initially rose and then fell, reaching their lowest levels in 1997.113  The EC argument in paragraph 83
that increased imports cannot be the cause of the decline in domestic unit sales values because the
value of shipments fell in 1995, before the surge in imports, ignores other forces that the USITC
recognized were at work in the market place before 1996.  Consumption fell in 1995.  However, when
consumption rose in 1996 and then again in 1997, the patterns existing in 1993 through 1995 would
suggest that unit prices would have risen.  Instead, they fell in the face of increases in imports of 22per cent in 1996 and 13.5 per cent in 1997.  The evidence is entirely consistent with the USITC’s
findings concerning the effects of increased imports.
(iii) Other Asserted Causal Factors
125. Article 4.2(b) requires that a Member not attribute to increased imports injury caused by other
factors.  This is not a case in which it can reasonably be said that the competent authority did not
address the issue of other causes of injury.  The USITC examined factors other than imports that may
be a cause of serious injury or the threat thereof to the domestic industry and included such findings in
its report.  The USITC examined explicitly each other possible cause of injury advanced by the parties
before it.  In each case, the USITC found that the asserted cause did not have the effect on theindustry suggested ( e.g., co-production, corn starch competition with wheat starch, importation by
domestic producers, rising prices for inputs) or had only a demonstrably minor role in the serious
injury suffered by the industry (increased capacity).
114  Again, the EC seeks simply to have this Panel
re-find the facts as to each of these factors.  To the extent that the EC asserts that “the evaluation of
other factors in the USITC report did not meet the standard required115, the EC fails to make any
argument grounded in the text of the Agreement or prior panel or Appellate Body decisions that a
particular standard is required.116
                                                     
110 US Exhibit 4 at I-16.
111 Revised USITC Report at II-33.  US Exhibit 10 at II-33.  The quarterly pricing data also support the
USITC finding in another important respect.  For the 5-year period examined, the data show that on an annual
basis, EU prices were at their lowest levels in 1996 and 1997, when the surge in EU imports and total imports
occurred.  Id.
112 US Exhibit 10 at II-33.
113 US Exhibit 4 at I-13.
114 US Exhibit 4 at I-16-18.
115 EC First Submission at ¶ 84.
116 Cf., e.g., US -- Woven Wool Shirts  at ¶ 7.50 (where agreement does not specify method for
considering other causal factors, member re mains free to choose method of assessment).WT/DS166/R
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126. As the very title of this section of the EC’s submission shows, its discussion of these factors
asks the Panel improperly to re-weigh the evidence.  The EC asserts that the USITC gave “insufficient
weight” to certain factors that the EC deems important .  As other Panels have found, however, it is for
the competent authority to decide what weight to give particular factors.117  The USITC specifically
examined each of the other causal factors that the EC now asserts should have led the authority to adifferent conclusion.  The USITC’s findings make clear why it did not reach the conclusion that the
EC urges.  
127. Before addressing further the EC’s allegations concerning these specific factors, it is
important to consider the EC's arguments that the USITC failed to articulate and apply the correctcausation standard. The USITC found that no other factor that might be adversely affecting the wheat
gluten industry was more important than the rapid increase in imports.  As its findings showed, no
factor other than the surge of imports could explain the decline in the performance of the industry as a
whole in 1996 and 1997.
118  To the extent that one other factor -- namely, additions to US capacity --
contributed to the decline in capacity utilization in that period, the USITC demonstrated why it was aless important factor than imports.  Indeed, the USITC specifically identified the relative contributions
to injury of capacity utilization and import.
119
128. The EC nevertheless faults the USITC for not articulating a causation standard and for not
“deducting” the degree of harm caused by non-import factors to determine the precise amount of
injury attributable to increased imports alone.  Both objections are without merit.  The causation
standard relevant to WTO review of an injury de termination is set forth in Article 4.2 (b), which
requires that the “investigation demonstrate[], on the basis of objective evidence, the existence of the
causal link between increased imports of the product co ncerned and serious injury or threat thereof.”
Under Article 3.2, the authority’s report must set fo rth “reasoned conclusions reached on all pertinent
issues of fact and law.”  The USITC determination clearly articulates its reasons for finding “the
causal link” between the increased imports and serious injury.  Nothing in those provisions requiresthat an authority articulate a further “causation standard.”  Indeed, nothing in the Safeguards
Agreement requires the competent authority to articulate the causation standard at all; Article 4.2(b)
requires merely that it be applied.
129. The EC’s further objection -- that the USITC should have “deducted the injury caused by
other factors"
120 in order to determine the precise extent of injury caused by imports -- likewise has no
support in the Safeguards Agreement.   Article 4.2(b) sets forth the relevant obligation with respect to
other causes of injury: “When other factors than increased imports are causing injury to the domestic
industry at the same time, such injury shall not be attributed to increased imports.”  As has been
discussed, the USITC’s determination more than satisfied this requirement.  Not only did it notattribute to increased imports the effects of other factors, it specifically addressed each asserted
                                                     
117 Korea – Dairy  at ¶ 7.30.
118 US Exhibit 4 at I-16-18.
119 As reflected in the USITC Report, the USITC conducted this analysis under provisions of US law
that provide that USITC must find not merely the causal link to the serious injury, but also that imports must be
a “substantial cause.” 19 USC. § 2252(b)(1)(A).   It defines “substantial cause” as “a cause which is important
and not less than any other cause.” 19 U.S.C. § 2252(b)(1)(B).   The EC makes some statements regarding USlaw, but the EC did not challenge US law thus such claims are not within the Panel’s terms of reference.  See EC
First Submission at  ¶ 128.  The only matter with respect to Articles 2 and 4 that has been referred to this Panelis whether the USITC’s findings and conclusions comport with the cited articles.  See  Guatemala --
Anti-Dumping Investigation Regarding Portland Cement from Mexico , AB-1998-6, at ¶ 73 (2 November 1998)
(“the ‘measure’ and the ‘claims’ concerning that measure constitute the ‘matter referred to the DSB’ which
forms the basis for a panel’s terms of reference.”).  The United States’ statutory provisions requiring the findingthat imports are a “substantial cause” completely satisfy the standard in Article 4.2(c) that the “causal link” toserious injury.
120 EC First Submission at ¶ 104.WT/DS166/R
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alternative cause, finding that some were not injuring the domestic industry “at the same time” and
specifying why others could not be regarded as more than relatively minor causes of injury.121
130. The history and context of Article 4.2(b) demonstrate why the EC’s proposal that the USITC
must somehow quantify and deduct from total injury the specific effects caused by other factors is notrequired.   The terms used in Article 4.2(b) originate in Article 3:4 of the Agreement on
Implementation of Article VI of the General Agreement on Tariffs and Trade (also known as the
Tokyo Round Anti-Dumping Code.)   Article 3:4 of the Tokyo Round Code stated, “There may be
other factors which at the same time are injuring the domestic industry, and the injuries caused by
other factors must not be attributed to the dumped imports.”  Before the adoption of Article 4.2(b), thequoted language from Article 3:4 had been interpreted in US - Salmon.   In that case, the Panel flatly
rejected the very argument that the EC makes here, stating that the requirement “not to attribute
injuries caused by other factors to the imports ... did not mean that, in addition to examining the
effects of imports under Article 3:1, 3:2 and 3:3, the USITC should somehow have identified the
extent of injury caused by these other factors in order to isolate the injury caused by these factors
from the injury caused by the imports from Norway."
122  Had the negotiators of the Safeguards
Agreement intended to impose the requirement that the EC now suggests, they would not have chosen
to copy language that had been interpreted as not imposing that requirement.
131. Indeed, the United States -- Salmon  panel considered that the sentence of the Antidumping
Code on which the relevant provision of the Safeguards Agreement is modeled “did not contain an
express general requirement to consider all possible factors other than the imports under investigationwhich might be causing injury to the domestic industry."
123  That panel contrasted the provisions of
the Antidumping Code that, like Article 4.2(a) of  the Safeguards Agreement, specified mandatory
factors to examine in determining the effects of im ports, to the provision on other factors, which did
not do so.124   It concluded that the provision on other factors specified no particular analysis.125  The
Safeguards Agreement cannot be read to mandate any different conclusion. The USITC analysis inthis case, which expressly and with particularity examined such other factors, more than satisfies the
requirements in the Agreement.  The EC’s attempt to require a particular means of analysis of other
factors is misguided.
132. Finally, the EC’s objection simply ignores the USITC’ s actual findings.  The USITC
specifically found that if the domestic industry, which had the capacity to do so, filled the growth in
demand in 1996 and 1997, instead of the increased imports doing so, the industry would have
operated at 61 per cent of capacity instead of 44.5 per cent as it actually did.
126  Under these
conditions, domestic production, instead of being below all pre-1996 levels, would have stood at
166.3 million pounds in 1997, well above the prior high of 142.6 million pounds.  Rather than havingfallen below all levels prior to the surge in imports, capacity utilization in 1997 would have exceeded
1995 levels.
127   In short, the fall in virtually all indicators of industry performance in 1996 and 1997
compared with prior periods, which the USITC found to constitute serious injury, would not have
occurred. While the United States does not regard su ch findings to be required by the Agreement, they
clearly satisfy the requirements of the Agreement, and the EC does not contest them. The EC has
                                                     
121 See US Exhibit 4 at I-16-17.
122 United States -- Imposition of Anti-Dumping  Duties on Imports of Fresh and Chilled Atlantic
Salmon from Norway, ADP/87, BISD 41s/229  ¶ 555, adopted by the Committee on Anti-dumping Practices on27 April 1994.
123 Id. at  ¶ 552.
124 Id. at  ¶ 550.
125 Id. at  ¶ 551.
126 US Exhibit 4 at I-12, I-17.
127 US Exhibit 4 at II-15, Table 5.WT/DS166/R
Page 258
advanced no reason why these findings -- regardless of the USITC’s specific findings on other
asserted causes -- do not satisfy the requirement of Articles 2.1 and 4.2.
Wheat Protein Levels
133. In paragraph 83 the EC claims that the USITC elsewhere “acknowledges that the price of
wheat gluten is directly related to the protein level in wheat ”, implying that the only factor that counts
in determining the price of wheat gluten is the protein level in wheat.  The USITC made no such
statement.  In support of this claim, the EC refers to a page (page I-23), but not specific text, in the
remedy section of the USITC views.  What the USITC there said was that the protein level of wheat isone of five factors that affect the demand  for wheat gluten.  It noted that a weather-related deficiency
in protein content in the wheat crop during 1993 resulted “at least in part” in an increase in the
demand for and price of wheat gluten in 1994.
128  The USITC also identified four other factors that
affect demand – the level of purchases by pet food producers, increased demand related to the use of
high-speed mixing machines at bakeries, increasing popularity of high-fiber breads and other bakeryproducts that use wheat gluten, and anticipation in early 1997 of the filing of a section 301 complaint.
134. The thrust of the EC’s argument here is that consumption of wheat gluten and the price of
wheat gluten should rise hand in hand.  However, as the USITC’s findings show, this did not happen
in 1996 and 1997.  As the USITC made clear in its causation analysis, the price of US wheat gluten
prices fell in 1996 and 1997 in the face of rising consumption – a fact the EC does not challenge – and
in the face of surging imports.  Thus, even if the protein level of wheat is a critical factor in the priceof wheat gluten, it does not explain why the price of wheat gluten fell in 1996 and 1997 when
consumption was rising.
135. The EC purports to provide evidence in its Ex hibit EC-10 that shows that the wheat protein
content of wheat, and only that factor, determines the price of wheat gluten in the United States.Figure 3 in Exhibit EC-10, which graphs the EC’s construction of wheat gluten prices and wheat
protein premiums, appears to represent the heart of the EC’s argument.  However, figure 3 does not
support the EC’s premise.  Comparing the spread between the price of wheat gluten and the wheat
protein premium in 1993 and 1995, the two normal years preceding the surge in imports, and the
spread in 1996 and 1997, the years in which the surge in imports occurred, it is clear that the spreadwas much narrower in 1996 and 1997.  To have maintained the same spread in 1996 and 1997, wheat
gluten prices would have had to have been substantially higher. They were not because of the surge in
imports.  Thus, the EC’s own analysis does not support its premise.  It is noteworthy that none of the
parties in the USITC’s investigation, including the EU respondents, asserted that a wheat protein
related factor was a more important cause of the serious injury.  Accordingly, there does not appear tohave been a factor to evaluate and there was no need for the USITC to have addressed the issue any
further in its report.
Co-product markets
136. The USITC found, in keeping with Article 4.1(c) of the Safeguards Agreement
129, that the
“domestic industry” producing the like or directly competitive product for purposes of its injury
analysis consisted of domestic producers of all forms of wheat gluten.130  The EC does not object to
this definition of the like or directly competitive product or the industry.  Its arguments, however, at
several points posit that the relevant analysis should properly concern a putative “wheat starch/gluten
                                                     
128 US Exhibit 4 at I-22-23.
129 “[I]n determining injury or threat thereof, a ‘domestic industry’ shall be understood to mean the
producers as a whole of the like or directly competitive products operating with the territory of a Member, orthose whose collective output of the like or directly competitive products constitutes a major proportion of thetotal domestic production of those products.”  Safeguards Agreement Art. 4.1(c).
130 US Exhibit 4 at I-10 to I-11.WT/DS166/R
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industry."131  Although firms that produce wheat gluten also produce wheat starch, it is only their
condition as producers of wheat gluten that is relevant.  Contrary to the EC’s current arguments, the
USITC properly considered “evidence that wheat gluten production decisions are affected by market
conditions in the wheat starch market132,  but did not consider wheat starch and wheat gluten
operations as constituting a single industry. As will be shown below, the EC”s contentions concerningthe effect of developments in the co-product market, insofar as they may have impacted the wheat
gluten industry, are misplaced.
(1) Wheat starch
137. The USITC considered arguments made by EU respondents about co-product markets.  The
USITC found that  wheat gluten production decisions are affected by market conditions in the wheat
starch market.  The USITC examined wheat starch prices and found that such prices, in contrast to
wheat gluten prices, showed a gradual increase over the period of investigation.  In particular, it foundthat weighted-average wheat starch prices were at their highest level of the investigative period in
1997.   The USITC also considered the possible impact on wheat gluten production of competition
between wheat starch and corn starch. The USITC found the relative stability in domestic wheat
starch prices and the gradual increase in such pric es to suggest that competition between corn starch
and wheat starch is not likely to have had much if any effect on wheat gluten production.
133  Thus,
both sets of findings find the logic behind the asserted effects of these factors to be faulty.
138. The EC’s analysis of this issue is contradictory both legally and factually.  First, by
introducing its own exhibits and evidence, the EC is  effectively urging the panel to make its own de
novo determination based on a new record that includes information newly supplied by the EC, rather
than review whether the USITC reached reasoned conclusions based on the record before it. For
example, the information in or relied on in EC exhibits 10, 12, 13 and 14 was not part of the record ofthe USITC investigation.  Accordingly, these exhibits and analysis in the EC’s first submission based
thereon should be disregarded by the Panel. As has been previously discussed, the issue before the
Panel is the adequacy of the analysis performed by the national authority at the time of the
investigation, and this question is to be judged on the basis of the evidence collected and considered
by that national authority.
134
139. Second, the EC, having postulated that surging imports could not have had any effect onprices
135, cannot seem to decide what drove down US wheat gluten prices in 1996 and 1997 at the
same time that US wheat gluten consumption was increasing.  Thus, the EC argues in paragraph 85
that “wheat protein premiums determine the wheat gluten price on the US market” and apparently arecritical to the overall situation of the domestic industry, and yet in paragraph 84 argues that the
conditions in the wheat starch and alcohol markets “are critical to the overall situation of the domestic
industry.”
140. Third, the EC does not demonstrate the relevanc e to the USITC determination of the evidence
that the EC insists should have been addressed.  For example, the EC asserts at paragraph 88 of its
statement that US wheat starch prices fell after 1992-93 until 1994-95 and still remained below
1992-93 levels in 1995-96.  On its face, this statement has no relevance to why wheat gluten
production, shipments, and capacity utilization in 1996-97 were lower than in any year in the period
1993-95.  It is likewise not apparent why it is relevant that wheat starch consumption fell in 1996 and
                                                     
131 See EC First Submission ¶¶ 76, 92.
132 US Exhibit 4 at I-16.
133 US Exhibit 4 at I-16-17.
134 Korea -- Dairy at ¶ 7.30
135 EC First Submission at ¶  84.WT/DS166/R
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1997 below 1995 levels.  Since wheat starch prices rose in this period in which wheat starch
consumption fell, the observation only compounds the dilemma of why during the same period wheat
gluten prices fell while wheat gluten consumption rose.
141. Similarly, the discussion in paragraphs 89, 90, 91, and 92 of the EC’s statement about
competitive conditions between wheat starch and corn starch has no relevance to the findings in
dispute.  The EC does not allege that competitive conditions between wheat and corn starch changed
during the period of investigation.  The EC's argume nt fails to explain how those conditions have any
bearing on the question addressed by the USITC -- namely, what caused the wheat gluten industry's
deterioration in 1996-97.
(2) Ethanol/alcohol
142. The USITC also considered whether conditions in the alcohol market (some wheat starch is
further processed into fuel-grade alcohol (ethanol) and food-grade alcohol) impacted wheat glutenproduction. The USITC noted that while there was evidence that one domestic producer, Midwest,
had reduced its wheat gluten production in 1995 for reasons related at least in part to conditions in the
alcohol market (the firm further processed wheat starch into alcohol), Midwest was but one of four
domestic producers of wheat gluten, and that Midwest’s action in 1995 explains, at most, only part of
the problem faced by one producer.  The USITC concluded that any problems in the alcohol market in
1995 did not explain the significant deterioration in 1996 and 1997 of the other three domestic
producers, who accounted for the majority of domestic production, nor did it fully explain Midwest’sdeclining financial performance on its wheat gluten operations.
136
143. The EC in paragraphs 93-95 claims that the USITC failed to investigate an alleged weakness
in the ethanol market.  The EC refers to the 1995 information considered by the USITC about
Midwest, and also asserts that US ethanol producti on declined severely in 1995.  The EC states in
paragraph 93 that it “clearly appears” (but provides no supporting evidence) that many of the US
producers have their own facilities to produce food-grade and fuel-grade alcohol and ethanol, and
implies in paragraph 94 (but provides no supporting evidence) that Midwest’s level of involvement in
the alcohol market is typical of firms that produce wheat gluten.
144. As is clear, however, from the USITC’s discussion on page I-17 of its report, Midwest was
the only domestic wheat gluten producer that intern ally processes a significant amount of wheat starch
slurry into alcohol-related products.  Thus, the EC  was wrong to suggest that Midwest’s involvement
in alcohol-related products is typical of other domestic firms that produce wheat gluten, and wrong to
imply that any impact that conditions in the alcohol market had on Midwest had a similar impact onother firms that produce wheat gluten.
145. The EC’s focus on data relating to conditions in the alcohol market in 1995 misses the mark.
What happened in 1995 occurred before the surge in wheat gluten imports and period in which the
USITC found the US wheat gluten industry to be seriously injured.  Thus, it does not explain thesurge in wheat gluten imports in 1996 and 1997 or the decline in the performance of the wheat gluten
industry in those years.
146. Finally, whatever change in conditions in the alcohol market may have occurred, it did not
lead to a decline in wheat starch prices or to a decline in Midwest’s sales of alcohol products.  As
stated above, wheat starch prices rose in 1996 and 1997 and were at their highest level at the end of
the period of investigation.  Also, the data on page II-19 of the USITC’s report show that Midwest’s
net sales of alcohol products rose in each year of the period of investigation, particularly in 1996 and
                                                     
136 US Exhibit 4 at I-16-17.WT/DS166/R
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1997.  While Midwest’s net sales of fuel grade alcohol did fall in 1994, they rebounded sharply in
1995, fell modestly in 1996, and then jumped in 1997 to the highest level of the period.
147. Thus, the USITC conducted an appropriate inquiry into matters relating to the impact of
conditions in the alcohol market on domestic production of wheat gluten, and reached reasonableconclusions based thereon.
Input prices
148. The USITC considered whether rising prices of wheat and wheat flour, the major inputs into
wheat gluten/wheat starch production, were a more important cause of serious injury.  The USITC
found that raw material costs rose during the period of the investigation, particularly in 1996 and
1997.  The USITC also found that domestic wheat gluten consumption increased significantly during
this period.  The USITC said that it would have expected the domestic industry to have been able to
pass on these cost increases in view of the fact that demand for wheat gluten is relatively insensitiveto price.  The USITC cited testimony of officials of domestic producers at the USITC hearing to the
effect that historically they had been able to pass on higher raw material costs to their customers.  The
USITC found that unit selling values of domestic wheat gluten, instead of rising to reflect increased
raw material costs and increased demand, fell in 1996 and 1997.  The USITC concluded that this
unusual development was explained by the dramatic increase in relatively low-priced imports during
the period, which had the effect of driving down wheat gluten prices.
137
149. The USITC’s statement that demand for wheat gluten is relatively insensitive to changes inthe price of wheat gluten is supported by the USITC’  s findings with respect to the unique nature of
wheat gluten.  As the USITC found elsewhere in its findings, demand is not sensitive to price changes
in wheat gluten because wheat gluten represents only a small cost of producing downstream products
and generally lacks substitutes.
138  In addition, the USITC found that about 80 per cent of the wheat
gluten consumed in the United States serves as an input by the baking industry to supplement the
gluten in the flours, and that wheat gluten must be  used in the production of high-fiber and multi-grain
breads.139  In concluding that there are no other domestic products that are “like” domestic wheat
gluten, the USITC cited the absence of substitute products with the functional “vitality” of wheat
gluten.140  In addition, information in the USITC’s record and cited at page I-22 of the USITC’s report
shows that all 19 importers/purchasers responding to a question in the USITC’s questionnaire stated
that there were no substitute products for wheat gluten.  The EC’s objection to this conclusion is
based on the USITC’s citation of statements by two US producers that they have been able to pass
raw material costs through to their customers.141   The fact that direct testimony supports conclusions
that the authority would reach from the objective ev idence cannot reasonably be said to detract from
that conclusion.
150. The EC’s argument in paragraphs 97-100 is both inadmissible under the standard of review
applicable in this proceeding and fails to show the relevance of wheat and wheat flour prices in the
United States as an asserted cause of the alleged injury.  The EC alleges that wheat prices rosedramatically during the period of investigation. As proof, the EC selectively cites monthly wheat price
data that it presents in Exhibit 12 to its statement.  The data on which this exhibit is based was not in
the record of the USITC investigation.  Although wheat price data were submitted to the USITC, they
were not presented on a monthly basis.  Indeed, Exhibit 12 contains information from after the period
of the USITC’s decision.  Having accepted that this Panel may not conduct a de novo  review, the EC
                                                     
137 US Exhibit 4 at I-17-18.
138 US Exhibit 4 at I-22.
139 US Exhibit 4 at I-6.
140 US Exhibit 4 at I-10.
141 EC First Submission at ¶ 98,  citing  US Exhibit 4 at I-17.WT/DS166/R
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should not now be heard to rely on new evidence never presented to the USITC.  As indicated above,
such evidence cannot be regarded as undermining the adequacy of the reasoned conclusions that the
USITC at the time of its determination.
151. Moreover, even if the Panel were to conclude  that the EC's submission of new evidence was
proper, the data on which the EC seeks to rely does not support its argument.  The EC cites the price
of wheat in June 1994 and a second price in May 1996, and claims that the price of wheat jumped 95
per cent in the interim and that this huge price increase coincided with the sharp decline in
profitability reported in 1995.   The EC’s focus on industry profitability in 1995 misses the mark as to
the USITC determination.  The USITC’s determination is based on a finding of a surge in imports andserious injury in 1996 and 1997.  Indeed, as indicated above, the USITC found that the domestic
industry operated at a profit in 1995, but operated at a loss in 1996 and 1997.
Imports of Wheat gluten by Domestic Wheat Gluten Producers
152. The USITC considered whether the ongoing importation of wheat gluten by domestic
producers was a more important cause of serious injury than increased imports, and concluded it was
not.  The USITC found that US producers’ imports remained relatively steady during the period of
investigation, and thus domestic producers were not responsible for the surge in imports in 1996 and
1997.
142  In view of this finding, the EC has not established the relevance of its contention that the
USITC should have excluded from its causation analysis the data for imports from Australia by US
producers.  Since the USITC found that such imports could not account for the surge in imports, theirinclusion would not have affected the USITC’s findings concerning the effects of increased imports.
153. The exclusion of such data as proposed by the EC is not required by the Safeguards
Agreement.  Unlike the WTO Antidumping Agreement, which expressly authorizes (but does not
require) a member to exclude imports by related parties under certain conditions
143, the Safeguards
Agreement does not authorize a member to exclude related-party imports or even address the issue.
Thus, the EC cannot establish that the failure to exclude such companies violated the Agreement.
(iv) The EC's Objections Concerning Non-Disclosure  of Confidential Information are not Well-
Founded
154. The EC’s suggestion that a determination may be found inadequately explained under the
Safeguards Agreement due to failure to disclose co nfidential information flies in the face of the
Agreement’s plain terms.  As the EC acknowledges, Article 3.2 prohibits domestic authorities from
disclosing confidential information.  Article 3.2 provides, “Any information which is by nature
confidential or which is provided on a confidential basis shall, upon cause being shown, be treated assuch by the competent authorities.  Such information shall not be disclosed  without permission of the
party submitting it.” (Emphasis added.).  That prohibition contains no exception for disclosure to
WTO panels.  Accordingly, it would be highly anomalous if the Safeguard Agreement placed on
competent authorities a standard for explaining their decisions that required them to disclose
confidential information.  That anomaly would be all the greater in that the sentences quoted aboveforbidding the disclosure of confidential informat ion follow immediately the sentence in Article 3.1
that provides for publication of a report setting forth the authority’s findings and reasoned
conclusions.
155. Article 4.2(c) makes quite clear that the requirement to publish “detailed analysis of the case
under investigation” and “demonstration of the relevance of the factors examined” cannot entail the
                                                     
142 US Exhibit 4 at I-17.
143 See Agreement on Implementation of Article VI of the General Agreement on Tariffs and Trade
1994, Article 4.1(i).WT/DS166/R
Page 263
publication of information treated as confidential under Article 3.2.  Article 4.2(c) states that such
publication shall be “in accordance with the provisions of Article 3.”  A published analysis that
revealed confidential information would violate the provisions of Article 3.  Consequently, the degree
of detail required in the published report cannot be so great as to require the disclosure of confidential
information.  To the extent that the EC suggests th at the Panel must “verify” all information cited by
domestic authorities, its suggestion reflects a misunderstanding of the standard of review, as has been
discussed.
156. The USITC accepts confidential information in safeguard investigations subject to release to
limited categories of representatives only under protective order during the investigations.  USITCregulations and policy give further content to those limitations.
144   In particular, long-established
USITC policy145 provides rules to assure that the publication of aggregate information does not
disclose to competitors the confidential information of any firm.  Under that policy, when confidential
business data come from one or two firms, the published report does not disclose the data.  Moreover,
to assure that aggregations do not disclose a particular firm’s information, aggregate summaries arenot provided when the information comes from three or more firms, but one firm accounts for 75 per
cent of the total or two firms account for 90 per cent.
157. The USITC published report consequently delete s all information from individual companies
and aggregated data where disclosure of aggregates would, under the policy, reflect risk of disclosure
of particular company information.  As the EC’s submission reflects, through much of the period,
there were only three US producers of wheat gluten and one was not able to provide UnitedStates-specific information on aspects of its operations.  In other instances, less than all of the US
producers engaged in the activity concerning which the USITC sought information.  To take an
example of which the EC specifically complains, not all US producers imported wheat gluten during
the period; consequently, published reporting of aggregate data would have risked disclosure to
reporting firms of their competitor's confidential in formation.  Such factors explain virtually all of the
deletions in the USITC’s publication.
158. Careful review of the published report, however, has established that in some instances the
USITC policy was inadvertently misapplied.  In particular, although the profile of companies
reporting certain pricing information at some periods came close to approximating the policy’scriteria, the policy guidelines were not met as to some of the pricing data that were withheld from
disclosure.  Consequently, the USITC has now prep ared a corrigendum to the public report that
provides the portion of the pricing data and certain other information that can be disclosed (attached
as Exhibit 10 to this submission).
146
159. Accordingly, the EC’s concern that the non-disclosure of this information hampered
“verification” of the USITC’s conclusions concerning pricing is based on a misreading of the
USITC’s analysis.  Nevertheless, the United States is confident that this greater degree of disclosure
will allay the EC's concerns.
                                                     
144 See, e.g., 19 C.F.R. 201.6 (g) (“Any business information submitted in confidence and determined
to be entitled to confidential treatment shall be maintained in confidence by the USITC and not disclosed exceptas required by law.”)
145 The internal document disclosing the USITC's approval of that policy in 1981 is attached as US
Exhibit 9.
146 A public version of the revised report will shortly be available to the public from the USITC.WT/DS166/R
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2. The Temporary Import Quota is Neither Being Applied to an Extent Greater than
Necessary nor Improperly Allocated
160. The EC alleges the US safeguard measure is inconsistent with Article 5.1 and 5.2 of the
Safeguards Agreement in that the United States a llegedly failed to apply the measure “only to the
extent necessary” and improperly allocated shares of the quota.  As discussed below, the EC's claimsare without merit.
(i) The Wheat Gluten Safeguard is not Excessive
161. The EC asserts that the temporary quota established by the United States on wheat gluten
imports is inconsistent with the general obligation imposed on Members under the first sentence ofArticle 5.1.  That sentence requires Members to “ . . . apply safeguard measures only to the extent
necessary to prevent or remedy serious injury and to facilitate adjustment.”  An examination of the
USITC’s carefully reasoned explanation for the safeguard measure it recommended, demonstrates that
the measure falls well within that requirement.
Standard of Review:  The Korea – Dairy Test
162. The EC suggests that this Panel should review the temporary wheat gluten import quota using
the test adopted by the Korea – Dairy  Panel, which found that:
Members are required, in their recommendations or determinations on the application
of a safeguard measure, to explain how they considered the facts before them andwhy they concluded, at the time of the decision, that the measure to be applied was
necessary to remedy the serious injury and facilitate the adjustment of the industry.
147
The Dairy  Panel went on to say that its role was
. . . not  to determine for ourselves whether the measure applied by Korea is at a level
that is no more restrictive than necessary to remedy the serious injury and facilitate
adjustment.  Rather, we must evaluate whether in deciding on the type and level of
the measure to be applied, the [competent] authorities considered relevant
information and explained their decision that the measure chosen was no morerestrictive than necessary to prevent or remedy serious injury to the [domestic]
industry and to facilitate the industry’s adjustment.
148
163. The EC purports to embrace the standard of review established in the Korea-Dairy  report.  In
fact, however, the EC’s critique of the safeguard measure at issue in this proceeding invites the Panelto undertake a far more searching inquiry than that contemplated by the Dairy report, and effectively
asks the Panel to substitute the EC’s preferred remedy for that established by the US competent
authorities.  There is no basis either in the text of Article 5, or under the approach adopted by the
Korea - Dairy  panel, for a de novo review of this nature.
164. Nor is there any basis for the EC’s evident, but unsupported, conclusion that the US
competent authorities were obliged to justify the safeguard measure they selected by publishing
detailed findings and conclusions equivalent to those a Member must provide to document its injury
and causation determinations.  Unlike Articles 3 and 4 of the Safeguards Agreement, Article 5
                                                     
147 Korea – Dairy  at ¶ 7.102.
148 Korea – Dairy  at  7.102 (emphasis added).WT/DS166/R
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contains no express requirement that a member publish findings and reasoned conclusions relating to
remedy.149
Article 5.1 Does Not Establish a Proportionality Rule
165. Implicitly recognizing that the USITC report easi ly meets the standard of review set out in the
Korea - Dairy  report, the EC beckons this Panel to embark on an examination of whether the US
temporary import quota meets a “proportionality rule”of the EC’s invention.150  This novel standard
finds no support either in the text of Article 5, let alone in the Korea -- Dairy  Panel report.
166. As an initial matter, the United States notes that the EC’s new “proportionality rule” appearsto be based on the erroneous assertion that a Member wishing to apply the safeguard is obliged to
justify that the proposed measure is “necessary."
151  The first sentence of Article 5.1 makes plain that
the relevant inquiry is not the extent to which the measure is necessary, but the extent to which it is
being applied.152
167. More fundamentally, the text of Article 5.1 provides no support for the notion that the remedyselected must be “proportional” to the serious inju ry, or threat of serious injury, that the competent
authorities have found.   Indeed, the first sentence of that article, does not exclusively focus on the
relationship between the safeguard measure and injury.  It also contemplates that Members will select
measures based on their ability to facilitate industry adjustment.  The EC’s concocted “proportionality
test”  conveniently ignores this second legal prong of Article 5.1, first sentence.
168. More specifically, Article 5.1 is concerned with ensuring that safeguard measures are not
applied beyond the degree necessary to accomplish two purposes:  (1) preventing or remedying
serious injury, and (2) facilitating industry adjustment.  Since the two objectives are not identical, ameasure that remedies serious injury may be insufficient to facilitate adjustment, and vice versa.  By
limiting its discussion to the first prong, the EC improperly reads the second prong out of theprovision.
169. The Dairy  Panel, by contrast, recognized the dual objectives of Article 5.1.
153  In examining
the USITC’s explanation for the safeguard measure it recommended, this Panel should recall that it
was entirely permissible, under Article 5.1, for the USITC  to the propose, and the President to adopt,a safeguard measure that would place the domestic i ndustry in a situation in which it could make a
positive adjustment to import competition.
                                                     
149 Article 3.1 requires that the competent authorities “publish a report setting forth their findings and
reasoned conclusions reached on all pertinent issues of  fact and law.” Article 4 of the Agreement expressly
requires that a Member publish a detailed analysis of its determination of serious injury or threat of seriousinjury.  Article 4(c) requires as follows–
The competent authorities shall publish promptly, in accordance with the provisions of Article 3, a
detailed analysis of the case under investigation as well as a demonstration of the relevance of the factorsexamined.
150 EC First Submission at ¶ 109 (emphasis added).
151 EC First Submission at ¶ 111.
152 Indeed, the Dairy  Panel summarily rejected a similar argument proffered by the EC, concluding that
“[Article 5.1] is not concerned with the decision or even the right of a Member to adopt a safeguard measure.The general authorization for a Member to apply a safeguard measure is found in Article 2.1 of the Agreementon Safeguards, . . . we cannot conclude that Article 5.1 requires a Member to further justify the necessity of
applying a safeguard measure.”  Korea – Dairy  at 7.99.
153 Korea – Dairy  at  ¶ 7.99, 7.102.WT/DS166/R
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The “To the Extent Necessary”  Language in Article 5.1 Applies to a Safeguard Measure in its
Totality
170. The EC misrepresents the Dairy  Panel when it cites that Panel in support of its assertion that
“the requirement to justify [that] the measure chosen is applied only to the extent necessary applies toall elements of the measure: product coverage, form, duration, and level."
154  In fact, the Dairy  Panel
found just the opposite.  While the Panel recognized that a safeguard measure is defined by the
elements of product coverage, etc., it specifically found that “in order to comply with Article 5.1 a
Member must apply a measure which in its totality  is no more restrictive than is necessary to prevent
or remedy the serious injury and facilitate adjustment."155  Thus, the EC’s assertion that each
individual element must satisfy a “necessity” requirement is erroneous.
The Wheat Gluten Import Quota Should be Judged under the Korea - Dairy Standard
171. The USITC’s report fully meets the test set out in the Korea-Dairy  report.  It clearly explains
“how [the US competent authorities] considered the facts before them and why they concluded . . .
that the measure to be applied was necessary to remedy the serious injury and facilitate the adjustment
of the industry."156  A review of the USITC report makes plain that the USITC (1) considered relevant
information, and (2) adequately explained the remedy it recommended.  Based on the explanation
provided by the USITC, the import quota, considered in its totality, plainly conforms with the
requirements of Article 5.1, first sentence.
The USITC Considered Pertinent Information and Clearly Explained Its  Remedy
Recommendation
Form of Safeguard:  The United States Was Not Obliged to Apply a Tariff Safeguard
172. The EC complains at length that the United States should have imposed a tariff remedy
instead of a quota.157  In the EC’s view, the explanations offered by the USITC for the measure it
recommended cannot satisfy the requirements of Article 5.1 because “ . . . a tariff should be used
unless . . . [it] would not be suitable to remedy the serious injury and facilitate adjustment.158  The EC
provides no textual support for its assertion that the Safeguards Agreement indicates a preference for,or requires an explanation of, a choice of one form of measure over another.  In fact, Article 5.1 does
not indicate a preference of any kind and nowhere mandates an explanation of the form of remedy
selected.
173. The last sentence of Article 5.1 says that “Members should choose measures most suitable for
the achievement of these objectives.”  The term in th is context is hortatory rather than obligatory in
nature.  The United States submits, based on the reasons set out below, that its wheat gluten safeguard
measure meets this objective.
174. More importantly for this purpose, however, the silence of Article 5.1 with regard to the form
that definitive safeguard measures should take cont rasts sharply with the language of Article 6 of the
Agreement, which states that provisional measures should take the form of  tariff increases.  Thus,
while Article 6 expresses a preference for tariffs, Article 5.1 expresses no preference for one type of
measure or another.  Plainly, then, the United States was under no obligation to apply a tariff
safeguard in this case.
                                                     
154 EC First Submission at ¶ 115.
155 Korea – Dairy  at ¶ 7.101 (emphasis added).
156 Korea – Dairy at ¶ 7.102.
157 EC First Submission at ¶ 118-125.
158 EC First Submission at ¶ 118WT/DS166/R
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The USITC Adequately Explained Why It Rejected a Tariff and Recommended an Import
Quota
175. In its report, the USITC took pains to describe why it recommended a quantitative restriction
rather than a tariff to remedy the serious injury it had found and to facilitate adjustment by thedomestic wheat gluten industry.  Specifically, the USITC provided three reasons why a tariff remedy
would be inappropriate in the case of wheat gluten imports.
176. First, the USITC found that it would be difficult to estimate the effect that a tariff in any given
amount might have on imports.
159  The USITC observed that there is a co-product relationship
between wheat gluten and wheat starch.  It noted that when demand for wheat starch rises, production
of wheat starch–and consequently wheat gluten–also tends to rise.  The USITC found that any
assumptions about the effect that a tariff on wheat gluten might have on imports of wheat gluten must
take into account both foreign demand for wheat gluten and foreign demand for wheat starch as well
as the effect that this demand will have on the supply and price of wheat gluten.  The USITCconcluded that “[g]iven the large number of variables, we found it impossible to predict the effect of
any tariff increase within an acceptable margin of certainty."
160
177. This explanation plainly articulates one important reason why the USITC considered it
appropriate to impose a measure other than a tariff.  In the USITC’s view, the uncertainties created by
these exogenous factors would make it impossible to predict whether a tariff would prevent or remedy
serious injury and facilitate adjustment.
178. Second, the USITC concluded that it was possible that EU exporters would choose to absorb
any tariff increase while continuing to export the same or greater quantities of wheat gluten to the
United States.  The USITC noted that pricing data indicated that imports from the EU consistently
undersold the US market in 1996 and 1997, and that US market prices in those two years were belowUS producers’ cost of production.  The USITC also noted the higher prevailing market prices of
wheat starch in the EU, which give EU producers more pricing flexibility than US or other foreign
producers.
179. The USITC also cited evidence indicating that EU capacity to produce wheat gluten increased
by 44 per cent from 1993 to 1997 and was projected to increase by an additional 30 per cent from
1997 to 1999.  The USITC observed that this increase exceeded the projected increase in demand in
the US market for wheat gluten.  The USITC conclu ded that, assuming the EU industry continued to
operate at a high level of capacity, much of any additional production might be directed towards the
US market at whatever price was necessary to produce a sale.
161  Thus, the USITC’s second point also
supported the choice of a measure other than a tariff.
180. Third, the USITC considered whether a tariff would be equitable with respect to different
foreign suppliers.  It noted that a tariff would be applied against imports from all suppliers, including
those who had maintained a stable market share.  The USITC stated that, because it believed EUsuppliers have greater pricing flexibility than other foreign suppliers, imposition of a high tariff would
be inequitable in that it would be likely further drive these suppliers from the US market.
162
181. In summary, the USITC considered relevant information, and provided three, well-articulated
grounds, for concluding that a tariff remedy would not be effective.
                                                     
159US Exhibit 4 at I-26.
160 US Exhibit 4 at I-26.
161 US Exhibit 4 at I-26.
162 US Exhibit 4 at I-26.WT/DS166/R
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182. Moreover, the USITC also considered whether a tariff-rate quota might provide an
appropriate remedy, but concluded for much the same reasons as in the case of a tariff that it would
not be.  The USITC cited in particular the 50 per cent point limitation in US law on the increase in the
tariff under a tariff-rate quota.163
The EC’s Fails in Its Effort to Second-Guess the USITC’s Remedy Recommendation on theForm of Relief
183. Implicitly recognizing that the USITC’s explanation of the factors it considered, and the
reasons it presented, in rejecting a tariff remedy satisfy the standard of review set out in the  Korea --
Dairy  report, the EC invites the Panel to embark on a full-scale critique of the USITC’s
recommendation on this point.  As noted previously, there is no basis in the Safeguards Agreement for
undertaking what amounts to a de novo  review of the USITC’s remedy findings.   Accordingly, the
Panel should disregard the EC’s invitation to second-guess the USITC on whether it selected anappropriate remedy and focus instead on whether the USITC considered relevant information and
provided an adequate explanation of its recommendation.   However, even if the Panel were to
undertake a more exacting inquiry, the EC’s contentions regarding the appropriate form of remedy in
this case should be rejected.
184. The EC takes exception to the USITC’s first re ason for rejecting a tariff -- that it would be
difficult to estimate the effect of a tariff because of the co-product relationship between wheat starchand wheat gluten.  The EC’s arguments with respect to the co-product relationship largely rest on the
same false assumption that underlay its similar arguments with respect to the USITC’s injury
determination.
164  Those arguments overlook the fact the USITC’s investigation was limited to an
examination of alleged serious injury to the US wheat gluten industry -- not the combined wheat
gluten/wheat starch industry, as the EC would have it.  Stated otherwise, the USITC properlyconsidered the question before it, namely whether increased wheat gluten imports were causing
serious injury to the  US industry producing the like or directly competitive product .  The USITC
found that the domestic industry consisted of firms insofar as they produced wheat gluten.
165
185. The USITC did consider the co-product relationship to the extent it was relevant indetermining the appropriate form of remedy for the domestic wheat gluten industry.   In particular, it
examined the relationship between production of wheat starch and wheat gluten in Europe in
analyzing whether a tariff regime placed on wheat gluten would provide a sufficiently certain remedy.
The USITC found that questions about starch demand raised uncertainties about the effectiveness of a
tariff measure.
166  Nothing in the Agreement on Safeguard compelled the USITC to project the
demand for wheat starch with a mathematical degree of certainty before deciding what form of
safeguard measure to recommend.
186. The EC also asks the Panel to reject the USITC’s second explanation for rejecting a tariff --
i.e., price underselling of EC wheat gluten in the US market.  Its arguments both ignore the USITC’s
full record on the issue and mischaracterize its findings. Substantial record evidence exists concerning
the factors in the EC wheat starch industry that affect the production of the co-product wheat
gluten.167   In particular, the US Department of Agriculture reported to the USITC that the EU starch
production refund was significant and that wheat starch prices in the EU are protected by high levels
of import protection and high sweetener prices in Europe that create a demand for wheat starch in
                                                     
163 US Exhibit 4 at I-27.
164 EC First Submission at ¶ 120-124.
165 US Exhibit 4 at I-9.
166 US Exhibit 4 at I-26.
167 US Exhibit 4 at II-20, II-23, and II-38-39WT/DS166/R
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Europe.168   Contrary to the EC’s contention, the USITC did not conclude that these factors led to the
subsidization of wheat gluten production.  Rather, the USITC concluded that, because wheat gluten
capacity grew in the EC largely as a byproduct of the desire to increase wheat starch supply in a
protected market for wheat starch, the prices at which the EU would sell wheat gluten appeared to the
USITC to be relatively unresponsive to changes in wheat gluten prices.169  The fact that the EU
undersold the US industry throughout 1996 and 1997 is consistent with that observation. The EC does
not deny, but rather endorses, the relationship between its wheat starch and wheat gluten operations.170
The USITC made no finding about whether or not the EU sales of wheat gluten were below the costof wheat gluten production in the EU, or at what prices they would do so, and consequently made no
finding concerning “subsidization”.
171
187. Finally, the EC also objects to the USITC’ s third explanation for rejecting a tariff – i.e.,
ensuring that the safeguard measure would have an equitable effect on all foreign suppliers.  The EU
has pointed to no provision of the Safeguards Agreement that would require the United States to
choose a measure that would reduce the market share of those countries whose imports have notcontributed to the increased imports that caused serious injury – particularly where, as here, such a
measure would be liable to be ineffective vis-a-vis imports from the source that did increase rapidly.
Moreover, to the extent that the EC’s greater capacity to export wheat gluten, and willingness to do so
despite falling prices in the US, was driven by increases in wheat starch production that were
influenced by market-distorting policies in the EC , there is no reason why the United States should
impose a measure that would harm other suppliers.  Wheat starch suppliers from other sources are
impeded from participating in expansion in the EC wheat starch market by relatively high EU tariffs.Commensurate with that impediment, wheat gluten production capacity for other sources remained
steady for much of the period, declining somewhat in 1997.
172   In contrast to consistent underselling
by EU producers in the United States in 1996-97, and their rapidly growing market share in this
market, the shares held by the other two major suppliers were stable or declined over the period of
investigation and their imports generally oversold the US industry.  The USITC reasonably concludedthat it would be inequitable to impose safeguard measures that would reward policies that tend to be
trade distortive at the cost of foreign supplying countries whose policies had not caused changes in the
US market.
188. In sum, each of the USITC's stated reasons for recommending a quota rather than tariff
measure was based on the conditions observed.  Although Article 5 of the Agreement imposes no
obligation to explain the reasons for choosing a quota as opposed to a tariff measure, each basis cited
by the USITC supplies a reasonable justification for that recommendation..
The USITC Adequately Explained the Quota Level and Duration of Relief It Recommended
189. With respect to the specific level of the quota, the USITC proposed and the President adopted
a quota that would restore imports (other than those from Canada) and domestic product to the market
share levels that obtained during the period 1993-95.  To determine the initial level of imports needed
to attain this objective, the USITC calculated the share that imports excluding those from Canadaachieved in 1993-95 (43 per cent) and, to take into account the fact that consumption had risen since
1995, multiplied the 1997 level of consumption (294,238 million pounds) by that percentage.
173  On
this basis, the USITC proposed a quota of 126 million pounds, with a 6 per cent annual escalator.174
                                                     
168 US Exhibit 4 at II-24, n. 95.
169 See US Exhibit 4 at I-24.
170 EC First Submission at ¶ 44.
171
172 See US Exhibit 4 at I-24.
173 US Exhibit 4 at I-28; see also  US Exhibit 4 at II-10, Table 1.
174 US Exhibit 4 at I-28-31.WT/DS166/R
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As the USITC found, the 6 per cent escalator exceeded the growth in imports that had been the trend
over the period of investigation.175  The President adopted a quota that reflected a more exact figure
drawn from this calculation.  As opposed to th e four-year measure that the USITC recommended as
necessary to support the adjustment measures advanced by the industry and prevent industry closures,
the President adopted a measure lasting three years and a day.
190. The objective that led the USITC to recommend a measure of this extent is apparent from the
face of its determination.   As has been discussed, the USITC found that, due to the rapid increase in
imports in 1996-97 from prior levels, the industry by 1997 was operating at a capacity utilization level
below that at which it could achieve a reasonable profit level.176  The USITC found that, because of
substantial operating losses in 1996-97, a significant portion of the US industry would have to scale
down in the near term and possibly shut down in the long term, if relief were not forthcoming.177  The
need for a reasonable profit level, which in itself the EC does not dispute, is further demonstrated by
the USITC’s findings that the industry would inve st in developing and marketing new products and
enhancing its efficiency and productivity.178  Thus, only by restoring market shares that existed prior
to the 1996-97 level  could the United States industry be restored to a reasonable profit level.  The EC
challenges neither the need for the US industry to achieve such a profit level in order to remedy
serious injury and facilitate adjustment nor that the restoration of 1993-95 shares is reasonably
calculated to achieve that objective.  Accordingly, the EC has advanced no basis for claiming that the
measure imposed did not meet the requirements of the first sentence of Article 5.1.
The USITC Properly Based the Proposed Import Quota on 1993-95 Levels
191. The EC asserts the USITC should not have recommended a measure that reduced imports
below their 1995-97 levels.  This allegation  ignores the language and purpose of Article 5.1, as well
as the USITC’s explicit findings.
192. Article 5.1, second sentence, provides that “[i]f a quantitative restriction is used, such a
measure shall not reduce the quantity of imports below the level of a recent period which shall be the
average of imports in the last three representative  years for which statistics are available, unless clear
justification is given that a different level is necessary to prevent or remedy or remedy serious injury .”
(emphasis supplied.)  Contrary to the EC’s claim, that provision does not limit safeguard importquotas to the average level of imports for the most recent three years for which statistics are available.
193. First, the EC’s reading of this provision would render the word “representative” mere
surplusage.  The term would be unnecessary if an authority could only refer to the most recent three
years for which statistics were available.  The term has meaning, however, in terms of the purposestated for measures in Article 5.1.  A “representative” period, interpreted in view of the purpose of
Article 5.1 would normally be a period in which imports did not cause serious injury.   To interpret
the provision otherwise would mean that a competen t authority would be required to choose an import
level that would normally not remedy serious injury and facilitate adjustment.  Such an interpretation
would be contrary to the remedial purpose of safeguard measures permitted under Article 5.1.
194. Second, even if the term “representative” is no t given meaning, the USITC’s findings satisfy
the requirement to provide a clear justification of the reason for choosing a different period.   As the
USITC found, in 1996 and 1997, US market prices were below US producers’ cost of production.
179
The USITC found that choosing a reference period composed in principal part of those two years of
                                                     
175 US Exhibit 4 at I-29.
176 US Exhibit 4 at I-12.
177 US Exhibit 4 at I-31.
178 US Exhibit 4 at I-25-26, 30.
179 US Exhibit 4 at I-26.WT/DS166/R
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crisis would not remedy the serious injury.180  Selecting the period that the EC has urged would have
defeated USITC’s objective of proposing a remedy that would allow the domestic industry to achieve
a reasonable level of profitability. Accordingly, the USITC proposed, and the President adopted, as an
appropriate reference period for establishing the import quota the three years immediately preceding
the 1996-97 surge in imports, a time when the domestic industry was profitable.181  T h e  U S I T C
provided a clear justification for selecting a period other than 1995-1997.  The EC has simply ignored
the USITC’s findings on this point.
(ii) The EC has Failed to Demonstrate that the US Safeguard Measure Improperly Allocates
Import Quota Shares Among Supplying Countries
195. The EC asserts that the United States should have allotted quota shares of wheat gluten
imports on the basis of supplying country average import market shares during the period 1995-97.182
Instead, the US safeguard measure allots shares based on averages during the 1993-95 crop yearperiod, a distribution that the EC says runs afoul of  the quota allocation rule set out in Article 5.2(a).
The second sentence Article 5.2(a) requires Members that impose quota safeguard measures
to allocate the quota between Members having a substantial supplying interest:
based upon the proportions, supplied by such Members a previous representative
period , of the total quantity or value of imports of the product, due account being
taken of any special factors which may have affected or may be affecting the trade in
the product.” (emphasis supplied.)
196. Unlike Article 5.1,  Article 5.2(a) does not c ontain a preference for, or indeed any mention, of
the last three representative  years for which statistics are available.  Nevertheless, the EC simply
assumes that the expression “a previous representative period” in Article 5.2(a) must invariably refer
to the most recent three-year period.  The EC provides no grounds for that bald assertion, either in thetext of Article 5.2(a) or elsewhere.  Plainly, how ever, the burden is on the EC to support it legal
conclusion on this point (as in others) with reasoned factual and legal arguments.
It has provided none.
197. In particular, the EC has not shown why the period 1993-95 was not “representative” of the
historical pattern of import market shares among substantial suppliers.  Indeed, the EC has not even
suggested, let alone demonstrated, that the period 1995-97 was in some way more “representative”
than the period used by the United States in its safeguard measure.  With respect to its allegation
under Article 5.2 then, the EC has simply failed to meet its burden of legal and factual proof that the
United States has improperly allocated its wheat gluten import quota.
3. The United States Satisfied its Obligations Under Articles 8 and 12
(i) The United States made timely Notifications to the Committee on Safeguards and provided
Adequate Opportunity for Consultations as required under Article 12
                                                     
180 US Exhibit 4 at I-28.
181 US Exhibit 4 at I-28.
182 The EC also alleges the United States failed to s eek agreement with the EC on the allocation of the
quota and provided no explanation as to why that method was not “reasonably practicable.”  EC First
Submission at ¶ 142-143.  The EC misinterprets the obligations of Article 5.2(a).  That Article states that aMember “may” seek agreement, but there is no obliga tion to do so.  Moreover, Article 5.2(a) contains no
requirement that a Member provide an explanation as  to why it was not reasonably practicable to seek
agreement.WT/DS166/R
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Art. 12:
1. A Member shall immediately notify the Committee on Safeguards upon:
(a) initiating an investigatory process relating to serious injury or threat thereof
and the reasons for it;
(b) making a finding of serious injury or threat thereof caused by increased
imports; and
(c) taking a decision to apply or extend a safeguard measure.
 2. In making the notifications referred to in paragraphs 1(b) and 1(c), the Member
proposing to apply or extend a safeguard measure shall provide the Committee on Safeguards
with all pertinent information, which shall include evidence of serious injury or threat thereof
caused by increased imports, precise description of the product involved and the proposed
measure, proposed date of introduction, expected duration and timetable for progressive
liberalization. . . .
3. A Member proposing to apply or extend a safeguard measure shall provide adequate
opportunity for prior consultations with those Members having a substantial interest as
exporters of the product concerned, with a view to, inter alia , reviewing the information
provided under paragraph 2, exchanging views on the measure and reaching an understanding
on ways to achieve the objective set out in paragraph 1 of Article 8.
198. The EC contends  the United States breached its obligations under Article 12 of the
Safeguards Agreement both in its alleged failure to timely notify its findings and decision, and in its
alleged failure to provide adequate opportunity for prior consultation.  The EC’s assertions are simply
incorrect.  Consistent with the requirements of Article 12, the United States made timely notifications
to the Committee on Safeguards (“Committee”), and it provided adequate opportunity for priorconsultations with Members having a substantial interest in wheat gluten exports.
199. The EC acknowledges that the United States satisfied each of the requirements of
Article 12.1, but the EC takes issue with the notifications based on its claim that “these procedural
steps, findings and decision had to have been made at a date that would have allowed the Committeeon Safeguards, and possibly, the Council for Trade in Goods to request additional information and
hold a meaningful discussion in a multilateral forum."
183  The EC attempts to read-in its own
interpretation of Article 12, and it provides nothing more in support of its position than a vague
reference to “the plain text and meaning of Article 12 of the SA”.  The actual text of Article 12.2
requires a Member to “immediately notify” the Committee.  The Korea -- Dairy Panel did note that
the term “immediately” introduces a certain urgency to the timing of the notification, but it also
recognized that no specific number of days is mentioned in Article.184  The United States timely
issued its notification to the Committee on 17 October 1997, only days after the USITC published
notice of its investigation in the Federal Register.   Until the USITC announced it had accepted the
petition and set out the scope of the investigation, the United States  had nothing to announce.Accordingly, the EC’s claim with respect to this point is without merit.
200. Next, the EC claims the United States did not timely file its notification of the findings of
serious injury because they “were effected after  the findings had been made and the measure was
enacted."
185  Yet the text of Article 12.1(b) specifically provides that a Member immediately notify
upon “ making  a finding of serious injury . . .”  Article 12.1(b) is clear that a Member’s obligation to
notify arises only after it has made a serious injury determination.  Moreover, the EC’s interpretation
                                                     
183 EC Submission at ¶  167.
184 Korea – Dairy  at ¶ 7.128
185 EC First Submission at ¶ 168 (emphasis added).WT/DS166/R
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suggests that a Member is obliged first to issue “p reliminary” findings of serious injury that the
Committee would then examine and ratify.  Again, the EC finds no support in the text of the
Safeguards Agreement for its position.  In fact, the EC’s interpretation directly contradicts Articles 3
and 4 of the Safeguards Agreement, which reserves  to competent authorities the ultimate authority to
conduct safeguards investigation.
201. Within the same line of argument, the EC takes issue with the United States’ notification,
based on the alleged failure of the United States to notify the Committee before taking the measure.
In the EC’s view importing Members are obligated to notify their “proposed measure.”  The EC's
position finds no support in the text of Article 12.  First, the text of Article 12.1(c) requires a Memberto immediately notify the Committee upon “ taking  a decision to apply or extend a safeguard.”  In
contrast, when the drafters intended a Member to notify the Committee before taking action, they
were explicit in that requirement.  Thus, Article 12.4 states that “A Member shall make a notification
to the Committee on Safeguards before  taking a provisional safeguard measure . . . “   (Emphasis
added).  There is no such statement in Articles 12.1, 12.2 or 12.3, which refer to applying orextending definitive safeguard measures.
202. Even assuming that Article 12 requires Members to notify proposed measures, the United
States satisfied that requirement in its Article 12.1(b) notification.  While it is true that the United
States' proposed measure is somewhat different from the one actually adopted, the change benefits  the
EC and other wheat gluten exporters.  The fact that the United States altered its proposed measure is
not precluded by any provision of the Safeguards Ag reement.  In fact, the idea that a Member would
alter its provision is specifically contemplated in Article 12.  On this point, the United States would
add that the object and purpose of Article 12's consultation requirement is to ensure that affected
exporting Members have the opportunity to presen t their views and to impact the measure the
importing Member ultimately decides upon.  Accordingly,  it should be expected that after consulting
with potentially affected Members an importing Member may well take into consideration theconcerns raised during consultations.  There is no basis on which to argue, however, that the
importing Member is forced to notify the revised provision anew before it can take action.  Indeed,
such a requirement provides an incentive for importing Members to ignore concerns raised in
consultations.  Because safeguards actions are “emergency measures” – that is, measures “requiring
immediate action"
186 – time is of the essence and an importing Member does not have the luxury of
providing multiple notifications, and then waiting for a period, before it can take action to address the
serious injury or threat suffered by its domestic industry.
203. Finally, the EC argues that Article 12.3 imposes on a Member an obligation to “provide
adequate opportunity” for prior consultations.  The EC then cites Korea – Dairy  for the proposition
that prior consultations means “consultations prior to the application of the measure.”   The United
States would agree that an importing Member must provide the opportunity for consultations before it
can take a safeguard action.  The EC fails to note, however, that the United States did hold
consultations with the EC (and other affected Memb ers) prior to imposing the wheat gluten safeguard
action.  The United States consulted with the EC on 24 April 1998 in compliance with therequirements of Article 12.3.
(ii) The United States Satisfied its Obligations under Article 8
Art. 8:
1. A Member proposing to apply a safeguard measure or seeking an extension of a
safeguard measure shall endeavour to maintain a substantially equivalent level of concessions
and other obligations to that existing under GATT1994 between it and the exporting Members
                                                     
186 The Concise Oxford Dictionary.WT/DS166/R
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which would be affected by such a measure, in accordance with the provisions of paragraph 3
of Article 12.  To achieve this objective, the Members concerned may agree on any adequate
means of trade compensation for the adverse effects of the measure on their trade.
. . .
3. The right of suspension referred to in paragraph 2 shall not be exercised for the firstthree years that a safeguard measure is in effect, provided that the safeguard measure has been
taken as a result of an absolute increase in imports and that such a measure conforms to the
provisions of this Agreement.
204. The EC alleges the United States violated Ar ticles 8 and 12.3 of the Safeguards Agreement by
“failing to offer a meaningful opportunity, indeed any opportunity at all, for consultations and
negotiations."
187  If the EC’s Article 8 claim is limited to the allegation that the United States failed to
provide the opportunity for prior consultation, then in the United States’ view the claim is redundant
and has already been addressed above.  Specifically, the EC once again neglects to inform the Panel
that the United States indeed did hold consulta tions with the EC prior to imposing the measure.
205. In addition to its allegation regarding consultations, however, the EC appears to make the
additional claim that the United States allegedly fail ed to maintain a substantially equivalent level of
concessions and other obligation pursuant to Article 8.  Yet the EC itself acknowledges the ambiguity
of Article 8.1 when it informs the Panel that:
The question may arise as to how a substantially equivalent level of concessions and
other obligations can be maintained given conditions on the right to immediately
withdraw concessions in the [Safeguards Agreement].188
While it identifies the fundamental ambiguity in its interpretation of Article 8, the EC’s only response
to this dilemma is that “[t]his is not a question the panel needs to answer."189
206. The United States respectfully submits if the EC’s allegation is that the United States violatedArticle 8, then it is precisely the Panel’s duty to determine what obligations, if any, Article 8 imposed
and how the United States might have been able to meet that obligation.  In the United States’ view
Article 8.1, when read in conjunction with Article 12.3, imposes on a Member the obligation to holdprior consultations.  It does not, however, require a Member to provide concessions before it can take
a safeguard action.  This interpretation is borne out by the text of Articles 8 and 12, as well as by the
object and purpose of the Safeguards Agreement.
207. The text of Article 8.1 provides that a Member proposing to apply a safeguard measure “shall
endeavour to maintain a substantially equivalent level of concessions and other obligations . . . in
accordance with  the provisions of paragraph 3 of Article 12.”  Article 12.3, on the other hand, merely
provides that a Member shall provide opportunity for prior consultations with a view to, among other
things, “reaching an understanding on ways to achieve the objective set out in paragraph 1 of
Article 8.”  Thus the only obligation on a Member proposing to apply a safeguard is to provide anopportunity for prior consultations.  As previously stated, the United States satisfied that obligation.
208. The United States finds further support for its interpretation of Article 8 in the object and
purpose of the Safeguards Agreement.  The preamble to the Agreement recognizes the need  “to
re-establish multilateral control over safeguards and eliminate measures that escape such control.”
Specifically, drafters of the Safeguards Agreement intended to eradicate so-called grey-area measures.
To ensure this objective, they permitted Members to impose safeguards for a limited period without
                                                     
187 EC First Submission at ¶ 178.
188 EC First Submission at ¶ 175.
189 EC First Submission at ¶ 175.WT/DS166/R
Page 275
fear of “having to pay” for such action.  For th e EC to now argue that a Member must provide
substantially equivalent concessions before taking a safeguard action jeopardizes the objective to
re-establish multilateral control because it ensures that Members will find methods outside of the
Safeguards Agreement to protect their injured domestic industries.  Such an outcome would defeat the
very purpose of the Agreement.
209. Accordingly, the United States respectfully submits it satisfied its obligations under
Articles 12 and 8 of the Safeguards Agreement.
E. THE EC 'S GATT ARTICLE I CLAIM IS WITHOUT MERIT
Art. I : With respect to customs duties and charges of any kind imposed on or in connection
with importation or exportation or imposed on the international transfer of payments for
imports for exports, and with respect to the method of levying such duties and charges, and
with respect to all rules and formalities in connection with importation and exportation, and
with respect to all matters referred to in paragraphs 2 and 4 of Article II, [citation omitted]any advantage, favour, privilege or immunity granted by any contracting party to any product
originating in or destined for any other country shall be accorded immediately and
unconditionally to the like product originating in or destined for the territories of all other
contracting parties.
210. The EC alleges that the US measure violates the most-favoured-nation provision of GATT
Article I.  In the EC’s view, the mere fact that Australia’s quota allocation is greater than the EC’s issufficient to support a claim of discrimination.
211. The United States respectfully submits the EC’s claim is without merit either factually or
legally.  First, the EC ‘s accusation that the United States deliberately chose a  representative period
most favorable to Australia because one US producer is a subsidiary of an Australian producer isbaseless and without foundation.
190  The USITC Report provided a reasoned analysis as to the
appropriateness of using the representative period the United States chose.191
212. Second, and more importantly, other Panels that have examined the issue consistently have
found that claims of discrimination in the administration of quotas are more appropriately raised as aviolation of Article XIII rather than Article I.  In EEC – Restrictions on Imports of Dessert Apples , the
Panel examined a claim raised by Chile that the EEC’s import quota on apples violated Article I.  The
Panel found that “it [was] more appropriate to examine the consistency of the ECC measures with the
most-favoured-nation principles of the General Agreement in the context of Article XIII . . . this
provision deals with the non-discriminatory administration of quantitative restrictions and is thus thelex specialis   in this particular case.
192 The Appellate Body has agreed as well that the allocation of
quantitative restrictions is outside the scope of Article I, in finding that the EC's tariff rate quota on
bananas under the Lomé Convention was not within the scope of the "Lomé waiver" of Article I. 1.193
213. Accordingly, the United States respectfully submits that the EC’s discrimination claim underGATT Article I must fail.
                                                     
190 EC First Submission at ¶ 41 and ¶ 182.
191 See paragraphs 182-183 supra .
192 L/6491, adopted on 22 June 1989, 36S/93, 133, para. 12.28;  See also, EEC –Restrictions on Imports
of Apples from Chile, L/5047, adopted on 10 November 1980, 27S/98, 112, para. 4.1.
193 EC – Regime for the Importation, Sale and Distribution of Bananas.   DS27/AB/R, paras. 180-188.WT/DS166/R
Page 276
V. CONCLUSION
214. For the foregoing reasons, the United States respectfully submits its safeguard measure on
imports of wheat gluten satisfy US obligations under the Safeguards Agreement and the GATT.
Accordingly, the EC's claims to the contrary are without merit and should be rejected by the Panel.
UNITED STATES LIST OF EXHIBITS
United States -- Definitive Safeguard Measure on
Imports of Wheat Gluten from the European Communities
Exhibit Number Description of Exhibit
1 USITC Producers Questionnaire.
2 Presidential Proclamation 7103, 30 May 1998.
3 Memorandum from the President, 30 May 1998, Accompanying Proclamation 7103.
4 USITC Report on Investigation No.  TA-201-67, Wheat Gluten, USITC Pub. No.  3088,
March 1998.
5 US Notification to the Committee on Safeguards under Article 12.1(a).
6 Original and revised US Notifications to the Committee on Safeguards under
Article 12.1(b).
7 US Notification to the Committee on Safeguards under Article 12.1(c).
8 Transcript of USITC hearing, injury phase, 16 December 1997.
9 USITC Memorandum Describing USITC Policy on Confidentiality.
10 Revised USITC Report on Investigation No.  TA-201-67, Wheat Gluten
__________WT/DS166/R
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ATTACHMENT 2-2
UNITED STATES ORAL STATEMENT
(20-21 December 1999)
Ms. Florestal
Mr. Chairman, Members of the Panel,
On behalf of the United States delegation, I would like to thank the Panel for agreeing to take
on this task.  At the conclusion of our statement, we would be pleased to receive any questions you
may have.
This case concerns a safeguard measure that the United States took when its authority, the US
International Trade Commission, determined that a surge of imports of wheat gluten in 1996 and 1997
caused serious injury to the United States wheat gluten industry.  As my colleague,  Mr. Toupin, will
discuss today, the Commission’s determination of injury and causation was entirely in accord with
Articles 2.1 and 4 of the Safeguards Agreement.  I will demonstrate why the measure taken by the
United States, which specifically addresses the injury found, is consistent with Article 5, and fully
comports with Articles 8 and 12.
I would like to make two preliminary remarks before we turn to those issues.  First, the
Appellate Body’s recent decisions in Argentina - Footwear  and Korea - Dairy make clear that no
issue of failure to comply with Article XIX of the GATT 1994 exists in this case.  Article XIX refers
to “unforeseen developments”.  The two Appellate Body Reports expressly contrast “unforeseen”
(that is, “unexpected”) with “unforeseeable” (that is, “incapable of being foreseen, foretold oranticipated”).  Both conclude that Article XIX's provisions must be interpreted with the ordinary
meaning of the word “unforeseen” and not with that of “unforeseeable.”
Here the European Communities’ first written submission admits that the surge of imports at
issue in this case was unforeseen.  It agrees with the USITC that the US wheat gluten producers didnot foresee the import surge when they added production capacity during 1993 to 1995 in anticipation
of a large increase in domestic demand.  As the USITC found, the US industry was correct that
demand would grow.  But imports increased at a rate  greater than the growth in  demand.  Though the
EC claims that the import surge was fore seeable, the Appellate Body Reports in Argentina - Footwear
and Korea - Dairy demonstrate conclusively that such a showing, even if made, would not satisfy the
requirement to make a prima facie   case under Article XIX.
Second, although the parties agree that the standard of review in this matter is not de novo , the
EC’s first written submission disregards that standa rd.  In examining a serious injury determination, a
Panel must address three questions:
• First, whether the authority considered all relevant factors, including those listed in Article 4.2(a);
• Second, whether its published report contains an adequate explanation of how the facts support
the determination made, and
• Third, whether the determination made is consistent with the Safeguards Agreement.
Many of the EC’s arguments are irrelevant under this standard.  In one respect, however, the
EC acts here in plain defiance of the standard.  The EC has presented to this Panel evidence that wasWT/DS166/R
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not before the national authority.  In doing so, th e EC seeks to have the Panel review the authority’s
decision on a basis clearly outside this Panel’s authority.   The Panel should disregard the new
evidence that the EC seeks to present and the arguments that it has made on that basis.
Mr. Toupin will now discuss the International Trade Commission’s injury and causation
determination.
Mr. Toupin
Mr. Chairman, Members of the Panel,
As the USITC’s findings are discussed at considerable length in the United States’ first
written submission, I will highlight a few salient points, paying particular attention to the Appellate
Body decision in Argentina - Footwear .  The USITC’s report conclusively demonstrates that it
considered all relevant factors during its investigation.  In reaching its affirmative determination, theUSITC found that the “surge in relatively low-priced imports in 1996 and 1997 coincided with the
decline in industry performance” in almost all performance indicators.  This decline coincided with
rising domestic demand and consumption.
It is undisputed that imports increased.  In the last two years investigated, 1996 and 1997,
imports increased 38 per cent from 1995 levels.  Moreover, even though consumption in the US
market was rising, imports gained a 20 per cent increase in market share during that two-year period.Coming as it did after a period in which import market share fell slightly, such a rise was, in the terms
that the Appellate Body recently used in Argentina - Footwear, “recent enough, sudden enough, sharp
enough, and significant enough, both quantitatively and qualitatively, to cause serious injury.”
Though the industry was profitable in the first three years of the period, it suffered growing
operating losses in 1996 and 1997, when imports, particularly from the EC, surged and consistently
undersold the US product.  As the USITC found, the industry’s gross profit, operating income, and
market share all declined in both 1996 and 1997.  Likewise, both the domestic industry’s production
and shipments fell sharply when imports surged, and were at their lowest levels in 1996-1997.  The
EC would have the Panel place controlling weight on the fact that, after the sharp declines in 1996,there were slight upturns in production and sales in 1997.  As the USITC found, however, both
indicators remained in 1997 far below their pre-import surge levels.  Moreover, since other injury
indicators continued to decline, the USITC found that minor improvements in some factors in 1997
were “isolated”.
The USITC’s analysis is in perfect accord with the recent statements of the Appellate Body in
Argentina - Footwear.  As the Appellate Body stated, while an authority must examine all relevant
factors, not all of those factors must be declining to support a conclusion that an industry is seriously
injured.  Rather, an authority considers whether the overall picture demonstrates “significant overall
impairment” of the industry.  The USITC performed just such an analysis here.  The EC has notadvanced any reason why the minor improvement in so me factors in the last year - particularly when
those indicators remained at seriously depressed levels - should have required the USITC to find no
serious injury.
The USITC’s determination also fully satisfies the requirement of Article 4.2(b) not to
attribute to increased imports the injury caused by other factors.  It did so in two ways.  First, each of
the causal factors it addressed is specific to the increased imports.  In particular, the USITC found thatcapacity utilization fell to its lowest levels in the 1996-97 period, when imports surged.  It estimated
what the capacity utilization of the US wheat gl uten industry would have been in 1997 but for the
increase in imports.  The USITC found that, at that level of capacity utilization, the industry would
have approached levels at which it had been profitable in the past.  This  analysis took into accountWT/DS166/R
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that the growth in the US industry’s capacity in 1993-95 would have had some effect on capacity
utilization.  However, by estimating how much the severe decline that actually occurred in 1996-97
resulted from the growth in imports, the USITC assured that it did not attribute to increased imports
the effects of other causes.
Second, the USITC specifically addressed each of the other factors that importers and foreign
producers suggested were causing injury.  The EC’s argument that the USITC’s analysis was
inadequate is based on the false premise that the USITC should have quantified the amount of injury
caused by each factor.  This argument is directly contrary to the GATT panel report in United States -
Salmon , which interpreted virtually identical language in the Antidumping Code before that language
was incorporated into the Safeguards Agreement.
The USITC’s findings on each proposed alternative cause of injury are discussed at length in
the United States’ first written submission.  To  summarize briefly, the USITC found that each
proposed alternative cause could not to any significant extent explain the severe deterioration in theindustry’s position in 1996 and 1997.  The EC’s argu ments in its written submission fail uniformly to
show how other factors affecting the industry coul d have led to its losses in the last two years
investigated.
In short, an objective assessment of the USITC’s Report shows that it examined all the
relevant factors, adequately explained why the facts supported its conclusion, and reached its
conclusions in accordance with the Safeguards Agreement.  At most, the EC has advancedsuggestions on how an authority might have reached a different conclusion.  It has not, and cannot,
show that a different conclusion was required.
Ms. Florestal will now discuss the issues relating to Articles 5, 8 and 12 of the Agreement.
Ms. Florestal
Mr. Chairman, Members of the Panel,
My colleague has discussed with you the USITC's thorough determination, which found that
the US wheat gluten industry was being seriously injured as a result of increased imports.  I will now
discuss with you the actions the United States took to respond to those findings.
The United States’ safeguard remedy comports with all applicable provisions of the
Safeguards Agreement.  The EC has demonstrated no violation of the covered agreement.  Instead, theEC has relied on extraordinary allegations of collusion and conspiracy to attempt to meet its burden.
Those allegations have no basis in fact.  They merely demonstrate that the EC is unhappy with the
temporary US safeguard measure.  The EC ha s not shown that, in taking such action, the
United States violated the Safeguards Agreement.
Our discussion of the US safeguard action today examines two aspects of the remedy the
United States put in place:  First, the level at which the quota was set,  and second, the distribution of
shares of the quota between supplying Members.
First, regarding the overall quota amount:  The President established a quota based on the
historical market share level that wheat gluten imports had obtained during the representative period
1993 to 1995.  But, in order to take into account the increase in consumption that had occurred, thePresident applied the 1993 to 1995 import market share to the higher level of consumption reached in
1997.  The President thus set the quota at a level higher than the average level of imports during 1993
to 1995.WT/DS166/R
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The EC’s position reads Article 5.1 as if the term “representative” were not present,
effectively requiring a Member to choose the most recent three years regardless of conditions in those
three years.  The question that Article 5.1 poses, however, is “representative” of what?  By choosing
as its benchmark the most recent three years preceding the increased imports and operating losses, theUnited States chose a period “representative” of conditions in which its industry can survive.  Such an
interpretation is in accord with the object and purpose of Article 5.1 to remedy serious injury and
facilitate adjustment.  The USITC, moreover, clearly justified this choice of a period in its finding that
setting a quota level at the average of 1995 to 1997 would not remedy the serious injury.  For these
reasons, the quota amount chosen was perfectly appropriate both to remedy the serious injury and tofacilitate the industry’s adjustment to import competition.
I will next turn to the question of how the quota was allocated.  The United States chose as “a
previous representative period” in accordance with Article 5.2, the same years - 1993 to 1995.  The
United States chose those years because they were the most recent period that was representative ofthe historical pattern in the market place.  Before 1996 and 1997, import market shares were relatively
stable.  Only the market share from one source - the EC - grew dramatically during the surge years of
1996 and 1997.  Likewise, only imports from that source – the EC – consistently undersold the US
product during that surge.  The surge years were unrepresentative because the surge itself distorted the
relative distribution of market shares among foreign suppliers.  Thus, the quota allocation chosen by
the United States comports with Article 5.2(a).  The EC cites Article 5.2(b), but that Article is
irrelevant because the United States did not take action under Article 5.2(b).
As we have shown, the US measure comports with the requirements of Article 5.  The EC
also raises questions about the fact that Canada is not subject to the measure, and tries to draw
similarities between the US safeguard and the safeguard taken by Argentina on footwear imports.
The Appellate Body’s report in Argentina – Footwear demonstrates why the EC’ s claims in this area
are without merit.  The Appellate Body explicitly stated that what was at issue in Argentina –
Footwear  was whether Argentina could take a safeguard remedy solely against third country imports
when its investigation found injury from all sources.  That is simply not the case here.  The USITC
conducted a separate examination of wheat gluten imports from Canada.  As the USITC found,
Canadian imports were not contributing importantly to the injury.  They did not participate in thesurge.  Canada was a relatively small and declining supplier to the US market, whose product
oversold the US product during the surge period.  On  the basis of the specific finding that Canadian
imports were not contributing importantly to the injury, the United States excluded Canada from the
measure.  Therefore, there is no basis on which the EC can argue that third country imports were
being punished for the injury caused by imports from an excluded country, as occurred in Argentina -
Footwear .
In closing, I would like to discuss briefly the EC’s complaints that the United States did not
satisfy its consultation obligations under Articles 8 and 12 of the Agreement.  That claim is simply
incorrect.  As US Exhibit 6 shows, the United States invited all affected Members to participate inconsultations.  Its invitation stated that consultations would be held with a view to “reviewing the
information provided, . . . exchanging views on the measure and reaching an understanding on ways
to achieve the objective set out in Article 8.1 of the Agreement on Safeguards.”  The EC accepted the
United States’ invitation to consult under those terms.  Consultations were held on 24 April 1998.
The United States satisfied its consultation obligations.
Mr. Chairman, Members of the Panel, that concludes the United States’ oral statement.  We
thank you for this opportunity to further elaborate our position.WT/DS166/R
Page 281
ATTACHMENT 2-3
UNITED STATES CLOSING ORAL STATEMENT
(21 December 1999)
Ms. Florestal
Mr. Chairman, Members of the Panel,
On behalf of the United States delegation, I would like to thank the Panel for the opportunity
to comment on some of the allegations raised by the EC in its oral statement yesterday.   We will
reserve much of our response for our second submission, but we feel compelled to respond to certain
claims raised by the EC that attempt to distort the record in this case.
Mr. Toupin will briefly address certain issues raised by the EC’s arguments concerning the
injury determination, while I will address some of the EC’s claims regarding the remedy the
United States chose.
Mr. Toupin
Mr. Chairman, Members of the Panel,
First, I would like make some comments concerning the EC’s bald claim yesterday that this
Panel should engage in new fact finding on injury based on new evidence never presented to the
competent authority.  In doing so, I do not mean to  suggest that the evidence that the EC seeks to
introduce here in any way detracts from the USITC’s determination.  For reasons given in the
United States’ first written submission, it does not.  Nevertheless, the EC should not be permitted to
disregard the respective roles of this Panel and the competent authorities.
At the outset, I should highlight an area of agreement between the United States and the EC
on the vexed subject of the standard of review.  The United States agrees completely with the EC, as it
states at paragraph 12 of its statement, that a Panel may not be “engaged itself in redoing the
Member’s procedure, thus getting to ‘its’ determination on the appropriateness to adopt ‘that’ or
‘another’ safeguard measure”.  Yet this is precisely what the EC asks the Panel to do by presenting
new evidence for the first time to this body.  Under Article 3 of the Safeguards Agreement, it is amember’s competent authority that investigates the facts.  The USITC did so by sending
questionnaires to foreign producers, importers, domestic producers, and purchasers; by gathering
other publicly available information; and by entertaining any information that interested parties
desired to submit, both through written submissions and at its hearings.  I note that the EC itself
appeared at the hearings as a witness, as shown on page B-8 of the USITC report.
The EC would have this Panel become another authority before which evidence could be
submitted on the underlying facts.  The EC would have this Panel find that, if only the USITC had
gathered just one more piece of evidence, the authority should have reached a different determination.
The evidence that the EC mentioned yesterday illustrates the harm that such an approach would do to
the ability of national authorities to conduct investigations under Article 3 of the Agreement.  This is
not a case, as the EC seems to suggest, in which the issue of input prices cannot be discussed exceptby reference to new information.  As the United States’ first written submission discusses, the USITC
obtained information on input prices.  The USITC had before it, for instance, data obtained directly
from the US wheat gluten producers on the costs of their inputs.  It had before it quarterly data onWT/DS166/R
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wheat costs provided by the EC producers.  The USITC made findings concerning the rise in input
costs, particularly the prices of wheat and wheat flour.
The mischief that the EC does by suggesting that this Panel should make new findings
because monthly official wheat cost data was also available is apparent.  Quite apart from the fact thatthe EC’s arguments from that evidence are irre levant to the USITC’s determination, the EC’s
approach would undermine the ability of member’s competent authorities to conduct investigations
under the Safeguards Agreement.  It is hard to imagine a case in which some piece of information
could not be obtained somewhere that was not before a competent authority.  Interested parties could
submit one set of information to the competent aut horities, and, on review of  determinations before
the WTO, the WTO members could seek to relitigate the case based on a new set of information.
Moreover, Article 3 of the Safeguards Agreement provides for fact-finding to occur through
proceedings that accord an opportunity for all commercially interested parties to present evidence and
their views.  The government-to-government dispute settlement process in the WTO has a different
purpose.  It is not designed to provide the procedures that the negotiators of the SafeguardsAgreement considered essential to fair and open administration of national safeguard regimes.  As the
Appellate Body reports have indicated, a Panel’s role is limited to conducting an objective assessment
of the matter to ascertain whether the United States acted in accordance with the Agreement.  The EC
would take this Panel outside of that role.
Second, we would like to correct a misstatement that the EC made yesterday in characterizing
the  United States’ position concerning the adequacy of the USITC’ s public report.  The EC told youyesterday, and I quote, “The US has explicitly recognized in  its first written submission that it has
‘misapplied’ the provisions of Article 3 and 4”.  This is simply not so.  What the United States said, at
paragraph 158 of its first written submission, was that in certain instances the USITC had
inadvertently misapplied its own policies concerning reporting of aggregate data.  The USITC is
correcting its misapplication of its own policies.  In the interest of transparency, the United States hassupplied that correction to the Panel.  The United States maintains its position that the USITC’s
findings are adequately explained in the published report as originally issued.  As further explained in
the first written submission, the EC’s contention that certain findings were inadequately explained
was based on a simple misreading by the EC of those findings.
Third, the EC’s oral presentation here yesterday continued to fail to address the basis for the
USITC’s determination.  The EC continued instead to present a beginning point to end point analysis
of the period of investigation that is contrary to its own statements about the proper analysis.
Nevertheless, taking the EC’s presentation on its own terms, it is startling how the EC ’s oral
presentation makes out a case for finding injury caused by increased imports.  The EC told usyesterday that, over the course of the period investigated, demand rose.  It told us that the US
industry’s costs also rose.  Hearing those facts alone, one would expect also to hear that prices rose.
But that is not what the EC told us, because it did not happen.  What the EC told us, at paragraph 38,
was that prices of EC imports at the end of the period of investigation were essentially the same as
they were at the beginning.  That prices did not rise when demand and costs rose suggests thatsomething must have been happening on the supply side.  It cannot have been an increase, however,
in domestic supply.  The EC characterized the overall trend of US production as remaining relatively
steady.  Only  the supply of imports grew.  The EC’s presentation seems to leave no option but to
conclude that increased imports held prices down at a level lower than the domestic industry’s cost of
production.
Ms. Florestal
The EC’s oral statements on Article 5 distorts the United States’ position, misstates the
findings of the Appellate Body, and wholly ignores those findings in certain areas.WT/DS166/R
Page 283
The EC’s claim of violation under Article 5.2(a)  of the Safeguards Agreement is without
merit.  Recently, the Appellate Body in Korea - Dairy  expressly cautioned against reading obligations
into Article 5 that are not found in the text of that Article.  Yet, the EC asks the Panel to do exactly
that.  The EC’s claims under Article 5.2(a) must be rejected for two reasons:  First, the United States
has specifically and repeatedly contested the EC’s allegation that the US failed to consult on themeasure.  That simply is not true.  Moreover, Article 5.2(a) does not establish a duty to consult.  The
consultation obligation is found in Article 12.  The United States satisfied that obligation.
Second, regardless of whether one argues that Article 5.2 or GATT Article XIII is the
lex specialis  in this case, the reality is that GATT Article I is not implicated because the US measure
is a quota and not a tariff.  The EC’s discrimination claim is particularly incomprehensible given that
the measure at issue is applied in the same manner to all Members subject to the measure.  There is no
discrimination in the US safeguard measure.
The EC also suggests to this Panel that Article 5.1 requires a Member to provide clear
justification for its choice to impose a quantitative restriction rather than a tariff measure.  The EC’s
position is directly contrary to the Appellate Body’s findings in Korea – Dairy.   The Appellate Body
specifically found, and I quote “a Member is not obliged to justify in its recommendation or
determination a measure in the form of a quantitative restriction which is consistent with the average
of imports in the last three representative years for which statistics are available. . (AB Report at
para. 99).  The United States imposed a safeguard measure in the form of a QR set above  the level of
imports in the last three representative years.  Thus, the Appellate Body has held that theUnited States was  not required to justify the measure.
The EC’s arguments that the United States has th e burden of proof to justify the level of the
measure it imposed is incorrect.  The United States imposed a measure in accordance with Article 5.1.
The EC argues that the measure is inconsistent with that Article.  Therefore, the burden is on the ECas the complainant to assert and prove its claim.
The EC’s allegation of a supposed “proportionality rule” in Article 5.1 not expressed in the
text is also contrary to the ad monition of the Appellate Body in Korea - Dairy to avoid reading
obligations into Article 5 that are not expressed in the text.  The EC fails to focus on the express terms
of Article 5.1 in its rush to create a new “rule”.  Article 5.1 imposes an obligation on Members to
apply a measure “only to the extent necessary to prevent or remedy serious injury and to facilitate
adjustment”.  The United States’ measure satisfies that obligation.
The EC next attempts a contorted argument that succeeds only in reading the term
“representative” out of Article 5.1.  The United States’ response to the EC ’s allegation on this point is
simple:  If the negotiators had intended that the term “last three representative years” should always
refer to the most recent three years, they would have said so.
Finally, on the EC’s claim that the United States failed to consult on the provisions of
Article 8, the United States notes that the EC’ s statement itself undermines that assertion.  The EC
acknowledges that the United States invited affected Members to participate in consultations.  While
the EC chooses to ignore the fact that consultations were held on 24 April 1998, it does not deny it.
Mr. Chairman, Members of the Panel, that concludes the United States comments on the EC’s
oral presentation.  Once again, we thank the Panel for this opportunity.
__________WT/DS166/R
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ATTACHMENT 2-4
UNITED STATES REPLIES TO QUESTIONS
A. QUESTIONS TO BOTH PARTIES
Q.1 We note that the ITC Report (p. I-9) states:  "[w]e find that domestically produced wheat
gluten is "like" imported wheat gluten and that  the domestic industry consists of the domestic
producers of all forms of vital wheat gluten, including modified wheat gluten that is used in the
baking and pet food industries."  Do the parties agree that, for the purposes of this proceeding, thedomestic industry consists of the domestic pr oducers of all forms of vital wheat gluten?
Reply
1. The United States agrees that the domestic industry consists of the domestic producers of all
forms of vital wheat gluten, including modified wheat gluten used in the baking and pet food
industries, which is how the USITC defined the indu stry.  While the EC has made references to a
wheat gluten/wheat starch industry, the EC has not challenged the USITC’s like product finding or its
finding that the domestic industry consists of the domestic producers of wheat gluten.  Furthermore,
during the USITC investigation neither the EC no r the EU producers contested the fact that the
domestic industry should be defined as something other than the domestic producers of all form of
vital wheat gluten.1
Q.2 In para. 9 of its third party submission, New Zealand asserts:  "New Zealand does not contest
that the protection of such confidential informati on, including from the respondents in the safeguards
investigation, may be appropriate at the time of  the investigation.  However, New Zealand considers
that a Member cannot justify a measure as being consistent with its obligations under the WTO
without disclosing to the panel and the parties the information on which it relies."  How do the partiesreact to this statement?
Reply
2. New Zealand makes this assertion without citi ng any provision of the Safeguards Agreement
(or any other authority) in support of its contention that a party must release all such confidential
information to the panel and the parties.  In fact, there is no such requirement in the Safeguards
Agreement or elsewhere.  To the contrary, Article 3.2 states:  “Any information which is by nature
confidential or which is provided on a confidential basis shall, upon cause being shown, be treated as
such by the competent authorities.  Such information shall not be disclosed without permission of the
party submitting it”.   (Emphasis added).   Furthermore, the requirement in Article 4.2 (c) that the
competent authority publish a detailed analysis of the case is expressly provided to be “in accordance
with the provisions of Article 3”.  Thus, not only does the Safeguards Agreement not require
disclosure of such confidential information by a Member, the Agreement forbids such disclosure
without the consent of the party that submitted the confidential information.  Finally, it should benoted that Article 3 protects the confidentiality of information furnished by domestic producers as
well as importers.  Disclosure carries with it the inherent danger of compromising the commercial
interests of the companies that supplied the inform ation.  It would also likely impede the ability of
competent authorities to gather such information,  thereby limiting the quality of the information
before them at the time they make their decisions.
                                                     
1  US Exhibit 4 at I-9.WT/DS166/R
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3. Article 3.2 sets no time limit on the obligation to keep this information confidential.  Contrary
to New Zealand’s suggestion, there is no provision that magically transforms information that is
confidential in the USITC investigation into non-confidential information that may be disclosed once
the matter goes to a WTO panel.
4. Apart from its inconsistency with the Safeguards Agreement, adoption of New Zealand’s
proposal would harm not only domestic producers in importing countries, but also importers and
producers from exporting countries.  For example, the USITC Report redacted not only confidential
information submitted by domestic producers, but also confidential information submitted by
exporting producers from Canada, Australia and the European Union, as well as by US importers of
wheat gluten.2
5. Furthermore, notwithstanding the redaction of confidential information,  the USITC report
adequately discloses the information on which the USITC based its findings.  The panel’s role is to
determine:  (1) whether, in making its findings and determination, the competent authority considered
all relevant factors, including those listed in Article 4.2(b); (2) whether the published report contains
an adequate explanation of how the facts support the determination made; and (3) whether thedetermination made is consistent with the Safeguards Agreement.  Nothing in this proceeding
suggests that in order to accomplish this task, th e Panel needs to examine and verify all the data
examined by the USITC during its investigation.
6. New Zealand purports to base its argument on the decision of the Appellate Body in Canada
– Aircraft.
3  But Canada –Aircraft is irrelevant in this proceeding because it provides no guidance
with regard to Article 3.2 of the Safeguard Agreem ent.  The Appellate Body did not address how and
under what circumstances a member should or could disclose confidential information to a Panelconsistent with the specific requirements of Article 3.2.
Q.3 In the view of the parties, is the Panel able to perform an "objective assessment of the matter
before it" within the meaning of Article 11 of the DSU on the basis of the ITC Report issued in
March 1998 (with the "corrigendum" submitted by the United States in these proceedings)?
Reply
7. Yes.  The Panel’s role consists of evaluating on an objective basis issues on which it finds
that the EC has made the required prima facie  case.  The USITC report in its public version (with or
without the recently produced “corrigendum”) provides sufficient information for the Panel toconduct the analysis required by Article 11 of the DSU regarding the relevant facts and circumstances
considered by the USITC that underlay  its determination that increased imports were causing serious
injury to the domestic wheat gluten industry.
8. The redaction of confidential information in the published USITC report does not materially
affect the Panel’s ability to conduct this review.  In its first submission, the EC raised two issues
regarding the redaction of confidential informa tion in the USITC report: (1) questions about the
pricing data for the US wheat gluten market (EC First Submission at Paragraphs 49, 82); and (2)
questions about the allocations methodologies used by the US producers in determining profitability.
(EC First Submission at Paragraph 67).
9. As to the first issue, pricing data, the EC’s initial objection was based on a misunderstanding
of the USITC report.  In discussing the import surge, the report stated that EU imports had
                                                     
2 US Exhibit 4 at II-22-24.
3 Canada -- Measures Affecting the Export of Civilian Aircraft  (WT/DS70/AB/R) 2 August 1999.WT/DS166/R
Page 286
consistently undersold domestic wheat gluten.4  The context made it clear that this statement referred
to consistent underselling during the import surge of 1996-1997.  The EC’s criticism was based on
another statement in the USITC report showing six quarters of overselling during the overall 1993-
1997 period, which the EC argued was inconsistent with the USITC’s findings.5  However, the six
quarters in which EU imports oversold the market all took place during 1993-1995, before the importsurge.
6  Thus, as the USITC found, the consistent underselling in 1996-1997 coincided with the surge
in EU and total imports.  Accordingly, the submis sion by the United States of the corrigendum only
confirms that the EC’s argument was base d on a misunderstanding of the USITC Report.
10. As to the second issue, the EC complains about the redaction of certain information regarding
the allocation methodology used by individual firms.  This kind of data, however, is manifestlybusiness sensitive in nature, and the USITC is prohibited from disclosing it  -- both as a matter of
domestic law and as required by Article 3.2 -- without  the consent of the submitting firms.  While the
EC has complained about the redaction of aggregat e data, it has acknowledged the need to protect
business confidential data relevant to individual firms.  EC First Submission at Paragraph 49.  The
allocation methodology information redacted from the USITC report is precisely of this nature.
Q.4 Could the parties clarify whether the EU had  access to the “confidential information” in
question in the domestic proceedings before the ITC?  If the EC did have access, under what
conditions?
Reply
11. Under the USITC’s rules, the EC could ha ve applied to be a party to the USITC
administrative protective order governing the confidential information at issue, pursuant to which its
counsel would have had access to the information.  But the EC never made such an application, and
thus did not have such access.  The counsel for the European producers (Association des
Amidonneries de Cereales de l’U.E.) did agree to the administrative protective order and thus did
have access to the confidential information.
12. Under USITC rule 206.17(a)(3)(D)(iii)(B), concerning governments as interested parties, the
EC qualified as an interested party and could have applied to be a party to the administrative
protective order.  While the EC filed an entry of  appearance early in the USITC investigation, and
participated in the remedy hearing, it chose not to actively participate during the injury phase and did
not exercise its right to obtain the confidential information available under the administrativeprotective order.
Q.5 We note the recent statement of the Appellate Body that the phrase "as a result of unforeseen
developments and of the effect of the obligations incurred by a Member under this Agreement,
including tariff concessions" in Article XIX:1(a)  of the GATT 1994 does not establish independent
conditions for the application of a safeguard measure additional to the conditions set out in thesecond clause of Article XIX:1(a), but it "describes certain circumstances which must be
demonstrated as a matter of fact in order for a safeguard measure to be applied consistently with the
provisions of Article XIX of the GATT 1994.
7
What could constitute such "unforeseen devel opments"?  By whom mu st such developments
be "unforeseen"?  In this case, what precisely were the circumstances constituting "unforeseen
developments" and where are these addressed in the ITC Report?
                                                     
4 US Exhibit 4 at I-16.
5 EC First Submission at Paragraph 82; US Exhibit 4 at II-36.
6 US Exhibit 10 at II-33.
7 Appellate Body Report, Argentina – Footwear , paras. 92 ff.; Appellate Body Report, Korea – Dairy ,
paras. 85 ff.WT/DS166/R
Page 287
Reply
13. The introductory language in Article XIX  was intended to ensure that any increase in imports
that may result in serious injury or threat of serious injury to a domestic industry is not simply theresult of (1) negotiated tariff reductions; or (2) factors of which the negotiating WTO Member was
aware at the time of the tariff concession.  Thus, unforeseen developments would include significant,
unexpected changes in the marketplace as compared to the situation that pertained at the time of the
tariff concession.  The developments summarized below, which resulted in a surge of low-priced EC
imports into the US in 1996-1997, were not foreseen -- and indeed could not have been expected -- bythe United States at the time the wheat gluten tariff concession was negotiated in 1994 as part of the
Uruguay Round.
14. Moreover, the 1996-97 import surge, and accompanying underselling of EC wheat gluten,
was not the result of the modest decrease in the US wheat gluten tariff negotiated in the Uruguay
Round.  The decline in the average price of EU wheat gluten from approximately $0.78 per pound in1994 before the tariff reduction to approximately $0.57 per pound in 1997 -- a decline of
approximately 27per cent -- cannot be accounted for by the much smaller declines of 1.1 per cent and
0.6 per cent in the US general rates of duty on wheat gluten between 1994 and 1997.
8
15. Indeed, in considering whether to recommend that the wheat gluten safeguard take the formof a tariff increase, the USITC found that wheat gluten appears to be largely insensitive to changes in
wheat gluten price and tariff levels.
9  Thus, the modest drop in the US wheat gluten tariff does not
explain the massive increase in imports during the 1996-97 period.
16. In fact, the USITC’s findings show that the 1996-97 import surge reflected a change in
market conditions that could not have been anticipated from prior market conditions.   The USITC
found that during 1993-95, imports both oversold and undersold the US wheat gluten market, and
import market share fell slightly.10  These trends gave no reason to believe that the mixed pricing
pattern would suddenly be replaced by a pattern of consistent underselling by EC imports, causingsuch a massive increase in imports that domestic production and shipments actually declined during a
period of growth in demand.
17. As the USITC findings show, this dramatic change in market conditions did not result from
developments in the wheat gluten market itself.  Rather, the USITC found that it resulted primarily
from a huge increase in EC production capacity aimed at increasing production of  wheat starch (a co-product of wheat gluten).
11  The EC wheat starch market is protected by high tariffs from import
competition, and its high domestic wheat starch prices encourage EC domestic production.12  I n
addition, the EC operates a number of programmes, including starch production  refunds, to enhance
the production of wheat starch.13
                                                     
8 US Exhibit 4 at II-33, Table 18.  The general US rate of duty on wheat gluten (other than wheat
gluten to be used as animal feed) was 8 per cent ad valorem in 1993-1994, and under concessions negotiated inthe Uruguay Round the United States agreed to reduce this rate in six stages to 6.8 per cent ad valorem in 2000.In 1997, the rate was 7.4 per cent ad valorem.  The United States agreed to reduce the general US rate of duty on
wheat gluten to be used as animal feed from 4 per cent ad valorem (in 1993-1994) to 1.8 per cent ad valorem in
2000; the rate was 2.9 per cent ad valorem in 1997.  EC First Submission at Paragraph 42; EC Exhibit EC-9; USExhibit 4 at II-6.
9 US Exhibit 4 at I-26; see also  US Exhibit 4 at I-17, I-24.
10 US Exhibit 4 at I-16, II-36.
11 US Exhibit 4 at I-24.
12 US Exhibit 4 at I-24, II-38-39, and n.  95.
13 US Exhibit 4 at I-24, n.  119.WT/DS166/R
Page 288
18. The USITC specifically found that EC wheat gluten production was not responsive to changes
in wheat gluten prices, but rather was driven by EC production of wheat starch.14  The USITC also
found that the high prices for wheat starch in its protected home market allowed the EC the flexibility
to sell wheat gluten at low prices, including its exports to the United States.15  Thus, developments in
the EC wheat starch market led to an increase in  EC production of wheat gluten, and to increased EC
exports of wheat gluten to the US at relatively low prices, for reasons unrelated to conditions in the
US or European market for wheat gluten.
19. Even the participants in the US wheat gluten market did not foresee these developments.  As
proof, one need only consider the fact that the US industry considerably expanded its capacity (largely
completed by June 1995), and a new US market en trant, Heartland Wheat Growers, began building a
new plant in 1993 and started production in 1996.16  As the EC itself has observed, such investments
were inconsistent with the expectation that imports would grow substantially in excess of the increase
in demand, as they did.  In short, circumstances in the marketplace would not and did not lead the
United States to foresee the developments that led to increased imports in 1996-97.
20. As the Panel’s question recalls, the unforeseen developments are circumstances to be
demonstrated, not conditions that must be found by the competent authority in order to make an
affirmative injury finding under the Safeguards Agreement.  In any event, the USITC Report makes
clear that the United States did not foresee the developments that led to increased wheat gluten
imports from the EC.
Q.6 In paras. 73-77 of its first written submissi on, the EC argues that the ITC failed to take
several "relevant" factors into account in its "serious injury" analysis (i.e. capital investment; new
entries/expansion; developments as to co-products, "imports as positive business strategy").  We notethat, in the summary of parties' arguments in th e relevant section of the ITC Report (pp. I-11, I-12),
while it appears that the EC raised arguments co ncerning "profitability" with respect to wheat
starch/wheat gluten, it is not clear that the EC ra ised the other factors just mentioned as "relevant" in
this context in the ITC proceedings.  Can the parties clarify whether or not the EC did raise these
issues in this context before the ITC?  If the EC did not raise them before the ITC in this context, whatconsiderations should guide the Panel in any examination of these factors or of their "relevance" in
this context?
Reply
21. The EC itself did not raise any of these issues in the USITC proceedings, although it could
have do so had it wished.  According to the USITC’s public docket list, the EC filed a notice of
appearance with the USITC early in the investigation, did not participate during the injury/causation
phase of the investigation, but then did appear and argue at the USITC remedy hearing.  The EC’s
arguments at the remedy hearing did not address the issues pertaining to the USITC’s “serious injury”analysis.
22. The European producers raised some but not all of these issues during the USITC
proceedings, although not necessarily in the same way that the EC has raised them before this Panel.
It appears that the European producers did raise argu ments, in at least some form, about developments
in co-product markets, about new entries and expansion in the US market, and about imports as analleged business strategy.
23. A review of the record shows that no party in the USITC investigation raised the EC’s
argument regarding the productivity of “capital investment.”  Thus, at least one of the arguments now
                                                     
14 US Exhibit 4 at I-24.
15 US Exhibit 4 at I-24-25, II-38.
16 US Exhibit 4 at I-12, II-8.WT/DS166/R
Page 289
raised by the EC in paragraphs 73-77 of its first submission is being raised in this Panel proceeding
for the first time.  The Panel should treat the failure by the parties to raise that issue during the USITC
investigation as supporting the conclusion that the i ssue is not relevant for the reasons stated in the
United States’ response to Panel Question #7.17
Q.7 Does the language of Article 4.2(a) of the Safeguards Agreement ("¼the competent
authorities shall evaluate all relevant factors of an objective and quantifiable nature having a bearing
on the situation of that industry") impose an obligat ion on the competent authorities to themselves
undertake an inquiry into "all relevant factors" even if these are not raised in the proceedings before
it?  If so, what is the nature and scope of this obligation?
Reply
24. Article 4.2(a) goes on to enumerate certain factors that the competent authorities “shall
evaluate.” Thus, there is no doubt that a competen t authority should undertake an inquiry as to these
specifically enumerated factors regardless of whether they are raised by the parties.
25. However, with respect to injury causation factors not specifically enumerated in
Article 4.2(a), the competent authority should in general be able to rely on the interested parties (e.g.,
importers and foreign producers, as well as domestic producers) to bring them to the authority’s
attention and raise arguments regarding the weight that the authority should attribute to them.  In view
of their intimate familiarity with the marketplace and their own commercial interests, the market
participants are in the best position to know of, and have every incentive to point out additional
factors -- such as other sources of injury to the domestic industry -- meriting examination by thecompetent authority.   Indeed, the USITC has long  relied on the comments and arguments of the
market participants to help it identify and analyze relevant causation factors.  If the parties fail to
mention particular factors during the course of the investigation, it strongly suggests that those in the
best position to know did not view those factors as significant.
26. The proposition that a competent authority may properly rely on the interested parties to
identify factors other than imports that may have caused or contributed to injury finds strong support
in a related context.  As the United States pointed out in paragraphs 130-131 of its first submission
here, in United States – Salmon-
18  the Panel addressed arguments about the interpretation of
Article 3.4 of the Agreement on Implementation of Article VI of the General Agreement on Tariffs
and Trade (also known as the Tokyo Round Anti-Dumping  Code).  The terms of Article 4.2(b) of the
Safeguards Agreement were drawn from that earlier provision.
27. The panel noted first that there was another provision, Article 3.3 of the Tokyo Round Anti-
Dumping Code (comparable to Article 4.2(a) of the Safeguards Agreement) that provided that the
investigating authorities must conduct “an evaluation of all the relevant economic factors and indices
having a bearing on the state of the industry,” and specifically enumerated certain factors that must beconsidered.  United States -- Salmon at Paragraphs 493, 557.  In interpreting the language in
Article 3.4, which, like Article 4.2(b) of the Safegu ards Agreement, provides that the competent
authority may not attribute injury caused by other factors to increased imports,  the Panel stated “there
is no express requirement that investigating auth orities examine in each case on their own initiative
the effects of all other possible factors other than imports under investigation.”  Id. at Paragraph 550.
                                                     
17 Moreover, as the United States demonstrated in its first submission, the EC’s belated claims
regarding capital productivity are without merit, in that in its injury analysis the USITC fully considered andevaluated the facts concerning capital investments in the industry, as well as the effects of increased imports on
productivity.  United States First Submission at Paragraphs 95-97.
18 United States - Imposition of Anti-Dumping Du ties on Fresh and Chilled Atlantic Salmon From
Norway , ADP/87, BISD 41s/229, adopted by the Committee on Anti-dumping Practices on 27 April 1994.WT/DS166/R
Page 290
Thus, in construing comparable provisions of the Anti-Dumping Code, the United States -- Salmon
panel concluded that, in contrast to the requirement that enumerated factors must be considered, there
was no requirement that the competent authority investigate the effects of non-enumerated factors that
had not been raised by the parties.
28. Accordingly, the USITC could properly rely on the parties to identify and raise arguments
about causation factors other than those enumerated under Article 4.2(a).
Q.8 Article 4.2(b) of the Safeguards Agreement states :  "When factors other than increased
imports are causing injury to the domestic industr y at the same time, su ch injury shall not be
attributed to increased imports."  We note that the term used in this sentence is "injury" rather than
"serious injury".  What is the meaning and relevance, if any, of this distinction?
Reply
29. The language that the Panel has identified in Article 4.2(b) recognizes that in any given case,
factors other then increased imports may play a greater or lesser role in any injury sustained by thedomestic industry.  The choice of the term “injury” as opposed to “serious injury” in this context is
appropriate, since the role that non-import factors may play in any  particular case may be small and
thus may not amount to “serious injury” within th e meaning of Article 4.1(a).   By using the term
“injury,” Article 4.2(b) avoids specifying a threshold or limit for the degree of injury that may be
caused by such other factors.  In its larger context, the language suggests that in establishing “the
causal link” between increased imports and serious injury, the competent authority must avoid
attributing to increased imports any degree of injury caused by other factors.
Q.9 What is the legal basis in the Safeguards Agreement for a causation analysis that examines
whether or not certain factors are "a more importa nt cause of serious injury than increased imports"?
What guidance, if any, can be found on this issue in past GATT/WTO practice?
Reply
30. Article  4.2(b) of the Agreement on Safeguards provides that a safeguards determination
under Article 4 requires that the investigation demonstrate “the existence of the causal link between
increased imports of the product concerned and serious injury thereof.”
31. As the United States discussed in its first submission19  the USITC Report reflects that the
USITC conducted its examination under provisions of US law that provide that it must find not
merely the “causal link” to the serious injury, but also that imports must be a “substantial cause.”  19
U.S.C. § 2252(b)(1)(A).20  US law defines substantial cause as “a cause which is important and not
less than any other cause.”  19 U.S.C. § 2252(b)(1)(B).
32. This aspect of US law requires the USITC to make a finding related to causation that, while
not required by Article 4.2, helps to ensure that its objectives are realized.  The requirement to
examine the relative weight of other factors ensures that the USITC both thoroughly examines the
causal link between increased imports and serious injury, as required by Article 4.2(b), and avoids
attributing to imports the effects of other causes of injury that are more important.  While they result
in findings that provide more detail than required under Article 4.2(b), the relevant US procedures are
entirely consistent with its letter and spirit.
33. The United States wishes to stress that the EC has not challenged the compatibility of US law
on this point with the Safeguard Agreement, and thus this issue is not within the Panel’s terms of
                                                     
19 United States First Submission at Paragraphs 127-128.
20 US Exhibit 4 at I-14.WT/DS166/R
Page 291
reference.   The only matter with respect to Articles 2 and 4 of the Safeguard Agreement that has been
referred to this Panel  is whether the USITC’s findings and conclusion comport with those articles.
See Guatemala  -- Anti-Dumping Investigation Regarding Portland Cement From Mexico, AB-1998-6
at Paragraph 73 (2 November 1998) (“the ‘measure’ and the ‘claims’ made concerning that measure
constitute the ‘matter referred to the DSB’ which forms the basis for a panel’s terms of reference.”).See also United States -- Measure Affecting Imports of Woven Wool Shirts and Blouses from India,
WT/DS33/AB/R, at Paragraph 6 (“Given the explicit aim of dispute settlement that permeates the
DSU, we do not consider that Article 3.2 of the DSU is meant to encourage either panels or the
Appellate Body to ‘make law’ by interpreting existing provisions of the WTO  Agreement outside the
context of resolving a particular dispute.  A panel need only address those claims which must beaddressed in order to resolve the matter in issue in the dispute”).
Q.10 What is the legal relationship between Article 5.2 of the Safeguards Agreement and Article I
of the GATT 1994?  What legal principles and/or past GATT/WTO practice give guidance in this
context?
Reply
34. Article 5.2(a) sets forth the MFN principle for safeguard quotas, which is the lex specialis in
this case.  Any challenge to a safeguard quota should be judged under the terms of Article 5 and not
under the general MFN principle of GATT Article I.  Although no previous Panel has examined this
question under the Safeguards Agreement, GATT disputes relating to the relationship between
Article XIII and Article I are instructive because the language in Article 5.2(a)21 is identical  to
Article XIII:2(d) of the GATT with respect to the requirement that:
In cases in which a quota is allocated among supplying countries, the Member
applying the restrictions may seek agreement with respect to the allocation of shares
in the quota with all other Members having a substantial interest in supplying the
product concerned.  In cases in which this method is not reasonably practicable, theMember concerned shall allot to members having a substantial interest in supplying
the product shares based upon the proportions supplied by such members during a
previous representative period, of the total quantity or value of imports of the product,
due account being taken of any special factors which may have affected or may be
affecting the trade in the product.
35. GATT panel determinations that have addressed the question consistently have found that
claims of discrimination in the allocation of a quota properly should be raised under GATT
Article XIII, rather than Article I.  In EEC Rest rictions on Imports of Apples from Chile I, Chile
argued that the EEC’s import restriction against Chilean apples violated GATT Article I.  Contrary to
its present arguments, in that dispute the EC “maintained that its action, being a quantitativerestriction, should be examined in connection with the most-favoured-nation type commitment
contained in Article XIII".
22  The panel concluded that the restriction constituted a quota, and it
concurred with the EC that it was “more appropriate to examine the matter in the context of
Article XIII which deals with the non-discriminatory administration of quantitative restrictions, rather
than Article I:1.
36. Similarly, in a second adopted report in EEC -- Restrictions on Imports of Dessert Apples,
Chile again argued that the EC’s import quotas were discriminatory and thus a breach of Article I.
The EC maintained that, as this was a question on the administration of quantitative restrictions, it
should be examined “solely under Article XIII, which was the lex specialis.” The panel again
                                                     
21 The United States assumes that the Panel’s question is limited to Article 5.2(a).
22 EEC Restrictions on Imports of Apples from Chile  I, L/5047 - 27S/98, adopted 10 November 1980.WT/DS166/R
Page 292
concurred with the EC, noting that the issue concerned the non-discriminatory administration of
quantitative restrictions, thus Article XIII is the lex specialis in that case.  Finally, as noted in the US
first submission, the Appellate Body in EC - Regime for the Importation, Sale and Distribution of
Banana23 endorsed the notion that allocation of quantitative restrictions is outside the scope of
Article I in finding that the EC’s tariff rate quota on bananas under the Lome Convention was not
within the scope of the “Lome Waiver” of Article I.
37. The reasoning in those panels applies equally in this instance.  No matter what the EC’s legal
theory, the underlying claim is that the allegedly discriminatory application of a quota measure –
either as a violation of Article 5.2(a) or 5.2 (b) -- l eads to a violation of Article I.  The EC’s position
that Article I addresses quotas is incorrect as a matter of law.  A claim of discrimination relating toquotas properly is raised either as a violation of Article 5, in the case of safeguards, or GATT
Article XIII.  But the US safeguard measure cannot be inconsistent with GATT Article I because it is
a quota, not a tariff measure.
Q.11 Can the parties indicate whether consultations took place on 24 April 1998 as the United
States is suggesting, and, if so, whether the parties discussed the measure proposed in theUnited States notification of 24 March 1998?
38. The United States has provided exhibits to the Panel conclusively demonstrating that the
parties held several consultations, including the consultations that took place on 24 April 1998.
39. In a letter dated 8 May 1998, the EC representative noted that consultations concerning the
wheat gluten investigation took place on 24 April 1998 and that “it was mentioned that the US was
considering a possible remedy in the form of a quota which would involve a departure from themethod of proportionate allocation provided for in Article 5.2(a).
24  The letter further sates that “if
such a departure from Article 5.2(a) is envisaged,” the EC expected that further consultations would
take place under Article 12.3
40. In a letter dated 14 May 1998, the EC representative referenced “formal” consultations on the
wheat gluten issue that occurred as far back as 11 July 1997.  The letter goes on to request “informal”consultations without prejudice to the further “formal” WTO consultations that were scheduled for
22 May 1998.  The EC representative provided a list of six questions to the United States on
21 May 1998, in preparation for consultations scheduled for the following day.  These questions
raised the EC’s concerns regarding the US “recommended measure”.  The United States’ records
indicate that consultations did in fact take place, and the EC does not appear to deny that contention.Thus, the EC’s own documents demonstrate that, far from refusing to consult, the United States
engaged in multiple consultations with the EC on the measure.
25
Q.12 On page 34 of its oral statement, the EC refers to an "informal meeting" held on 19-20 May 1999.  Do the parties consider that this meeting constituted "consultations" within the
meaning of Article 12.3 of the Safeguards Agreement?
Reply
41. Article 12.3 of the Safeguards Agreement ma kes no mention of “formal” or “informal”
meetings, it refers merely to “prior consultations.”   The object and purpose of Article 12.3, as clearlystated, is to provide Members with a substantial interest the opportunity to consult with the Member
proposing to apply the measure.  That objective is satisfied when the parties concerned meet and
                                                     
23 WT/DS27/AB/R
24 Letter of 8 May 1988 from J-J. Bouflet, Minister Counsellor of the European Commission to
B. Kasper, Second Secretary Permanent Mission of the United States.
25 See US Exhibit 11 and 12.WT/DS166/R
Page 293
discuss the matter, regardless of whether that meeting is designated as “formal” or “informal.”
Therefore, as the EC itself admits, the parties met on 19-20 May 1999 and discussed the matter.
Accordingly that meeting forms a part of the “consultations” between the parties.  As noted above,
however, the meeting on 19-20 May does not constitute the only consultations between the parties.  In
view of the multiple consultations held with the EC –  both “formal” and “informal” –  the UnitedStates has amply satisfied that requirement.
26
Q.13 With respect to production, capacity and capacity utilization, what is the meaning andrelevance of the following statement at p. II-14 of the ITC Report:  "ADM, Manildra and Midwest
reported that dryer capacity defines the limit on production capacity for wheat gluten."
Reply
42. According to what these producers reported to the USITC, their dryers are the piece of
equipment that constrains and sets the upper limit on their production capacity for wheat gluten.  In
other words, other pieces of equipment may allow them to produce more in a given period of time, buttheir dryers serve as a bottleneck.  The relevance is that the piece of equipment that serves as a
bottleneck determines their practical capacity for that product.
43. Separate dryers are used for wheat gluten and wheat starch.  After the starch and gluten are
separated from each other, they are submitted to special processes, including drying.
27
B. QUESTIONS TO THE EC
Q.14 In its first written submission, the United St ates indicates that the ITC has now prepared a
corrigendum to the public report that provides the portion of the pricing data and certain otherinformation that can be disclosed, and attached it as Exhibit 10.  The United States also expresses
that it is "confident that this greater degree of disclosure will allay the EC's concerns."  How does the
EC react to this statement? What, in your view, is the status of this corrigendum in these proceedings?
Reply
44. The Safeguards Agreement sets out two requirements concerning the publication of reports:
(1) Article 3.1 requires that the competent authorities “publish a report setting forth their findings and
reasoned conclusions reached on all pertinent issues of fact and law”, and (2) Article 4.2(c) requires
that the competent authorities “publish promptly, in accordance with the provisions of Article 3, adetailed analysis of the case under investigation . . . .”  Neither provision specifies the level of detail
required, and neither provision specifically requires that all information be published.
45. The United States submits that the report as initially published by the USITC satisfied the
publication requirements of Articles 3.1 and 4.2(c).  The United States brought forward these
previously unpublished facts in response to a claim  made by the EC in ¶¶ 56 and 82 of its FirstSubmission.  The EC claimed that the USITC did not have evidence to support its finding that imports
of wheat gluten from the EC consistently undersold US wheat gluten in 1996 and 1997.  This
previously unpublished information (it was included in the confidential version of the USITC’s report
but not in the public version) supports the USITC’s finding.
46. There is no transparency issue here despite the EC’s claim to the contrary in ¶ 29 of its Oral
Statement.  The USITC’s finding was clear on its face and was supported by evidence in the record of
                                                     
26 Presumably, the EC would define “informal” to mean those consultations that are not specifically
designated in writing as consultations held under Article 12.3 of the Safeguards Agreement.
27 US Exhibit 4 at II-7, Figure 1.WT/DS166/R
Page 294
the investigation.  Furthermore, in the course of the USITC ’s investigation, the European producers
had access to all the confidential business information in the record of the USITC investigation ,
including the pricing data at issue here, under an administrative protective order.  Accordingly, they
had full opportunity to review the information a nd make any arguments they deemed appropriate.
Moreover, as pointed out in the response to panel question 4, the EC could have had access to theconfidential information itself, but chose not to apply to become a party to the administrative
protective order.  Thus, the EC complaint about a lack of transparency vis-a-vis the exporting Member
are without merit.
47. The United States further notes that the EC has not challenged the USITC’s redaction
procedures.  Although the EC has not disputed that  publishing aggregate data in certain circumstances
can have the effect of disclosing a company’s confidential information to competitors, the EC has
simply stated that any redaction of aggregate information is improper.  Thus, the EC has not raised a
legal claim with respect to these pricing data that this Panel must decide.
Q.15 What is the motivation underlying the assertion in paragraph 49 of the EC first written
submission that "[t]his requirement presupposes that the detailed analysis and the demonstration of
the relevance of factors are published and not held secret, unless confidentiality is really an issue"?
Is the EC asserting that confidentiality is not really  an issue here?
Reply
48. The EC has acknowledged the obligation to protect business confidential data submitted byindividual firms, but questions the USITC ’s reda ction of aggregate data.  EC First Submission at
Paragraph 49.  However, the US had ample reason to redact the aggregate. Throughout much of the
investigative period there were only three US producers, one of which was not able to provide US-
specific information on its operations, and not all producers engaged in each activity for which the
USITC sought information (e.g., not al l US producers imported wheat gluten).
49. Thus, in many instances the USITC had data for only two firms, and publication of aggregate
data would have risked disclosure of each firm’s confidential competitive information to its
competitors.  Pursuant to its long-standing policies, the USITC redacted all aggregate data that risked
such disclosure.  The EC’s arguments do not provide any basis for disputing the confidentiality claims
of the competing firms involved, and likewise do not suggest any way for the United States to
disclose the confidential information consistent with  its obligations to preserve the confidentiality of
the information submitted to it.
Q.16 Is the EC arguing that it was/is prejudiced  in any way in these WTO dispute settlement
proceedings from the ITC's treatment of confidentia l information in the public version of its report?
If so, in what way?
Reply
50. The EC was not prejudiced by the USITC’s treatment of confidential material.  As pointed
out in the response to Panel question 4, the EC could have had access to confidential information in
the USITC proceeding, as the European producers did, but chose not to apply to be a party to theadministrative protective order governing that material.
51. The redaction of confidential information in the published USITC report does not materially
affect the Panel’s ability to conduct this review.  The Panel’s role does not entail verifying all the data
examined by the USITC during its investigation.WT/DS166/R
Page 295
52. Furthermore, as explained in response to Panel question 3, the EC’s only specific objections
concerning the redactions of confidential information in the USITC report were based on a misreading
of that report, and fail to show any prejudice to it in these WTO dispute settlement proceedings.
Q.17 We note that the EC did not refer to Arti cle 3 of the Safeguards Agreement in its panel
request.  In what way and on what legal basis is the EC referring to Article 3 of the SafeguardsAgreement in these proceedings?
53. In ¶¶ 28 and 29 of its First Oral Statement the EC sets out a new claim against the
United States under Article 3.2 of the Safeguards Agreement.  Because the EC did not reference
Article 3 in its panel request, this claim falls outside the terms of reference of this Panel.Accordingly, the Panel should disregard the claim and any arguments made by the EC under it.
54. In ¶ 28 of its statement, the EC asserts in pertinent part that–
Article 3.2 of the SA certainly allows that information which truly must be kept
confidential, is not included in the public version of the report of a safeguard
investigation without permission by the company concerned.  However, the ITCreport oversteps this provision by not even providing aggregate data. [Emphasis in the
original.]
The EC then asserts in ¶ 29 of the statement that “The EC submits that the US refusal to disclose
pertinent information even in an aggregate form c onstitutes a very serious violation of the US WTO
obligations . . .” and then cites several reasons.
55. The United States agrees that Article 4 requires that the competent authorities publish, in
accordance with the provisions of Article 3, “a detailed analysis” of the case under investigation and a
demonstration of the relevance of the factors examined.  Article 4 does not require the competent
authorities to publish all non-confidential informat ion, but only to publish a detailed analysis and
demonstration of the relevance of the factors examined.  Any further claim based on Article 3.2 of the
Agreement is beyond this Panel’s terms of reference, and the Panel’s terms of reference with respectto Article 3 are limited to the extent that a claim arises under Article 4.  As was made clear by the
Appellate Body in European Communities – Hormones, “Panels are inhibited from addressing legal
claims falling outside their terms of reference".
28
56. The United States has explained its reasons for not publishing confidential businessinformation in its responses to panel questions 2, 3 and 15 above.
Q.18 At p. I-13 of its Report, the ITC states that it "received usable financial data on wheat gluten
operations from three of the four domestic produce rs of wheat gluten. The three firms accounted for
the substantial majority of domestic production of wheat gluten."  Why precisely does the EC object to
this degree of data coverage and on what legal basis?
Reply
57. The USITC findings fully complied with all the requirements of Article 4 of the Safeguards
Agreement, including with regard to consideration of profit and loss data relating to the condition of
the domestic industry.  As noted in the excerpts from the USITC report quoted in the question, the
                                                     
28 Appellate Body Report, EC Measures Concerning Meat and Meat Products (Hormones) ,
WT/DS26/AB/R, WT/DS48/AB/R, adopted 13 February 1998, para. 156.  This finding in European
Communities – Hormones was cited by the Appellate Body in Korea – Dairy  at para. 139.WT/DS166/R
Page 296
USITC received usable data from three firms accounting for the great majority of domestic
production.
58. As explained in Paragraph 105 of the First Subm ission of the United States, the data furnished
by one of the four domestic wheat gluten producers included financial information on that firm’s
Canadian and United States operations combined, and thus did not provide usable data on theprofitability of the US operations alone.  The Safeguards Agreement does not require 100 per cent
data coverage, and the data coverage that the USITC received on profitability of US operations,
representing a  major proportion of the total domestic production of wheat gluten, is fully consistent
with Article 4.1(c) of the Safeguards Agreement.
Q.19 In paragraph 165 of its first written submission, the EC argues that paragraph 3 of Article 12
"provides further clarification that the measure shou ld be notified immediately when it is proposed,
not after it has been put into place".  Does the EC consider that both the proposed measure and the
final measure have to be notified?
Reply
59. The United States notes that it notified both its proposed measure (Article 12.1(b)
supplemental notification), and its final measure (Artic le 12.1(c)).  The EC appears to take exception
to the United States’ Article 12.1(c) notification, which identified the final measure, because it was
notified one day after the measure became effective.  Under the EC’s reading, the United States was
obligated to notify the measure it actually imposed -- i.e., the final measure -- before it could be
imposed.
60. The EC’s reading simply ignores the fact that Article 12 refers to “proposed measures” and
not final measures.  The purpose of Article 12's notification requirements, as the Appellate Body has
found, is to provide transparency so that potentially affected Members may have information
concerning the facts of the case in order that they might decide to request consultations, which in turn
may lead to modification of the proposed measure.29  The EC had just such an opportunity.  The
United States fully and repeatedly consulted with the EC (and other affected Members) on the
proposed measure.  After consultations were concluded, the United States reflected on the views of
affected Members and it imposed a measure consistent with the obligations of the Safeguards
Agreement.
Q.20 If a proposed measure is altered before it is  imposed, must the modification be notified prior
to imposition of the measure?
Reply
61. The Safeguards Agreement does not require a Member to notify the modification of a
proposed measure before the final measure can be applied.  Article 12.2 states that in making their
12.1(b) and 12.1(c) notifications, Members shall provide to the Safeguards Committee “all pertinent
information” which includes a “precise description of the product involved and the proposed
measure” (emphasis added).  The purpose of that provision, as clarified in Article 12.3, is to permit
Members during consultations to exchange views on the measure proposed.  Once consultations havebeen completed, there is no provision in the Safeguards Agreement that prevents a Member from
modifying its measure – consistent with substantive requirements of the Agreement -- in order to take
into account the results of consultations.
62. Indeed, the EC’s reading of Article 12 would render consultations a meaningless exercise of
form over substance.  Under the EC’s reading a Member proposing to apply a safeguard would simply
                                                     
29 Korea – Dairy  AB Report at ¶ 111.WT/DS166/R
Page 297
ignore any suggestions offered up by potentially affected Members because incorporating those
suggestions would trigger another round of noti fications which would delay the Member from
applying the measure.
63. The objective of consultations is to provide potentially affected Members with ample
opportunity to comment on the competent authority’s investigation and to actively express their views
at a time when the Member proposing to apply a measure is deliberating on a course of action.  The
EC had exactly such an opportunity.  The United States consulted with the EC extensively prior to
applying the measure, thus the objectives of Article 12 were properly met.
Q.21 In paragraph 166 of its first written submissio n, the EC submits that the United States failed
to notify each and every step in Article 12.1 Safeguards Agreement in a timely manner. In paragraph200 of its first written submission, the United Stat es is arguing that the EC's interpretation of
Article 12 Safeguards Agreement suggests that a Member is obliged first to issue "preliminary"
findings of serious injury that the Committee would then examine and ratify.  Does the EC agree with
this interpretation of its argument?
Reply
64. Paragraph 200 of the first US submission addressed the argument in paragraph 168 of the
EC’s submission that “[i]n particular, the US notifications of the findings of serious injury and of the
decision were effected after the findings had been made and the measure was enacted”.  The EC
considered this to be a violation of Article 12 because the “findings and decision had to have been
made at a date that would have allowed the Committee on Safeguards and, possibly, the Council forTrade in Goods to request additional information and hold a meaningful discussion in a multilateral
forum.”  The United States’ comment merely suggested  that if its notifications on the findings of
serious injury were effected before the findings had been made they would constitute “preliminary”
findings.
Q.22 The United States argues that it notified the proposed measure and that consultations were
held. The United States refers to its notification pursuant to Article 12.1 (b) of the Safeguards
Agreement of 24 March 1998 (United States Exhibit 6). Could the EC explain why it does not
consider this notification to be a notification of the proposed measure ?
Reply
65. The EC’s contention appears based on an erroneous reading of Article 12 that would require
notifications before  a Member takes a decision to apply a safeguard measure.  In fact, Article 12
requires notification “upon taking a decision to apply . . . a safeguard measure.”  In other words
notification is to take place after  the decision is made.
Q.23 The United States is suggesting in paragraphs 205 and 208 of its first written submission that
the EC is claiming that Article 8 of the Safeguards  Agreement requires that substantially equivalent
concessions be provided before a Member, in casu  the United States, can take a safeguard action. Is
this a correct reflection of the EC's argument under Article 8 of the Safeguards Agreement?WT/DS166/R
Page 298
Reply
66. In paragraphs 205 - 208 of its submission, the United States sought clarification as to
paragraph 177 of the EC’s submission, which argued that:
By imposing certain specific conditions on the right of an affected Member to
withdraw substantially equivalent concessions, paragraph 3 of Article 8 is addressing
only the last step of the process.  It does not relieve Members from the obligation to
make every effort to maintain a substantially equivalent level of concessions when
imposing a measure under the Safeguards Agreement.  An affected Member would be
fully within its rights to request temporary concessions on other products to offset theconcessions impaired by the safeguard measure.
67. In response to the EC’s claim, in paragraph 205 of its first submission, the United States
noted that “if the EC’s allegation is that the United  States violated Article 8, then it is precisely the
Panel’s duty to determine what obligations, if any, Article 8 imposed and how the United Sates might
have been able to meet that obligation”.  The United States went on to articulate its interpretation ofthe obligations contained in Article 8.
Q.24 Does the EC agree with the United States that consultations within the meaning of
Article 12.3 of the Safeguards Agreement were held on 24 April 1998 regarding the proposed wheat
gluten safeguard measure?
Reply
68. See US Response to Panel Question 11.
Q.25 Could the EC expand on the relationship between Article XXVIII of the GATT 1994 and
Article 8 of the Safeguards Agreement?
Reply
69. The United States looks forward to reviewing the EC's response to this important question,
and the United States reserves its right to provide its views on the matter during its second oral
presentation.
C. QUESTIONS TO THE UNITED STATES
Q.26 At p. I-13 of its Report, the ITC states:  "Based on a careful review of the allocation
methodologies used by domestic wheat gluten producers in responding to the Commission's
questionnaire, we find those allocations to be appropriate."  Could the United States clarify the
nature of the "careful review" and clarify and elaborate upon the "allocation methodologies" referred
to?
Reply
70. In the financial section of the producers’ questionnaire sent to domestic wheat gluten
producers, the USITC provided specific instructions with respect to the submission of the financialdata.
30  The USITC directed that questionnaire recipients provide financial data on overall
establishment operations, combined wheat gluten/wheat starch operations, wheat gluten operations,
and starch operations. Firms that did not maintain separate internal profit-and-loss and cost of
production data for wheat gluten operations were directed to allocate costs between wheat gluten and
                                                     
30 A copy of the this questionnaire was attached as Exhibit 1 to the United States’  First  Submission.WT/DS166/R
Page 299
wheat starch to explain their allocation methodolo gy and provide worksheets with their calculations.
They were also instructed to indicate the account ing basis that they used (US generally accepted
accounting principles (GAAP), tax, cash, or other).31
71. All reporting firms stated that their financial data were prepared in accordance with GAAP.The majority of the responding firms maintained separate internal profit-and-loss and cost ofproduction data for wheat gluten on a regular basis and furnished such data to the USITC.  The
responding firm that did not maintain separate data made allocations, and provided the USITC with an
explanation of the basis for those allocations.
72. The accounting methodologies used by all the producers were reviewed by the USITC
accounting staff and checked for reasonable allocation methods to the extent the revenues and costswere not directly attributable to a particular product.  The USITC accounting staff found all of the
allocation methods to be in accordance with US generally accepted accounting principles.  It found
that differences among the methodologies used by the responding companies were principally a
function of differences in operations and reflected commercial realities.  Copies of the confidential
questionnaires submitted by domestic wheat gluten producers were made available to authorizedrepresentatives of the parties to the administrative protective order, including representatives of the
EU producer respondents.  The USITC considered the arguments made by EU producer respondents
with respect to the allocations in find ing the allocations to be appropriate
.32
73. In addition, the USITC selected the largest producer, Midwest Grain Products, Inc., for a two
day on-site verification in Atchison, Kansas on 3 and 4 December 1997.  This verification was
conducted by a USITC auditor, an independent cert ified public accountant (CPA).  The auditor
prepared a 50-page verification report, including exhibits, which was made a part of the USITC’s
record in the investigation.  Virtually all of the information in the report is confidential business
information.  However, the United States can provide the following information about the report
without disclosing confidential business information.  Midwest Grain, the company selected for
verification, is a public corporation whose stock is traded on the NASDAQ stock exchange.  The
USITC auditor confirmed that Midwest’s overall financial statements were prepared in accordancewith GAAP and were audited by an independent ce rtified public accounting firm in accordance with
US generally accepted auditing standards.  Midwest made these audits available to the USITC auditor.
74. To derive the wheat gluten financial data from the overall corporate financial data, the USITC
auditor at the verification conducted a reconciliation which entailed a detailed evaluation of the firm’s
operations and the accounting system.  The USITC auditor reconciled Midwest Grain’s questionnairedata on wheat gluten for each period with the product income and loss statements which were derived
from the audited financial statements.  This was possible as Midwest Grain prepares separate income
and loss statements on a monthly basis for each of its divisions, one of which is the wheat gluten
division.  The USITC auditor reviewed the financial statements for each division and any allocations
that might have been used, and tested their reasonableness with alternative allocation methods.
75. In addition, the USITC auditor confirmed that the allocation methods used by Midwest to
measure the financial performance of each division, to the extent allocations were necessary, had been
in use for a number of years and were not changed for purposes of the USITC wheat gluten
investigation.  The auditor concluded that the verification objectives were fully satisfied. number of
years and were not changed for purposes of the USITC wheat gluten investigation.  The auditorconcluded that the verification objectives were fully satisfied.
                                                     
31 US Exhibit 1, US First Submission, USITC producers’ questionnaire at 8.
32 US Exhibit 4 at I-13.WT/DS166/R
Page 300
Q.27 At p. I-14 of the ITC Report, the ITC states :  "While there has been minor improvement in
several factors during the most recent year, these improvements are isolated and do not change our
conclusion that the domestic industry is presently seriously injured."  Could the United States explain
how these "improvements" in each of  the "several factors" referred to are "isolated" and why did they
not affect the determination of serious injury?
76. As the United States pointed out in ¶¶ 75-76 of its First Submission in this proceeding,
Article 4.2(a) of the Safeguards Agreement requires competent authorities to evaluate “all relevant
factors of an objective and quantifiable nature having a bearing on the situation of that industry,” in
particular the several factors enumerated therein.  But Article 4.2(a) leaves to the competent
authorities the discretion to decide the relative weight  to be accorded to each factor, so long as they
reach a reasoned conclusion.  Thus, neither Article 4.2(a) nor any other provision in the Agreement
requires that any particular factor or number of factors be declining in any given year of the
investigative period, but only that the evidence with respect to the relevant factors provide a basis for
the competent authority to make a reasoned conclusion that the domestic industry is seriously injured.
77. The USITC noted that several indicators rose slightly in 1997 from very depressed levels in
1996.  For example, it found that domestic wheat gl uten industry capacity utilization declined from
78.3 per cent in 1993 to as low as 42.0 per cent in 1996 before rising slightly to 44.5 per cent in
1997.33  It also found that domestic production of wheat gluten rose from 128 million pounds in 1993
to 143 million pounds in 1995, fell sharply to 112 million pounds in 1996, and then increased to 122
million pounds in 1997.  However, the USITC noted that domestic wheat gluten production in 1997
remained at a depressed level and that it was 4.5 per cent lower than the 1993 level.34
78. At the same time, the USITC found that other indicators of serious injury declined in 1997
and reached their lowest level of the investigative period in that year.  For example, USITC found that
the share of the domestic market held by domestic wheat gluten producers fell to its lowest level of
the investigation period in 1997.35   It found that the profitability of the domestic wheat gluten
industry fell in 1996 and again in 1997, and that the industry operated at a loss in both years.36  The
USITC also found that average unit values for wheat gluten were at their lowest level of theinvestigative period in 1997, and that this decline in average unit values occurred at the same time that
average unit costs were rising
37   The USITC also found that worker productivity was at its lowest
level in 1997, and that as a result unit labour costs almost doubled during the period of the
investigation.38
79. The USITC reasonably concluded that those trends did not contradict the overall picture that
the domestic industry was in a state of serious injury.  The USITC appropriately characterized the
indicia that showed improvement in 1997 as “isolated” because: (1) major financial indicators
continued to fall, and (2) the indicators that did improve, improved only slightly and remained at
substantially depressed levels.
Q.28 In its causation analysis, in what manner did the ITC take into account injury attributable to
causes other than increased imports (inter alia, those that the United States refers to at para. 125 of
its first written submission as having "only a demonstrably minor role in the serious injury suffered by
the industry")?
Reply
                                                     
33 US Exhibit 4 at I-12.
34 US Exhibit 4 at I-13.
35 US Exhibit 4 at I-16.
36 US Exhibit 4 at I-13.
37 US Exhibit 4 at I-13.
38 US Exhibit 4 at I-14.WT/DS166/R
Page 301
80. In its causation analysis the USITC first established the existence of a clear causal link
between increased imports of wheat gluten and the serious injury being suffered by the domestic
wheat gluten industry.  The USITC found that virt ually all of the increase in wheat gluten imports
occurred in 1996 and 1997, and that most of this increase consisted of imports from the EU.  TheUSITC found that imports from the EU consistently undersold domestic wheat gluten in 1996 and
1997.  It also found that the share of the US market held by wheat gluten imports increased sharply in
1996 and 1997 to its highest level of the period of investigation.
81. The USITC found a direct correlation between the increase in wheat gluten imports and the
significant decline in domestic wheat gluten industry performance in 1996 and 1997.  Specifically, theUSITC found that domestic production, shipments, capac ity utilization, unit prices, industry financial
performance, and worker productivity all declined during the period of greatest import penetration
and in the face of rising domestic demand and consumption.
39
82. The USITC then examined factors other than imports which might be a cause of seriousinjury to the domestic industry.  The USITC separately examined each of the possible causesidentified by the participants in the investigati on, including changes in co-product markets, imports of
wheat gluten by domestic producers, competition among domestic producers, increased domestic
wheat gluten capacity, and rising raw material costs (for wheat and wheat flour), to determine whether
any of these possible causes was a more important cause of the serious injury than increased imports.
The USITC analysis clearly demonstrates that none of these other factors played more than a minor
role in contributing to the injury experienced by the domestic industry in 1996 and 1997 when the
surge in imports took place and the USITC found the US industry seriously injured.
83. The first of the other possible causes addressed by the USITC was the alleged change in co-
product markets.
40  The USITC examined US selling prices of wheat starch, which is the major co-
product of wheat gluten production.  The USITC found that, in contrast to the domestic selling price
of wheat gluten, the domestic selling price of wheat starch showed a gradual increase over the period
of investigation (“POI”).  The USITC found that weig hted-average wheat starch prices were at their
highest level of the investigative period in 1997.
84. Thus, there was no decline in wheat starch prices that either paralleled the sharp decline since
1994 of domestic wheat gluten prices or explained the sharp decline in the financial performance of
domestic wheat gluten producers.  In effect, the USITC found no causal link between developments in
the US wheat starch market and the 1996-97 decline in the condition of wheat gluten producers.Similarly, the USITC found the relative stability, and gradual increase, in domestic wheat starch
prices suggested that competition between corn starch and wheat starch was not likely to have had
much if any effect on wheat gluten production.
85. The USITC also considered evidence cited by importers that one domestic producer had
reduced its wheat gluten production in 1995 for reasons related in part to conditions in the alcoholmarket, and considered importers' claim that this explained that firm's poor financial performance.
The USITC found that this action explains only part of the problem faced by one producer and could
not be extrapolated to account for the problems facing all domestic producers, nor could it explain the
significant deterioration in 1996 and 1997 of the other three domestic producers, who accounted for
the majority of domestic production.  Indeed, the evidence did not even fully explain the decliningfinancial performance of that one producer in  its wheat gluten operations.   Accordingly, since the
USITC found the industry as a whole to be seriously injured in 1996-97, this factor, which had a
                                                     
39 US Exhibit 4 at I-10, 16.
40 US Exhibit 4 at I-16-17.WT/DS166/R
Page 302
partial effect only on the condition of one producer, was demonstrably minor in relation to the overall
cause of injury.
86. As for the alleged impact of imports of wheat gluten by domestic wheat gluten producers,41
the USITC found that imports by domestic purchasers remained relatively steady during the POI.
Thus, US producers were not responsible for the surge in imports that occurred in 1996 and 1997.Again, this factor could not be linked to the de terioration in 1996 and 1997 that the USITC found
constituted serious injury.
87. The USITC found that the domestic industry added substantial new capacity.
42  However, the
USITC found that the bulk of the increased capacity was added early in the POI in anticipation of
continued strong growth in domestic demand and consumption and before the surge in imports.  TheUSITC found that industry projections  of continued growth in demand and consumption were largely
correct, as apparent consumption increased nearly 18 per cent between 1993 and 1997.  The USITC
found that, had the domestic industry satisfied the growth  in demand rather than lost sales to the surge
in imports, the industry would have operated at 61 per cent of capacity in 1997.
88. The USITC found this to be a level much closer to previous capacity levels at which the
industry was able to operate profitably.  Accordin gly, the severe profitability and operating income
losses in 1996-97 could not be ascribed to increased capacity.  Nor would increased capacity explain
why US shipments and production in 1996-97 fell below prior levels.  Accordingly, although
increased imports could account for the conditions the USITC identified as serious injury, the increase
in capacity could not.
89. The USITC examined and rejected the claim that rising raw material prices as reflected in the
prices paid for wheat and wheat flour, the major inputs into wheat gluten/wheat starch production,were a more important cause of serious injury than increased imports.
43  Raw material costs did
increase during the POI, particularly in 1996 and 1997.44  However, the USITC found the evidence
indicates that wheat gluten producers historically were able to pass on the cost increases to their
customers, finding that demand for wheat gluten is relatively insensitive to price changes.45
90. This finding is supported by evidence in the confidential version of the USITC report which
shows that when raw materials costs rose in 1994, the average unit selling value of wheat gluten also
rose, and when the raw materials costs fell in 1995, the average unit selling value of wheat gluten also
fell.46  In 1996 and 1997, however, average unit selling values declined despite increased demand and
higher raw material costs.  The USITC concluded that this unusual development was explained by the
dramatic increase in relatively low-priced imports during the POI, which had the effect of drivingdown wheat gluten prices.
91. In summary, the causation analysis employed by the USITC was fully consistent with
Article 4.2(b) of the Safeguards Agreement.  The USITC investigation demonstrated, on the basis of
objective evidence, the existence of the required causal link between increased imports and serious
injury.  Through its examination of other alleged causes of injury, the USITC ensured that it did notascribe to increased imports the effect of other causes of injury.
Q.29 In the United States first written submission (para. 84), the United States asserts:  "While the
United States conducted a global investigation and examined imports fr om all sources, its
                                                     
41 US Exhibit 4 at I-17.
42 US Exhibit 4 at I-17.
43 US Exhibit 4 at I-17.
44 US Exhibit 4 at I-17.
45 US Exhibit 4 at I-17.
46 Confidential version of USITC Report at II-29; US Exhibit 4 at C-4.WT/DS166/R
Page 303
determination did not attribute injury from NAFTA imports to third countries"  We also note that in
the ITC report (p I-18), it states:  "Section 311 of the NAFTA Implementation Act provides that if the
Commission makes an "affirmative injury determination in an investigation under section 202 of the
Trade Act ¼", the Commission must also "find" wh ether –(1) imports of the Article from a NAFTA
country, considered individually, account for a substantial share of total imports; and (2) imports ofthe Article from a NAFTA country ¼ contribute importantly to the serious injury, or threat thereof,
caused by imports".
Is the Panel therefore correct in understanding that imports from Canada were taken into
account in order to reach a finding of serious injury, but that a separate causation analysis was thenperformed on imports from Canada?  If so, what is the legal basis in the Safeguards Agreement for
such a separate causation analysis?
Reply
92. In its analysis, the Commission found that the serious injury sustained by the domestic wheat
gluten industry was attributable to a surge in imports from the EU in 1996 and 1997, accompanied by
sustained underselling by EU producers.47
93. In a second step, the USITC examined Canadian imports alone and determined that they werenot a significant cause of the serious injury.  In particular, the USITC pointed to the fact that Canadian
imports declined significantly during the period, while overall imports increased, and that Canadian
imports generally oversold the market.
48  Thus, the  Panel is correct in its understanding that the
USITC conducted a separate causation analysis of Canadian imports to determine whether they
contributed importantly to the serious injury.  The results of that analysis make clear that the USITC’s
overall causation finding did not depend on the inclusion of Canadian imports.
94. Nothing in the Safeguards Agreement  proscribes an independent causation analysis for
imports originating in the territory of another free-trade area (FTA) participant or, indeed, suggeststhat only a single causation analysis is appropriate.  Article 4.2(b), which addresses causation
procedures generally, says nothing about the number or sequence of causation analyses that the
competent authority may undertake.  Rather, it esta blishes general rules for the authority to follow
when it examines causation issues.  Moreover, the EC has pointed to no relevant Article 4.2(b) defect
in either of USITC’s causation analysis.  Thus, there is no basis for the EC to challenge eithercausation finding.
Q.30 In connection with the exclusion of Canada from  the application of the United States wheat
gluten safeguard measure, is the United States  relying on Article XXIV of the GATT 1994?  If so, in
what way?
Reply
95. As noted above, the USITC conducted a separate causation analysis of NAFTA imports,
pursuant to US law and as required under Article 802 of the NAFTA.  The President  adopted the
USITC’s recommendation to exclude Canadian impor ts on the ground that they did not contribute
importantly to the serious injury that the USITC had found.
96. Article 2.2 of Safeguards Agreement establishes a general rule that “[a] safeguard measure
shall be applied to a product being imported irrespective of its source.”  In addition, Article 5.2
establishes specific rules for allocating safeguard quotas.  Neither article makes  specific reference to
                                                     
47 US First Written Submission at ¶ 85.
48 US Exhibit 4 at I-19, I-29.WT/DS166/R
Page 304
application of safeguard measures by the participants of customs unions and FTAs to imports from
other countries participating in the union or FTA.
97. Specific provisions addressing these issues are found in footnote 1 of the Safeguards
Agreement, appended to Article 2.1.   The last sentence of footnote 1 states that “Nothing in this
Agreement prejudges the interpretation of the relationship between Article XIX and paragraph 8 ofArticle XXIV of GATT 1994.”
98. Footnote 1 establishes two important principles.  First, it demonstrates that the framers of the
Safeguards Agreement recognized a connection (“the relationship”) between safeguards measures
(Article XIX) and customs unions and FTAs, as defined in Article XXIV:8.  Second, the footnote
makes clear that the negotiators of the Safeguards Agreement sought to avoid any implication that theprovisions of the Safeguards Agreement could be invoked to change that nexus (“Nothing in this
Agreement prejudges the interpretation”).
99. Thus, to determine Members’ rights and obligations regarding the application of  a safeguard
measure in the context of an FTA, one must look to the applicable provisions of the GATT 1994,
namely Articles XIX and XXIV:8 in the first instance.  In particular, the footnote makes clear that the
non-discrimination requirement of  Article 2.2 of the Safeguards Agreement, and the quota allocation
rules of Article 5.2, are not pertinent in assessing the safeguards treatment accorded by a customs
union or FTA member to goods originating in other  participant countries.
100. To sum up, the question of how an FTA member may (or must) treat imports from its FTA
partners when it applies a safeguard measure cannot be answered by reference to the Safeguards
Agreement.  Rather, the answer is to be found in the rights and obligations associated with FTAs as
those rights and obligations may apply in the context of safeguards measures contemplated byArticle XIX.
101. GATT Article XXIV:8(b) provides as follows:
A free-trade area shall be understood to mean a group of two or more customs
territories in which the duties and other restrictive regulations of commerce (except,
where necessary, those permitted under Articles XI, XII, X III, XIV, XV and XX) are
eliminated on substantially all the trade between the constituent territories in products
originating in such territories.
102. We do not understand the EC to question as a factual matter that the US is a participant in the
NAFTA, that the NAFTA constitutes an FTA for purposes of Article XXIV:8, or that the NAFTA
requires the United States to exempt Canadian and Mexican wheat gluten imports from a globalsafeguard measure, unless those imports “contribute importantly” to injury and “account for a
substantial share” of imports.
103. That the NAFTA constitutes a free trade area for purposes of Art. XXIV:8 is well
documented in the relevant working party reports.  The safeguard exemptions set out Article 802 of
that agreement, were introduced upon the formation of the NAFTA.  The EC  has not questioned thefact that Article 802 constitutes a critical compone nt of the free-trade.   The importance the NAFTA
parties attached to this provision is illustrated by the fact that NAFTA Article 802 was also included,
in slightly different form, in Article 1102 of the  1988 United States - Canada Free-Trade Agreement.
Article 1102 required Canada and the United States to exempt each other’s products from any  global
safeguard measures they imposed while the agreement was in effect, subject to the same sort ofexceptions included in NAFTA Article 802.
49
                                                     
49 Article 1102 of the US – Canada FTA provides in relevant part:WT/DS166/R
Page 305
104. Finally, we do not understand the EC to contest the proposition that  under GATT
Article XXIV, the  governments of a free-trade  area may agree to exclude each other’s goods from
Article XIX safeguard measures as part of an agreement to eliminate “duties and other restrictive
regulations of commerce” on “substantially all the trade between the[ir] constituent territories in
products originating in such territories.”  In a si milar vein, the EC has stated that “the European
Communities does not question the right of a member of a customs union to exclude other members
of that customs union from the scope of a safeguards measure".50
105. In fact, the EC’s complaint in respect of US treatment of Canadian imports is procedural innature.  It argues that the United States was prohibited from excluding Canadian imports from its
wheat gluten safeguard measure because they were included for purposes of  assessing global injurycausation.  But the EC fails to point to any provision of GATT Article XIX (or of the Safeguards
Agreement) that imposes such a rule.  See response to Question 29.
106. Nor does GATT Article XXIV address the sequencing, or number, of causation analyses that
may be undertaken as part of an Article XIX safeguards investigation.  Article XXIV:8(b) addresses
“duties and other restrictive regulations of commerce.”  To the extent that this language applies tosafeguards measures, it addresses the measures themselves, not procedures for conducting serious
injury investigations.
107. Therefore, there is no basis for the EC’s claim that the United States could not exclude
Canadian imports from its safeguard measure having included them for purposes of its causation
analysis.
108. Lastly, the EC argues that the Appellate Body  endorsed the notion of “parallelism” crafted by
the panel in Argentina – Footwear and that the procedures employed by the United States in respect toCanadian imports were inconsistent with that concept.  The United States does not understand the
Appellate Body to have established a broad requirem ent of “parallelism” given the fact-specific nature
of the Footwear dispute.
51  Nevertheless, the procedures contemplated by NAFTA Article 802, and
employed by the United States in the case of its wheat gluten safeguard, satisfies the purpose of the
“parallelism” notion the Footwear panel articulated, which is to ensure that  when a Member attributesserious injury to imports originating in the territory of a country that is a party to a customs union (or
FTA, in this case), those imports should be included in the safeguard measure the Member determines
to apply.
                                                                                                                                                                    
1. With respect to an emergency action taken by a Party on a global basis, the Parties shall retain
their respective rights and obligations under Article XXI of the General Agreement on Tariffs and
Trade  subject to the requirement that a Party taking such action shall exclude the other Party from such
global action unless imports from that Party are substantial and are contributing importantly to theserious injury or threat thereof caused by imports.  For purposes of this paragraph, imports in the range
of five per cent to ten per cent or less of total imports would normally not be considered substantial.
50 Argentina – Footwear  at ¶ 5.71.
51 The Appellate Body noted:
112.  Argentina applied the safeguard measures at issue after conducting an investigation of products
being imported into Argentine territory and the effects of those imports on Argentina’s domestic
industry.  In applying safeguard measures on the basis of this investigation in this case, Argentina wasalso required under Article 2.2 to apply those m easures to imports from all sources, including from
other MERCOSUR member States.113.  On the basis of this reasoning, and on the facts of this case, we find that Argentina’sinvestigation, which evaluated whether serious injury or the threat thereof was caused by imports from
all sources, could only lead to the imposition of safeguard measures on imports from all sources .
(Emphasis in original).WT/DS166/R
Page 306
109. NAFTA Article 802, and US law implementing that provision, provide for the inclusion of
FTA imports in a US safeguard measure in such cases.  Conversely, Article 802 and US implementing
provisions, provide for the exclusion of Mexican and Canadian imports from an eventual safeguard
measure where they did not play a significant role in causing serious injury or threat of injury.  Thus,
in both cases, the NAFTA and US law comport with the notion of “parallelism.”
Q.31 Does the United States believe there is a difference between "taking the decision to apply a
measure" (wording used in Article 12.1(c) of the Safeguards Agreement) and "taking a measure"
(term used in Article 12.4 of the Safeguards Agreement regarding provisional safeguard measures)?
If so, how does this difference, according to the United States, affect the notification requirements
under Article 12 of the Safeguards Agreement?
Reply
110. Article 12.4 of the Safeguards Agreement requi res Members that apply a provisional measure
to make a notification “before taking a provisional safeguard measure …..”  Article 12.1(c) requiresimmediate notification once a Member has taken a decision to apply or extend a safeguard measure
(“A Member shall immediately notify . . . upon taki ng a decision to apply . . . a measure”).  The
United States is of the view that Article 12.4 requires notification prior to applying the safeguard,
whereas Article 12.1(c) requires notification once the decision to apply the measure is taken.  In the
case of wheat gluten, the President took the decision to apply the safeguard measure on 30 May 1998,
and the United States notified the Safeguards Committee of that action on 4 June 1998.
Q.32 In paragraph 203 of its first written submissio n, the United States argues that it agrees that
an importing Member must provide the opportunity for consultations before it can take a safeguard
action.  However, in paragraph 201 of the same subm ission, the United States argues that there is no
obligation to notify a proposed measure.  Can the United States explain on what basis consultations
will be held, if there is no obligation to notify proposed measures?
Reply
111. The argument the United States sought to address in paragraph 201 of its first written
submission is the EC’s claim that the United States did not notify the “proposed measure,” which the
EC appears to define as the final measure.  Paragraph 201 makes the point that there is no suchrequirement.  With respect to the basis consultations on which consultations will be held, Article 12.3
contemplates that a number of issues will be revi ewed at that time, including “exchanging views on
the measure.”  The Korea – Dairy  panel noted that “the basis for the serious injury finding, and the
details of the measure that the notifying member proposes to apply” are among the information to be
discussed in consultations.
52  The United States provided all of the requisite information in its original
and supplemental notifications under Article 12.1(b) prior to holding consultations with the EC.
Q.33 We note that the United States made two notifications pursuant to Article 12.1(b) of the
Safeguards Agreement regarding a finding of serious injury (on 11 February 1998 and
24 March 1998, respectively). What factors determined this course of action?
Reply
112. The United States made its first notification under Article 12.1(b) of the Safeguards
Agreement after the USITC found that increased wheat gluten imports were causing serious injury to
the domestic industry.  At that time, the USITC had not published a report on its findings nor had it
decided on an appropriate remedy to recommend to the President.  On 18 March 1998 the USITC
                                                     
52 Korea – Dairy  at ¶ 7.120.WT/DS166/R
Page 307
forwarded its injury report and remedy recommendation to the President.  Subsequently, the United
States provided a revised 12.1(b) notification to the Committee on Safeguards that included pertinent
information on the evidence of serious injury, the amount of the increase in imports, and a description
of the proposed measure.   The United States also provided a copy of the USITC’s non-confidential
report to the Committee.
Written Questions by the Panel to the Third Parties
To Canada
Q.1 In the United States first written submission (para. 84), the United States asserts:  "While the
United States conducted a global investigation and examined imports fr om all sources, its
determination did not attribute injury from NAFTA imports to third countries"  We also note that in
the ITC report (p I-18), it states:  "Section 311 of the NAFTA Implementation Act provides that if the
Commission makes an "affirmative injury determination in an investigation under section 202 of the
Trade Act ", the Commission must also "find" whether –(1) imports of the Article from a NAFTA
country, considered individually, account for a substantial share of total imports; and (2) imports of
the Article from a NAFTA country contribute importantly to the serious injury, or threat thereof,
caused by imports".
Is the Panel therefore correct in understanding that imports from Canada were taken into
account in order to reach a finding of serious injury, but that a separate causation analysis was then
performed on imports from Canada?  If so, what is the legal basis in the Safeguards Agreement for
such a separate causation analysis?
Reply
113. See US Response to Panel Question 29.
Q.2 Is the exclusion of Canada from the application of the United States wheat gluten safeguard
measure based on, or related to, Article XXIV of the GATT 1994?  If so, in what way?
Reply
114. See US Response to Panel Question 30.
Written Questions From the European Communities to the United States
Q.1  Please indicate in which of its findings the ITC determined that increased imports were due
to unforeseen developments; i.e. to unexpected deve lopments which led to a product being imported in
such increased quantities and under such conditions as to cause serious injury?
Reply
115. The USITC findings demonstrating the circumstances constituting “unforeseen
developments” are summarized in the response to Panel question 5.
116. The assumption in the EC’s question -- that th e USITC should have made findings in which it
explicitly “determined” that increased imports were due to unforeseen developments -- is not
supported by the recent Appellate Body reports addressing safeguards measures.  The Appellate Body
has stated that Article XIX does not establish “independent conditions” for the application of a
safeguard measure, but rather describes “certain circumstances which must be demonstrated as aWT/DS166/R
Page 308
matter of fact in order for a safeguard measure to be applied consistently with the provisions of
Article XIX of the GATT 1994.”  Ar gentine -- Footwear at Paragraph 92.
117. Thus, what is required is not a USITC “determination” of such conditions, but rather a
demonstration as a matter of fact of the circumstances constituting “unforeseen developments”.  The
portions of the USITC Report summarized in the re sponse to Panel question 5 amply demonstrate as a
matter of fact the circumstances constituting “unforeseen developments.”
Q.2 Nowhere in the ITC report an explanation is given of the methodology used to assess
profitability of the US industry.  However, the ITC claims on the one hand that at 78.3 per cent of
capacity utilization, the US wheat gluten industry operated “reasonably profitably.”  On the other
hand, the ITC equally claims that if there had been no increase in imports since 1993, industry wouldhave operated at 61 per cent  capacity utilisation in 1997.
Where in its report does the ITC show that at this 61 per cent level of capacity utilisation the
industry could have operated profitably in 1996 and 1997?
How is this second claim consistent with the fact recognized by the ITC that in particular in
1996 and 1997 wheat prices, i.e. 75 per cent of input cost, were at their highest level?
Reply
118. The EC’s contentions here (and in its first oral statement) misstate the findings of the USITC
report.   Contrary to the suggestion in the EC’s first question here, the USITC did not make anystatements or predictions as to whether the industry would or could have been profitable at 61 per cent
of capacity in 1996 or 1997.  What the USITC report said is that this 61 per cent of capacity is “much
closer [than the 44.5 per cent of capacity actually reported in 1997] to the level at which the industry
operated early in the investigative period when it operated reasonably profitably.
53  The statement the
USITC actually made is fully consistent with the record.  The industry was profitable in 1993 andeven more so in 1994, when capacity utilization was 78.3 per cent and 67.4 per cent, respectively.
While profitability dropped in 1995, when capacity utilization was 56.2 per cent, the industry was not
yet suffering losses.  The record further shows that the industry was unprofitable in 1996 and 1997,
when capacity utilization was 42.0 per cent and 44.5 per cent, respectively.
54  Thus, as the USITC
Report shows, the industry had its most profitable year (both in terms of gross profit and net operatingincome) during the period in 1994, when capacity utilization was at 67.4 per cent.   Accordingly, even
the EC must concede that, as the USITC stated, 61 per cent is much closer than 44.5 per cent to the
level at which the industry had operated profitably early in the period.
119. Somewhat higher wheat prices in 1996-1997 woul d not affect this analysis.  Historically,
demand for wheat gluten had been relatively inelastic, and the industry had been able to pass onincreases in input costs to wheat gluten purchasers in the form of higher prices, which should not have
been difficult given the substantial increase in demand in 1996-1997.  Instead, as the USITC found,
prices declined, despite the increase in input costs and the increase in demand, as a result of the surge
of relatively low-priced imports.
55
Q.3 How and where does the ITC explain in its report why the US producers had reason to
assume, when massively increasing their producti on capacity, that increased domestic consumption
(domestic market demand) would turn to them only for supply?
                                                     
53 US Exhibit 4 at I-17.
54 US Exhibit 4 at I-13, II-15, Table 5.
55 US Exhibit 4 at I-17-18.WT/DS166/R
Page 309
Can the US indicate where in the ITC report an explanation is provided on how the
assumption referred to in the previous question could hold in light of the fact that one of the major US
domestic producers, Manildra, controlled a dominant part of the imports.
120. The USITC made no findings that the US producers assumed that increased domestic
consumption would turn to them only for supply .  As the USITC Report stated, the US producers
expanded production capacity in expectation of a significant increase in domestic demand.  This
increase in demand in fact occurred in 1996-1997.  Furthermore, as part of its analysis pursuant to
Article 4.2(b) of the Safeguards Agreement, the US ITC analyzed the effects of increased imports on
capacity utilization, in which it held other factors constant, and thus isolated the effects of increasedimports on capacity utilization.  For purposes of this analysis, the USITC did a calculation of what
capacity utilization would have been in 1997, using the assumptions that there had been no increase in
imports since 1993, and that domestic producers would have supplied all of the increase in domestic
demand, and came up with a figure of 61 per cent capacity utilization.  The USITC analysis did not
make a prediction of what would have actually happened in 1997 if the increased imports had notoccurred.  Nor did the USITC making any factual findings or statements as to what portion of the
expected increase in demand the domestic producers expected to capture.
56  Nor is such an expectation
by the US producers required by any provision of the Safeguard Agreement.
121. Thus, the EC’s question about whether the US producers had good reason for expecting that
the increased domestic consumption would go to them is not relevant.57  Given the irrelevance of this
issue, the USITC made no explicit findings about it as such.  Nevertheless, the USITC Report shows
that the US producers had every reason to expect that they would capture at least a large portion of theincreased demand.  The share of domestic consumption taken by imports fell somewhat between 1993
and 1995.
58  In addition, a new US producer, Hear tland Wheat Growers, which had begun
construction  of a plant in 1993, opened the plant and began production in 1996.59  Its entry would
normally have been expected to take market share from both importers and domestic producers,
particularly given pricing patterns while the plant was being built, when imports from all sources bothoversold and undersold the domestic product from 1993.
60  Thus, there was every reason to assume
that a new entrant to the domestic industry would take market share from the imports, leading to a
significant increase in the domestic producers’ overall share of the market, and no reason for the
domestic producers to expect that imports would grow to take the increased demand.
                                                     
56 It is the EC that has contended that  the US producers foresaw that they would capture the entire
increase in US demand, and did not foresee that the increase would instead be captured by imports.  EC First
Submission at Paragraph 53, 63.  While conceding that the dramatic import surge was unforeseen by the US
industry, the EC has instead argued that the US was “i rrational” to have expanded production capacity and not
to have foreseen that imports would increase dramatically and would capture the increased demand.
57 It is likewise irrelevant whether the US producers were unreasonable in not foreseeing the
unexpected developments that led to the surge in imports in 1996-1997.  This question is irrelevant, under theplain language of Article XIX of GATT and the holdings in the recent Appellate Body Reports in Argentina --
Footwear  and Korea -- Dairy. The pertinent clause in Article XIX refers to “unforeseen developments” and
makes no reference to “unforeseeable developments.”  Article XIX likewise imposes no requirement that the
failure by the US industry or government to foresee such developments be reasonable or well-founded.Similarly, the two Appellate Body Reports both contrast the meaning of “unforeseen” (synonymous with“unexpected”) with that of unforeseeable” (meaning “incap able of being foreseen, fore told or anticipated”), and
both conclude that Article XIX’s provisions must be interpreted with the ordinary meaning of the word
“unforeseen.” Argentina -- Footwear   at Paragraph 91; Korea -- Dairy  at Paragraph 84.  Thus, whether the US
producers had good reasons for not foreseeing the import surge is not relevant.   Nevertheless the USITCresponse provides ample information demonstrating why they had no reason to foresee it.  See Response toPanel Question #5.
58 US Exhibit 4 at C-3, Table C-1.
59 US Exhibit 4 at II-8.
60 US Exhibit 10 at II-36.WT/DS166/R
Page 310
122. Since the reasonableness of the US producers’ expectations regarding capturing the expected
increase in US demand is not relevant, the EC’s further question about the reasonableness of such
expectations given the relationship between Manildra and any imports it may have controlled is
likewise irrelevant.  Furthermore, Manildra hardly  controlled a “dominant” part of US imports.
According to the USITC Report, Manildra is the subsidiary of a parent company that has as additionalsubsidiaries two Australian producers of wheat gluten that exported wheat gluten to the United States,
while there was one other Australian firm not controlled by Manildra that also produced wheat
gluten.
61  As a share of total imports, Australian imports declined during the period, suffering declines
in 1995, 1996 and 1997, with its share of imports falling further behind the EU’s rapidly growing
share each year.62
Thus, it was not imports from Australia, and hence not any imports controlled by Manildra, that
constituted the surge in increased imports that captured the increase in domestic demand in 1996 and
1997 that the US producers had hoped to capture.  The USITC specifically found that imports of
wheat gluten by US producers remained relatively steady during the period, and that the US producers
were not responsible for the surge in imports in 1996.63  Moreover, since imports from Australia, as
well as Australia’s share of total imports, were falling in 1995, when the US producers were adding
capacity, the US producers would not have had any basis for expecting that Australian imports would
increase to capture the increase in US consumption.64
__________
                                                     
61 US Exhibit 4 at II-8, II-22.
62 US Exhibit 4 at II-12, Table 2.
63 US Exhibit 4 at I-17.
64 US Exhibit 4 at II-12, Table 2.WT/DS166/R
Page 311
ATTACHMENT 2-5
SECOND WRITTEN SUBMISSION OF THE UNITED STATES
(17 January 2000)
TABLE OF CONTENTS
Page
I. INTRODUCTION 312
II. THE EC HAS FAILED TO ESTABLISH THAT THE USITC’S INVESTIGATION WAS
INCONSISTENT WITH THE SAFEGUARDS AGREEMENT 312
A. S TANDARD OF REVIEW ....................................................................................................................... 312
B. B URDEN OF PROOF .............................................................................................................................. 3 14
C. U NFORESEEN DEVELOPMENTS ............................................................................................................ 315
D. C ONFIDENTIAL DATA.......................................................................................................................... 315
E. EC ARGUMENTS ON “CONDITIONS ” AND PRICE ................................................................................... 317
F. C ONSIDERATION OF INJURY FACTORS ................................................................................................. 317
G. P ROFITS AND LOSSES ........................................................................................................................... 318
H. I MPORTS BY US PRODUCERS ............................................................................................................... 319
I. C OMPETITION WITH CORN PROCESSORS .............................................................................................. 320
J. I NPUT COSTS ............................................................................................................................... ........ 321
K. C APACITY UTILIZATION ...................................................................................................................... 322
III. THE REMEDY THE UNITED STATES IMPOSED COMPORTS WITH US OBLIGATIONS
UNDER ARTICLE 5.1 OF THE SAFEGUARDS AGREEMENT 324
A. T HE UNITED STATES APPLIED ITS SAFEGUARDS QUOTA “ONLY TO THE EXTENT
NECESSARY ” .............................................................................................................................. ......... 324
1. The quota was not applied beyond the extent necessary .................................................................... 3242. The United States was not required to use a tariff safeguard measure.............................................. 326
B. T
HE WHEAT GLUTEN QUOTA IS SET AT A LEVEL IN EXCESS OF IMPORT LEVELS
IN THE LAST THREE REPRESENTATIVE  YEARS ................................................................................... 328
IV. THE UNITED STATES COMPLIED WITH ARTICLE 5.2(A) QUOTA ALLOCATION RULES
329
V. THE UNITED STATES OBSERVED THE NOTIFICATION AND
CONSULTATIONS REQUIREMENTS OF ARTICLES 8 AND 12 329
A. T HE UNITED STATES SATISFIED ITS CONSULTATION OBLIGATIONS UNDER ARTICLE 12.................... 329
B. T HE UNITED STATES TIMELY FILED ITS NOTIFICATION ON THE INVESTIGATION AND
 ON THE PROPOSED MEASURE ............................................................................................................. 330
VI. CONCLUSION 331
UNITED STATES LIST OF EXHIBITS 332WT/DS166/R
Page 312
I. INTRODUCTION
1. The European Communities has failed to assert and prove its claim that the United States’
safeguard measure is inconsistent with US obligations under the Agreement on Safeguards .  In its first
written submission, filed on 6 December 1999, the United States addressed the claims raised by theEC alleging violations of Articles 2, 4, 5, 8 and 12 of the Safeguards Agreement as well as GATT
Article I.  The United States demonstrated that the findings and economic conclusions of the USITC
in this matter were carefully reasoned and amply articulated, and that the safeguard measure applied
by the United States is fully in accordance with US obligations under the Safeguards Agreement and
GATT 1994.   The United States also demonstrated that it fully satisfied the notification andconsultation provisions of the Safeguards Agreement.
2. In its second written submission, the United States addresses the written questions of the
Panel and the EC as well as certain elaborations of the EC’s arguments raised in its first oral statement
on 20 December 1999.  The United States’ submissions and responses together demonstrate that theEC’s claims are without merit and properly should be rejected by the Panel.
II. THE EC HAS FAILED TO ESTABLISH THAT THE USITC’S INVESTIGATION
WAS INCONSISTENT WITH THE SAFEGUARDS AGREEMENT
A. S
TANDARD OF REVIEW
3. As the Appellate Body recently confirmed, in examining a serious injury determination, a
Panel must address three questions: (1) whether the competent authority considered all relevant facts,
including each factor listed in Article 4.2(a); (2) whether its published report contains an adequateexplanation of how the facts support the determination made; and (3) whether the determination made
is consistent with the Safeguards Agreement.
1   A panel should not  conduct a de novo  review, and it is
accordingly inappropriate for a panel to attempt to conduct its own assessment of the raw data
reviewed by the competent authority during its investigation.2  
4. The Appellate Body further stated that Article 11 of the Understanding on Rules and
Procedures Governing the Settlement of Disputes (“DSU”) requires that  “... a panel should make an
objective assessment of the matter before it, including an objective assessment of the facts of the case
and the applicability of and conformity with the relevant covered agreements ...".3
5. While the EC admits that the Panel is not to undertake a de novo  review, it nevertheless asks
the Panel to do just that by conducting a review of new evidence that was not before the USITCduring its investigation.
4   The EC’s argument that the Panel should consider its new evidence is based
                                                     
1 Argentina -- Footwear Appellate Body Report at ¶ 116 (quoting and endorsing the standard stated in
the Argentina -- Footwear  Panel Report at ¶ 8-124).
2 In Argentina -- Footwear , the panel concluded that it would be inappropriate for it to review the raw
data in the record before Argentina’s competent authority: “[i]f we were to conduct our own assessment of the
underlying evidence as contained in the entire record of Argentina’s investigation, we believe that we would
effectively be engaging in a de novo review, which we and both parties agree would be inappropriate.”Argentina -- Footwear  Panel Report at ¶ 8.126.   The Appellate Body subsequently held that the panel had
correctly stated the standard of review, although the Appellate Body questioned the Panel’s reliance on severalprevious panel reports reviewing investigations under the Tokyo Round Agreements.    Argentina -- Footwear
Appellate Body Report at ¶ 117.
3 Argentina -- Footwear Appellate Body Report at ¶ 120.
4 Despite the EC’s request to the Panel to engage in what would amount to a de novo  review  of the
USITC’s findings, the United States notes that European courts have themselves declined to implement such astandard.  The European Court of Justice, for example, pointedly avoids substituting its own assessment of thefacts for that of the competent authority in matters involving the evaluation of complex economic situations.WT/DS166/R
Page 313
on a play on words.  The EC argues that the Panel should review the EC’s new evidence because
under Article 11 of the DSU the Panel is to conduct an “objective assessment of the facts of the case.
”  Under Article 3.1 of the Safeguards Agreement, a competent authority conducts an investigation,
after which it publishes a report setting forth its findings “on all pertinent issues of fact and law.”
Hence, the EC implies, a Dispute Settlement Body  (DSB) panel may make the same kind of inquiry
into “ facts” that a competent authority makes.5  
6. However, the “facts” that are the subject of the two different kinds of proceeding are very
different.  A competent authority determines whether a domestic industry has been seriously injured
by increased imports.  A panel resolves a dispute between member governments about whether, in
doing so, the competent authority violated the Safeguards Agreement.  The “facts” examined by thecompetent authority concern the economic condition of the domestic industry.  The “facts” to be
examined by a panel concern whether the member’s actions complied with the Safeguards
Agreement.  Since under the Safeguards Agreement, injury determinations are made by competent
authorities, the facts before the Panel concern what the competent authority did and the findings it
made.
7. As pointed out in the United States’ Oral Statement
6, the EC’s contention that the Panel
should gather additional evidence on the economic conditions of the industry would be contrary to the
balance of concessions and benefits in the Safeguards Agreement.7    Article 3 makes it clear that it is
the competent authorities established by WTO Members that are authorized to conduct investigations
of whether increased imports have caused serious injury.  There is nothing in the DSU that suggests
that it was intended to operate in derogation of the fact-finding responsibilities reserved by the
underlying WTO Agreements to the Members and their competent authorities.  Article 3 likewiseestablishes conditions for these investigations, including notice and public hearings, that guarantee
interested parties, including both domestic and foreign commercial interests, the opportunity to
present evidence and comment on the other presentations and evidence received by the competent
authority.  The government-to-government proced ures established in the DSU do not create any
equivalent process in panels.
8. The new evidence that the EC now seeks to have this Panel consider concerning monthly spot
market prices for wheat illustrates the pitfalls of a panel entertaining new evidence.  When such new
                                                                                                                                                                    
See, e.g., Joined Cases C-248/95 and C-249/95 SAM Schiffahrt v. Germany [1997] ECR I-4475, ¶¶ 23-25 ,
citing Case 138/79 Rouquette Freres v. Council, [1980] ECR 3333, ¶ 25; and Case  166/78, Italy v. Council,
[1979] ECR 2575, ¶ 15.  Therefore, it  employs a deferential standard of review which focuses on whether the
action being reviewed "contains a manifest error or constitutes a misuse of power or whether the authority inquestion did not clearly exceed the bounds of its discretion."  Case 138/79 Rouquette Freres v. Council, [1980]
ECR 3333, ¶ 25.  And as observed in Case C-122/94 Commission v. Council,  [1996] ECR 881, ¶ 18, "the
discretion which [the Council] has does not apply exclusively to the nature and scope of the measures to be
taken but also to some extent to the finding of the basic facts inasmuch as, in particular, it is open to the Council
to rely if necessary on general findings."  See also,  Case C-169/95 Spain v. Commission,  [1997] ECR 135, ¶ 34
wherein it was recognized that in applying the terms of the Treaty, the competent authority "enjoys a significantfreedom of assessment."  Therefore, "the Courts, when examining the lawfulness of the exercise of suchfreedom, cannot substitute their own assessment of the matter for that of the competent authority but must
restrict themselves to examining whether the assessment of the competent authority contains a manifest error or
constitutes a misuse  of power (see, in particular, Case 57/72 Westzucker v. Einfuhr- und Vorratsstelle Für
Zucker  {1973} ECR 321, paragraph 14)."
5 See EC Oral Statement at ¶¶ 11, 14.
6 See United States Oral Statement, December 21, 1999, at 2-5.
7 As pointed out in he United States’ first submission, EC exhibits 10,12, 13 and 14 were not part of the
record of the USITC investigation and those exhibits (a nd the EC’s arguments based on those exhibits) should
be disregarded by the Panel.  US First Submission at Paragraph 138.WT/DS166/R
Page 314
evidence is presented, a panel will not have had the benefit of comment on it by the interested parties
or the evaluation of it by the competent authority.
9. Two points are relevant here.  First, the USITC investigated input prices and obtained
information directly from US wheat gluten producers and foreign producers.  The raw data were made
available to representatives of the interested pa rties, including the European producer respondents,
under administrative protective order, and they had the opportunity to comment on it.  The USITC
made findings concerning the rise in input costs, including wheat prices.8   
10. Second, the monthly public data that the EC now wishes the Panel to consider were equally
available to the EC and to the EU producers at the time of the investigation, but they chose not to
submit such data to the USITC.  (The EC appeared as a party during the investigation, and the EUproducers participated very actively in the investigation).  The EU producers in fact submitted other
official data (from the US Department of Agriculture) on this subject,  and may have viewed those
data as more probative than the data that the EC now submits to the Panel.  However, neither the EU
producers nor any of the other parties are here before the Panel to clarify or otherwise address these
evidentiary matters.
11. Moreover, the new data presented by the EC are not probative of raw material costs, as some
US wheat gluten producers purchase wheat flour rather than wheat as their raw material (wheat gluten
is made from wheat flour), and those with their own flour milling operations obtain a substantial
portion of their wheat through long-term contract s and not through the spot market.  Again, the
interested parties are not present in this proceeding to clarify this question.
12. Regardless of the EC’s characterization of its new evidence as  “official US government
statistics,” permitting a party to submit data to a WTO panel that it could have submitted to thecompetent authority during the investigation, but did not, invites strategic manipulation by parties of
the process before the competent authority.  In almo st every investigation, there is likely to be some
additional source of  information, perhaps including government information, that may have some
relevance to the industry under review, and may be contrary to some other piece of information.  If
parties know that they can withhold such info rmation from the scrutiny and evaluation of the
interested parties and the competent authority during the investigation and then introduce it for the
first time before the WTO panel to cast doubt on the competent authority’s findings, then it will be in
a party’s interest to engage in such strategic gamesmanship.  The WTO will undermine proceedings
before competent national authorities if it encourages such practices.
13. For all these reasons, a WTO panel is not a proper tribunal to review new evidence on the
factors investigated by the designated competent authorities, and the Panel should decline the EC’s
invitation to conduct such a review.
B. B
URDEN OF PROOF
14. The EC further contended in its Oral Statement that there is a special burden of proof in
safeguards cases resting with the Member that adopted the safeguards measure.9   This contention is
not supported by the Safeguards Agreement or by any other authority, and the EC is unable to cite any
authority for it.  To the contrary, the  Korea -- Dairy  panel stated that the complainant must first
submit a prima facie  case of violation of the Safeguards Agreement, and that  “[a]s a matter of law the
burden of proof rests with the ... complainant, and does not shift during the panel process."10   The
Appellate Body concluded that the panel did not err in its application of the burden of proof.  Korea --
Dairy   Appellate Body report at ¶ 150. Thus, here the EC, the complainant, first has the burden of
                                                     
8 See US Exhibit 4 at I-17 to I-18.
9 EC Oral Statement at ¶ 9.
10 Korea -- Dairy  Panel report at ¶ 7.24.WT/DS166/R
Page 315
submitting a prima facie  case, and the burden rests with the EC throughout the entire process and
never shifts to the United States.
15. As demonstrated in this submission, as well as in our First Written Submission, the EC has
failed to make out a prima facie  case of violation of the Safeguards Agreement and its claims should
accordingly be dismissed.  Contrary to the EC’s assertions, the EC has not shown that the USITCfailed to consider all the relevant evidence; it has utterly failed to show that there was any evidence
that the USITC should have considered but did not.  Nor has the EC shown that the USITC’s
conclusions were deficient, and it has not shown any biased, deficient or subjective presentation of the
facts.
11   
C. U NFORESEEN DEVELOPMENTS
16. The United States has addressed the issue of “unforeseen developments” at length in its
response to the Panel’s Question #5.   In sum, the USITC Report makes clear that the United States
did not foresee the developments that led to increased wheat gluten imports from the EC in 1996-
1997.  As the USITC findings show, this dramatic change in market conditions did not result from
developments in the wheat gluten market itself.  Rather, the USITC found that it resulted primarilyfrom a huge increase in EC production capacity in an effort to increase production of  wheat starch (a
co-product of wheat gluten) to meet demand for whea t starch in the EC market.  Thus, developments
in the EC wheat starch market led to an increase in EC production of wheat gluten, and to increased
EC exports of wheat gluten to the US at relatively low prices,  for reasons unrelated to demand for
wheat gluten.  While there was mixed overselling and underselling by imports from 1993-1995,
during the import surge in 1996-1997 imports consistently undersold the US market.
17. These developments were not attributable to the modest reduction in the US wheat gluten
tariff negotiated in the Uruguay Round.  Moreover, the participants in the US wheat gluten market
clearly did not foresee such developments.  The US industry’s substantial addition of production
capacity during 1993-95, and the entry of a new producer into the market, are inconsistent with the
fact that even US industry failed to foresee the dramatic jump in imports during 1996-97.
18. The USITC Report amply demonstrates that the import surge resulted from significant
changes in the marketplace that occurred after the tariff concession was negotiated.  Accordingly, the
USITC Report demonstrates as a matter of fact circumstances constituting unforeseen developments,
and the “unforeseen developments” provision of Article XIX:1(a) of GATT 1994 is fully satisfied.
D. C
ONFIDENTIAL DATA
19. The concerns that the EC raised in its Oral Statement about the redaction of confidential data
in the USITC report are insubstantial, as shown in the United States’ response to Panel Question #3 .
In summary, the EC contends that any redaction of aggregate data is improper.12  However, the EC’s
sweeping assertion fails to take account of the fact th at in some circumstances, such as those present
in the USITC’s wheat gluten investigation, the disclosure of aggregate data may reveal sensitive,
proprietary information, as the United States explained in its first submission.13  
20. Contrary to the EC’s contentions in ¶¶ 30-33 of  its oral statement, the USITC’s treatment of
aggregate data did not violate any provisions of Articles 3 and Article of the Safeguards Agreement.
That the USITC staff made some mistakes in applying its policy on aggregate data with respect to
                                                     
11 EC Oral Statement at ¶ 10.
12 EC Oral Statement at ¶ 28.
13 See US First Submission at ¶¶ 156-157, and Exhibit 9.WT/DS166/R
Page 316
pricing data (mistakes corrected in the corrigendum) in no way involves a violation of Articles 3 and
4, and the correction does not constitute an acknowledgement of such a violation.
21. Article 3 of the Safeguards Agreement imposes a requirement to protect confidential data;
contrary to the EC’s contention it imposes no requirement on a competent authority to publish every
piece of non-confidential data it receives.  Moreover, the requirement in Article 4.2(c) to publish adetailed analysis of the case and a demonstration of the relevance of the factors examined does not
impose an obligation to publish all evidence.  Nor does Article 3 contain such a requirement.  What is
required is that the competent authority must set out its findings and reasoned conclusions on the
issues.  The USITC Report does so, and, as set forth in the United States’ response to Panel
Question 3, the specific questions raised by the EC about confidential information do not raise anyissues that the Panel must address.
22. Moreover, if the EC’s point is that aggregate information must be made available to the Panel,
its objection that the USITC’s release of additional aggregate data in the corrigendum comes too late
(EC Oral Statement at ¶¶ 31-32) is without merit.  If there the competent authority were required to
provide the Panel with the means to verify particular findings, that duty would arise during the panelproceeding, not before.  The United States has provided the Panel with all aggregate information
whose publication would not disclose confidential information.  Moreover, the aggregate information
provided to the panel confirms the accuracy of the only specific USITC finding (regarding
underselling and overselling) attacked by the comp laining Member with resp ect to confidentiality.
Thus, the EC has not suggested, much less established, why any additional information would be
needed.
23. The United States notes that the EC has not in its initial submissions urged the extreme
position espoused by New Zealand’s third party s ubmission.  New Zealand contends that the duty not
to disclose confidential information applies only during the competent authority’s investigation, and
does not apply during a WTO proceeding.
14   This argument has no basis in the Safeguards
Agreement.  Article 3.2 requires authorities not to disclose confidential information without the
permission of the party submitting it.  Article 3.2 does not, on its face, place any time limit on thatduty.  Contrary to New Zealand’s suggestion, ther e is no provision in the Safeguards Agreement or
the DSU that magically transforms information that  is confidential in the USITC investigation into
non-confidential information that may be disclosed once the matter goes to a WTO panel.  Apart from
its inconsistency with the Safeguards Agreemen t, adoption of New Zealand’s proposal would harm
not only domestic producers that submit confidential information, but importers and producers fromexporting countries as well.  For example, the USITC Report redacted not only confidential
information submitted by domestic producers, but also confidential information submitted by
producers from Canada, Australia and the European Union.
15  
24. New Zealand purports to base its argument on the decision of the Appellate Body in Canada
– Aircraft.16   But Canada –Aircraft is irrelevant in this proceeding because it provides no guidance
with regard to Article 3.2 of the Safeguard Agreem ent.  The Appellate Body did not address how and
under what circumstances a member should or could disclose confidential information to a Panel
consistent with Article 3.2.
25. [Deleted]
                                                     
14 New Zealand Third Party Submission at ¶¶ 9-10.
15 US Exhibit 4 at II-22 to II-23.
16 Canada -- Measures Affecting the Export of Civilian Aircraft (WT/DS70/AB/R) 2 August 1999.WT/DS166/R
Page 317
E. EC ARGUMENTS ON “CONDITIONS ” AND PRICE
26. The EC’s argument on price in ¶¶ 34 et seq. of its Oral Statement are difficult to fathom.  In
its First Written Submission, the EC attacked the USITC’s finding on price underselling, failing to
understand that the USITC’s finding of consistent underselling applied to 1996-97, not the entire
investigatory period.  The EC in its Oral Statement do es not advert again to that argument.  Instead, it
makes a vague allegation about a failure to find “conditions” without specifying what conditions need
be found.
27. It would appear that the EC seeks some finding about the substitutability of imports and
domestic product -- that is, whether the products were so related that differences in price would
matter.  In one sense, the issue is academic.  The record shows that when Australian and EC importsboth were mixed in their overselling and underselling of the US product, their relative market shares
remained relatively steady.  US production rose.  When in 1996-97, the EC alone consistently
undersold the US industry, its market share rose 20 per cent, while the Australian market share
remained stable.  US production and market share fell.  The trends speak for themselves.
28. Nevertheless, the USITC made findings that showed why the conditions were such that these
price and volume trends would arise.  In making its findings on the like or directly competitive
product, the USITC made specific findings on the substitutability of imported and domestic wheat
gluten.  It found that, overwhelmingly, purchasers found  them to be of roughly the same quality, to be
used for the same purpose, and to be sold to the same end users.  This finding suggests that purchasers
would tend to change suppliers if price relations changed, as indeed occurred in 1996-97.
29. The United States does not deny that factors other than imports, such as the protein content of
the domestic wheat crop, can affect domestic demand for and the domestic price of wheat gluten.  Asthe USITC report noted and as the EC again pointed out in its oral statement on 20 December 1999
17,
domestic wheat gluten demand and prices rose in early 1994 in response to the low protein level in the
1993 domestic wheat crop, and then fell in 1995 when the protein content of the domestic wheat crop
returned to a more normal level.  However, this  only reinforces the finding of the USITC that
domestic prices should have increased in 1996 and 1997 when domestic demand and consumptionwere rising.  However, domestic prices fell substantially in 1996 and 1997 in the face of rising
demand and consumption.  The only explanation for this substantial price decline was the surge in
imports in 1996 and 1997 – virtually all of which was attributable to EU imports.
F. C
ONSIDERATION OF INJURY FACTORS
30. As evidenced by its arguments in ¶¶ 43-56 of its Oral Statement, the EC continues to ignore
the USITC’s explanation of its conclusions regardin g the factors that relate to serious injury and
causation, and continues to misunderstand the role of the Panel.  Instead, the EC implicitly urges the
Panel to draw its own conclusions based on the selective evidence the EC would have the Panel
consider.  As the United States pointed out in ¶ 61 of its First Written Submission, the question for
this Panel is the adequacy of the USITC’s determination as it was made at the time, not whether thePanel itself would have reached a contrary conclusion based on the facts advanced by a complaining
Member.  The United States believes that standard  of review comports with Article 3.1's requirement
that a Member provide “ reasoned  conclusions reached on all issues of law and fact.”  (Emphasis
added).  By picking and choosing pieces of evidence which it argues support a contrary conclusion,
the EC does not satisfy its burden to show that the USITC was unreasonable in reaching theconclusion that it did.
                                                     
17 Oral Statement of the EC, 20 Dec. 1999, ¶¶ 38, 63-68.WT/DS166/R
Page 318
31. Specifically, the EC ignores the fact that the USITC’s findings relating to increased wheat
gluten imports and the increased share of the US wheat gluten market taken by imports were
supported by findings of fact based on the record in the USITC investigation.  In particular, the EC
ignores the fact that the USITC found that wheat gluten imports increased by nearly 40 per cent
between 1995 and 1997, more than twice the 18 per cent rate of increase in wheat gluten consumptionduring the same period; ignores the fact that the share of the US wheat gluten market held by imports
increased from 50.1 per cent in 1995 to 60.2 per cent in 1997, or by 20 per cent; and ignores the fact
that virtually all the factors relating to wheat gluten industry health declined in 1996 and 1997 in the
face of the surge in imports.
18   Instead, the EC selectively notes that US consumption increased in
1996 and 1997, wrongly implies that imports increased at no more than this rate, and concludeswithout explanation that “the increase in imports in terms of domestic market share cannot support a
finding of injury, let alone serious injury."
19   
32. The USITC found that domestic wheat gluten production and shipments (sales) rose during
the first 3 years of the investigation period, fell sharply in 1996 and then increased in 1997, but to a
level that was still below the level in the first 3 years of the investigation period, notwithstanding theincrease in domestic demand and consumption.
20    The EC again ignores the data.  It notes the uptick
in production and shipments in 1997, and concludes that the trend in production and shipments “has
remained relatively steady.21    The EC ignores the fact that domestic wheat gluten production and
shipments in 1996 and 1997 remained well below the levels in the pre-1996 period, before the surge
in imports, and it ignores the fact that this decline in domestic wheat gluten production and shipments
occurred at the same time that domestic wheat gluten demand and consumption were rising.
33. Although the USITC did not place much weight on inventory data, other than to note that end
of period inventories and the ratio of domestic producer inventories to shipments both more than
doubled during the period of investigation, the EC summarily ignores these findings and asserts that
inventories “were strongly going down in 1996 and 1997."22   While inventories did in fact decline in
1996 and 1997, the EC ignores the fact that domestic wheat gluten production and shipments were
also down in 1996 and 1997 from pre-1996 levels.  Consequently, the trend in inventories wouldsimply reflect decisions about whether to let producti on fall faster than shipments, rather than the
other way around.  A fall in inventories would simply reflect a deeper cut in production.  In such a
depression period, inventory trends are of little probative value with respect to causation, and the
USITC did not cite them in finding that the causal link was satisfied.
G. P
ROFITS AND LOSSES
34. In ¶¶ 50-54 of its Oral Statement, the EC called into question the allocation methodologies
employed by US wheat gluten producers in submitting profit and loss data to the USITC.  The USITC
stated that it carefully reviewed the allocation methodologies used by domestic wheat gluten
producers in responding to the Commission’s questionnaire, and found those allocations to be
appropriate.23   As the Panel will recall, on the basis of those data, the USITC found that the domestic
industry was profitable during 1993-95, before the surge in imports, and operated at a loss in 1996 and
1997, when the surge in imports occurred.24
35. As the United States explained in its response to the Panel’s question #26, the USITCprovided clear instructions to domestic firms on how they were to submit financial data in response to
                                                     
18 US Exhibit 4 at I-10, 16.
19 EC oral statement of 20 December 1999 at ¶ 44.
20 US Exhibit 4 at I-13.
21 EC oral statement of 20 December 1999 at ¶ 46-47.
22 EC oral statement of 20 December 1999 at ¶ 48.
23 US Exhibit 4 at I-13.
24 US Exhibit 4 at I-13.WT/DS166/R
Page 319
the USITC’s domestic producers’ questionnaire.25   Firms that maintained separate internal profit-and-
loss and cost of production data for wheat gluten operations were directed to provide those data, and
firms that did not were directed to allocate costs between wheat gluten and wheat starch to explain
their allocation methodology and provide worksheets with their calculations.26   The majority of the
responding firms maintained separate internal profit-and-loss and cost of production data for wheatgluten on a regular basis and furnished such data to the USITC.  The responding firm that did not
maintain separate data made allocations, and provided the USITC with an explanation of the basis for
those allocations.
36. USITC accounting staff reviewed the accounting methodologies used by all the producers and
checked for reasonable allocation methods to the extent the revenues and costs were not directlyattributable to a particular product.  The USITC accounting staff found all of the allocation methods to
be in accordance with US generally accepted accounting principles.  It found that differences among
the methodologies used by the responding companies were principally a function of differences in
operations and reflected commercial realities.  Copies of the confidential questionnaire responses
submitted by domestic wheat gluten producers were made available to authorized representatives ofthe parties in the investigation that were partie s to the administrative protective order, including
representatives of the European producer respondents.
27   The European producer respondents set out
their concerns in their posthearing brief submitted during the injury phase of the USITC investigation,
arguing inter alia  that the USITC should give little or no weight to reported profitability data.28   The
USITC considered the arguments made by respondents with respect to the allocations in finding those
allocations to be appropriate.29
37. In addition, the USITC selected the largest producer, Midwest Grain Products, Inc., for a two
day on-site verification in Atchison, Kansas on December 3 and 4, 1997.  This verification was
conducted by a USITC auditor, an independent cert ified public accountant (CPA).  The auditor
prepared a 50-page verification report, including exhibits, which was made a part of the USITC’s
record in the investigation.  The USITC auditor reconciled Midwest Grain’s questionnaire data on
wheat gluten for each period with the product income and loss statements which were derived fromthe company’s audited financial statements.  This was possible because Midwest Grain prepares
separate income and loss statements on a monthly basis for each of its divisions, one of which is the
wheat gluten division.  The USITC auditor reviewed the financial statements for each division and
any allocations that might have been used, and tested their reasonableness with alternative allocation
methods.  In addition, the USITC auditor confirmed that the allocation methods used by Midwest tomeasure the financial performance of each division, to the extent allocations were necessary, had been
in use for a number of years and were not changed for purposes of the USITC wheat gluten
investigation.  The auditor concluded that the verification objectives were fully satisfied.
H. I
MPORTS BY US PRODUCERS
38. In its Oral Statement, the EC again raised the issue of wheat gluten imports by domestic
producers, particularly by Manildra, which is owned by an Australian firm that also has Australian
production operations.  The EC argues in its Oral Statement (at ¶ 55) that a policy of importation by
Manildra that corresponds to its business strategy of optimizing profits cannot be considered an
injury.
                                                     
25 A copy of the this questionnaire was attached as Exhibit 1 to the United States First Submission.
26 US Exhibit 1, US First Submission, USITC producers’ questionnaire at 8.
27 As pointed out in the United States’ response to Panel question 4, the EC could have had access to
those questionnaire responses, but chose not to apply to be a party to the administrative protective order.
28 Posthearing Brief on Injury of Association des Amidonneries de Cereales de L’U.E, at 35
(Dec. 23 1997).
29 US Exhibit 4 at I-13.WT/DS166/R
Page 320
39. The USITC addressed this issue in its causation analysis and made two findings.  First, it
found that US producers’ wheat gluten imports remained relatively steady during the period
examined, and thus US producers were not responsible for the surge in imports that occurred in 1996
and 1997.  Second, it noted that the US market has historically depended in part on imports to meet
domestic demand, and noted that in all but one year of the investigative period domestic apparentconsumption of wheat gluten exceeded US producers’ capacity to produce wheat gluten.
30   
40. The point the EC is trying to make here is unclear.  Even the Antidumping Agreement, which
contains a specific provision for domestic producers who import, does not permit the authority to
disregard such imports.  Moreover, as the USITC made clear, the 1996-1997 surge in imports that
caused serious injury was due to EC imports not wheat gluten imports by US wheat gluten producers,including from Australia.
41. The USITC found that wheat gluten imports by domestic producers remained steady during
the investigation, and thus US wheat gluten producers were not responsible for the surge in imports
that occurred in 1996 and 1997.  The USITC found that the bulk of the increase in imports was from
the EU.
31   US wheat gluten imports from the EU increased by 69 per cent between 1995 and 1997.32  
While US wheat gluten imports from Australia also increased in 1996 and 1997, the rate of increase
was comparable to the rate of  increase in domestic wheat gluten consumption.  As a share of total US
wheat gluten imports, US wheat gluten imports from Australia declined from 40.5 per cent in 1995 to
35.3 per cent in 1997.33   Thus, there was no evidence of a change in the pattern and level of imports
by domestic wheat gluten producers in 1996 and 1997 that would explain the surge in imports and
decline in industry performance in those 2 years.
I. C OMPETITION WITH CORN PROCESSORS
42. As explained above in our response to the Panel’s Question #28, the USITC considered
arguments about the impact of competition in the US market between corn starch and wheat starch
and its impact on wheat gluten production.  The USIT C found that the relative stability, and gradual
increase, in domestic wheat starch prices suggested that competition between corn starch and wheat
starch was not likely to have had much if any effect on wheat gluten production.  The USITC alsoconsidered evidence cited by importers that one domestic producer had reduced its wheat gluten
production in 1995 for reasons related in part to conditions in the alcohol market, and considered
importers' claim that this explained that firm's poor financial performance.  The USITC found that
such action by the one producer in 1995 explained only part of the problem faced by one producer and
could not be extrapolated to account for the problems facing all domestic producers, nor could not itexplain the significant deterioration in 1996 and 1997 of the other three domestic producers, who
accounted for the majority of domestic production.  In fact, the evidence did not even fully explain the
declining financial performance of that one producer in its wheat gluten operations.
43. The EC asserts in ¶¶ 61-62 of its Oral Statement that domestic wheat starch producers operate
at a relative competitive disadvantage to domestic corn starch producers, and that the USITC shouldhave investigated more thoroughly the conditions of competition between wheat starch and corn
starch.  However, the EC does not assert how the USITC’s alleged failure to further investigate this
issue might have contravened the Safeguards Agreement, nor does the EC demonstrate the relevance
of this assertion to the USITC findings in dispute.
44. As the United States explained in ¶ 141 of its First Submission to this Panel, the EC’s
statement about competitive conditions between wheat starch and corn starch has no relevance to the
                                                     
30 US Exhibit 4 at II-17.
31 US Exhibit 4 at I-16.
32 US Exhibit 4 at II-12.
33 US Exhibit 4 at II-13.WT/DS166/R
Page 321
findings in dispute.  The EC does not argue that competitive conditions between corn and wheat
starch changed during the period of investigati on, nor does it contest the USITC’s finding that wheat
starch prices rose during the period of the investigation.  The fact that the price of wheat is higher than
the price of corn, as the EC alleges in ¶ 61 of its oral statement, is not only irrelevant, but simply
confirms the statement in the USITC report that premium wheat starch prices usually enjoy a pricepremium over corn starches and low grade wheat starches.
34   In short, the EC fails to explain how
conditions of competition between wheat starch and corn starch had any causal effect on the
deterioration in the wheat gluten industry that took place in 1996 and 1997.  Accordingly, in the
absence of a showing of relevance, there is no reason to believe that there is a causal link, and no
basis for attributing the decline in the performance of the domestic wheat gluten industry in 1996 and1997 to conditions of competition between wheat starch and corn starch.
J. I
NPUT COSTS
45. The USITC examined and rejected the claim that rising raw material prices as reflected in the
prices paid for wheat and wheat flour, the major inputs into wheat gluten/wheat starch production,
were a more important cause of serious injury than increased imports.35   Raw material costs did
increase during the POI, particularly in 1996 and 1997.  However, the USITC found the evidence
indicates that wheat gluten producers typically are able to pass on the cost increases to their
customers, because demand for wheat gluten is relatively insensitive to price changes.  In 1996 and
1997, however, unit selling values declined despite increased demand and higher raw material costs.
The USITC concluded that this unusual development was explained by the dramatic increase in
relatively low-priced imports during the POI, which had the effect of driving down wheat gluten
prices.
46. In ¶¶ 84-86 of its Oral Statement, the EC makes much of the fact that the USITC cited
testimony presented by the presidents of two of the domestic producers, Midwest and Manildra, to
support its finding that domestic wheat gluten producers typically are able to pass on cost increases to
their customers.  The EC argues that oral assertions by persons interested in the outcome of an
investigation do not fulfill US obligations under Article 4.2(b) of the Safeguards Agreement.  The ECclaims that these assertions are factually incorrect because customers can substitute high protein
wheat or wheat flour.
36    
47. The USITC’s finding with respect to the ability of domestic producers to pass on cost
increases is supported by quantifiable data in the record of the USITC’s investigation.  Data in the
confidential version of the USITC report show that when raw materials costs rose in 1994 from the1993 level, the unit selling value of wheat gluten also rose, and when the raw materials costs fell in
1995, the unit selling value of wheat gluten also fell.
37   In 1996 and 1997, however, unit selling
values declined despite increased demand and higher raw material costs.  The USITC concluded that
this unusual development was explained by the dramatic increase in relatively low-priced imports
during the POI, which had the effect of driving down wheat gluten prices.
48. Furthermore, the EC’s claim about substitute products is not consistent with what wheat
gluten purchasers told the USITC.  US purchasers generally reported in their questionnaire responses
that wheat gluten has no substitutes when used in bakery products that require the vitality/binding
properties of wheat gluten.38   The evidence in the USITC report indicates that the amount of wheat
gluten used in the production of bakery products varies by type of product and with the nature of the
                                                     
34 US Exhibit 4 at II-21.
35 US Exhibit 4 at I-17.
36 EC oral statement of 20 December 1999, ¶¶ 84-86.
37 Confidential version of US Exhibit 4 at II-29 and C-4].
38 US Exhibit 4 at II-27.WT/DS166/R
Page 322
production process.  For example, the USITC found that the wheat gluten must be used in the
production of high-fibre and multi-grain breads and in the production of bagels.  The USITC also
found that the shift to high-speed mixing equipment has led to increased use of wheat gluten because
the higher mixing speed tends to break down the vitality of the flour.39   Thus, while most flours
contain gluten in varying amounts and the hard wheat flour used in bread making typically has a highgluten content
40,  this does not mean that bakers do not need to supplement the protein content of their
flour by adding wheat gluten.  The EC implies th at high gluten wheat flour has a sufficiently high
gluten content so as not to require the addition of wheat gluten to enhance the gluten level.  This is
contrary to the evidence in the record of the USITC investigation41,  and the EC offers no support in
the USITC record for its claim.
49. As stated above, the testimony of the two domestic company presidents was thus supported
by the record as a whole.  The United States does not agree that the testimony of a company official
on conditions affecting the industry should automatically be regarded as unobjective just because the
official may have an interest in the outcome of the investigation.  Most participants in an
investigation, whether representing a domestic producer, purchaser, distributor, or an importer, haveat least some interest in the outcome of the investigation.
50. As a practical matter, company officials who are involved in the day-to-day pr oduction, sale,
purchase, or importation of the product are likely to be the most knowledgeable persons about the
factors affecting the economic performance of the industry and the conditions of competition between
the domestic and imported products and are the source of much of the information obtained in the
course of the investigation.  For example, most of the information of a quantifiable nature is obtained
through questionnaires filled out by officials of companies involved in the production, importation, orpurchase of the product under investigation.  Accordingly, there was no reason why the USITC should
have disregarded the testimony of the two company presidents when the testimony was given under
oath and described the experiences of their respective companies, particularly when the testimony was
not rebutted, and was consistent with other evidence before the Commission.
K. C
APACITY UTILIZATION
51. In its injury determination, the USITC performed a calculation analyzing the effects of
increased imports on capacity utilization, pursuant to the requirement of Article 4.2(a) of the
Safeguards Agreement to examine the specific enumerated factors.42   The USITC calculated what the
capacity utilization level would have been in 1997 (61 per cent)  if the domestic industry had
increased production to match the increase in domestic consumption, rather than seeing it captured byincreased imports.  This calculation explicitly held constant the other possible effects of increased
imports ( e.g., their effect in driving down prices) to isolate the effects of imports on capacity
utilization in accordance with Article 4.2(a).  The EC makes no argument that this methodology is not
in accordance with the plain language of Article 4.2(a).
52. Given that the USITC conducted this analysis of  the effects of increased imports on capacity
utilization in accordance with the requirements of Article 4.2(a), the EC’s complaint in ¶ 76 of its Oral
Statement that this analysis shows “protectionist  aims” is without merit.  By conducting such an
                                                     
39 US Exhibit 4 at I-23.
40 US Exhibit 4 at II-4.
41 See, e.g. , testimony at the 16 December 1997 USITC injury hearing by Charles A. Sullivan,
Chairman and Chief Executive Officer of Interstate Bake ries Corp., at 80: “If we had a crop of wheat that had
significantly high protein, we would use a less amount of the gluten, but I have not seen a crop in all the years
that I have been in the business that we haven’t had to use some.”
42 US Exhibit 4 at I-12, I-17.  The EC’s criticism (EC Oral Statement at ¶ 73) of the description of this
USITC analysis in the United States ’ First Submission as an “ ex post facto  justification” is obviously wrong,
since this analysis comes directly from the USITC Report.WT/DS166/R
Page 323
Article 4.2 analysis, the USITC was hardly “assuming,” as the EC claims it was, that the entire
increase in domestic demand (much less “the entire domestic consumption”) “should have” turned to
US domestic suppliers.43   Article 4.2(a) requires an examination of what effects on the domestic
industry have been caused by increased imports, including the effects on specific enumerated factors
such as capacity utilization.  In its capacity utilization finding in its injury analysis, the USITCisolated the effects of increased imports on capacity consistent with Article 4.2(a); it was not making
assumptions about which suppliers “should have” satisfied domestic demand.
53. In its Question #3 to the United States, the EC implicitly criticizes  the USITC’s
determination because it did not make an explicit an alysis of how much of the expected increase in
demand the US industry expected to capture.  This criticism has no basis in the Safeguards
Agreement, which imposes no duty to make any such finding.  The EC would in effect require an
analysis that would subdivide increased imports.  It would limit USITC analysis to only that portion
of increased imports that the USITC affirmatively found that the industry could not have expected,
and treat as illegitimate any consideration of the effects of the other portion of increased imports.
Whether or not such an analysis might be permissible under the Safeguards Agreement, there is nosuggestion in the Agreement that such an analysis is required.  Article 4.2(a) directs the competent
authorities to investigate the effects caused by “increased imports,” not some of the increased imports.
54. Whether or not the US producers had good reason for expecting that the increased domestic
production would go to them is not relevant.  Given the irrelevance of this issue, the USITC made no
explicit finding about it as such.  Nevertheless, the USITC Report shows that the US producers had
every reason to expect that they would capture a large portion of the increased demand.  They did not
foresee, and had no reason to foresee, that the increased demand would instead be captured by low-priced EC imports, which increased due to developm ents in the EC wheat starch market exogenous to
the wheat gluten market.  Between 1993 and 1995 import market shares fell somewhat.
44   In addition,
a new US producer, Heartland Wheat Growers, which had begun constructing its plant in 1993, began
production in 1996.45   Its entry would normally have been expected to take market share from both
importers and domestic producers.  Certainly that would have been expected as the plant was beingbuilt, given pricing patterns before 1996, when imports from all sources both oversold and undersold
the domestic product.
46   Thus, there was every reason to assume that a new entrant to the domestic
industry would take market share from the imports, l eading to a significant increase in the domestic
producers’ overall share of the market.
55. The EC also asks in its Question 2 where in its findings the USITC showed that at 61 per cent
capacity utilization, the industry would have been profitable in 1996 and 1997.  Contrary to the EC’s
suggestion, the USITC made no statements or predictio ns as to whether the industry could or would
have been profitable at 61 per cent of capacity in 1996 and 1997; the Safeguards Agreement requires
no such statement.  What the USITC Report stated was that the 61 per cent capacity utilization level
was “much closer [than the 44.5 per cent of capacity actually reported in 1997] to the level at whichthe industry operated early in the investigative period when it operated reasonably profitably.”  This
observation was directly relevant to analyzing whether the effects of increased imports were causing
serious injury.
56. Moreover, this statement is entirely consistent with the record.  As the USITC Report stated,
the industry was profitable in 1993 and even more so in 1994, when capacity utilization was 78.3 percent and 67.4 per cent, respectively.
47    Accordingly, even the EC must concede that, as the USITC
                                                     
43 EC Oral Statement at ¶ 75.
44 US Exhibit 4 at C-3, Table C-1.
45 US Exhibit 4 at II-8.
46 [US Exhibit 4 at II-36 and Corrigendum]
47 US Exhibit 4 at I-13, II-15 at Table 5.WT/DS166/R
Page 324
stated, 61 per cent is much closer than 44.5 per cent to the level at which the industry had operated
profitably early in the period.  Furthermore,  since the industry had its most profitable year in 1994
when capacity utilization was 67.4 per cent, the EC’ s suggestion that the 78 per cent capacity
utilization level of 1993 was the only level at which the industry could operate profitably is just plain
wrong.48  
III. THE REMEDY THE UNITED STATES IMPOSED COMPORTS WITH US
OBLIGATIONS UNDER ARTICLE 5.1 OF THE SAFEGUARDS AGREEMENT
A. T HE UNITED STATES APPLIED ITS SAFEGUARDS QUOTA “ONLY TO THE EXTENT NECESSARY ”
1. The quota was not applied beyond the extent necessary
57. The EC has characterized the first sentence of Article 5.1 as establishing a “proportionality
test.”  The United States has made clear why that characterization is incorrect.49   However, there can
be no disagreement regarding the fact that Article 5.1, first sentence, establishes a specific obligation.
That obligation is to apply a measure “only to the extent necessary to prevent or remedy serious injury
and to facilitate adjustment.”  The EC has argued that the United States violated that requirement in
two ways.50   
58. First, the EC alleges that the US wheat glut en safeguard is being applied beyond the extent
necessary because it purportedly seeks to address all of the injury suffered by the industry, including
injury caused by sources other than imports.  Second, the EC contends that the US resort to a
quantitative restriction amounted to the application of a safeguard measure beyond the extent
necessary because, in the EC’s view, quotas are disfavoured under the Safeguards Agreement and the
GATT.  The EC’s arguments are without merit on both claims.
59. The United States took care to ensure that its safeguard measure was applied “only to the
extent necessary” to remedy the serious injury caused by imports.  While the EC alleges that the
United States attributed injury from other sources to imports and then applied a remedy that addressed
all of the injury, it cites no findings by the USITC identifying factors other than imports that were a
significant cause of serious injury to the domestic industry.
60. In ¶ 105 its oral statement, the EC crafts a hypothetical situation, based on its reading of the
US safeguards statute51,  in which the United States allegedly could  apply a remedy that “punishes”
imports for the injury caused by other sources.  The EC’s  hypothetical plainly does not apply to the
facts of this case, where the USITC identified no sign ificant sources of injury other than imports.  The
                                                     
48 EC Oral Statement at ¶ 71.  In addition, the industry was still profitable (although less so) in 1995,
before the import surge, when capacity utilization was 56.2 per cent.  US Exhibit 4 at I-13, II-15 at Table 5.  TheEC’s repeated efforts to argue that it was the domestic industry’s expansion of capacity in 1993-1995, and notthe import surge of 1996-1997, that caused the serious injury to the industry are simply inconsistent with therecord.
49 US First Submission at ¶ 165-169.
50 The EC also asserts the United States violated Article 5.1 through its alleged  “inherent
inconsistency” in considering the co-product nature of wheat gluten for purposes of the remedy but not in itsinjury investigation.  The United States previously addressed this erroneous argument in paragraph 184 - 185 ofits first submission, and the EC’s oral statement adds nothing new to that argument.
51 The EC cites the provisions of 19 USC. 2252(b)(1) as “evidence” of its assertion that the United
States has disproportionately restricted wheat gluten imports.  The United States does not understand the EC, in
citing this provision of US law, to have challenged its compatibility with the Safeguards Agreement as such.
Indeed, the EC could not purport to do so at this stag e, having not included the US safeguard statute in its
request for a panel.  Moreover, the EC stated in its First Written Submission that the compatibility of the US
safeguard law “is not under the scrutiny of this Panel. ”  First Written Submission of the EC, ¶ 128.  See USresponse to Panel Question # 9.WT/DS166/R
Page 325
hypothetical thus has no relevance for purposes of assessing whether the US wheat gluten safeguard
measure has been applied beyond the extent necessary to remedy the serious injury attributable to
increased imports.
61. Moreover, the EC’s argument seems to assume that the United States was required to quantify
the specific amount of injury that was due to imports as opposed to other causes.  As pointed out inthe first US written submission, the specific language that the negotiators of the Safeguards
Agreement adopted in Article 4.2(b) concerning injury due to other factors had previously been
interpreted not to require such quantification.
52   Article 5.1 does not impose any particular
methodology by which Members must ensure that their safeguard measures are not applied beyond
“the extent necessary”.
62. The EC’s contention that the US safeguard measure did not take account of the injury caused
by other factors, but instead sought to remedy all of the industry’s injury, simply disregards the actual
remedy imposed and the findings underlying that remedy.  The USITC conducted an analysis in
addition to its injury findings and causation findings to ascertain what would be necessary to remedy
the injury caused by imports and facilitate adjustment.   Both that analysis, and the action taken by thePresident, ensure that the remedy taken was as modest as possible to address the injury caused by
imports and facilitate adjustment by the industry.
63. In particular, the remedy does not seek to offset each element of injury that the USITC found
was caused by increased imports.  For example, as noted at, in evaluating the injury factor concerning
capacity utilization, the USITC held all other factors constant and ascertained what the difference in
US capacity utilization would be if the US  producers had captured the increase in demand acquired
by increased imports in 1996-1997.  By contrast, in its remedy findings, the USITC conducted a
different analysis that was directed toward determining the effect its recommended safeguard measure
would have on the US industry’s operations in the future.
53   This analysis did not assume that the
domestic industry would capture all of the increase in domestic demand in 1997 from earlier levels.
Although the safeguard remedy was based on the 1993-1995 market shares held by imports,  the
USITC applied those market shares to 1997 domestic consumption/demand levels in setting quotalevels.  Thus, the remedy the USITC proposed, and that the President adopted, does not seek to recoup
for the domestic industry the full increase in domestic demand.
64. In addition, the remedy analysis did not attempt to isolate the effects of increased imports on
capacity utilization from its effects on price. The remedy analysis assumed that domestic producers,
relieved from pressure from low-priced imports, would prefer to raise their prices above theiroperating costs, even though this meant that they would be foregoing some increase in sales, and
consequently in production and capacity utilization.  This different kind of analysis is consistent with
the Safeguards Agreement, which prescribes certain factors for competent authorities to consider in
making their injury determination, but by contrast does not specify any particular method of
estimating the effects of proposed safeguard remedies.
65. For both of these reasons, the USITC’s projection of the capacity utilization level that the
domestic industry would reach if the proposed sa feguard remedy were implemented (50.7 per cent-
53.3 per cent) is lower than the USITC’s calculation of the capacity utilization level (61 per cent) in
its injury analysis.  Because this estimate assumes that the US industry will sell at a price that covers
its operating costs, it seeks to ensure that the US industry will operate at a level at which it willachieve a reasonable profit.
                                                     
52 US First Written Submission at ¶ 130.
53 USITC Report at I-30 to I-31.WT/DS166/R
Page 326
66. Nevertheless, although the projected capacity utilization is considerably closer to the
utilization levels at which the US industry operated profitably, it remains below the 56.2 per cent level
achieved in the last year of profitability (1995) and well below the 78.3 per cent level achieved in
1993.54  The USITC found that this remedy would al low US producers “to more fully utilize their
recently increased capacity ... , thereby raising productivity and lowering unit operating costs."55   The
remedy was not designed, however, to ensure that domestic producers could come close to completely
utilizing their increased capacity.  Thus, the US remedy plainly does not seek to remedy all ills facing
the US industry, but rather seeks specifically to facilitate the US industry’s adjustment to those
specific problems posed by increased imports.
67. Moreover, although the USITC found that a 4-year remedy would be necessary to facilitate
adjustment, the President did not impose a remedy of that duration.  Instead, he chose a remedy of
only 3 years.  Thus, both the USITC’s recommendations and the President’s action were calculated to
ensure that the United States would not apply a safeguard measure beyond the extent necessary to
remedy the serious injury attributable to imports and facilitate adjustment.  Under these
circumstances, the EC has no basis on which to argue that the United States imposed an overlyexpansive remedy that addressed not only injury caused by imports, but also injury from other
sources.
2. The United States was not required to use a tariff safeguard measure
68. The EC further alleges that the form of the remedy the United States applied -- a quantitative
restriction -- automatically means that the United States applied a remedy beyond the extent necessary
to remedy the serious injury.  The EC arrives at that conclusion based on its supposition that
Article 5.1 disfavours quota measures over tariffs.  In support of its claim, the EC points to the third
sentence of Article 5.1, which states that “Members should choose measures most suitable for the
achievement of these objectives,” and argues that sentence, read in conjunction with the “only to
extent necessary” language of Article 5.1, first sentence, disfavours quotas.  The EC also points to
“basic principles of the GATT 1994” as evidenced in the preamble to the Safeguards Agreement, and
the panel report in Turkey -- Restrictions on Imports of Textiles and Clothing Products.
56 
69. There is no basis for the claim that the Safeguards Agreement disfavours quotas for purposes
of applying definitive safeguard measures.  Indeed, Article 5, which treats definitive safeguard
remedies, specifically  provides for quotas and fails to mention duties at all.  Moreover, whereas
Article 6, which provides for provisional safeguard measures, establishes a preference (although not a
requirement) for provisional tariff remedies, Article 5 contains no such admonition.  Had the framersof Article 5 preferred tariff remedies over quantitative restrictions for purposes of definitive
safeguards measures, they would have included in Article 5 language akin to that in Article 6.
70. Plainly, Article 5.1 contemplates that Member s may establish safeguard measures in the form
of quantitative restrictions.  Rather than subordinating them to tariff measures, Article 5.1, second
sentence, simply places restrictions on the extent to which they may be applied.  That sentenceprovides:
If a quantitative restriction is used, such a measure shall not reduce the quantity of
imports below the level of a recent period which shall be the average of imports in the
last three representative years for which statistics are available, unless clear
justification is given that a different level is necessary to prevent or remedy seriousinjury.
                                                     
54 USITC Report at II-15, Table 5.
55 USITC Report at I-30.
56 WT/DS34/R 31 May 1999.WT/DS166/R
Page 327
71. Where a Member satisfies that obligation, and assuming that the quota is not otherwise
applied beyond the extent necessary to prevent or remedy serious injury, it is free to apply a
quantitative restriction.  The EC’s citation to the fourth preamble of the Safeguards Agreement, that
the Safeguards Agreement is “based on the basic principles of GATT 1994," and its reference to
Turkey – Textiles  are irrelevant.  The preambular language the EC cites may establish context for the
interpretation of Article 5, if the plain meaning of its terms are in doubt.  But they are not in doubt,
since they plainly provide for definitive safeguard measures in the form of quantitative restrictions
and do not create any preference for tariff remedies.
72. The EC next tries to fashion an argument out of  the third sentence of Article 5.1, which
provides that “Members should choose measures most suitable for the achievement of theseobjectives.”  The EC argues in its first submission (but did not further elaborate in its oral statement)
that “a tariff should be used unless, as provided by the third sentence of paragraph 1, a tariff would
not be suitable to remedy the serious injury and facilitate adjustment."
57  This is a contorted reading of
Article 5.1, to say the least.
73. The second sentence of that article specifically provides for quantitative restrictions without
the slightest hint that they may be used only where a tariff remedy is unsuitable.  In fact, as noted
above, Article 5.1 nowhere mentions tariff remedies, which hardly suggests that they are to be
preferred.  The last sentence of Article 5.1, which admonishes Members to choose the most suitable
remedy, does not exalt tariff remedies over quantitative restrictions as a matter of principle.  Rather, it
admonishes the importing government to choose a measure -- whether tariff- or quantitative-based --
that, in the particular case, is most suitable fo r remedying or preventing injury and facilitating
adjustment.   In fact, the USITC  provided extensive explanations as to why, in the case of wheatgluten, a tariff measure would not meet the objectives of remedying the industry’s serious injury and
facilitating its adjustment.
58  Thus, a tariff measure was not the “most suitable” remedy in the case of
wheat gluten imports.
74. Both the EC’s first written and oral statements acknowledge the USITC’s explanations, but in
the EC’s view these “short arguments” are inadequate.59   If by that the EC means to imply that there
is a specific page limit requirement – that position is both erroneous and absurd.  The USITC’s
reasoned explanations as to why a tariff measure was an unsuitable remedy amply satisfy US
obligations under Article 5.1.
B. THE WHEAT GLUTEN QUOTA IS SET AT A LEVEL IN EXCESS OF IMPORT LEVELS IN THE LAST
THREE REPRESENTATIVE  YEARS
75. In its oral statement the EC continues to argue that the burden of proof shifts to the United
States to demonstrate that the wheat gluten quota conforms to the second sentence of  Article 5.1 –
i.e., a quantitative restriction cannot reduce the level of imports below the last three representative
years of imports.  In the EC’s view, Article 5 establishes a special rule that is “not the usual burden of
proof.."60   This argument simply ignores GATT jurisprudence on this issue, most recently articulated
in Korea – Dairy  where the Panel found that “the burden of proof rests with the . . . complainant, and
does not shift during the panel process."61   Accordingly, the burden, at all times remains with the EC
to prove its claim.  It has failed to do so in this instance.
                                                     
57 EC First Submission at ¶ 118.
58 The United States previously discussed these issues in detail in ¶ 194 of this submission.
59 EC First Oral Statement at ¶ 109.
60 EC Oral Statement at ¶ 122.
61 Korea – Dairy at ¶ 7.24.WT/DS166/R
Page 328
76. The substance of the EC’s claim is that the United States failed to use the “representative”
period 1995 to 1997.  The EC argues that the most recent three years of wheat gluten imports are
representative because they “represent exactly the pattern of trade on-going before the entry into force
of the measure . . . "62   But this argument is entirely circular.  A three-year pattern of trade is not
“representative ” merely because it occurred in the last three years.  Rather, a three-year pattern oftrade is “representative” if it is characteristic of pre-existing patterns.  The EC resorts to doublespeak
because the pattern of trade that pertained during the 1995 to 1997 period was unlike – that is,
unrepresentative  –  of the historical pattern of US wheat gluten import trade.  That is so because
1996-97 were surge years, with imports far in excess of historical averages and rising faster than the
increase in demand.  Moreover, the EC’s complaints about the size of the quota are particularlyunpersuasive in light of the fact that the United States set the quota at a level higher  than that
accounted by imports during the 1993-95 period.
77. The EC discounts the United States’ position that  the term “representative,” as used in
Article 5.1, normally would be a period in which imports did not cause serious injury.  The EC’s
contrary reading would undermine the remedial purpose of the Safeguards Agreement since a quotaset at the average level of imports during the period in which the industry sustained serious injury
would be unlikely to remedy that injury or facilita te adjustment.  The EC responds that “if an increase
in imports were a ‘clear’ justification for using a representative period other than the ‘last three
representative years for which statistics are available,’ this situation would always apply, rendering
the provision meaningless."
63   Yet, by arguing that Article 5.1 normally would require a Member to
set its quota level at the level that pertained during the most recent three years, it is the EC that is
rendering “representative” meaningless.
78. Moreover, assuming arguendo  that the EC’s interpretation of “ representative” is correct,
Article 5.1 provides for deviation from that level when “clear justification is given that the different
level is necessary to prevent or remedy serious injury.”  As noted in the United States’ first
submission, the USITC’s findings satisfy the “clear justification” requirement.64  The USITC found
that choosing a period comprising the two years of crisis -- 1996 and 1997 -- would not remedy theserious injury; thus selecting that period would have defeated the objectives of remedying serious
injury and facilitating adjustment set out in Article 5.1.
65
IV. THE UNITED STATES COMPLIED  WITH ARTICLE 5.2(A) QUOTA
ALLOCATION RULES
79. In its oral statement, the EC added nothing to bolster its claim that the United States allocated
the wheat gluten quota in violation of Article 5.2(a).   Rather, the EC continues to assert that the
United States failed to consult with Members with a view to achieving an agreed allocation and did
not explain why that method was not “reasonably practicable.” Conspicuously absent from the EC’s
allegations are any arguments that would support its conclusion that the hortatory or permissive
language of Article 5.2(a) should be read as mandatory in nature.
80. Article 5.2(a) provides that “in cases in which a quota is allocated among supplying countries,
the Member applying the restrictions may seek agreement.” The EC reads the term “may” as “shall,”
but provides no textual basis for this extraordin ary interpretation nor does it cite to any WTO
jurisprudence that would sanction such a leap.  It is apparent from the plain terms of Article 5.2(a)
that the EC’s claim is incorrect as a legal matter.
                                                     
62 EC Oral Statement at ¶ 199.
63 EC Oral Statement at ¶ 119.
64 See US First Submission at ¶ 194.
65 See US First Submission at ¶ 194.WT/DS166/R
Page 329
81. Moreover, to the extent that this purported “obligation” in Article 5.2(a) imposes an
obligation to hold consultations, the United States satisfied that requirement.  That fact is confirmed in
letters drafted by the EC on this issue.  Specifically, in a 8 May 1998 letter to the United States from
Jean-Jacques Bouflet, Minister-Counsellor to the EC Commission Delegation in Geneva, Mr. Bouflet
notes that the parties indeed did consult on 24 April 1998, and further confirms that the partiesdiscussed the quota allocation issue.  Therefore, the EC’s allegation that the United States breached
Article 5.2(a) by failing to consult on the quota allocation is factually incorrect, as evidenced by the
EC’s own document.
66   
V. THE UNITED STATES OBSERVED THE NOTIFICATION AND CONSULTATIONS
REQUIREMENTS OF ARTICLES 8 AND 12
A. T HE UNITED STATES SATISFIED ITS CONSULTATION OBLIGATIONS UNDER ARTICLE 12
82. The EC alleges that because of the “unilateral” nature of safeguards measures, the Safeguards
Agreement imposes heightened consultation and negotiations obligations on the Member imposing
the measure.67   To that end, the EC discerns an obligation to consult under practically every article of
the Safeguards Agreement, even where the plain terms of the article in question do not call for suchconsultation “obligations.”  Thus, the EC alternately alleges violations of consultation obligations
under Articles 5, 8 and 12 of the Safeguards Agreement.
68   The United States submits that it amply
satisfied its consultation obligation, to the extent  such obligations exist.  Therefore, the EC’s
allegations on this point cannot be sustained.
83. The EC has not denied that it actually consulted with the United States under Article 12.3 on
24 April 1998.  In its response to Panel Question 11 the United States provided documentation
supporting its claim and demonstrating that the parties discussed the proposed measure (US Exhibits11 and 12).  Those facts alone are sufficient to establish that the United States satisfied its
consultation obligations under Article 12.3.  Rather than respond to the facts brought forward by the
United States, the EC has made conclusory assertions.  The EC’s oral statement alleges that at certain
“informal meetings” held after the Article 12.3 consultations, the United States failed to accede to EC
demands.  In short, the EC has not met its burden of proof with respect to its claim of a violation ofArticle 12.3.
B. T
HE UNITED STATES TIMELY FILED ITS NOTIFICATION ON THE INVESTIGATION AND ON THE
PROPOSED MEASURE
84. The EC maintains that the United States failed to notify the “proposed measure,” because the
US safeguard measure was notified three days after it had taken effect.  The EC further alleges thatthe United States “made findings of serious injury on 15 January 1998, but notified the WTO only on
11 February 1998.”  In the EC’s view “[a]ll these notifications were thus effected ex post facto , i.e.
after the action or the measure had been adopted and not at the stage of proposed action or measure, in
clear breach of the letter and the spirit of Article 12 SA.”
85. The EC’s claim regarding the US notification of serious injury is incomprehensible in light of
the plain terms of Article 12.1(b), which requires immediate notification “upon . . . making a finding
of serious injury . . . ”  The United States simply could not have provided notification of the USITC’s
serious injury findings until after  the USITC made those findings.  Thus, the EC’s complaint that the
                                                     
66 Letter dated 8 May 1998 from Mr. Bouflet to Mr. Bob Kasper of the United States.  US Exhibit 11.
67 EC Oral Statement at ¶ 174.
68 The United States previously discussed in Section III herein the fact that Article 5.2 does not
establish a consultation “obligation.”WT/DS166/R
Page 330
notification was inconsistent with Article 12.1(b) because it was “effected ex post facto ” cannot be
taken seriously.
86. The EC’s allegations regarding the US remedy notification are equally unfounded.
Article 12.1(c) requires immediate notification “upon . . . taking a decision” to apply a safeguard
measure.  The United States effected a notification of this type once it had taken the decision toimpose the wheat gluten safeguard, in conformity with the plain terms of Article 12.1(c).
87. Detailed below is a brief chronology of the relevant consultation and notification events in
this matter, which may help the Panel to address the various notification and consultation issues raised
in this proceeding.
Date Action
19 September 1997 Domestic industry files petition with USITC
1 October 1997 USITC completes evaluation and announces institution o f
investigation
17 October 1997 United States files Article 12.1(a) notification
15 January 1998 USITC votes unanimously that increased imports are causing
serious injury to the domestic industry
11 February 1998 US files Article 12.1(b) notification
18 March 1998 USITC issues confidential report and recommendation
24 March 1998 US files supplementation 12.1(b) notification along with a copy o f
the public version of the USITC’s report
24 April 1998 US holds first consultations with the EC
19-20 May 1998 The US holds “informal” consultations with the EC (alleged by
EC)
22 May 1998 US holds second consultations with the EC
1 June 1998 US measure on wheat gluten becomes effective
4 June 1998 US files Article 12.1(c) and Article 9 notification
88. In light of these facts, the EC’s complaint regarding the timing and notifications on theinvestigation and the proposed measure cannot be sustained.
VI. CONCLUSION
89. The EC has failed to assert and prove its claim that the US safeguard measure is inconsistent
with US obligations under the Safeguards Agreement or the GATT 1994.  For the reasons presentedWT/DS166/R
Page 331
in the US first and second submissions and first oral statement, the United States respectfully requests
that the Panel reject the EC’s claims in this dispute and affirm that the United States has acted
consistently with its obligations.WT/DS166/R
Page 332
UNITED STATES LIST OF EXHIBITS
United States – Definitive Safeguard Measure on
Imports of Wheat Gluten from the European Communities
Exhibit Number Description of Exhibits
11 Letter dated 8 May 1998 from Mr. Jean-Jacques Bouflet, Minister-Counsellor of the
EC Commission Delegation to Mr. Bob Kasper of the United States regarding
consultations on 24 April 1998.
12 Letter dated 21 May 1998 from Mr. Juan Monfort of the EC Commission
Delegation to Mr. Bob Kasper regarding consultations on 22 May 1998 (withattachment).
US Exhibit 11
US Exhibit 12
__________WT/DS166/R
Page 333
ATTACHMENT 2-6
COMMUNICATION OF THE UNITED STATES CONCERNING
PROPOSED PROCEDURES GOVERNING PRIVATE
CONFIDENTIAL INFORMATION
(27 January 2000)
My authorities have instructed me to respond to the Panel’s fax of 25 January 2000, wherein
the Panel proposes procedures for providing and safeguarding Business Confidential Information.
The United States has carefully reviewed the Panel’s fax.  As the United States has noted in its
submissions to the Panel, under Article 3.2 of the Agreement on Safeguards , as well as US law, US
competent authorities are precluded from disclosing  confidential information provided to them in the
course of a US safeguards investigation, absent the express consent of parties that supplied theinformation.  In this case, that would include not only the consent of US producers but also producers
of the European Communities, Australia, and Canada, as well as US purchasers and importers.
While the United States has reservations about the basis on which the Panel is seeking the
information in question, the United States nevertheless wishes seeks to facilitate the Panel’s work and
to that end is prepared to make every effort to secure authorization to provide relevant Business
Confidential Information that the Panel is seeking for its deliberations.  It would greatly facilitate ourefforts in this regard, however, if we were in a position to specify for the companies concerned the
precise nature and scope of the information that the Panel is seeking, as well as the use to which the
information will be put.  This information would help the companies concerned to assess the extent of
commercial risk they may face in the event of an inadvertent or unauthorized disclosure of any
sensitive information they have provided.  To this end, it would be highly desirable if the Panel couldindicate to the Parties the type and extent of the information it is seeking; whether the business
information to be supplied is solely that contained in the confidential report of the US International
Trade Commission or would also include raw data that US and/or other suppliers, importers, and
purchased furnished directly to the Commission; and whether the Panel would expect to use the
information solely for its own purposes in verifying arguments advanced by the Parties to date or for
some other purpose.
In the absence of an enforceable mechanism for ensuring the non-disclosure of confidential
information, our efforts to secure consent from the companies concerned may be enhanced to the
extent that there are strict and verifiable restrictions on the degree of access provided to theinformation, both in terms of the place in which it is made available and the affiliation and number of
persons accorded access to it.  Once we have been apprised of the nature and extent of business
confidential information that the Panel is seekin g we will consult with the firms in question and
provide a detailed response to the Panel’s proposed procedures.  In our view, the appropriate
procedures may varying depending on the particular information being sought.
We should hasten to point out, that even if th e United States is successful in obtaining
permission from US producers, importers, and purchasers to disclose some or all of the information
the Panel is seeking, we may not be well situated  to secure such permission from companies located
outside the United States or with non-US ownership.  In those instances we very likely would need to
seek the cooperation of the Members concerned, in particular the EC, Canada, and Australia.
__________WT/DS166/R
Page 334
ATTACHMENT 2-7
UNITED STATES ORAL STATEMENT
SECOND MEETING
(1 February 2000)
Final Version
Mr. Chairman, Members of the Panel,
On behalf of the United States delegation, I would like to thank the Panel for its hard work to
date in examining the questions raised in this dispute.  In this oral statement, the United States will not
repeat the arguments made in its previous submissions, but rather will briefly respond to the issues
raised in the EC’s Second Written Submission and its response to the Panel ’s questions.
The United States will begin its presentation with a statement by Mr Henderson addressing
the EC’s recent arguments regarding standard of review, unforeseen developments and confidentialinformation.  Mr. Gearhart will address new argume nts the EC has raised regarding the so-called
wheat protein premium.  Ms. Florestal will close the United States’ presentation with a discussion of
the EC’s claims under Articles 5 and 12 of the Safeguards Agreement.
At the conclusion of our statement, we would be pleased to receive any questions you may
have.
Mr. Henderson,
Standard of Review and Burden of Proof
1. The EC begins its second written submission with a list of questions purporting to set forth
the issues to be examined by the Panel.  Yet upon closer examination, each of the EC’s questions
concerning the USITC’s injury and causation findings  directs this Panel away from its task under the
WTO Agreements.  The EC’s questions reverse the burden of proof, create false definitions of terms,and manufacture obligations that are not contained in the Safeguards Agreement.
2. Contrary to the wording of the EC’s questions , it is the EC as complainant that bears the
burden of proof, a burden that does not change throughout this panel process.  Thus, after the EC has
submitted its arguments and the United States has responded to the EC’s claims, the Panel must weighthe evidence and arguments submitted by both parties to determine whether the EC has met its
burden.
3. In addition to reversing the burden of proof, th e EC also supplies its own definitions of terms
in the Safeguards Agreement, and then tries to argue that the US has failed to satisfy those newly-
created definitions.  The EC does this, for example, in discussing the requirement in Article 4.2(b)
that the investigation must demonstrate the causal link between increased imports and serious injuryon the basis of “objective evidence.”  The EC argues that this means that the United States must show
that the evidence the USITC cited in its causation findings was not “biased by subjective, political or
unrelated aims.”  The EC’s twisted definition of “objective evidence” is not based on anything in the
Safeguards Agreement or any decision construing th e Agreement.  Moreover, it reverses the burden ofWT/DS166/R
Page 335
proof, and seeks to distract the Panel’s attention to irrelevant matters.  The Panel is fully capable of
determining whether the pertinent evidence in the USITC investigation constitutes “objective
evidence” under Article 4.2(b) without undertaking a separate inquiry into the existence of such
alleged other motives.
4. In addition, the EC suggests that Article 4.2(b) required the USITC to establish with “positive
and irrefutable evidence” the existence of the causal link between increased imports and serious
injury.  There is no such language in Article 4.2(b).  Neither the Safeguards Agreement nor the
Dispute Settlement Understanding nor Panel or Appellate Body reports require  “positive and
irrefutable evidence.”  As the EC itself acknowledged in its first oral statement, the Panel’s job is toexamine the USITC report and determine whether the USITC’s decision was reasonable.
5. Again and again in its submission the EC offers evidence that it says the USITC report did not
consider,  and claims that such omissions constitute, in themselves, a violation of Article 4.2.  The EC
in effect  argues  that it can demonstrate a violation of  Article 4.2 simply by demonstrating that some
piece of evidence that it considers relevant was not included in the USITC report.
6. The EC makes a fundamental mistake, misreading Article 4.2 by confusing the term “factors”
with particular “facts” or “evidence.”  Article 4.2(a) requires a competent authority to evaluate “all
relevant factors” bearing on the situation of the domestic industry.  Article 4.2(c) requires the
competent authority to publish a report containing a detailed analysis of the case, as well as ademonstration of the relevance of the “factors” examined.  Similarly, Article 3.1 requires a competent
authority to publish a report setting forth findings and conclusions of law reached on “all pertinent
issues of fact or law.”
7. Thus, while the competent authority’s report should address all relevant “factors” and resolve
all relevant “issues of fact,” the Safeguards Agreement  contains no requirement that it explicitly
mention each “fact,” much less each piece of evidence.  To show that a particular fact or piece of
evidence is not mentioned does not establish a violation of the Safeguards Agreement.   Moreover, as
the United States has demonstrated in its previous submissions, the specific examples cited by the EC
do not show that the USITC report failed to address an y relevant factor or issue of fact, or that the
United States in any way violated the Safeguards Agreement.
8. Similarly, the Safeguards Agreement does not require the competent authority’s report to
contain every specific fact that may support the authority’s findings.   Consequently, the EC’s
complaint that the USITC report  redacted some non-confidential information states no claim under
the Safeguards Agreement.
9. The United States has previously set forth in its response to Panel Question 7 why the USITC
did not have an obligation on its own initiative to hypothesize other possible causes of injury to the
domestic industry besides increased imports beyond those  raised by the parties, including the EC or
the European producers, during the USITC investigation.  However, in its treatment of this issue, theEC misrepresents the role of the USITC in gath ering information during the investigation.  The EC
claims that the USITC did not actively search for information during its wheat gluten investigation,
but rather relied solely on the information that the parties placed before it.  As the EC knows very
well, this is absolutely incorrect.
10. As was demonstrated in the United States’ prior submissions, the USITC conducted a very
thorough investigation.  The USITC sent questionnaires to domestic producers, importers, andpurchasers, and gathered publicly available information.  The USITC held public hearings in both the
injury and remedy phases of the investigation, at which all parties expressing an interest -- including
the EC -- were permitted to appear and make their views known.  At these hearings, the USITCWT/DS166/R
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Commissioners and staff directly questioned the witnesses and requested additional information and
clarification of arguments.  The record was supp lemented by additional information and arguments
supplied by the parties.  Through the investigative process, the USITC developed a substantial body
of information and arguments relating to the questions of injury and remedy, and the USITC made its
determination and recommendation on the basis of that detailed record.
Unforeseen Developments
11. As set forth in the United States’ response to Panel Question 5, the USITC’S detailed report
amply demonstrates as a matter of fact the unexpected developments that caused the increasedimports.  These developments concerned the European producers’ expansion of capacity as part of an
effort to increase their production of wheat starch for the protected European market, for reasons
unrelated to developments in the wheat gluten market, and were in fact unforeseen by the United
States and the domestic wheat gluten industry.  These USITC findings fully satisfy the ruling of the
Appellate Body in Argentina -- Footwear  that this provision of Article XIX of the GATT 1994 does
not establish “independent conditions” for the application of a safeguard measure, but rather
“describes certain circumstances which must be demonstrated as a matter of fact in order for a
safeguard measure to be applied.”
12. In its second submission, the EC attempts to add an obligation not found in the Safeguards
Agreement or in Article XIX and that does not fl ow from the recent Appellate Body decisions
addressing unforeseen developments.  According to the EC, the Appellate Body stated that suchunforeseen developments must be “demonstrated in [the competent authority’s] investigation report.”
That is simply incorrect.  The Appellate Body made no such statement.  The Appellate Body in
Argentina -- Footwear  considered “whether the Argentine authorities have, in their investigation ,
demonstrated that the increased imports in this case occurred as a result of  unforeseen developments
and of the effect of the obligations incurred by a Member under this Agreement, including tariffconcessions.”  Thus, the relevant question is whether the USITC demonstrated in its investigation that
unforeseen developments occurred, not whether the USITC made a specific determination regarding
unforeseen developments.  It is plain that the USITC report shows that those developments took place.
Ms. Florestal,
13. Mr. Chairman, at this point I would like to briefly depart from the text of our prepared
statement to discuss the fax the Panel sent over this morning regarding certain Business Confidential
Information it would like the United States to provide, and the procedures for that information.
14. The United States seeks to be responsive to the Panel’s request.  We note that the Panel’s
working procedures do not include a reference to the language in Article 3.2, which provides that
“[confidential information] shall not be disclosed without permission of the party submitting it.”  The
United States believes that it is important for the working procedures to reflect the obligation
contained in Article 3.2.
15. In addition, the Panel’s fax makes reference to the recent Appellate Body report in Canada –
Aircraft .  The United States believes that Canada - Aircraft  is not applicable to the situation here.
The United States recalls that the information at issue in Canada – Aircraft  was information in the
government’s possession.  It is not at all similar to this case, where the information the Panel is
requesting is business confidential information relating to private parties.  Moreover, the Canada --
Aircraft  case did not involve an express prohibition on providing that information without the express
consent of the parties, as is the case under Article 3.2 of the Safeguards Agreement.WT/DS166/R
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Confidential Information
16. While acknowledging that the USITC could properly redact from its report confidential data
of individual companies, the EC continues to argue that the redaction of aggregate data is improper in
every case.  However, the EC carefully avoids acknowledging why the USITIC redacted aggregatedata in this case.  The USITC did so for an entirely justifiable reason, namely because of the small
number of firms that submitted data.  Disclosing aggregate data in such circumstances would have
made it easy for competing companies to discern the individual confidential information supplied by
other firms.  Article 3.2 states that such confidential information submitted to the competent authority
“shall not be disclosed without the permission of the party submitting it.”  Moreover, Article 4.2(c)expressly requires that publication of the competent authority’s report shall be in accordance with
these  provisions of Article 3.    
17. In its Second Submission, the EC adds another new claim.  It says that because the USITC
redacted confidential information from its  report, the United States violated an obligation to providenon-confidential summaries of confidential information.  The  EC is once again misreading the
Safeguards Agreement, which contains no such obligation.  Article 3.2, which addresses non-
confidential summaries of confidential information, states only that “parties providing confidential
information may be requested to furnish non-confidential summaries thereof, or if such parties
indicate that such information cannot be summarized, the reasons why such a summary cannot be
provided.”  Thus, this provision deals only with  the submission of non-confidential summaries by
interested parties  that make submissions during th e course of a safeguards investigation.  Article 3.2
does not impose any requirement on a competent authority such as the USITC to provide a
non-confidential summary, nor does any other provision of the Safeguards Agreement.  Moreover,
Article 3.2 does not impose an obligation on a competent authority to require that interested parties
provide such non-confidential summaries during the investigation.  Article 3.2 states  only that
non-confidential summaries “may be requested” of submitting parties.
18. Finally, the EC’s claims of prejudice from the USITC’s redaction of confidential information
cannot be taken at face value.   Under USITC rules the EC could have applied to be a party to the
administrative protective order governing the confidential information, and could have had access to
that information during the USITC proceeding.  The European producers did exactly that, and theircounsel had such access.  While the EC appeared at the beginning of the investigation, it chose not to
apply to be a party to the protective order.  Its lack of access to the confidential information was due
to its own choice.
New Claims
19. Indeed, this panel should not consider the EC's misplaced arguments that a competent
authority must provide non-confidential summaries of confidential information and that the USITC
must have made a specific determination of unforeseen circumstances.  These are among several
contentions that the EC raises for the first time in its most recent submission.  Also new is the EC’sclaim that US law requiring the USITC to determine that other possible causes of injury are not a
more important cause of serious injury to the domestic industry than increased imports is inconsistent
with Article 4 of the Safeguards Agreement.  Those claims were not included in the EC’s panel
request, and it would prejudice the United States if such claims were now to be considered, when
briefing is almost completed.  If these new claims are allowed to be heard now, the United States will
have been deprived of its ability to address these claims in both its first and second written
submissions, at the December 21-22 oral argument , and in its responses to the Panel’s questions.
20. In addition, the EC now claims in response to Panel Question 18 that the United States
somehow violated Article 4.2(a) of the Safeguards Agreement because one producer, ADM, did notWT/DS166/R
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maintain separate financial records for its US and Canadian operations, and thus submitted combined
data for its US and Canadian operations to the USITC.  Although the EC never explains why this
producer’s data problems constitute a violation of the Safeguards Agreement, it is clear that the EC
raised no such claim in its panel request and that its attempt to introduce such a claim at this late date
is prejudicial to the United States and outside the panel’s terms of reference.
21. Mr. Chairman, I would now like to turn to my  colleague, Mr. Gearhart, who will address the
EC’s new arguments relating to the so-called wheat protein premium.
Mr. Gearhart,
Protein premium
22. Mr. Chairman and members of the Panel, we would now like to address the new arguments
that the EC makes about a so-called wheat protein premium factor, which the EC now asserts explain
why US wheat gluten prices declined in 1996 and 1997 at the same time that US consumption
increased.  These arguments are contrary to USITC findings that the EC has never challenged.  In its
Second Written Submission the EC claims that supplies of high-protein wheat in 1996 and 1997 were
good and that the protein premium for wheat was low.  This, the EC claims, enabled bakers to force
down wheat gluten prices and also allowed bakers and pet food producers to buy more wheat gluten.
The EC claims that because input costs (wheat pr ices, fuel, and depreciation) were rising, US wheat
gluten producers were caught in a cost-price squeeze caused by domestic factors.  The trouble withthe EC’s new argument is that it is contrary to the USITC’s uncontested findings that demand
increased for reasons not based on the price of  wheat gluten.  The EC is asking this Panel to
substitute its judgment for that of the US compet ent authority in analyzing the factors that affect
demand.
23. The USITC addressed the reasons for the increase in demand for wheat gluten in 1997 and
indirectly for 1996 on page I-23 of its report.  The USITC listed four reasons.  First, the increase in
demand for canned cat food formulations that feature product in gravy instead of the regular loaf-style
canned cat food.  Second, the shift by bakeries to high-speed mixing equipment, which requires a
higher protein content in the dough.  Third, the increasing popularity of high-fibre bread and otherproducts, like bagels, that are particularly high in wheat gluten.  Fourth, anticipation by purchasers
and importers of the section 301 petition submitted by the domestic wheat gluten industry in
January 1997.  The EC has never challenged these findings.
24. Nor is there any support in the record for the EC’s new hypothesis.  As we have previously
stated, the USITC also recognized that the protei n content of the wheat crop can affect demand for
wheat gluten.  This was the case in 1993 and 1994.  As the USITC observed, both demand for wheat
gluten and the price of wheat gluten rose in 1994 in response to the decline in the protein content of
the 1993 wheat crop.  However, when the protein content returned to a more normal level in the
following year, prices came back down.
25. There was no evidence before the USITC of a drop in the protein content of the wheat crop in
1996 and 1997, or of any other change relating to the protein content of the wheat crop that would
explain the increase in wheat gluten consumption in those two years.  Nor did any of the parties in the
USITC investigation make the argument the EC has advanced in this proceeding.  While EU
producers during the USITC proceeding cited the 1993/94 supply shortage, fluctuating prices of
wheat, and the price premium of wheat over corn as factors affecting the domestic wheat gluten
market, they did not allege a “wheat protein premium factor” or protein shortfall in the 1996 and 1997
wheat crops.  If the protein content of wheat during 1996 and 1997 was a serious factor affecting price
and demand for wheat gluten, it is surprising that it was only discovered by the EC long after the
conclusion of the USITC investigation.WT/DS166/R
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26. In arguing that high protein wheat is a substitute for wheat gluten, the EC continues to
misstate the role that wheat gluten plays in the bakery industry, particularly in the production of
certain bakery products such as high-fibre and multi-grain breads and bagels.  Without sufficient
protein content, the dough will lack the necessary elasticity and will not rise properly.  Some wheatgluten must be added to the production process to bring the protein content up to the required level.
The protein content of wheat flour -- even high-protein wheat flour -- is simply not high enough to do
the job.
27. Thus, the demand for wheat gluten by producers of the bakery and pet food products that
require wheat gluten does not rise or fall with the price of wheat gluten.  Demand for wheat gluten is
instead driven by the amount of protein required to make the various bakery and pet food products.  In
the absence of some abnormality in the wheat crop, this demand is dependent on the mix and quantity
of bakery and pet food products made and the production processes used.  Moreover, as the USITC
found , wheat gluten represents only a small share of the cost of the downstream products.
28. As we have stated previously, what changed in 1996 and 1997 was imports.  Between 1995
and 1997, imports surged by 40 per cent, which was more than double the increase in domestic
consumption.  As a result, domestic producers’ shipments fell in 1996 and 1997, and were below the
levels of 1993, 1994, and 1995.  Domestic prices should have increased to offset the increased costs
of inputs, as they had done in previous years.  Instead, as the USITC report shows, domestic prices
fell in response to the surge in low-priced imports.
29. In short, the EC and the United States agree that the US wheat gluten industry experienced a
cost-price squeeze in 1996 and 1997.  However, as the USITC found, the reason for the squeeze was
the surge in low-priced EC imports that consiste ntly undersold the US product.  The US authority
reasonably concluded that those increased imports displaced US wheat gluten and held down prices.Without the increased imports, the US industry would have been able to sell a greater amount of its
product at a higher price as demand increased.  The USITC report amply demonstrates the causal link
between increased imports and serious injury.
Ms. Florestal,
30. Mr. Chairman, Members of the Panel, I would like to make a few brief remarks on the EC’s
claims under Articles 5 and 12 of the Safeguards Agreement.
Article 5.1:  Setting the Quota Level
31. The EC has made two principal arguments under Ar ticle 5.1.  First, the EC has argued that the
United States should have used a tariff remedy rather than a quota.  Second, the EC claims that the US
should have set the quota at a higher level than we did.  Specifically, the EC complains that the United
States should have set the quota at the level of imports during 1995 to 1997.
32. The EC’s second written submission in large part merely restates the EC’s position without
responding to many of the legal claims asserted by the United States.  The United States will not
repeat all of its arguments here.  Rather, we would direct the Panel to the relevant portions of the US
submissions on this issue.  In this statement, the United States will highlight the key legal problems
with the EC’s arguments under Article 5.1.
33. First, contrary to the EC’s position, Article 5.1 does not favor tariff measures over quotas.
When the Safeguards Agreement does  establish such a preference, it does so explicitly.  For example,
Article 6 refers to provisional measures.  Article 6 specifically states that provisional measures shouldWT/DS166/R
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be in the form of tariff increases.  There is no such language in Article 5.  Therefore, the conclusion to
be drawn is that the Framers of the Safeguards Agreement did not intend to state a preference for one
remedy over another under Article 5.1.
34. The EC recognizes that the terms of Article 5.1 itself do not favor tariffs over quotas.
Therefore, the EC attempts to shift the Panel’s focus from the plain terms of Article 5.1.  The EC does
this by creating “rules” and “tests” that are not found in the Safeguards Agreement.  The United States
asks the Panel to examine the actual language of Article 5.1, rather than to focus on the EC’s tests.
35. Article 5.1 sets out a specific rule for the application of quotas as a safeguard measure.  It
states that if a Member chooses to impose a quota, it may not set the quota level below a specified
floor unless there is a clear justification as to why a lower level is necessary.  Thus, under Article 5.1
a Member may not impose a quota level below the level of imports in the last three representative
years unless it provides clear justification.
36. The most recent representative three-year period in this instance was 1993 to 1995.  Thus,
under Article 5.1 the United States could have set the quota level based on imports during the 1993 to
1995 period.  Instead, the United States established a quota well above 1993 to 1995 import levels.
The United States chose to establish a higher quota level in order to allow imports an equitable share
of the increase in US consumption that occurred during 1996 to 1997.
37. The EC argues that the US should have established an even larger quota level.  In the EC’s
view, the United States should have set the quota at the level of imports during 1995 to 1997.  The
EC’s position is incorrect for a number of reasons:
38. First, the EC simply mis-reads the plain terms of Article 5.1.  Article 5.1 provides that the
quota level cannot fall below the average of imports in the last three  representative   years.  The 1995
to 1997 period the EC points to is not representative because imports surged during that period.  The
EC tries to read the word representative out of Article 5.1 by arguing that the importing country must
always choose the most recent three year period.  It is not surprising that the EC wants this Panel to
ignore the word “representative”  because there was nothing representative about the level of imports
during the surge period 1996 to 1997.
39. The Panel should reject the EC’s effort to render meaningless a term specifically included in
the Safeguards Agreement.  The word representative must be given meaning.  The task for this Panel
is to determine what the term representative means.  The Oxford dictionary defines representative as
that which is typical of a class or category.  Article 5.1 must be defined in its context.  Article 5.1 is aprovision regarding setting import levels.   In the context of Article 5.1 the term representative
logically means a period that is typical of import levels.  The level of imports that occurred in 1993 to
1995 was the most recent that is typical of the historical level of imports.  Thus, 1993 to 1995 was
representative.
40. The EC fails to satisfactorily answer the question of why the surge years of 1996 to 1997 are
typical of the historic level of wheat gluten imports  into the United States.  The EC argues that the
most recent three years of imports is representative merely because it is the most recent period.  Yet
that claim cannot logically hold true.  A period is not representative merely because it is the most
recent period.  It is representative only if it is typical of the historical pattern of trade in the product.
A surge period generally is an anomaly -- that is, a departure from typical import levels.  Thus, a
surge period would normally not be representative of import levels. The EC ignores the fact that thesurge in imports occurred during the last two years of the 1995 to 1997 period, thus rendering the
period unrepresentative.WT/DS166/R
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41. Second, even if the EC were correct that the term representative is mere verbiage without
meaning, the United States has nonetheless satisfied the requirements of Article 5.1.  As demonstrated
in its first submission, the United States provided clear justification in the USITC’s report as to why a
quota level different from the surge levels of 1995 to 1997 was necessary to remedy serious injury.
At that level of imports, the USITC found that the domestic industry was seriously injured.  Thus, toestablish relief based on 1995 to 1997 import levels would simply not achieve the objectives of
remedying serious injury and facilitating adjustment.
Article 5.2:  Quota Allocation
42. The EC also objects to how the United States allocated the quota between supplying
countries.  The EC makes two principal argument s under Article 5.2 of the Safeguards Agreement.
First, the EC alleges that the United States failed  to seek agreement with supplying countries before
allocating the quota and failed to explain why reaching agreement was not reasonably practicable.
Second, the EC asserts that the United States should have allocated shares of the quota based on themarket shares that existed during 1995 to 1997.
43. The EC’s first complaint that the United States violated Article 5.2(a) by failing to seek
agreement on allocating the quota is incorrect.  In the first instance, the EC wholly fails to address the
question of why the permissive language in Article 5.2(a) that Members may seek agreement on
allocating the quota constitutes an obligation to seek agreement.
44. Moreover, the United States held consultations with the EC on at least two separate occasions
before allocating the quota.  The EC admits that these consultations did take place.  Having made that
admission, the EC now argues that Article 5.2(a) contai ns not just an obligation to consult but a higher
obligation to “seek to reach agreement.”  (EC Response to Panel Question 10).  There is no basis for
the EC’s claim.  During consultations, the  parties discussed the quota allocation issue but were notable to come to an agreement on the point.  There is no requirement in Article 5.2(a) that parties
actually achieve agreement, thus there is no violation of Article 5.2(a).
45. Following consultations, the United States allocated shares of the quota based on the shares
held by individual supplying Members during the most recent representative period, namely 1993 to1995.   This  allocation is consistent with the terms of Article 5.2(a), which requires allotting shares of
the quota based upon the proportions supplied by Members during “a previous representative period”.
46. The EC has failed to make any arguments to support its claim that in using the 1993 to 1995
period for allocating the quota, the United States violated the provisions of Article 5.2.  The ECmerely asserts without explanation or justification that 1995 to 1997 constitute the only possible
previous representative period.  The EC simply does not address the fact that in the last two years of
that period imports from the EC surged to injurious levels, while imports from other Members
remained relatively stable.  In the EC’s view, setting quotas on any basis other than the most recent
three year period is discriminatory and violates US MFN obligations.
47. The EC puts forward conclusory statements without any serious legal argumentation.  These
statements are inadequate to meet the EC’s burden of proof on this claim.  Based on that fact alone,
the United States asks the Panel to reject the EC’s claim under Article 5.2.
48. Moreover, an analysis of Article 5.2 demonstrates that the EC’s claim is incorrect as a matter
of law.  The question presented for this Panel is the meaning of the term “a previous representativeperiod.”  In the context of Article 5.2, which addresses the allocation of import shares among
supplying countries, the term “a previous representative period” should be given a meaning that
addresses the question of import distribution.  Based on this logic, “a previous representative period”WT/DS166/R
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means a period that is typical of the historical distribution of import market shares between supplying
countries.
49.  To that end, the United States would direct the Panel’s attention to US Exhibit 13, which is a
chart of market shares of Members supplying wheat gluten to the US market from 1990 to 1999.  TheEC’s market share during the period 1995 to 1997 rose dramatically from 42.2 per cent in 1995 to
45.0 per cent in 1996 and 51.5 per cent in 1997.  This is in contrast to the EC’s historical market
share, which ranged from 29.5 per cent in 1990 to 42.2 per cent in 1994.  Thus, the EC’s market share
from 1995 to 1997 level was not representative.  During 1993 to 1995 the EC’s share went from 34.1
per cent to 33.6 per cent  to 42.2 per cent  Those figures are more representative of the EC’s historicalmarket share levels.
50. Thus, the evidence demonstrates that the EC’s preferred quota allocation period -- 1995 to
1997 -- was truly unrepresentative of the historical pattern of market shares in the United States over
the past 10 years.  This is because imports from the EC surged during the last two years of that period.By contrast, consistent with Article 5.2(a), th e United States recognized that 1993 to 1995 was a
recent representative period and allocated shares based on that period.
51. Even assuming, for purposes of argument, that the 1995 to 1997 period could be viewed as
representative, the EC has not demonstrated that the quota allocation period the United States used
was inconsistent with Article 5.2.   The EC fails to show why the period the United States chose --
1993 to 1995 -- is not also “a recent representative period”.  The plain text of Article 5.2(a) refers to a
representative period, not  the representative period.  The text itself suggests that there may be more
than one representative period for quota allocation purposes.  That makes sense because the
distribution of import shares may have been relatively stable over many years so that any number of
previous periods may be representative.
52. The EC claims that the way in which the United States allocated shares of the wheat gluten
quota was inconsistent with MFN treatment under GATT Article I.  But that Article plainly does not
apply to quota allocations.  The EC wants to direct the Panel’s attention away from the express terms
of Article 5.2(a), which plainly call for safeguard quotas to be allocated on the basis of a
representative period, not the last three years, which may not be representative.   The EC has notpointed to anything in the GATT which overrules the specific language of Article 5.2(a), which the
United States has followed in this case.
53. Moreover, in choosing the most recent period that is representative of historic market share
levels, the United States ensured equitable treatment among its trading partners.  The  EC’s claim thatthe United States discriminated in favor of Australia is without merit.  The United States chose the
representative period and then applied the same period to all Members that were granted a quota
allocation.  Australia received no favorable treatment, merely the same treatment that was accorded to
the EC and all other affected Members.
Article 12:  Consultations
54. The last issue the United States would like to address is the EC’s allegations under Article 12
of the Safeguards Agreement.  The United States has repeatedly stated that it fulfilled its obligations
to consult with the EC under Article 12 of the Safeguards Agreement.  We are pleased that in their
second submission the EC now acknowledges that these consultations did indeed take place.  Having
made that acknowledgement, the EC is reduced to one last argument.  The EC complains that it was
deprived of the opportunity to consult on the United States’ proposed measure.  The EC argues that
the United States notified the USITC’s proposed safeguard measure.  The EC characterizes the
USITC’s proposal as an internal recommendation that does not qualify as a “proposed measure”.  The
EC also argues that the USITC’s proposed remedy cannot be considered to be the US “proposedWT/DS166/R
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measure” because it was notified under Article 12.1(b) rather than 12.1(c) of the Safeguards
Agreement.
55. The problem with the EC’s argument is that the United States plainly did notify the
Safeguards Committee of its proposed measure.  The proposed measure was clearly set out in theUnited States12.1(b) notification, which contained the USITC’s report and proposed remedy
recommendation to the President.  The United Stat es provided this information to the Committee on
24 March 1998, well over two months before the President put the quota into effect.  The President
deliberated on the USITC’s proposed measure.  The safeguard measure that the President put into
effect was based very closely on the USITC’s proposal, with alterations that simply made the finalmeasure more trade-liberal.  The EC had every opportunity to provide its views to the United States
during that two-month period, and in fact did so.
56. The EC says that the United States should have notified the USITC ’s proposed measure
under Article 12.1(c) instead of Article 12.1(b).  In effect, the EC is complaining because it receivedmore advance notice of the proposed US measure, rather than less.  More importantly, there is no
provision in Article 12 that requires or suggests that a Member is obliged to notify its proposed
measure under Article 12.1(c).  Once again, the EC merely asserts that such an obligation exists
without finding support for its position in the text.
57. In addition, the Appellate Body has found that the principal purposes of Article 12 are to
promote transparency and information sharing.  ( Korea -- Dairy  AB report at ¶ 111).   Surprisingly, in
an effort to find a violation where none exists, the EC calls into question these very important
purposes.  The EC argues that before the United States notified its proposed measure, it should have
first fully completed its internal deliberative process.   Under the EC’s reading of Article 12, only after
already deciding what it intended to do should the United States have notified its proposed safeguard
measure and elicited views from affected exporting Members.  In effect, the EC argues that the UnitedStates should have decided on the safeguard measur e to be applied without any input from supplying
countries.
58. The EC’s position is puzzling because it is antithetical to the notion of transparency and
information sharing.  In effect, the notification procedure that the EC is suggesting calls for the UnitedStates to make its decision in secrecy and without input from affected Members.
59. In addition to the fact that the EC’s position is inconsistent with the object and purpose of
Article 12, the EC’s reading also renders the consu ltations that would follow  after this late-stage
notification practically useless.  If, as the EC suggests, a Member may satisfy the consultationrequirements of Article 12 only after it has taken a decision to apply a safeguard and decided on the
measure it intends to apply, then it greatly reduces the likelihood that a Member will subsequently
modify its decision based on information provided by  affected Members during consultations.  At the
late stage in which the EC is suggesting that consolations should take place, a Member would have
already considered and addressed fundamental questions about the nature and extent of the measure.It would have decided what it intended to do wi thout having heard the views of affected Members.
That outcome would be inconsistent with the object and purpose of  Article 12.
60. The EC’s reading of Article 12 calls for consultations not on the proposed measure but rather
on what is very likely to be the final measure because the importing Member will have already made
its decision.  Moreover, the EC’s view makes it ve ry unlikely that a government would ever modify
its measure because under the EC’s reading a Member would have to re-notify the new proposal andstart the consultation process again.  That is because if the Member decided to change its proposed
measure, the new measure would then be its proposed measure.  This could lead to an endless round
of consultations and notifications.  To avoid that result, and the attendant delay in providing relief forWT/DS166/R
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their industries, governments would very likely decide  not to modify their proposed measures.  That
would mean that they would not seriously consider   the views of importing Members.  In addition,
any announcement by the importing government that it intends to impose import relief is likely to
prompt a surge in imports as suppliers seek to ship their products before the measure is put into effect.
Again, to avoid that result importing governments would be very unlikely to make a change in theirproposed measures, which under the EC’s interpretation, would require a further round of notification
and consultations.
61. Finally, the United States would draw the Panel’s attention to the essential fact that the
measure the USITC proposed was not markedly different from the measure the president actuallyapplied.  Indeed, the only significant difference between the two is that the measure the USITC
proposed was for a term of 4 years, while the measure the president applied was for only 3 years.
Thus, the United States notified and consulted on almost exactly the same measure as the one applied.
It is difficult to understand under those circumstances how the EC has been harmed or how the United
States failed to meet its obligations under Article 12.
62. Mr. Chairman, Members of the Panel, that concludes the United States’ oral statement.
__________WT/DS166/R
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ATTACHMENT 2-8
UNITED STATES RESPONSES TO QUESTIONS FROM THE PANEL
AT THE SECOND MEETING OF THE PANEL
(4 February 2000)
Q1.  Please comment on the EC statement (pages 8, paras. 33-35) during the second
substantive Panel meeting that there are ways in  which information of a “confidential” nature
can be given – e.g. in an indexed or ranged form – while maintaining its confidentiality.
Response
1. Unfortunately, the use of percentages and indexes, as proposed by the EC, would not be
adequate to alleviate the disclosure problem posed in this case.  When the universe of reporting
companies is small, the USITC faces the same problem in reporting data in percentage and index
forms that it faces in reporting the actual aggregate data – the percentages and indexes may also reveal
confidential data.  The confidential information is most likely to be revealed to competitor companies
that have furnished data reflected in the percenta ges and trends.  Each competitor can index its own
data or restate its own information in percentage terms.  Taking that information, as well as aggregateinformation the USITC report already discloses on other factors, such as sales and production,
competitors can use aggregate indices and percentages to derive confidential information about their
competitors.
2. Thus, the USITC report necessarily used other methods to give the maximum public
disclosure of information without compromising c onfidentiality.  There are numerous examples in the
USITC report where the USITC has characterized c onfidential data without revealing the underlying
confidential information.  For example, on page I-13 of its report the USITC characterized data
relating to wheat gluten industry financial performance in terms of trends and whether the overall
industry was profitable or operated at a loss, wit hout revealing actual overall industry profit and loss
data, which would have revealed confidential business information.
3. Finally, we note that, even if the EC approach could be adopted, it would not solve the
confidentiality problems posed on this record.  Its approach would only apply to aggregate statistical
information.  It would not be effective with resp ect to individual firm statistical information or
confidential descriptive information.
Q3. In connection with question 2 above, could the parties please indicate to the Panel, what,
if any, they consider the difference between “demonstrating” such unforeseen developments in
an “investigation” – the terms used by the Appellate Body at para. 98 of the Argentina –
Footwear  report – and “making a specific determination” regarding such unforeseen
developments.
Response
4. The requirement that unforeseen developments be demonstrated “in the investigation”  (to use
the language of the Appellate Body in Argentina – Footwear ) is satisfied if the competent authority’s
report contains evidence or information demonstrating the existence of unforeseen developments as a
matter of fact.  A specific determination of unforeseen developments is not required by Article XIX or
by the recent Appellate Body reports .  Accordingly, specific findings of fact and conclusions of lawWT/DS166/R
Page 346
on the issue are likewise not required.  The evidence and information in the USITC report amply
demonstrate the existence of unforeseen developments as a matter of fact, and therefore fully satisfy
the requirements of Article XIX, and are in accordance with the ruling of the Appellate Body in
Argentina – Footwear .
Q4. How does the United States respond to the statements of the European Community at
para. 25 of its oral statement to the second substantive Panel meeting concerning “unforeseen
developments”?
Response
5. Although the United States reserves the right, granted by the Panel, to respond more fully
once the EC has provided the document on which it relies, a preliminary response can be made.  The
prediction that, according to the EC, a wheat gluten association representative made to USTR in 1992
is not relevant to what the United States government foresaw in 1994, when trade concessions werenegotiated.  Indeed, that prediction, if it had ever been believed, would have appeared to have been
disproved in 1994.  As Table 15 of the USITC report shows, not only had EU production not
increased substantially, it fell slightly from 1993 to 1994; EC capacity had risen only slightly and
remained at only about 55 per cent of the level that been predicted for 1995.  More importantly, EC
exports to the United States had fallen by 24 per cent.  In short, whatever the domestic wheat gluten
industry representative had predicted in 1992 would have had no bearing on what the United States
government would have foreseen as occurring in 1994 when trade concessions were negotiated.Trends after 1992 were contrary to that prediction.  Moreover, the substantial US industry investment
in additional capacity in 1993 and 1994 demonstrated through the industry’s actions that, whatever
one of its spokesmen may have said in 1992, after 1992, the industry did not believe that there would
be substantial increases in EU exports to the United States.
6. As Table 15 of the USITC report also shows, another development occurred after 1992 that
would tend to render moot the relevance to imports to the US of any prediction made in 1992
concerning increased wheat gluten production in the EU.   From 1993 to 1994, EU exports to the
United States as a share of total EU production fell 23 per cent, from 10.4 per cent to 8.0 per cent.
Continuation of this trend would have suggested that exports to the United States would not haveincreased as much as production even if the EU expanded its production.  However, this trend
reversed after 1994.  EU exports to the United States expanded as a share of EU production to
13.3 per cent by 1996 and 14.3 per cent in 1997, an increase of 79 per cent over the 1994 level.  In
contrast, EU shipments to other foreign markets as a percentage of total EU production were lower in
1996 and 1997 than in 1993 and 1994.  EU home market shipments as a percentage of total EUproduction were at their highest level, for the period investigated, in 1994 and at their lowest level in
1997.  In short, not only did the EU expand production and exports after 1994, it also substantially
increased its concentration on exportation to the United States market.  There was no ground to
foresee such a development in 1994, or, for that matter, in 1992.
7. Moreover, the EC’s statements in Paragraph 25 fail to address other information in the USITC
report that demonstrated the existence of unforese en developments.  The increase in EC wheat gluten
capacity, on which the EC’s statements focus, was on ly one part of the information detailed in the
United States’ response to the Panel’s earlier Question 5, particularly the change in the pricing of EC
imports in the US market.  The USITC found that EC wheat gluten production was driven not by
changes in wheat gluten prices, but by EC wheat starch production.  The EC producers were aiming to
increase their production of wheat starch for the protected EC market. The high prices for wheatstarch in the protected home market allowed the EC to export wheat gluten to the US market at
relatively low prices.  Thus, for reasons unrelated to conditions in the wheat gluten market, there was
a dramatic change in market conditions, resulting not  only in an increase in wheat gluten imports, but
also in a change from mixed overselling and underselling to a pattern of consistent underselling by ECWT/DS166/R
Page 347
imports.  As previously discussed, the US producers who built new capacity and the domestic
company that entered the market would not have done so if they had foreseen these developments.
Q6. In connection with question 5 above, please  comment on the relevance of the fact that
Article 2.1 SA refers to the increase in imports relative to domestic production only.  (We note
that the Anti-Dumping Agreemen t (article 3.2) and the SCM Agreement (article 15.2) refer to
the amount of imports relative both to production and consumption).
Response
8. Under the Safeguards Agreement, the term imports “relative to production” refers to a legal
requirement.  Article 2.1 requires that a competent authority find that the product is being imported
“in such increased quantities, absolute or relative to domestic production,” as to cause or threaten to
cause serious injury.  The requirement is satisfied if the increase is either in absolute terms or relative
to domestic production.  That comparison is not to be made relative to consumption.
9. In contrast to the threshold legal determination required in Article 2.1, Article 4.2(a) cites
trends in imports as compared either to consumpt ion or production as relevant factors in evaluating
the situation of the industry.  As examples of such factors it includes both “the rate and amount of the
increase in imports of the product concerned in absolute and relative terms” and “the share of the
domestic market taken by increased imports”.  Since the share of the market taken by imports is their
share relative to consumption, Article 4.2(a)’s reference to their increase in relative terms refers to thebasis of comparison set forth in Article 2.1,  namely, “relative to domestic production”.  In short, both
criteria are relevant factors in evaluating whether increased imports cause serious injury.
Article 4.2(a) does not make any of the factors that it lists dispositive or entitled to greater weight than
other factors.
10. The Anti-Dumping Agreement and Part V of the Subsidies Agreement likewise make both
increases in imports relative to production and consumption relevant to a determination of whether
dumped or subsidized imports cause material injury.  Unlike the Safeguards Agreement, however,
neither of these other agreements makes any particular measure of increase legally necessary to an
affirmative determination.
Q7. Does the United States rely on Article XXIV alone   for the manner in which it treated
imports from Canada in its injury and causation analysis and the application of its safeguard
measure?  Or does the United States believe that imports from another WTO Member who is
not a participant in an FTA could also be treated in a similar manner in a safeguardinvestigation and the application of a safeguard measure?
Response
11. Footnote 1 to the Safeguards Agreement and Article XXIV of the GATT 1994 are both
relevant for purposes of determining how a Member may treat its customs union and FTA partners in
conducting a safeguards investigation and applying a remedy.
12. The United States does not believe that imports from WTO Members that are not participants
in FTAs or Customs Unions could be treated in a similar manner.  The United States notes, however,
that Article 9 of the Safeguards Agreement calls for special treatment for imports from developing
Member countries that meet certain requirements.WT/DS166/R
Page 348
Q8. Could Article XXIV of the GATT 1994 pr ovide an “exception” or “derogation” to
provisions of the Safeguards Agreement?  Please give the legal basis for your response.
Response
13. Article XXIV provides neither an exception nor a derogation to the provisions of the
Safeguards Agreement.  Rather, Article XXIV provides an exception to Article XIX of the GATT
1994 and the other provisions of GATT 1994.
14. The relevant provision for purposes of the Safeguards Agreement is footnote 1.  Footnote 1
provides that the Safeguards Agreement should not be interpreted in such a manner as to prejudge the
existing relationship between Article XIX and Article XXIV of the GATT.  In order to determine how
a Member may treat its FTA partners for purposes of safeguards, the Panel must look not to the
Safeguards Agreement but to Article XXIV – as directed by footnote 1.  In this regard, the United
States would note that contrary to the EC’s allegation, footnote 1 is not limited to customs unions.The last sentence of footnote 1applies to all of Article XXIV, including the provisions relating to free
trade area agreements.
15. An examination of Article XXIV demonstrates that the United States’ treatment of Canada
both with respect to the injury investigation and the remedy applied are consistent with Article XXIV,
as noted in the United States’ earlier submissions.
Q9. How do you react to the argument made by the European Communities concerning
“discrimination” at paras. 115-137 of its oral statement at the second substantive Panel meeting,
particularly with respect to GATT Article I?
Response
16. At this late stage in the proceedings, the EC has raised the novel claim that the US measure is
discriminatory because it treats imports from Canada more favorably than EC imports.  The EC
suggests that it has only just become aware of the fact that the United States examined Canadian
imports and determined that such imports were not contributing seriously to the injury.
17. First, to the extent that the United States treated Canadian imports differently, this action is
permissible under Article XXIV, which permits more favorable treatment for FTA partners.
18. Second, it is surprising that the EC now take s issue with the fact that the United States
separately examined Canadian imports to ensure that it was not ascribing injury from that source to
imports from third countries.  In Argentina – Footwear , the EC took exception to the fact that
Argentina did not perform such an analysis.  The EC specifically cited with approval the United
States’ actions in its wheat gluten investigation.  According to the EC, “the United States made
separate determinations concerning imports from NAFTA members and concluded that imports fromthat source, and in particular, Canada did not cause injury.  If Argentina had applied the same
procedure as the United States in the wheat gluten case, then it  would not have been able to come to
the conclusion it did.”  ( Argentina -- Footwear  at ¶ 5.131).  For the EC now to argue either that it was
unaware of the United States’  actions, or that the US action is inconsistent with the Safeguards
Agreement, is simply not credible.
19. Moreover, the EC’s argument that the two-st ep causation analysis performed by the USITC
was discriminatory because it departed from principles of parallelism is simply wrong.  As we have
noted, we do not understand the Appellate Body to have established a broad requirement of
“parallelism” in the Footwear  dispute.   Nevertheless, US procedures satisfy the purpose of the
“parallelism” notion the  Footwear  panel articulated.  That purpose is to ensure that where a MemberWT/DS166/R
Page 349
attributes serious injury to imports originating the territory of a country that is a party to a customs
union (or FTA, in this case), those imports should be included in the safeguard measure the Member
determines to apply.
20. The very procedures that the EC complains of  ensure that is the case. Conversely, those
procedures provide for the exclusion of Mexican and Canadian imports from an eventual safeguard
measure where they did not play a significant role in causing serious injury or threat of injury.  Thus,
in both cases, the two-step US causation analysis comports with the notion of “parallelism.”
21. The EC would like this Panel to focus on th e number and sequence of the USITC’s causation
analyses, issues the Safeguards Agreement does not address.  The real question is whether the United
States attributed injury occasioned by Canadian imports to those from the EC.  The answer plainly is
“no.”
22. The EC also argues that the allocation of shares of the wheat gluten quota discriminates in
favor of Australia over the EC in violation of GATT Article I.  As fully explained in our previous
submissions, GATT Article I is simply not implicated when the claim at issue relates to quota
allocation.  The relevant GATT provision governing this subject generally is Article XIII.   For
purposes of the allocation of a safeguards quota , however, the more relevant provision is Article 5.2
of the Safeguards Agreement.  For the reasons we have made plain in our submissions, the EC does
not have a sustainable claim under that provision.
23. Moreover, the United States simply did not discriminate in allocating the wheat gluten quota.
The United States determined “a” representative period consistent with the requirements of
Article 5.2.  Supplying Members were then allocated shares of the quota on the basis of the shares of
the market they held during the representative period.
24. In its oral statement of 2 February 2000, the EC purports to respond to US Exhibit 13 by
providing a chart and written statement to the Panel regarding market share levels in 1998 and 1999.
The Panel will recall that US Exhibit 13 demonstrated in precise numerical terms what the United
States has noted all along:  That is, the 1995 to 1997 period was not representative of the historical
market share levels of supplying Members – eith er the EC’s or Australia’s.  The United States
therefore allocated the quota based on a period that was representative  – namely the 1993 to 1995
period.
25. The EC’s statement and chart are irrelevant for purposes of evaluating the information in US
Exhibit 13.   The EC provides the Panel with an alleged analysis of market share levels in July of1998 to May of 1999.  The EC’s views with respect to the distribution of import market shares after
the US safeguard measure went into effect are simply not germane to the question of whether the
United States based its quota allocation on an appropriate representative period.
Q10. Is the causation analysis under Article 4.2 SA to be conducted in terms of imports as a
“necessary” or “sufficient” condition (or both) for serious injury?
Response
26. Under Article 4.2, there are two different inquiries.  One is whether there is serious injury or
threat thereof.  The other is whether the serious inju ry or threat thereof is caused by increased imports.WT/DS166/R
Page 350
Q11. Does the phrase “prevent or remedy seri ous injury” in Article 5.1 SA mean that a
Member should or may aim to restore the market situation that existed prior to the period of
serious injury determined to have been caused by imports?
Response
27. Article 5.1 permits Members to apply safeguards measures only to the extent necessary to
both prevent or remedy serious injury and to facilitate adjustment.  In some cases, it will be necessary
to restore the market situation that existed prior to  the period of the injury in order to remedy the
injury and place the industry in a position to adjust.  In other cases, a Member will be able to achieveits dual objectives without restoring prior market conditions.  It will depend on the facts of each case.
Q12. On what basis was the decision taken to  increase the level of the US wheat gluten
quantitative restriction by 6 per cent per year?
Response
28. The United States would first like to clarify that it did not increase  the level of the restriction
by 6 per cent.   Rather, the United States decreased  the level of the restriction by increasing the
overall amount of the quota.  This is in keepin g with Article 7.4, which requires that Members
progressively liberalize safeguards measures that are applied for longer than one year.
29. The United States provided for a 6 per cent growth rate for imports in order to avoid
restricting imports over the life of the safeguard beyond the extent necessary.  Import growth during
the period of investigation had averaged 4.2 per cent.  (USITC Report at I-29).  By setting a growth
rate at 6 per cent, the United States sought to allow imports a reasonable rate of growth and further
encourage the industry to adjust to import competition.
Q15. We note that section 311(a) of the NA FTA Implementation Act provides for certain
actions to be taken after the Commission makes an affirmative determination in an
investigation under Section 202 of the Trade Act.  Is it a determination that the domestic
industry is “seriously injured”?  Or is it a determination that the domestic industry is “seriouslyinjured” and that this “serious injury” is caused  by imports?  Please cite the relevant portions
of your legislation.
Response
30. The reference is to an affirmative determination under section 202(b)(1)(A) of the Trade Act
of 1974, that is, to a determination that a product is being imported into the United States in such
increased quantities as to cause or threaten to cause serious injury to a US industry producing a like or
directly competitive product.
__________WT/DS166/R
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ATTACHMENT 2-9
LETTER OF THE UNITED STATES RESPONDING TO THE PANEL'S
REQUEST FOR INFORMATION
(8 February 2000)
My authorities have instructed me to respond to the Panel’s fax of 1 February 2000, in which
the Panel requests certain confidential business information furnished by the domestic industry, or
derived from information furnished by the domestic in dustry, in the United States International Trade
Commission (USITC) safeguard investigation on wheat gluten.  The Panel procedures provide that the
Panel will make this confidential business information available to its members, the Secretariatofficers serving the Panel, and 22 European Comm ission (EC) officials and unknown others in the EC
or in the private sector who may be designated in  the future by the EC as its “representatives.”
The confidential business information that the Panel has requested represents some of the
most sensitive information that companies provide to competent  authorities that conduct safeguards
investigations.  The requested information involves everything from the cost structures of individual
companies to their profit margins and pricing practices.  Access to that information would reveal tocompetitors, customers, and suppliers the submitting companies' financial and operational strengths
and weaknesses.  This knowledge would aid compe titors in setting their own prices and provide an
unfair advantage to suppliers and customers in their negotiations with the companies whose
information is revealed.  The result would be further damage to an industry that the USITC has
already found to be seriously injured.  Even more important, the unauthorized dissemination of suchsensitive information could damage the reputation of WTO dispute settlement in the business
community worldwide, whose support and confidence is essential to the future of the WTO.  The
impact of such an unauthorized disclosure cannot be overstated.
This information was submitted to the USITC by US wheat gluten producers under strict
assurances of non-disclosure.  The USITC is prohibited from disclosing the information absent
consent from the submitting companies, under provisions of US law that implement Article 3.2 of the
Agreement on Safeguards .  That article prohibits a competent authority from disclosing CBI it
receives in the course of a safeguard investigation without permission from the submitting parties.
Promptly after receiving the Panel’s request,  the United States contacted the companies
concerned in an effort to obtain their permission for the release of the information the Panel has
requested.  We have attached to this communication a copy of a letter from the Wheat Gluten Industry
Council responding to our request (US Exhibit 15).   The WGIC represents all of the parties whose
consent is required.
We are pleased to inform the Panel that the United States expects to receive permission from
the various domestic producers for release of all of the information the Panel has requested.   As the
attached letter makes clear, the producers will grant that permission subject to two adjustments in the
Panel’s procedures intended to provide greater assurances against unauthorized disclosures.  In
particular, the procedures should be amended to make clear that: 1) the Panel will review the CBI
exclusively in camera ; and 2) any Panel member, or WTO employee, who views or hears such
information shall be under an obligation not to disclose the information, or allow it to be disclosed, to
any person.  For the reasons set out in the WGIC le tter, the companies concerned are not prepared to
grant permission for the CBI to be divulged to EC representatives.WT/DS166/R
Page 352
By swiftly seeking permission from US wheat gluten producers to provide the information in
question to the Panel, and by reporting to the Panel on the steps that will allow the United States to
obtain that permission, the United States has responded “promptly and fully” to the Panel’s request, as
contemplated by Article 13.1 of the  Understanding on Rules and Procedures Governing the
Settlement of Disputes .
We have attached to this communication further US comments on the Panel’s request for
confidential business information.  As the Panel is  aware, the United States had reserved its comments
on the procedures pending identification by the Panel of the information it was seeking and anexplanation of the purpose for which the information is being sought.  The Panel identified the
information in its 1 February 2000 communication, but has not as yet informed the Parties of the
reason that the information is required.  That explanation would have permitted the United States to
make specific suggestions regarding the Panel’s procedures tailored to uses to which the Panel intends
the CBI to be put.
Finally, the United States would reiterate its view that, consistent with the appropriate
standard of review in proceedings under the Agreement on Safeguards , the Panel may not undertake a
de novo review of the evidence before the USITC, whether based on CBI or non-confidential data.  To
the extent that the Panel requires access to CBI from the USITC report, it should be for the purpose of
confirming the compliance with the Agreement on Safeguards of the USITC’s injury and causation
determinations, not for developing or documen ting alternative injury or causation theories.
__________WT/DS166/R
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ATTACHMENT 2-10
COMMENTS OF THE UNITED STATES ON THE PANEL'S PROCEDURES
GOVERNING PRIVATE-CONFIDENTIAL INFORMATION
(8 February 2000)
1. As the Panel is aware, in the United States’ letter dated 27 January 2000 the United States
reserved its comments on the Panel’s proposed “Procedures for treatment of business confidential
information” pending identification of which information the Panel sought and the reason why the
information is required.  The Panel has now pr ovided “Procedures for treatment of private
confidential information” dated 1 February 2000, and has identified the information it is seeking.  TheUnited States has responded promptly and fully to the Panel’s request.
2. The United States hopes that the terms proposed by the domestic industry submitters of the
information sought by the Panel will become the basi s for the Panel’s obtaining the information that it
seeks.  The United States wishes to address at this time both the procedures that the Panel has adopted
and statements that the Panel has issued in adopting them.  Those statements and procedures may be
interpreted as asserting authority contrary to the Safeguards Agreement and the Dispute SettlementUnderstanding and to the sound operation of proceedings under both agreements.
3. The Panel’s communication of 2 February 2000, citing the Canada-Aircraft  Appellate Body
report, suggests that the United States may be required to provide the Panel and the EC certain
confidential business information (CBI)  subject to the imposition of possible adverse inferences if the
United States does not do so.   However, in Canada-Aircraft  the Appellate Body was not addressing a
Panel’s request for information first obtained subject to a provision, such as Article 3.2 of the
Agreement on Safeguards, that imposes a specific requirement on the Member not to disclosure
confidential information without consent from the supplying parties.  Thus, the Appellate Body was
not addressing a case, such as this one, in which a Panel’s request for CBI creates a tension between aMember’s responsibilities under the Dispute Se ttlement Understanding (DSU) and its specific
obligations under another covered agreement.  Applyi ng the approach taken by the Appellate Body in
Canada-Aircraft in this very different context risks undermining the carefully negotiated balance of
benefits reflected in the Safeguards Agreement without advancing the objectives of the DSU.
4. For the reasons given below, the terms of those agreements, properly construed, indicate how
the objectives of the two agreements are to be properly reconciled when a panel desires access to
confidential information.  In reviewing the determination of a competent authority under the
Safeguards Agreement, a panel should, if it seeks confidential information:
(1) recognize that a Member that has conducted a safeguard investigation is bound under
the Safeguards Agreement not to disclose confidential business information in its
possession in the absence of consent for its release;
(2) find that such a Member satisfies its obligation under the DSU if it  makes a good
faith effort to obtain consent for disclosure to the Panel of such information; and
(3) determine, if the Member is unable to obtain consent, whether the competent
authority’s published report on the investigation nevertheless contains an adequateWT/DS166/R
Page 354
explanation of its injury and causation determinations to satisfy the requirements of
the Safeguards Agreement.
The United States Satisfies the Requirements of DSU Article 13.1 by Requesting, in Keeping with
Article 3.2 of the Safeguards Agreement, that the Private Parties Consent to Disclosure ofInformation to the Panel
5. The United States recognizes, as the Appellate Body indicated in Canada -- Aircraft , that
under DSU Article 13.1 a panel may seek information from any body that it deems appropriate.  That
article also states that a Member “should respond promptly and fully to any request by a panel forsuch information as the panel deems necessary and appropriate.”  Although the Appellate Body
indicated that “should” in that context may be read as imposing a mandatory requirement, it did not
address cases such as that presented by the present dispute, in which the Member is subject to an
affirmative obligation under another covered agreement to protect the information from disclosure.
6. Article 13.1 does not state that a Member shall in all cases provide a panel the information the
panel seeks.  Instead, it speaks in more general terms, stating that a Member “should respond
promptly and fully”.  The use of the term “should” in DSU Article 13.1 assumes that in some cases a
Member may not be able to respond fully to a panel’s request.  “Should” cannot be read as “shall” in
this context, because such a reading would compel a violation of Article 3.2 of the Safeguards
Agreement, and the WTO Agreement is to be read so as to avoid such conflicts between agreements.
The phrasing of Article 13.1 contemplates that in some cases a Member may satisfy its obligation torespond although it is not able to provide the requested information.
7. The United States submits that this is such a case.  Article 3.2 of the DSU states the
fundamental principles that the DSU “serves to preserve the rights and obligations of Members under
the covered agreements” and that “recommendations and rulings of the DSB cannot add to ordiminish the rights and obligations provided in th e covered agreements.”   Accordingly, the panel ’s
authority under Article 13.1 of the DSU to seek information reaches its limit when providing the
information requested would cause a Member to violate its obligations under another covered
agreement.
8. Article 3.2 of the Safeguards Agreement governs treatment by the United States International
Trade Commission (USITC) of the information that the Panel is seeking.  The USITC collected that
information from domestic producers in the course of its wheat gluten investigation.  Article 3.2
provides that any such information that is by nature  confidential or is provided on a confidential basis
shall be treated as such by the competent authority conducting the safeguard investigation.  Thesecond sentence of that article states, “Such information shall not be disclosed without permission of
the party submitting it” (emphasis added).  This provision makes no exception for disclosure of
confidential information to panels or to complaining parties in WTO dispute settlement proceedings.
Thus, for the United States to provide to the Pane l or the EC information that was submitted to the
USITC on a confidential basis without the consent of the submitting companies would violate theSafeguards Agreement.
9. The fact that Article 13.1 of the DSU, and paragraph 3 of Appendix 3 to the DSU, both
provide that when documents are submitted to a panel they shall be kept confidential does not affect
this conclusion.  Article 3.2 of the Safeguards Agreement does not make provision for the competent
authority to release the information on a limited basis so long as the information is not divulged to the
public at large.  Rather, it categorically forbids a competent authority from disclosing  the information
without consent.  That the Panel, pertinent WTO employees, twenty-two EC officials and unspecified
other persons possibly to be designated by the EC in the future might keep the information
confidential does not detract from the fact that the United States would be disclosing  the information
to them. Under Article 3.2, disclosure requires consent.WT/DS166/R
Page 355
10. Unlike the provisions of the Subsidies Agreement at issue in Canada -- Aircraft , the
Safeguard Agreement ensures that a panel has the means to undertake a review of the matter before it
without recourse to confidential information.  Specifically, Articles 3.1 and 4.2(c), respectively,
provide for the competent authority to issue a public report and to publish a detailed analysis of the
case under investigation.  Where, as here, a complaining Member has raised a challenge under
Article 4, the question before the Panel is whether the public report that the USITC issued pursuant to
Article 3.1 contains an adequate explanation of how the facts support the USITC’s injury and
causation determinations.  Accordingly, the Safeguards Agreement provides a means through which a
panel can review the competent authority’s determinations, and take account of the fact thatArticle 3.2 may preclude a Member from providing a panel with confidential information.
11. The United States meets its obligation to respond to a panel’s request for confidential
information under Article 13.1 of the DSU when it takes the one step contemplated by Article 3.2 of
the Safeguards Agreement.  That step is to s eek from those who submitted the information consent to
disclose the information to the panel.  As the accompanying letter from the Wheat Gluten Industry
Council makes clear, the United States has done so.  This is not a case in which the United States, to
use the phrasing of the Appellate Body, has “refus[ed] to collaborate” with the Panel.  Canada --
Aircraft  at ¶ 204.   The United States’ submission informing the Panel of its efforts to obtain consent
for disclosure of the information constitutes a full and prompt response under DSU Article 13.1.
Moreover, as the Industry Council’s letter states, the United States may be able to obtain such consent
if the confidentiality of the information is protected to the satisfaction of the original providers of the
information.
Requiring the Disclosure of CBI Under Threat of Adverse Inferences Would Interfere with the
Conduct of Safeguards Investigations
12. Strict conformity with Article 3.2 of the Safeguards Agreement provides the necessary
framework for the effective conduct of the safeguards investigations as required by Article 3.1 of the
Agreement.  Article 3.2 provides more than a right for Members to complain in the WTO if their
companies’ confidential information is improperly released.  The operation of national laws that
conform to Article 3.2 provides the basis for competent authorities to obtain the cooperation they needto conduct safeguard investigations.  The Agreement recognizes that the injury and causation
information that authorities must gather in order to make the findings required by Article 4.2 will
commonly be confidential, because this information will include firm-specific data on prices, profits
and losses, production, productivity, costs of production, capacity utilization, and imports.  This
information is highly commercially sensitive.  If the producers, importers, and consuming industrieswhose information a competent authority seeks cannot be assured that they will enjoy the benefits of
Article 3.2, they will be deterred from submitting necessary information.
13. This assurance is necessary to obtain the cooperation of both foreign and domestic interests --
both of those who may oppose safeguard relief and of those who support it.  Although in the currentcase, the Panel has requested information provided to the USITC by domestic producers only, the
authority it has claimed to obtain access to confidential information would apply to all submitters of
information in safeguard proceedings.  Authorities in  these investigations obtain critical confidential
information from importers, consuming industries, and foreign producers.   All of these firms rely on
the protections afforded by members’ laws pursuant to Article 3.2.   Without strict observance of
those protections, competent authorities can expect that these firms will become substantially more
reluctant to provide necessary information.  Both the willingness of domestic industries to petition
their governments for relief, a right the Safeguards Agreement guarantees, and the ability of others to
provide evidence defending their interests, would be compromised.WT/DS166/R
Page 356
14. In short, the ability of Members to perform the investigation required by Article 3.1 would be
substantially impaired if firms believed that the WTO dispute resolution process constituted an
unstated exception to the plain language of Article 3.2.  As the United States has previously stressed
in the current proceedings, the Safeguards Agreement leaves the crucial task of gathering information
and weighing the evidence to the competent authorities.  Insofar as the procedures that the Panel hasadopted suggest that a Member must provide information regardless of the consent of those who
submitted confidential information, those procedures threaten to undermine the functioning of the
Safeguards Agreement.  Article 3.2 constitutes a negotiated benefit both to Members whose exports
may become the subject of an investigation and to Members whose competent authorities are
conducting those investigations.  The DSU should be interpreted so as not to disrupt that balance ofbenefits.
15. Thus, Article 3.2 protects both domestic and foreign interests concerned with safeguards
investigations.  In keeping with Article 3.2, US law prohibits the USITC from releasing CBI of all
firms, even if, to the extent it originates with a domestic producer, the United States might not besubject to a WTO proceeding if the information were released.  It may be noted, however, that, in the
current case, the United States would not be free from complaint from other WTO Members if it were,
in violation of Article 3.2, to disclose information without the consent of submitting US companies.
As the EC has frequently noted in these proceedings, one of the US producers is related to an
Australian company.  Australia might well have a basis for complaint under Article 3.2 if the
United States were, without consent, to disclose information of a company related to one of its
enterprises.   And as one of the US firms producing  wheat gluten is related to an EC producer, the EC
might have the same basis for complaint.  Indeed, the EC has just requested consultations with
Argentina concerning two antidumping measures, in document WT/DS189/1, with the complaint that
“the Argentinean investigating authority appears to have rejected without any valid justification the
requests for confidential treatment submitted by the EC exporters with respect to highly sensitive
business information, including information on prices and production costs.”
The Procedures Adopted by the Panel Would Unde rmine the Guarantees Provided for the Treatment
of Confidential Information Under the Safeguards Agreement
16. The circumstances of this case demonstrate the reasons why the negotiators of the Safeguards
Agreement did not authorize competent authorities to release confidential business information to
anyone, including panels, without the consen t of the providers of that information.
17. Although Articles 13.1 and 18.2 of the DSU provide that confidential information must be
held confidential, those provisions impose no enforceable legal obligation on panelists, on officials ofthe Secretariat who may assist them, or on Members.
1.  In contrast, US law provides criminal
penalties for disclosure of trade secret information, as well as other legal remedies.  See 18 U.S.C. §§
1831, 1832, 1905.  Thus, it is quite a different matter for firms to provide information to the US
government than for the United States to forw ard that information to the WTO.  Indeed, this
difference between the strong assurances against disclosure that national authorities can and, by virtueof Article 3.2, must provide, and the lack of any significant protections offered under DSU rules, goes
a long way toward explaining why the Safeguards Agreement does not include an exception for the
disclosure of confidential business information to WTO panels.
18. The facts of this case point up the lack of protection that is available for CBI if it leaves the
custody of the investigating authority.  The EC wa s a party to the USITC proceeding, but did not seek
                                                     
1 The United States would have further detailed comments on the Panel’s procedures if the private
submitters of the confidential business information were willing to consent to the release to parties that the
procedures anticipated.WT/DS166/R
Page 357
access to the CBI at issue in this panel proceeding and did not challenge its authenticity, its
evidentiary value, or even its confidential nature.  Every item of the CBI now at issue was available to
the EC, under the USITC’s administrative protective order procedure, which releases information to
specific individuals under penalty of disbarment and criminal sanction.  The EC declined to submit
itself to this procedure to obtain the information.  Nonetheless, it now stands to receive that sameinformation subject to no individual undertakings, no enforceable legal obligation to refrain from
disclosing it and no sanctions in the event of unauthorized disclosure.  Private enterprises may be
understandably hesitant when the EC declines to ob tain access to information when to do so would
subject its representatives to sanctions, and designates 22 persons to receive that information when no
sanctions are provided.
19. Moreover, to the extent that DSU Article 13.1 contemplates the disclosure of CBI, it
addresses the disclosure of such information to a Panel, not other parties.  The procedures that the
Panel has adopted, however, operate contrary to DSU Article 13.1, in that they provide that without
the USITC’s consent the CBI shall be made available not only to the Panel but to the EC as well.Article 13.1 provides that “[c]onfidential information which is provided shall not be revealed without
formal authorization  from the individual, body, or authorities of the member providing the
information.”  The United States’ authority has not provided such authorization in this case.
20. The EC’s response to the Panel’s announced procedures provides an unfortunate
demonstration of the need for the authorization mechanism provided in Article 13.1.  The EC has
named no fewer than 22 officials as possible recipients of the CBI.  The rather astonishing number ofofficials that the EC has designated would tend to make it impracticable to trace the source of any
further release if it should occur.  By allowing the EC unlimited discretion in deciding which, and
how many, of its officials may have access to the CBI in this case, contrary to Article 13.1 and
without any showing of need, the procedures further undermine the ability to protect that information
from disclosure.  As the Wheat Gluten Industry Council’s letter makes plain, the EC’s undisciplineddesignation of 22 representatives has undercut whatever ability the United States might have had to
persuade its industry to consent to release of confidential information to the EC.
21. The procedures also operate contrary to the Safeguards Agreement and the DSU in suggesting
that the Panel may overrule the designation by the United States of the information it submits as“confidential.”  If the Panel disagrees with the US designation, the United States would be put in the
position of either withdrawing the information (under threat of adverse inferences) or withdrawing the
confidentiality designation.  There is no basis for this procedure. To the contrary, Article 3.2 of the
Safeguards Agreement requires the competent authority to treat as confidential any information that is
by its nature confidential or that is provided on a confidential basis.  Thus, the USITC in acceptinginformation as confidential has, in keeping with  Article 3.2, affirmatively obligated itself to the
submitters to keep that information confidential.  Th e United States would thus be prohibited by the
Safeguards Agreement from obeying a Panel demand to release certain information as
non-confidential if the USITC has accepted it as confidential.  Under the general principles governing
the dispute settlement process as set forth in Article 3.2 of the DSU, panel procedures may notproperly subject a Member to such a dilemma.
22. The possibility that, under the announced process, the Panel might declare information non-
confidential that the USITC has accepted as confidential is all the more inappropriate when the EC
had an opportunity to participate fully in the USIT C proceeding.  Although the EC was a party in that
investigation, neither it nor any EC producers raised any objection that the USITC improperly treated
as confidential individual company information that it received in the course of its investigation.  The
EC received the public staff report of the USITC during that investigation and, despite having the
opportunity at that time, never objected that the public report excised aggregate data, which is the
only objection it has raised here.  Those who submitted information to the USITC relied on theWT/DS166/R
Page 358
understanding that any objections to confidential tr eatment would be raised before the USITC.  Had
objection been raised at that stage, submitters could, if the USITC granted the objection, have
exercised the right guaranteed by US law pursuant to Article 3.2 to withdraw the information from the
USITC record.
23. For a panel to undertake to reconsider confidentiality designations after the investigation is
concluded would undermine the expectations -- guaran teed by Article 3.2 -- of those from whom the
competent authority obtained information.  Since that provision plainly entrusts designations of
confidentiality to competent authorities during invest igations, there is no basis for a panel to reject a
party’s determination that information is to be acco rded confidential status.  Procedures that would
allow for such a result understandably erode any confidence producers, importers, and consuming
industries may have that their commercially sensitive information will be protected, and undermine
the United States’ ability to obtain their consent to disclosure of that information to the Panel.
Consideration of Adverse Inferences is Inappropriate in this Case24. The statement that accompanied the procedures adopted by the Panel suggests the possibility
of drawing adverse inferences if the United States fails to provide the requested confidential
information.  Although the Appellate Body in Canada -- Aircraft  advised that panels might issue such
reminders, the application of adverse inferences is inappropriate in this case.  First, the statements in
Canada -- Aircraft affirming the possibility o f drawing adverse inferences were predicated on the
legal finding that Canada had violated Article 13.1 of the DSU.  Where, however, as shown above, aMember has complied with Article 13.1 by responding in a manner contemplated by the Safeguards
Agreement, adverse inferences would be inappropriate.
25. Moreover, as the Appellate Body made clear, panels may not use adverse inferences to punish
Members for failing to provide certain information.  Rather, they may draw adverse inferences onlywhere, in the circumstances, those inferences “could be logically or reasonably derived from a panel
from the facts before it.” Canada -- Aircraft  at ¶ 200.  Consideration of whether to draw an adverse
inference is, as the Appellate Body indicated, an aspect of the “objective assessment of the facts” that
a panel undertakes under Article 11 of the DSU. See Canada -- Aircraft  at ¶ 198.
26. An objective assessment of the facts cannot lead to the conclusion that the United States is
withholding information because of its “inculpatory character”.  Canada -- Aircraft at ¶ 204.  Nor has
the EC suggested this is the case.  The United States is doing so because of what it regards, in good
faith, as its obligations under the Safeguards Agreement and US law to protect the information in
question.  There is no basis for the Panel to in fer that disclosure of the information might
disadvantage the United States’ case before the Panel.  The only appropriate inference under the
circumstances is that the United States is attempting in good faith to fulfill its WTO obligations, not
that it is attempting improperly to shield informa tion from disclosure. Even on issues to which the
parties have disagreed in this proceeding, there is no fundamental difference concerning the nature of
the evidence.  For example, although the parties in this case have argued at length about input costs,one of the types of CBI that the Panel requests, there is agreement on what the data show -- namely,
that input costs rose in 1996-97.
27. In sum, panel review of determinations made under the Safeguards Agreement must take into
account the specific requirements of that Agreement, including Article 3.2.  That Article imposes a
requirement on competent authorities not to disclose confidential information and makes no provision
for disclosure to panels absent consent of the priv ate parties.  It can thus be inferred that the
negotiators of the Safeguards Agreement considered that competent authorities would normally obtain
confidential information during investigations, but that panel review of determinations pursuant to
Article 14 of the Safeguards Agreement would not require panels to review that information.
Nothing in the DSU supersedes that judgment of the negotiators of the Safeguards Agreement.WT/DS166/R
Page 359
28. This case should be decided in the manner contemplated by the Agreement under which the
EC has claimed a violation.  If the USITC’s public report does not satisfy the requirements of
Article 4, the Panel should hold the United States to have violated the Agreement.  If the report does
satisfy them, the Panel should hold that the United States satisfied the Agreement.
__________WT/DS166/R
Page 360
ATTACHMENT 2-11
RESPONSE OF THE UNITED STATES TO THE EUROPEAN COMMUNITY
LETTER OF 11 FEBRUARY 2000
(22 February 2000)
The United States appreciates the opportunity that the Panel has afforded to the United States
to respond to the letter submitted by the European Communities on 11 February 2000.
The United States has addressed previously much of what the EC discusses in that letter and
in the attachment to it, and will not burden the Pa nel with further argument on these points.  Likewise,
this letter will not dignify with a response the EC ’s allegations concerning the United States’ good
faith in these proceedings.  The United States’ previous submissions set forth legitimate and serious
concerns with respect to the operation of the Safeguards Agreement and panel proceedings under the
Dispute Settlement Understanding.  The United States is confident that the Panel will not be distracted
by unwarranted and unseemly accusations from giving these issues its well considered attention.
One point raised by the letter of 11 February, however, does deserve a response.  That is the
EC’s conclusory accusation that the in camera  submission of the information that the Panel has
requested would violate Article 18.1 of the Dispute Settlement Understanding.  With respect, the
United States submits that the EC has failed adequa tely to read the Dispute Settlement Understanding.
The Panel has requested information from the report of the US International Trade
Commission under the Panel’s authority granted in Article 13 “to seek information ... from any
individual or body which it deems appropriate” an d to “seek information from any relevant source.”
The US International Trade Commission is certainly a “body” and a “relevant source” within the
meaning of Article 13.  Article 13.1 further provides, “Confidential information which is provided
shall not be revealed without formal authorization from the individual, body, or authorities of theMember providing the information.”  Thus, Article 13.1 on its face contemplates that when a Panel
requests confidential information from the authorities of a Member (not excluding an authority  whose
decision is before the Panel), the Panel may not further reveal that information without formal
authorization from the authority.  As discussed in the United States’ earlier submission, the
Safeguards Agreement prohibits a competent authority  from providing such authorization without the
consent of those who provided the confidential info rmation to the authority in the first place.  In
effect, the EC is arguing that Article 18.1 forbids the Panel from gathering information in a way that
Article 13.1 specifically authorizes.
The EC has misread what is contemplated by Article 18.1 by an “ ex parte  communication”.
The United States agrees that, if it were to submit any form of argument or make any communication
to the Panel calculated in any way to persuade the Panel with respect to matters that are sub judice ,
Article 18.1 would forbid such a communication.  The United States would not in providing the
requested information make any ex parte  communication to the Panel concerning the information. As
this case exemplifies, such a communication is qu ite different from the provision of information
pursuant to a Panel request under Article 13.1.  The information that the Panel has requested is
pre-existing material not prepared in the course of this panel proceeding.  The requested informationconstitutes summaries of confidential data prepared before the Commissioners of the USITC reached
any decision in the matter; most of the data in tabu lar form.  Article 18.1 is not violated and the EC is
in no way prejudiced by the United States’ provision of information to the Panel under the procedures
contemplated by Article 13.1.WT/DS166/R
Page 361
  Finally, we note that, while the EC has alleged that receipt of such information in camera
would violate the Rules of Conduct on the appointm ent of Panelists, the EC has decided not to
indicate what provision of the Rules it would regard as being violated.  It is thus impossible for the
United States to reply to such a claim.  In any ev ent, a procedure that is contemplated by the DSU
cannot be contrary to the Rules of Conduct.
__________WT/DS166/R
Page 362
ATTACHMENT 2-12
COMMUNICATION OF THE UNITED STATES CONCERNING NEWLY
PROPOSED PROCEDURES GOVERNING PRIVATE
CONFIDENTIAL INFORMATION
(28 February 2000)
I am writing to convey the reactions of my authorities to the Panel’s fax message of
25 February 2000 proposing a procedure for the view ing of the requested information, as follows:
No more than two representatives of the United States would bring the requested
information to a designated location at the premises of the WTO in Geneva on
Thursday 2 March 2000.  The Panel, two professional staff of the Secretariat, and no
more than two representatives of the European Communities would review the
information exclusively in camera.  No photocopies of the information would be
permitted.  The Panel, the two professional staff of the Secretariat, and the [two]
representatives of the European Communities may take written summary notes of the
information for the sole purpose of the Panel process. These individuals would beunder an obligation not to disclose the information, or to allow it to be disclosed, to
any person.  Any such notes would be destroyed at the conclusion of the Panel. While
the Panel would be under an obligation not to disclose the information in its report, it
could make statements of conclusion drawn from such information.
In the view of the United States,  the procedure that the panel has proposed is helpful and
constructive.  The United States continues to maintain that there is no need for, or legal basis on
which to require, disclosure of the information in question to representatives of the European
Communities.  Nonetheless, the United States is actively seeking to secure permission from the US
firms in question for the release of the information under the terms the Panel has suggested.
In this regard, we request clarification on one very important aspect of the proposed
procedure.  In particular, the United States wishes to know whether the European Communities is in a
position to comply with the Panel’s condition that “These individuals would be under an obligation
not to disclose the information, or to allow it to be disclosed, to any person.”  In similar circumstances
the EC has not been able to warrant that those EC representatives to whom confidential businessinformation was disclosed would not disseminate such information to other EC officials (see
WT/DS27/ARB, para. 2.5).
Upon  receiving a clear answer to this question, the United States will provide a definitive
answer (within 24 hours if at all possible) from th e US firms in question regarding whether they will
consent to release of the information the Panel has requested.
Again, we appreciate the Panel’s effort to resolve this problem.
__________WT/DS166/R
Page 363
ATTACHMENT 2-13
FINAL COMMENTS OF THE UNITED STATES CONCERNING NEWLY
PROPOSED PROCEDURES GOVERNING PRIVATE
CONFIDENTIAL INFORMATION
(3 March 2000)
Thank you for your communication of 1 March 2000 concerning the issue of special
procedures to protect confidential business information (“CBI”).  The United States considers it
perfectly appropriate for the Panel to proceed with its review, as it decided on 1 March, on the basis of
the existing record.  As the United States has previously stated, all of the European Communities’(“EC”) claims may be objectively evaluated based on  that record.  Moreover, we believe that the EC
has no ground to complain that the public record is inadequate given that:
(1)  it was a party to the United States International Trade Commission (“USITC”)
proceeding but failed to avail itself of the opportunity to review the CBI then; and (2) by its letters of
28 and 29 February the EC has rejected a constructive proposal, offered by the Panel on 24 February,
under which the EC could have review ed the CBI in this proceeding.
However, in the event that the Panel continues to believe that there would be some benefit in
the Panel having access to the CBI, my authorities have instructed me to inform the Panel that the
United States remains prepared to assist the Panel in this regard.  Accordingly, the United States
would like to inform the Panel, as foreseen in the letter of the United States to the Panel of
28 February 2000, of the action that the United States took in response to the Panel’s 24 February
communication and the EC’s letters of 28 and 29 February.
In its 24 February communication the Panel proposed,  inter alia , that the Panel, two WTO
professional staff members, and two representatives of the EC be permitted to examine the CBI in
camera  and to make summary written notes, subject to an obligation not to disclose the information,
or allow it to be disclosed to any person.  Under the procedure, the notes would be destroyed at the
conclusion of the Panel proceedings.
The United States considers that the Panel's proposed procedure represented a reasonable
basis on which to reconcile both the obligation of the United States to protect sensitive proprietary
information submitted to the USITC under a guarantee of confidentiality and the EC’s desire to have
access to any information that the Panel seeks to review.  In its 28 and 29 February communications,
however, the EC made clear that it is not in a position to honour the Panel’s proposed requirement that
the two designated EC representatives refrain from di sseminating the CBI to other EC officials.   In its
letters of 28 and 29 February, the EC insisted on the right to distribute the CBI up through the entire
EC chain of command, presumably to include at leas t those 22 individuals designated by the EC in its
communication of 1 February.
The EC’s position that it must be free to disseminate the CBI to such EC officials as it sees fit
is plainly at variance with the compelling need, recognized both in Article 3.2.of the Agreement on
Safeguards  and in the Panel’s proposed procedure, to provide meaningful protection against
inadvertent or unauthorized CBI disclosures.  As a result of its self-imposed procedures, the EC
cannot rule out the possibility that any data its representatives record during the course of an in
camera  review would be widely distributed in th e Commission.  Understandably, the US producersWT/DS166/R
Page 364
are unwilling to grant permission for disclosure to the EC of their commercially-sensitive data under
circumstances in which widespread dissemination of the data in the EC Commission must be
presumed -- particularly in the absence of any enfo rceable remedies available to the United States or
US producers in the event of dissemination outside the EC.
After reviewing the EC’s letters of 28 and 29 February, and before receiving the Panel’s
communication of 1 March, the United States discussed with the US producers ways in which  to
modify the Panel’s constructive proposal to accommodate the EC’s internal rules while providing
adequate safeguards against dissemination of the CBI.  To this end, the United States obtained from
US wheat gluten producers consent to make the CBI available to the Panel and the EC for in camera
review under the Panel’s proposed procedure - - subject to two changes.  The changes would be
designed to address the EC’s inability to prevent the dissemination of the CBI beyond those EC
representatives participating in the review.
Specifically, the domestic producers have stated that they would be willing to permit the CBI
to be disclosed to EC representatives in camera provided those representatives refrain from making
written notes of the data.  With that change, the producers would not insist that the EC representatives
not make further disclosures to other EC officials for purposes directly related to this proceeding --
with the strict understanding that the information could not be revealed to persons outside the EC.
These modifications would minimize the possibility of significant data leakage while permitting the
EC representatives both to review the data and comp ly with the EC’s internal reporting requirements.
The United States is providing this informa tion in order to make the Panel aware of the
consent it had received with the US producers regarding the in camera disclosure of the CBI.  In the
US view, if implemented this arrangement could have served to facilitate the Panel’s work and
accommodate the EC.
The US producers’ consent to a modified in camera  review procedure, as described above,
remains in place.  (See enclosed letter.)  Thus, if the Panel continues to have an interest in reviewing
the requested information, the United States offers this procedure as a possible way forward.
__________WT/DS166/R
Page 365
ATTACHMENT 2-14
ORAL STATEMENT OF THE UNITED STATES
AT THE ADDITIONAL MEETING OF THE PANEL WITH THE PARTIES
(18 May 2000)
Mr. Chairman, Members of the Panel,
1. On behalf of the United States delegation, I would first like to thank the Panel for providing
us this opportunity to summarize our case to the reconstituted Panel.  In particular we appreciate thewillingness of the Chairman to step in and serv e in the unusual circumstances in which we found
ourselves, and we appreciate the indulgence of the other panelists in meeting with the parties.  We are
pleased to see you once again today.  The United States will not attempt today to address each of the
points raised in the 314 pages of text in the draft descriptive part and the further pages of additional
correspondence, but rather will focus on the key issues.
1. The investigation by the USITC
2. Before turning to the issues in dispute, I will begin with a summary of the situation found by
the USITC.  At the beginning of the investigation period, in 1993, the US wheat gluten industry was
performing well.  Its members were profitable.  They projected growth in consumption, and expected
based on past performance that this situation would lead to a growth in their own sales.  The outlook
was sufficiently good that a new producer sought to enter the industry.
3. Imports were a factor in the wheat gluten market, but at a steady level.  From 1993 to 1995,
the volume of imports remained at approximately 130 million pounds.  Then, the volume surged,
increasing to 156 million pounds in 1996 and 177 million pounds in 1997 – an increase of 38 per cent
all together.  (Report, p. II-12.)  For US wheat gluten producers, the 1993 to 1995 period saw roughly
flat sales, varying between 121 and 132 million pounds.  But in 1996, sales fell to 109 million pounds,
before rising somewhat to 117 million pounds in 1997, which was still lower than at any time before
1996.  (Report, p. II-10)  As a result, positions in the market were reversed.  Where US wheat gluten
producers had had a slight majority of total sales from 1993 to 1995, by 1997, imports had a 58 percent market share, and US producers only 42 per cent.
4. Import pricing also changed in 1996.  The USITC examined the quarterly average prices for
imports and for domestic merchandise. For the 1993 to 1995 period there were 12 such comparisons,
and EC wheat gluten sold for less than US wheat gluten in them exactly half of the time.  But in 1996and 1997, EC wheat gluten sold for less than US whea t gluten in every single quarter.  Starting in the
second quarter of 1996, the price for US wheat gluten decreased consistently, and by the end of the
investigation period had dropped 12 per cent lower than its previous low point.  At the same time,
input prices were increasing.  As a result, the profits that the industry had experienced in 1993 to 1995
became losses in 1996, and deeper losses in 1997.  The USITC determined that these conditions
constituted an overall impairment in the condition of the industry caused by increased imports.
5. The USITC arrived at this conclusion after a thorough investigation.  It first reviewed the
petition filed by the US wheat gluten industry in September 1997, and issued a notice in the Federal
Register announcing the commencement of the investigation in October 1997.  That notice invited anyWT/DS166/R
Page 366
persons who wished to participate in the process to file an entry of appearance.  In addition to the US
producers, five parties appeared before the USITC: the industry association representing producers of
wheat gluten in the European Union, the Europe an Commission, the sole Australian producer of
wheat gluten, the government of Australia, and the government of Canada.  The Federal Register
notice indicated that, if they satisfied the requirements of the USITC regulations, the representativesof each of these parties could obtain access to confidential business information gathered during the
investigation.  Representatives of the US producers, the European producers, the Australian producer,
and the Government of Canada all requested and received access to confidential information.
However, the EC did not do so.
6. The USITC gathered information on the wheat gluten industry through questionnaires issued
to US producers, to foreign producers, and to US importers. All of the US producers responded, along
with 26 importers, and 14 foreign producers.  In addition, persons who appeared before the USITC
were entitled to submit argument and information in two rounds of briefing, the first related to
whether imported wheat gluten was a substantial cause of serious injury to the domestic industry andthe second to the nature of the safeguard that should be imposed.  The US producers, the EC
producers, the Australian producer, the Australian government, and the Canadian government all
submitted briefs, which contained argument and supporting information that the USITC had not
previously received.  The EC itself did not submit any briefs during the course of the proceedings and
did not appear at the injury hearing.
7. In their brief on serious injury, the EC producers argued that improvements in certain
financial indicators in 1997 proved that the US wheat gluten industry was not seriously  injured, and
that the domestic producers’ profitability data were distorted by improper allocation of costs between
the production of wheat gluten and wheat starch.  The EC producers also argued that any injury
sustained by the domestic industry was not attributable to increased imports, but instead to five
unrelated factors.
8. The USITC found that the imports of wheat gluten were a substantial cause of serious injury
in a vote in January 1998, and held a hearing on potential remedy measures in February 1998.  All of
the parties presented testimony at that hearing.
9. The USITC voted to recommend that the safeguard take the form of a quantitative restriction
in March 1998, and issued its public report on the investigation two weeks later.  The report addressed
the arguments raised by all of the parties and, in particular, those of the EC producers.  The USITC
recognized that certain indicators of the US wh eat gluten industry’s performance improved in 1997,
but found that those improvements were isolated because other indicators continued to decline.  TheUSITC also evaluated each of the other possible causes of injury identified by the EC producers, and
found that none of them could explain to a significant degree the serious injury experienced by the US
wheat gluten industry in 1996 and 1997.
10. Thus, as you can see the USITC sought information from a wide variety of sources and
carefully considered the views of each party that displayed an interest in the outcome of its
investigation.  This evaluation established that the United States had the right to impose a safeguard,
as contemplated under Article XIX of the GATT 1994 and by the Safeguards Agreement.
2. Standard of review
11. Before I move to our rebuttal of the arguments raised by the EC, I would like to discuss
briefly the standard of review, both because it is the basis for the Panel ’s consideration of each of the
issues in dispute, and because the EC has thor oughly distorted that standard in its arguments.WT/DS166/R
Page 367
12. Article 11 of the Understanding on Dispute Settlement states that “a panel should make an
objective assessment of the matter before it, including an objective assessment of the facts of the case
and the applicability of and conformity with the relevant covered agreements.”  The Appellate Body
recently emphasized that in applying these guidelines to the Agreement on Safeguards, “the
applicable standard is neither de novo  review as such, nor ‘total deference’, but rather the ‘objective
assessment of the facts.’ ”
13. However, in paragraph 5 of its second written submission, the EC states that the Panel must
examine whether “the US authorities established, as they should, the ‘existence (i.e. a positive and
irrefutable evidence of its reality) of the ca usal link between increased imports of the product
concerned and serious injury.’ ”  That is decidedly not the approach embodied in the Safeguards
Agreement.  Article 3.1 requires that the comp etent authorities make “findings and reasoned
conclusions” on “all pertinent issues of law and fact,” and Article 4.2(c) requires a demonstration of
the “relevance of the factors examined.”  Neither of these provisions suggests that irrefutable evidence
is necessary.
14. In fact, by affording all interested parties the opportunity to present argument and evidence
before the competent authorities, the Safeguards Agreement ensures that on almost all matters in
dispute, there will be evidence to support both sides.  Then, should a WTO Member dispute the
competent authority’s decision before the WTO, the Appellate Body has stated in Korea - Dairy  that
the “significance and weight properly pertaining to the evidence presented by one party is a function
of a panel’s appreciation of the probative value of all the evidence submitted by both partiesconsidered together.”  (Para. 137)  Therefore, the proper question is not whether the evidence
supporting the findings of a competent authority is “irrefutable.”  In most cases, it will have been
vigorously contested before both the competent authority and the Panel.  Rather, the Panel must
determine whether an objective assessment of the facts indicates that the USITC demonstrated the
relevance of the factors it examined and made reasoned conclusions as to all pertinent issues of lawand fact.
3. Serious injury
15. The USTIC finding of serious injury amply meets these criteria.  As I described earlier, the
domestic industry first began to suffer poor financial performance in 1996, when the surge in imports
began.  Its performance worsened in 1997.  The EC argues that certain small positive developments in
1997, especially an increase in the volume of sales by the domestic industry, defeat a finding of
serious injury.  However, the USITC considered this information, along with other indicators of the
performance of the domestic industry, such as a precipitous reduction in operating margins andmarket share that resulted in financial losses, and concluded that the information demonstrated a
significant overall  impairment.  The USITC subjected the data it used to a variety of checking
procedures, including verification of one domestic producer’ s information by a certified public
accountant, and found the data to be reliable.  The EC has provided absolutely no reason to doubt the
validity of this analysis.  Therefore, the United States has satisfied the Safeguards Agreementrequirement of establishing that the domestic industry was being seriously injured.
4. Causation
16. An objective assessment also supports the USITC finding that increased imports caused the
serious injury suffered by the US wheat gluten industry. As I described earlier, the USITC found that
the volume of imports rose, while imports from the EC began to sell consistently for less than wheatgluten produced in the United States.  The USITC found that these conditions prevented the domestic
industry from increasing its prices to match rising input costs, which resulted in decreasing profits.WT/DS166/R
Page 368
Thus, there was a direct link between the increased im ports and an overall impairment in the condition
of the domestic industry.
17. The EC couches its arguments against this finding in terms of violations of Articles 3 and 4 of
the Safeguards Agreement, but the foundation of these claims is a factual argument – that the USITC
incorrectly attributed the condition of the industry to increased imports when other factors were
responsible for any injury that the industry suffered.  This legal argument fails because the USITC
carefully examined each of the four alternative causes posited by the EC, and explained why they did
not cause serious injury to the US wheat gluten industry.
18. First, I will address the EC claim that fluctuation in the so-called “protein premium” is the
primary impetus for changes in wheat gluten demand.  I will do this in some detail because this issue
only became central to the EC argument in the second written submission.  It is not one of the five
alternative explanations of injury identified by the EC producers in their arguments before the USITC.
The protein premium is the price differential between low- and high-protein wheat, and the EC claimsthat a decrease in the differential is responsible for declining wheat gluten prices after 1995.  There
can be no question that the USITC addressed this issue.  It specifically found that “the increase in
demand for wheat gluten in 1994 . . . resulted at least in part from a weather related deficiency in
protein content in the wheat crops.”  (Pub. 3088, p. I-22.)  It also found that “demand for wheat gluten
is expected to continue to grow, with possible sharp fluctuations in demand due to weather related
effects on the wheat crop.”  (Pub 3088, p. I-23.)  Ho wever, the USITC found that most of the increase
in demand during 1993-97, and particularly in 1997, was due to long-run factors – the growing
popularity of high-gluten bread products and pet fo ods, the need for heightened gluten content in
bakery products made with high-speed mixers, and larger orders from purchasers who were concerned
that a potential WTO action by the United States would affect the market.
19. Thus, it is clear that the USITC did consider the effect of the protein content of wheat on
demand for wheat gluten.  It found protein content to be just one among many factors that varied in
importance from year to year, and one that was not particularly important after 1994.  The report cited
to evidence to support these findings.  The USITC also analyzed how changes in demand would affect
prices and consumption of wheat gluten.  (Pub. 3088, pp. I-16 - I-18.)
20. In fact, the protein premium is just one aspect of the relationship between the protein content
of wheat and demand for wheat gluten, which the USITC examined in terms of whether the protein
content itself had an effect on the marketplace.  If the EC or the EC producers of wheat gluten truly
felt that the protein premium was central to the determination of wheat gluten prices, they had every
opportunity to emphasize that point in their briefs and submit the necessary data.  When they did not,the USITC was entitled to conclude that the protein premium was not a significant factor.  In the
context of this Panel’s inquiry, the failure by the EC and EC wheat gluten producers to press this issue
is one of the facts that the Panel should consider in its objective assessment of the USITC findings.
21. I will cover the EC’s remaining factual claims in a more summary fashion.  The second of the
alternative causes now posited by the EC is that wheat gluten prices were depressed after 1995
because domestic producers had unwisely committed to major capacity expansions, which forced
them to compete more vigorously with each other to fill the capacity.  The USITC found that, in light
of the expected growth in demand for wheat gluten, domestic producers acted reasonably in deciding
to increase capacity in the early 1990s.  The extra capacity only became a problem when increasing
imports deprived the domestic producers of the growth in sales that they reasonably expected to
enjoy.  (Pub. 3088, p. I-17)
22. The third of the alternative causes claimed by the EC is that sales of low-priced corn starch
were depressing demand for wheat starch, an additional output of the production of wheat gluten, and
that these developments influenced the performance of the wheat gluten industry.  The USITCWT/DS166/R
Page 369
considered this possibility, but found that wheat starch prices increased throughout the investigation
period and peaked in 1997, when the wheat gluten industry performance was worst.  Therefore, the
USITC concluded that competition between corn star ch and wheat starch did not have a significant
effect on the wheat gluten market.  (Pub. 3088, p. I-16)
23. The fourth alternative cause identified by the EC is that these other factors were already
causing prices to decline when the industry’s input costs increased, placing the domestic wheat gluten
producers in a cost-price squeeze that caused their profits to fall.  The USITC considered this
possibility and found that in light of the domestic industry’s historic experience and the prevalent
conditions of competition, the industry’s inability to raise prices to cover higher raw material costswas “unusual.”  As I have just described, the USITC found that other factors were not significantly
affecting the wheat gluten industry.  It concluded that the new development of increased imports at
relatively low prices was responsible for the serious injury that the industry had experienced.  (Pub.
3088, pp. I-17 - I-18.)
24. In addressing each of these factors, the USITC referenced the arguments of the parties and
cited evidence in support of its findings.  That the EC can identify contrary evidence is not strange,
since most of the issues were subject to intensive argument during the investigation.  An objective
assessment of the facts will reveal that the USITC considered all of the relevant facts and adequately
explained its determination.
4. Confidential information
25. I would now like to turn briefly to the role  of confidential information in the Panel’s
deliberative process.  In its second oral statement, the EC recognized that the report of a competent
authority need not include confidential information that supports the various findings.  Thus, the only
issue remaining for the Panel’s resolution is whethe r the summary of confidential information in the
report is adequate.  Nothing in the Safeguards  Agreement even requires a competent authority to
prepare a non-confidential summary of confidential information.  The only mention of such a
summary appears in Article 3.2, third sentence, which states that parties providing confidential
information to the competent authority “ may be requested to furnish non-confidential summaries.”
(emphasis added.)  Therefore, the USITC was under no obligation to include summarized data in itsconfidential  report, let alone to use the particular methodologies that the EC suggested for
summarizing those data.
26. There is an additional question as to whether the Panel needs to consider confidential
information to assess the USITC’s decision.  As before, we submit that the public report is fullysufficient to evaluate the findings of the USITC.  However, if the reconstituted Panel feels that a
review of confidential information would be useful, the domestic producers have already specified
that they do not object to disclosure of that inform ation to the Panel, or to the EC’s participation in
that process in a manner consistent with the requirements of the Safeguards Agreement.
27. Finally, we note that should the Panel decline to review confidential information, it would be
inappropriate to draw an adverse inference against the United States.  The Appellate Body in Canada
- Aircraft  authorized the use of adverse inferences by a panel only when a party refuses to provide
information, and the inference “could be logically or reasonably derived from the facts before it.”  (¶¶
200 & 205.)  The United States has never refused to supply information to the Panel.  Rather, it has
consistently worked with the Panel to ensure that the information is submitted and evaluated in
compliance with the requirements of Article 3.2 of the Safeguards Agreement, which states that theinformation “not be disclosed without permission of the party submitting it.”  Therefore, there is no
reason to make any inference based on actions taken by the United States to protect confidential
information.WT/DS166/R
Page 370
5. Unforeseen developments
28. The United States safeguard also satisfies the requirement of Article XIX:1 of GATT 1994
that the increase in imports be the result of “unforeseen developments.”  The EC argues that theUSITC never examined this issue.  However, a separate determination as to unforeseen circumstances
has never been required.  The Appellate Body stated in paragraph 92 of its report in Argentina -
Footwear  that:
Although we do not view the first clause in Article XIX:1(a) as establishing
independent conditions  for the application of a safeguard measure, additional to the
conditions  set forth in the second clause of that paragraph, we do believe that the first
clause describes certain circumstances  which must be demonstrated as a matter of
fact . . .  (emphasis original)
This passage establishes that “unforeseen developments” is not one of the determinations the
competent authority must make pursuant to Article 2 of the Safeguards Agreement, or one of the
factors that must be examined pursuant to Article 4.  The question, then, is not whether the competent
authorities made a finding or conducted an investigation of unforeseen developments, but as the
Appellate Body stated in Argentina - Footwear , whether they “in their investigation, demonstrated
that the increased imports in this case occurred ‘as a result of unforeseen developments.’ ”  (¶ 98)
29. The USITC report and evidence on the administrative record show that the investigation did
just that.  The EC concedes that US producers did not foresee an increase in imports when they
concluded in the early 1990s that wheat gluten demand would grow strongly, and commenced
capacity expansions on that basis.  (Pub. 3088 at I-17.)  Since they did not foresee the growth in
imports, US producers plainly did not foresee the conditions that spurred that growth in imports.There is no basis to conclude that the US government had reached a conclusion different from that of
the domestic producers when it agreed to the tariff reduction on wheat gluten implemented in the
Uruguay Round.
30. In describing the reasons for the increase in imports, the USITC report lists several
developments that occurred at the end of the investigation period, which were not foreseen at the time
that the United States agreed to the reduction in the wheat gluten tariff.  First, the EC producers
unexpectedly expanded their wheat gluten production capacity.  (Pub. 3088, p. I-24.)  Second, the
surge in imports was accompanied by consistent price undercutting on the part of EC producers, who
had previously sold at average prices both above and below domestic producers’ prices.  (Pub. 3088,pp. I-16, II-36.)  Third, in 1995-97, EC producers devoted an ever-increasing portion of their total
production to exports to the United States.  These findings by the USITC, which are cited to evidence
on the record, show that the investigation did demonstrate that increased imports occurred as a result
of unforeseen developments.
6. Exclusion of imports from NAFTA parties
31. Our last point on causation is that the decision to place imports from the NAFTA parties
outside of the safeguards measure on wheat gluten is fully consistent with GATT 1994 and the
Safeguards Agreement.  In Argentina - Footwear , the Appellate Body stated that “Argentina’s
investigation, which evaluated whether serious injury or the threat thereof was caused by imports
from all sources, could only lead to the imposition of safeguard measures on imports from all
sources.”  (Emphasis original.)WT/DS166/R
Page 371
32. The Appellate Body emphasized that its decision turned on the facts of the case, in which
Argentina evaluated all imports, including those from Brazil, determined that that group of imports
caused serious injury, but excluded Brazil from the remedy.  Thus, it had attributed injury caused by
an outside factor – imports from Brazil – to imports covered by the safeguard measure.  The USITC
did not do this.  It performed two evaluations – one of all imports and one of imports from theNAFTA parties.  This two-step process ensured th at the injury finding underlying the safeguard did
not depend upon the effects of imports from countries that were excluded from the measure.  As such,
the result is equivalent to an evaluation restrict ed to non-NAFTA countries, and conforms with the
requirement that the competent authorities not attribute injury caused by other factors to the imports
that are subject to a safeguard.
33. In Argentina - Footwear , the Appellate Body refers several times to the fact that the
investigation covered imports from all sources.  Th at, by itself, cannot be an infirmity.  Even if a
competent authority decides from the outset to ex clude imports from within a free trade area, it must
still include such imports in its investigation to  ensure that there is no inconsistency with the
Article 4.2 requirement not to attribute injury caused by other factors to the increased imports.
34. In addition, imports from NAFTA parties fell over  the course of the investigation and, thus,
did not participate in the increase in imports. Th erefore, the exclusion of wheat gluten from NAFTA
parties would not affect the determinations of serious injury or causation.
35. GATT 1994 and the Safeguards Agreement, read together, authorize this result.  The analysis
begins with GATT Article XXIV, paragraph 8, which defines a free trade area.  The last sentence offootnote 1 of the Safeguards Agreement cross references this definition, stating that “[n]othing in this
Agreement prejudges the interpretation of the relationship between Article XIX and paragraph 8 of
Article XXIV of GATT 1994.”  Thus, it is GA TT 1994, and not the Safeguards Agreement, that
governs the applicability of Article XIX to safeguards measures among members of a free-trade area.
36. The definition of a free trade area in GATT Article XXIV establishes that among members of
a free trade agreement, "duties and other restrictive regulations of commerce (except, where
necessary, those permitted under Articles XI, XI I, XIII, XIV, XV and XX) are eliminated on
substantially all trade between the constituent territories.”  To untangle this somewhat complex
provision, free trade areas eliminate trade restrictions on substantially all trade, but may maintainmeasures permitted under several other GATT articles.  Measures under Article XIX, namely
safeguards, are not listed as among those that a free trade area may specifically maintain.  This silence
indicates that members of a free trade area may choose to “eliminate” safeguard measures on
substantially all trade among themselves.  Since the United States has done that with regard to Canada
and Mexico, its action fully comports with the Safeguards Agreement.
7. Validity of the safeguard measure
37. Finally, we turn to the permissibility of the safeguard measure chosen by the United States.
As required under Article 4.2, the USITC examined whether factors other than increased importscould have been responsible for the serious injury experienced by the domestic industry and found
that they were not responsible for that injury.  A ccordingly there is no basis for the EC claim that the
US impermissibly applied its safeguard measure to remedy injuries unrelated to the increased exports.
38. Article 5.1, second sentence, states a general rule that a safeguard in the form of a quantitative
restriction may not restrain imports to a level less than “the level of a recent period which shall be the
average of imports in the last three representative years” without clear justification.  And Article 5.2states that when the Member imposing a quantitative restriction cannot reach agreements with other
Members as to the level of the restriction, it ma y allot to each a share “based upon the proportions,
supplied by such Members during a previous representative period, of the total quantity or value ofWT/DS166/R
Page 372
imports of the product, due account being taken of any special factors which may have affected or
may be affecting the trade in the product.”  The use of 1993-95 as the period for determining both the
volume of the quantitative restriction imposed by the United States and the shares allocated to the
major suppliers also comports fully with the Safeguards Agreement.
39. Neither Article 5.1 nor Article 5.2 elaborates on the factors that make a period
“representative.”  Therefore, to determine the m eaning of the clause the Panel must “examine these
words in their ordinary meaning, in their co ntext and in light of the object and purpose of
Article XIX.”  The ordinary meaning of representative is “typifying” or “serving as a characteristic
example.”  (Webster’s New 3d Int’l Dictionary 1926 (1981).  Thus, in the context of Article 5.1,
which calls for a consideration of the overall volume of imports, a period is representative if it reflects
the typical level of imports.  Similarly, in the context of Article 5.2, which calls for a consideration of
the distribution of imports among various sources, a period is representative if it reflects a typical
distribution.
40. It is also significant that the Appellate Body recently found that Article XIX and the
Safeguards Agreement addresses “emergency action” which “is not the language of ordinary events in
routine commerce.”  In the context of setting the overall quota level pursuant to Article 5.1 of the
Safeguards Agreement, the requirement that a particular period be “representative” would appear to
preclude any year in which unforeseen developments resulted in unprecedented import volumes.
41. In any event, basing the quota levels on years in which there was an import surge would
frustrate the remedial purpose of the Safeguards Agreement by guaranteeing imports access to the
imposing country’s market at levels already determin ed to cause serious injury.  This is the position
advanced by the EC, and it simply makes no sense.
8. Conclusion
42. In the interests of brevity, the United States has focused on the complicated central issues.
This should not be interpreted as a de-emphasis of the many additional points that we have made in
our submissions and oral presentations.  We not e the following discussions in particular:
• paragraphs 82-88 of the US second written submission, showing that the US
complied with the notification requirements of Articles 8 and 12 of the Safeguards
Agreement; and
• paragraphs 70-124 of the US first written submission, which show that the USITC
report met all of the requirements of Articles 2.1 and 4.
43. Mr. Chairman, Members of the Panel, that concludes the United States’ oral statement.
__________WT/DS166/R
Page 373
ATTACHMENT 2-15
RESPONSES OF THE UNITED STATES
TO THE ADDITIONAL QUESTIONS FROM THE PANEL
(22 May 2000)
Question 1 (to the EC)
Before the USITC, did the EU producers rais e “protein premiums” as a factor that the
USITC should take into account?  If so, did the EU producers raise it as a factor relevant to the
entire period of investigation, or only to cer tain specific years, i.e., 1993-1994?  Please
substantiate your answer on the basis of  evidence already on the Panel record.
1. The United States would like to take this opportunity to provide information relevant to the
Panel’s question to the European Communities (“EC ”) .  The USITC’s review of its files, particularly
the briefs submitted during the serious injury phase of the safeguard inquiry and at the injury hearing,
shows very little discussion of the so-called “protein premium.”  The prehearing brief submitted on
behalf of the producers of wheat gluten in the EU contains only one mention of the protein content of
wheat, in a footnote on page 15 of a 43-page document.  The 211-page transcript of the USITChearing contains only four pages in which the EU producers discussed the protein content of wheat –
pages 151 and 170-172.  The EC producers’ 48-page posthearing brief mentions protein content only
twice, on pages 26 and 31, along with a supporting attachment.  EC Exhibit 18 at 31, n. 81.  The
paucity of references to protein content shows that that issue was not a major element in the EU
producers’ presentation to the USITC.
2. The nature of the discussion in the EU producers’ posthearing brief is revealing.  They stated
that the low protein level in the wheat harvested in 1993 resulted in a protein shortage in 1993-94 that
caused prices to increase.  The protein premium is mentioned only once, in a footnote that describes it
as “one indicator of the protein level in wheat.”  The EU producers then continue to observe that the
protein premium spiked in 1993-94.  They made no observation with regard to previous or later years,
and did not claim that protein content had any effect on the price of wheat gluten at any time other
than 1993-94.
3. These materials establish that the EU producers cited the protein premium exclusively as an
indicator that wheat harvested in 1993 had a lower protein content than in other years, and not as an
independent factor affecting wheat gluten prices.  Thus, in analyzing the effect on the marketplace of
the low protein content of wheat harvested in 1993, the USITC fully addressed the protein argument
as raised by the EC producers.
Question 2 (to the United States)
Beyond the information given in your response dated 17 January 2000 to question 26 of
the Panel on the nature of the “careful review” performed by the USITC pertaining to the
financial data submitted by the United States producers, was there any additional basis for the
statement in the USITC Report that the alloca tion methodologies were “appropriate”  (USITC
Report, p. I-13).  If so, where is this indicated in the USITC Report?
4. The statements on page I-13 of the USITC Report regarding the USITC’s “careful review” of
the domestic producers’ allocation methodologies, and its determination that those methodologiesWT/DS166/R
Page 374
were “appropriate,” contain a footnote (footnote 57) referring to pages II-20, II-19-21 of the USITC
Report, which further address the allocation issues.  This footnote states that the “supporting
information on these pages of the report is confidential business information.”  Thus, the place in the
USITC Report where this information is discussed is on pages II-19 to II-21, in particular in two
paragraphs on page II-20.  However, as the footnote states, most of this information is businessconfidential, because it discusses the particular allocations used by individual companies, and is thus
redacted from the public USITC report.
5. The USITC’s staff report reflects its resolution of issues that arose in its careful review of
producers’ cost allocations, a review that included extensive input from respondents and includedscrutiny not discussed in the Report.  After the petition was filed on 19 September 1997, the USITC
prepared draft questionnaires, and submitted them to  the parties, including the EU producers, for
comments.  On 3 October, counsel for the EC produc ers submitted a letter to the USITC with eight
pages of comments on the draft producer questionnaire, including several directed at allocation issues.
In response to comments by EC producers, the final USITC producer questionnaires specificallyasked domestic producers to explain their allocation methodology and to supply worksheets (US
Exhibit 1 at 8).   After the questionnaires was sent out, USITC staff travelled to Kansas and Missouri
later in October  to visit the facilities of the domestic producers, and to interview their personnel about
a wide range of matters, including allocation issues.   (See  USITC Report at II-4, II-6, II-8).
6. After the USITC received the questionnaire responses on or about 31 October, USITC staff
examined the questionnaire responses in detail.  A USITC accountant examined the financialinformation in the questionnaire responses and called all of the producers for clarification of the data,
and for more information, including on allocation issues.  USITC staff followed up with letters
seeking additional information, and received more information from the domestic producers.  These
procedures and the evidence of the appropriateness of domestic producers’ accounting procedures are
documented in USITC staff memoranda of the meetings with the parties, staff notes of the phone callsto the parties, and letters to the parties, as well as the parties ’ questionnaire responses and additional
submissions of information in response to these USITC requests.  Much of the information involved is
business proprietary information and, therefore, confidential.  However, it was all placed in the record
of the USITC investigation, and was available to representatives of parties subject to the USITC’s
administrative protective order, including representatives of the EU producers.
7. After reviewing  these materials, on 25 November counsel for the EU producers sent a letter
to the USITC, contending that there were deficiencies in the domestic producers’ questionnaire
responses, including on allocation issues, and urging  the USITC to collect additional information from
the domestic producers.  The next day a USITC accountant followed up with a call to a domesticproducer seeking certain information that the EC producers had requested, and USITC staff followed
up with a written request.  On 1 December Manildra responded to USITC staff requests by producing
allocation worksheets that had been requested.
8. That same week, on 3 and 4 December, a USITC auditor, a certified public accountant,
travelled to Kansas and verified the financial information submitted by Midwest, the largest US wheat
gluten producer, including the allocation methods used.  The auditor interviewed Midwest personnel,
reviewed numerous documents, and verified the fina ncial data in Midwest’s questionnaire response
against its internal records.  The USITC auditor prepared a detailed verification report, dated
12 December which was placed in the record of the USITC investigation, and available to parties to
the USITC protective order, including representatives of the EU producers.
9. On 11 December, the parties submitted pre-hearing briefs to the USITC.  The EU producers
again raised questions about the allocation methodologies used by the domestic producers. (EC
Exhibit 16 at 7-13).  At the public USITC hearing on 16 December 1997, the attorney on the USITC
investigative team asked the domestic producers several questions about their allocationWT/DS166/R
Page 375
methodologies:  “ for each of the firms that you represent, does each of the firms regard wheat gluten
as a separate profit center, and do they have a formulation for coming up with figuring out what their
financial data is for gluten versus starch?  If they do have such a formulation, did they use the same
formulation in supplying data in their questionnai re responses, or did they develop a different
formulation for purposes of this investigation?”  The domestic producers’ counsel answered thequestions at the hearing, and submitted a fuller response in the posthearing brief in order to discuss
confidential information without revealing it publicly.  (EC Exhibit 17 at 111-114).
10. In addition, after the hearing, USITC Commissioner Crawford posed additional questions to
the domestic producers about their allocation methodologies.  She asked the domestic producers (1) toexplain why their allocation methodologies would not result in the mis-attribution of costs to wheat
gluten; and perhaps the under- or over-estimation of profitability; (2) to report the value of wheat
starch and any products that might be considered waste; and (3) to explain differences between
financial statistics for the two main wheat gluten producers.
11. In their posthearing briefs, the petitioners answered the questions of USITC Commissioner
Crawford and the USITC attorney, and explained the allocation methodologies in a detailed 12-page
response.  The domestic producers argued, inter alia , that the USITC auditor’s verification report put
to rest the EU producers’ questions concerning the accuracy of the challenged profit and loss
information.  In their posthearing brief, the EU producers addressed the allocation methodologies of
two of the domestic producers, but did not questi on the USITC’s verification report, which had been
made available to them under the administrative protective order.  (EC Exhibit 18 at 35-39).
12. Although the business confidential content of the confidential staff report’s discussion of the
staff’s examination of the producers’ allocations methodologies cannot be disclosed absent permission
from the submitters, the nature of that discussion can be generally characterized in pertinent part.  As
the public version of the report discloses, each firm used its own methodology and each method wasfound to have been consistently applied from year to year.  The confidential discussion in the report
addressed the results of review of each producer’s information, in particular addressing the staff’s
analysis of the cost allocation methodologies of the two producers whose allocations EC producers
had challenged.  As to one, the staff report reflected the result of staff’s verification of its
methodology, particularly recounting how an alternative allocation using a different methodology hadbeen conducted and did not yield significantly different results.  As to the other, the report explained
why the complaints that the EC producers raised  in their posthearing brief, which concerned
allocation of certain overhead charges, were based on a mistaken interpretation of the data provided.
The discussion also describes how the cost allocation methodologies of the two firms differ from each
other.
__________WT/DS166/R
Page 376
ATTACHMENT 3-1-1
SUBMISSION OF AUSTRALIA
(16 December 1999)
TABLE OF CONTENTS
Page
1. Introduction................................................................................................................. .... 376
2. Size of quota................................................................................................................ ..... 376
3. Allocation of quota to  supplying countries ................................................................... 377
4. Manildra ..................................................................................................................... ..... 378
5. Article I of GATT 1994................................................................................................... 379
6. Conclusion ................................................................................................................... .... 380
1. Introduction
1. Australia thanks the Panel for the opportunity to make a third party submission.  Australia
will supplement this through its oral statement on 21 December 1999 at the Panel's session with third
parties.  Australia's submission focuses on:  the size of the quota;  the allocation of market shares to
individual suppliers;  and the issue of alleged disc rimination in favour of Australia.  In that context,
Australia will also rebut comments made by the EC in its First Submission about the Australian-
owned company, Manildra.
2. Size of quota
2. At pages I-21 to I-31 of its report, in particular on pages I-27 and I-28, the USITC provided a
detailed justification of the necessity of the measure to prevent or remedy serious injury and tofacilitate adjustment.  The US was permitted under SG Article 5.1 to impose a quantitative restriction
at the levels recommended by the USITC provided that they were justified.  This was done by the
USITC.
3. In section 5.2, in particular paragraph 134 of the EC's First Submission, the EC relies on a
quotation from EC - Bananas - Rec ourse to Article 21.5 by Ecuador.
1  Australia submits that this
quotation is being made out of context.  This report was discussing whether certain years were
representative because of distortions.  For example, paragraph 6.45 of that report says:  "Accordingly,
in our view, the 1994-96 period could not serve as a previous representative period because of the
presence in the market of the foregoing distortions."  This justifies the omission of years where thereare distortions, rather than being seen to limit the discretion of a Member to exclude a non-
representative year.  Moreover, the EC - Bananas case was about the allocation of country share, not
about the size of the quota.  SG Article 5.1 does not use the phrase "a previous representative period"
but rather "last three representative years".  The EC provides no argument why past findings in
respect of GATT Articles XIII should apply to SG Article 5.1.  The relevant fact in the context of the
level of the quota is that the USITC did justify the necessity of looking at the level of imports during
the period before the surge, in order to reach a recommendation on what level of import restrictionwas necessary to prevent or remedy injury, and to facilitate adjustment.  In doing this, it justified
basing its recommendation on the level of imports during the period (crop years) 1993-1995.
                                                     
1 WT/DS27/RW/ECU.WT/DS166/R
Page 377
4. The period used by the United States in the case (1993-1995) is particularly appropriate
because it covers the period prior to the surge in wheat gluten imports found by the USITC to be the
cause of serious material injury to the domestic wheat gluten industry.  This was the surge that
distorted the domestic market and caused serious injury.  An effective remedy could not be fashionedat that level of imports of wheat gluten.
5. Despite the trade-distorting European conditions that caused the surge in imports, the
Safeguards Agreement requires only that a surge occurred, and that the surge caused serious injury.
The EC does not dispute that the surge occurred.  Under the Safeguards Agreement, the USITC was
entitled to recommend, and the President of the US was entitled to choose and implement, an effective
and efficient safeguard remedy based on the period before the surge caused injury.
3. Allocation of quota to supplying countries
6. The US is entitled to allocate quota to supplying countries, since this is explicitly provided for
under SG Article 5.2.  The basis for such a share is set out in SG Article 5.2(a) as being based on the
proportions during "a previous representative peri od ... due account being taken of any special factors
which may have affected or may be affecting the trade in the product".
7. The USITC analysed what was appropriate for determining the "previous representative
period" in this case.  Moreover, the allocation of country shares on the basis of 1993-95 reflected thechoice of the period for determining the quota.  A ccordingly, this period was also appropriate for the
choice of country shares, since "these years preceded the significant increase in imports that occurred
in 1996 and 1997.
2
8. A Member is allowed discretion here in determining "a previous representative period".There is no necessary link between the "last three representative years" referred to in SG Article 5.1
and "a previous representative period" in SG Article 5.2(a).  If the intent had been for such a link, then
the term "previous representative period" would have been defined in SG Article 5.1.
9. Paragraph 144 of the EC's First Submission claims that:
"Paragraph 2(a) of Article 5 requires a quantitative restriction to be allocated among
substantial suppliers on the basis of proportional shares in a previous representative
period for which reliable statistics are available. In this case, the previous
representative period was 1995-97."
10. This is no more than an implied assertion by the EC that "a previous representative period"
must be the latest period for which reliable statistics are available.  There is no basis in the text of the
Safeguards Agreement for this.  If that is what the term "a previous representative period" is supposed
to mean, then surely the text would have said so.  On the contrary, "a previous representative period"
should be one that is representative of the norm al flow of imports, which the USITC judged was
1993-95, the same period on which it based its recommendation for the quota.  This did not require
recourse to SG Article 5.2(b).
11. The EC never provides any argument or evidence that 1993 - 1995 period used for allocation
among country suppliers is not, as a matter of fact, "a previous representative period" for the purpose
of SG Article 5.2(a).  The resulting allocation amounts implemented by the US are simply a function
of the representative period selected, and in no way targets any country.  Moreover, in the context of
                                                     
2  USITC Report, page I-28, lines 15 and 16.WT/DS166/R
Page 378
the USITC's recommendation, which was accepted by the US Government to base the quota on this
period, it was clearly not an arbitrary period.
12. Moreover, SG Article 5.2(a) cannot be read to imply some obligation that the "most suitable"
or "most representative" period must be found, whatever that would mean.  It only requires that "aprevious representative period" be chosen.  The necessity test in SG Article 5.1 only applies to the
level of the quota applied.  The issue of the allocation amongst supplying countries is a different issue.
Without evidence that the 1993-1995 period is not "a previous representative period" within the
meaning of SG Article 5.2(a), there is no justification for the EC's claim.
13. As the same EC - Bananas report
3 cited before said at paragraph 6.50:  "Members have a
degree of discretion in choosing a previous representative period".  The period used by the US in this
case is particularly representative because it covers a time prior to the surge in wheat gluten imports
found by the USITC to be the cause of serious material injury to the domestic wheat gluten industry,
and is coincident with the period for the overall quota.
4. Manildra
14. Australia is obliged to comment on the EC's references to an Australian owned company,
Manildra, that is part of the US wheat gluten industry.  The EC seeks to make something out of the
fact that Manildra has an investment in the US and that its Australian operations also export to the US.
In some cases the comments are not even accurate.  For example, the EC complains at paragraphs 41,71 and 158 of its First Submission that the Manildra Group "owns two Australian producers of wheat
gluten" that "account for the dominant share of exports of wheat gluten from Australia to the US"
(citing the USITC report at page II-8).  However, the USITC report, confirms at page II-22 that
Manildra’s Tasman Starches production facility was closed in 1997, thereby reducing considerably
Australia’s capacity at the very time the EC was radically expanding wheat gluten production.
15. The EC at paragraph 41 of its First Submission finds it "necessary to draw attention to the
fact" that an Australian company has interests in wheat gluten production in both Australia and the
US.  The EC goes as far as to claim that such a legitimate business relationship "may explain the
discriminatory structure given to the safeguard measure by the US."  Australia disagrees with the ECcharacterization of the US's safeguard measure as discriminatory.  Australia also objects to the
insinuation here, and indeed throughout the EC First Submission, especially again in paragraph 180,
that the US somehow colluded with Australia in fashioning the safeguard remedy.  The US's
determination of the safeguard remedy and its implementation of that remedy were legal and fair.  The
EC provides no evidence for its insinuations, nor is there any.
16. There is no obligation on the US under the Safeguards Agreement to take account of the
nationality of the ownership of a company in its domestic industry.  Indeed, it could be inconsistent
with the Safeguards Agreement for it to do so.
17. In paragraph 77 of its First Submission, the EC says that the USITC report fails to address the
issue of Manildra's imports.  Then again in paragraph 102 of its First Submission, the EC argues that
"imports from Australia to the US by US producers should have been excluded entirely from the
causation analysis and findings."  The EC gives no textual reason why this was required by
SG Articles 2 and 4.2, but merely affirms that it was.  This issue was addressed at page I-17 of the
USITC report.  However, there was no obligation for it to be addressed.  The Safeguards Agreement
is about the impact of imports from all sources on the "domestic industry" as defined inSG Article 4.1(c).  The issue of who the importer is  irrelevant.  Just because one of the companies in
the US industry is an importer does not make those imports a "factor other than increased imports".
                                                     
3 WT/DS27/RW/ECUWT/DS166/R
Page 379
18. While it is not clear what the EC is actually proposing in terms of the Safeguards Agreement,
presumably the EC is in effect arguing that importing firms should be excluded from the definition of
domestic industry for injury purposes.  The EC may be thinking by analogy of a provision such as
Article 4.1(i) of the Anti-Dumping Agreement4, or Article 16.1 of the Subsidies Agreement.5  Even in
those agreements the provision is discretionary.  This ability to exclude companies from the domestic
industry in anti-dumping (and countervailing duty) cases is exercised to obtain affirmative findings of
injury, and so to make it easier to impose anti-dumping duties.  However, SG Article 4.1(c) does not
contain any such provision.  The presence of such flexibility in the Anti-Dumping and Subsidies
Agreements and its omission from the Safeguards Agreement mean that a Member does not have thediscretion, let alone the obligation, to exclude such companies from the definition of "domestic
industry" under the Safeguards Agreement.
5. Article I of GATT 1994
19. A recurrent theme of the EC First Submission, aside from its attempts to get the Panel to
conduct what would essentially be a de novo  review of the USITC finding of injury (which the US has
addressed in detail), is its unfounded insistence that the quota remedy is discriminatory and favours
Australia.  The EC fails to identify any inconsistency with the Safeguards Agreement where the US
made quota allocations.  The EC alleges in paragraph 144 of its First Submission that the US "unfairly
reallocates market share from one WTO Member to another" and concludes in paragraph 147 that the
US "clearly and repeatedly breached Article 5.2(a)" of the Safeguards Agreement.  This claim that theUS breached Article 5.2(a) of the Safeguards Agreement is trivially incorrect, since there was no "re-
allocation" of market shares.
20. The EC claims that the US's safeguard measure breaches Article I of GATT 1994 through the
allocation of country shares on the basis of the representative period, 1993-1995.  This is despite noattempt by the EC to show that this period was not representative.  Indeed given that the quota is
based on the same period it is difficult to see what other period would have been representative, even
without taking into account the distortions inherent in the period subsequent to 1995.  The EC claim is
without merit and amounts to no more than an asse rtion that the EC has been treated unfairly.
21. Australia does not accept that the EC has been treated in a "flagrantly discriminatory
manner".
6  This is just empty rhetoric.  The US has complied with its obligations under
SG Article 5.2(a).  The US was allowed to provide individual shares to principal suppliers under
SG Article 5.2(a).  If the US's obligations under the Safeguards Agreement are satisfied, then any
conflict with GATT 1994 Article I would be subject to the General Interpretative Note to Annex 1Aof the WTO Agreement.  Accordingly, the choice of 1993-1995 as a previous representative period
does not constitute a violation of Article I of GATT 1994.
                                                     
4 "when producers are related [footnote 11 omitted]  to the exporters or importers or are themselves
importers of the allegedly dumped product, the term "domestic industry" may be interpreted as referring to therest of the producers."
5  "except that when producers are related [footnote 48 omitted]   to the exporters or importers or are
themselves importers of the allegedly subsidized product or a like product from other countries, the term
"domestic industry" may be interpreted as referring to the rest of the producers".
6 At paragraph 180 of the EC's First Submission.WT/DS166/R
Page 380
6. Conclusion
22. In conclusion, Australia considers that the US complied with the Safeguards Agreement and
in its choice of the level of quota and in its choice of 1993-1995 as a previous representative period
for the apportionment of country shares.  In addition, Australia rejects the EC's rhetoric aboutdiscrimination in respect of Australia and that the business activities of Manildra in the US should
have been treated differently by the US Government because it is has Australian ownership.WT/DS166/R
Page 381
ATTACHMENT 3-1-2
ORAL STATEMENT OF AUSTRALIA
(21 December 1999)
1. Australia welcomes this opportunity to elaborate its views on this case.  Our submission set
out our main thinking regarding the legal standing of the remedy imposed by the US.
2. While Australia does not normally support the imposition of import restraint measures, in this
case, Australia considered that the USITC had in this particular case demonstrated that serious injury
was being caused by imports of wheat gluten from the EC.  Accordingly, Australia recognized the
right of the US to impose a safeguard measure.  Further, Australia recognized that the measure had to
be imposed on imports from all sources and not just from the EC.
3. Australia considers that the US was justified in deciding to impose a quota as the remedy.
Australia also agrees that the US justified the necessity of its choice of the quota level.
4. In order to prevent or remedy the serious injury caused by the surge of imports after the 1995
crop year, it was necessary to look to the situation preceding that surge to see what level of quota was
necessary.  The level during the crop years 1993-1995 is clearly justified as the basis for such a
calculation.  Indeed, the US imposed a level of quota that even included imports from countries such
as Canada that were not covered by the quota.  The amount of the quota was correctly determined by
the USITC to be an amount that the US industry could absorb and that would ensure a continuedsteady and sure supply of wheat gluten to the US market.
5. While Australia considers that a quota was needed as the remedy in this particular case,
Australia disagrees with the EC that the US had a WTO obligation to justify its choice of a quota over
a tariff or tariff rate quota.  Section 5.1.2 of the EC's First Submission about the form of the remedy is
based on the broad interpretation of the Korea - Dairy report
1, which was reversed by the Appellate
Body.2   In particular the point made by the EC in paragraph 125 of its First Submission in regard to
the third factor cited by the USITC in support of a quota over a tariff, viz.
"a high tariff would be inequitable in that it is likely to further drive [other foreign]
suppliers from the US market"3
is irrelevant to the matters before this Panel.  In any case, the EC mischaracterizes the USITC’s
consideration as the protection of the market shar e of other importers as against the EC, when the
USITC was in fact responding to the concern of domestic consumers that the wheat gluten supply be
diverse and competitive.  The USITC was fully within its rights to consider the equitable impact of a
tariff on all foreign suppliers and to recognize that setting a tariff sufficiently high as to restrict the
quantity of imports would necessarily prevent countries, which do not provide subsidies, fromcontinuing to export to the US.
6. The EC has also made play of the fact that one of the companies in the US industry was
Australian owned and is also an importer of wheat gluten from Australia.  As we pointed out in our
submission, these facts are irrelevant to the matter s before the Panel.  The EC's points amount to no
more than an ad hominem  argument.
                                                     
1 WT/DS98/R
2 WT/DS98/AB/R
3 At page I-26 of the USITC Report.WT/DS166/R
Page 382
7. While it is not entirely clear what the EC considers that the US should have done about
producers of wheat gluten who are also importers, the implication at least is that they or their imports
should have been excluded in one way or another from the injury consideration.  As we noted it would
have been inconsistent with the Safeguards Agreement to exclude elements of the domestic industry
on such grounds.  Similarly it would not be consistent to exclude consideration of some imports.While these considerations may be seen by the EC to bolster its  ad hominem  argument in this
particular case, it would significantly weaken the disciplines under the Safeguards Agreement to
allow a Member to make such exclusions.  In the case of anti-dumping investigations, the flexibility
arrogated to themselves by some Members to exclude some parts of a domestic industry can serve to
make affirmative findings on injury all that much easier to achieve.
8. Article 5.2(a) of the Safeguards Agreement onl y requires that the country shares be on the
basis of "a previous representative period".  This does not have to meet the necessity test of
Article 5.1.  The EC has not addressed this issue directly apart from claiming that it was
disadvantaged as compared to Australia.  The EC's arguments are made in the context of the size of
the quota.  Even there the citation of EC - Bananas (with regard to GATT Article XIII) misrepresentsthe finding of the panel.  In that case, it is clear that the point at issue was about the obligation to
exclude distorted years and the discretion that is afforded the importing Member to choose a previous
representative period.  Indeed to assume that "a previous representative period" means no more than
"the last three years" would be to render the drafting meaningless.  Moreover, to assume that the
choice is unique, i.e. to say that it should be "the previous representative period" rather than "a
previous representative period" would again be to change the drafting in order to remove the
deference afforded the importing Member in the choice of period for the allocation of quota.
9. The choice of the crop years 1993-1995 for the allocation of quota was not arbitrary.  On the
one hand it was the same period as used for the basis for the calculation of the overall quota.  On the
other hand it was the period before the surge of imports that caused the injury, which the safeguard
action seeks to remedy.  Thus it was genuinely "representative".  It is difficult to see how the period
distorted by the surge of imports causing the injury at issue could be regarded as being"representative" for the purpose of a measure to remedy that injury.
10. There was no favourable action taken by the US in respect of Australian exports to the US.
There was no breach of equitable treatment.  What the EC appears to be saying amounts to no more
than that:  its exporters used their excess capacity to injure the US industry;  its exporters should be
allowed to continue to injure the US industry;  and so its exporters should be allowed to maintain theirlevel of exports achieved before the safeguard measure was imposed.  This interpretation of the EC
has no basis under the Safeguards Agreement and is inconsistent with the purpose of the safeguard
action, which is to prevent or remedy serious injury.
11. In conclusion, Australia would like to reiterate that it considers that in this particular case the
USITC did justify its injury finding and the level of quota recommended.  In addition, the countryallocation between Australia and the EC recommended by the USITC and adopted by the US is
consistent with the United State's obligations under the Safeguards Agreement and GATT 1994.
__________WT/DS166/R
Page 383
ATTACHMENT 3-2-1
SUBMISSION OF CANADA
(16 December 1999)
TABLE OF CONTENTS
Page
1. Introduction................................................................................................................. ....... 383
2. Exemption of Canada from the US safeguard measure on wheat gluten ..................... 384
3. Argument..................................................................................................................... ....... 385
4. Conclusion ................................................................................................................... ....... 387
ANNEX 1 – FULL TEXT OF ARTICLE 802 OF THE NAFTA 388
1. Introduction
1. Canada is a third party in these proceedings and is appreciative of the opportunity to provide
its views to the Panel on certain matters arising in the dispute.
2. The dispute concerns a safeguard measure imposed by the US in the form of a quantitative
limitation on imports of wheat gluten effective as of 1 June1998.1
3. The dispute was initiated by a request for consultations on 17 March 1999, by the EuropeanCommunities (EC) in respect of a safeguard measure imposed by the US on imports of wheat gluten.
2
Such consultations with the US were held in Geneva on 3 May 1999, but no mutually satisfactory
solution was reached.
4. On 3 June 1999, the EC requested the establishment of a panel pursuant to Article 6.1 of the
DSU.3  The Dispute Settlement Body (DSB) establis hed this Panel on 26 July 1999, with the standard
terms of reference.4
5. Canada, Australia and New Zealand reserved their rights to participate as third partiespursuant to Article 10.3 of the DSU.
6. Canada has a substantial interest in the matte r, particularly with respect to the EC claim
regarding the exclusion of Canada from the application of the safeguard measure imposed by the US.
7. Canada has had an opportunity to review those portions of the First Submission of the US as
it pertain to this particular issue, and is fully supportive of the points made by the US.
                                                     
1 Proclamation 7103 of 30 May 1998 - To facilitate Positive Adjustment to Competition From Imports
of Wheat Gluten, submitted as US Exhibit 2;  Memora ndum of 30 May 1998 - Action Under Section 203 of the
Trade Act of 1974 Concerning Wheat Gluten by the President of the US, published in the Federal RegisterVol. 63, No. 106, pp. 30359 and 30363 on 3 June 1998, submitted as US Exhibit 3.
2 WT/DS166/1
3 WT/DS166/3
4 WT/DS166/4WT/DS166/R
Page 384
8. Canada maintains that the US Internatio nal Trade Commission (USITC) findings and
recommendations regarding imports of wheat gluten from Canada, as well as the subsequent US
decision to exempt Canada from the safeguard measure on wheat gluten, are consistent with US
obligations under the WTO agreements, in particular Article XIX of the GATT 1994 and Articles 2
and 4 of the Agreement on Safeguards.  Canada furthe r maintains that the EC claim to the contrary is
unfounded and as such should be rejected by the Panel.
2. Exemption of Canada from the US safeguard measure on wheat gluten
9. Pursuant to the obligations of the US under the North American Free Trade Agreement
(NAFTA), Canada was exempted from the safeguard measure imposed by the US after the USITC
found that imports of wheat gluten from Canada and Mexico did not contribute importantly to the
serious injury.5   Article 802 of the NAFTA provides that "any [NAFTA] Party taking an emergency
action under Article XIX or any such agreement shall exclude imports of a good from each other
Party from the action unless:
(a) imports from a [NAFTA] Party, considered individually, account for a substantial
share of total imports;  and
(b) imports from a [NAFTA] Party, considered individually, or in exceptional
circumstances imports from Parties considered collectively, contribute importantly to
the serious injury, or threat thereof, caused by imports."6
Thus, unless affirmative findings on both conditions are made, NAFTA Parties must be exemptedfrom a safeguard measure taken by another NAFTA Party.
10. Article 802 of the NAFTA was incorporated into  US law through Sections 311 and 312 of the
NAFTA Implementation Act.
7  Accordingly, after the USITC instituted a safeguard investigation on
wheat gluten imports and made an affirmative injury determination8, it conducted a separate analysis
of imports from Canada and Mexico to determine whether they accounted for a substantial share of
total imports and contributed importantly to the serious injury.9  The USITC found that "imports from
Canada declined significantly during the period examined, while imports overall increased.10  I t
concluded that imports from Canada were not contributing importantly to the serious injury caused byimports, and recommended that the President exclude Canada (and Mexico
11 ) from any relief action.
The definitive safeguard measure imposed by the US in the form of a quantitative limitation on
imports of wheat gluten, effective as of 1 June 1998, excluded imports of wheat gluten from Canada,
as well as imports from certain other countries.12
                                                     
5 Proclamation 7103 of 30 May 1998, submitted as US  Exhibit 2;  USITC Report, Investigation
No. TA-201-67, Publication 3088, March 1998, su bmitted as US Exhibit 4, pp. I-5 and I-18/19.
6 NAFTA, Art. 802.  The full text is reproduced in Annex 1.
7 19 U.S.C. 3371, 3372 (Supp. 1993).
8 US First Submission, para. 10-48, for a factual description of the USITC investigation and the
measure adopted by the US.
9 US First Submission, para. 36 and 40.
10 USITC Report, submitted as US Exhibit 4, p. I-19.
11 USITC Report, submitted as US Exhibit 4, p. I-19;  the USITC investigation concluded that there
were no reported imports of wheat gluten from Mexico during the period examined (1993-1997);  the USITCtherefore found that Mexico did not account for a substa ntial share of total imports and recommended that the
President exclude Mexico from any relief action.
12 Proclamation 7103 of 30 May 1998, submitted as US Exhibit 2;  Memorandum of 30 May 1998,
submitted as US Exhibit 3.WT/DS166/R
Page 385
3. Argument
11. The EC raises legal claims under both the GATT 1994 and the Agreement on Safeguards
regarding the US decision to exclude imports from Canada from the application of the safeguard
measure on wheat gluten.  The EC asserts that, by doing so, the US breached its obligations under
Article XIX of GATT and Articles 2 and 4 of the Agreement on Safeguards.
12. The EC argument rests solely on certain parts of the Panel Report in  Argentina - Safeguard
Measures on Imports of Footwear13 (Argentina - Footwear ).  This Panel Report was appealed, and the
decision of the Appellate Body was released on 14 December 1999.  Given the very short time
between the release of this decision and the due date of the submission of Canada
(16 December 1999), Canada has not had an adequate opportunity to review this decision.  Therefore,Canada will limit its comments at this point to Panel Report in  Argentina - Footwear .  Canada will
present its views on the Report of the Appellate Body, as they are relevant to this dispute, orally to
this Panel.
13. The EC claims that the US violated " the principle of parallelism” elaborated by the Argentina
- Footwear  Panel.
14  In support of its claim, the EC cites comments in the Panel Report describing the
principle of parallelism, with regard to a safeguard measure imposed by a member of a customs
union.15  In particular, the EC cites the comment of the Panel that the provisions of Article 2 of the
Agreement on Safeguards "imply a parallelism  between the scope of a safeguard investigation  and the
scope of the application  of safeguards measures.16
14. In its submission, the US indicates that the EC provides no arguments as to why the language
from Argentina-Footwear  would be relevant in this case.17  Canada agrees with this conclusion.  The
Panel itself, in response to arguments raised by Argentina on NAFTA and the US wheat glutensafeguard in particular, recognised "that MERCOSUR is a customs union, whereas NAFTA is a free-
trade agreement".
18  Moreover, as the Panel also pointed out, the provisions of footnote 1 to
Article 2.1 on which it relied to elaborate the principle of parallelism concern only regional
integration in the form of a customs union.  Canada therefore further agrees with the US that the EC
has not, with this particular claim, met its burden of proof.
15. In any event, the US submits that its actions, i.e. its decision to exclude Canada from the
safeguard measure on wheat gluten, are consistent with the Agreement on Safeguard.19  T h e  U S
further submits that the circumstances examined by the Argentina – Footwear  Panel were wholly
different.  Canada agrees with the US on both counts.
16. The USITC report clearly shows that the methodology used by the USITC in examining
NAFTA imports is consistent with both the GATT 1994 and the Agreement on Safeguards.  While the
US conducted a global investigation and examined imports from all sources, its determination did not
attribute injury from NAFTA imports to third countries.  After the USITC made an affirmative injury
determination, it conducted a separate analysis of imports from Canada and Mexico.  Its investigation
and analysis demonstrated clearly that Canadian imports declined significantly during the period ofinvestigation, while overall imports increased.
20  The USITC rightly concluded that imports from
                                                     
13 WT/DS121/R, 25 June 1999.  This Panel Report has been appealed.
14 EC First Submission, para. 55, 60 and 103.
15 EC First Submission, para. 55.
16 Argentina - Footwear, para. 8.87.
17 US First Submission, para. 83.
18 Argentina - Footwear, para. 8.100.
19 US First Submission, para. 84.
20 USITC Report, submitted as US Exhibit 4, p. I-19.WT/DS166/R
Page 386
Canada did not contribute importantly to the serious injury.  Based on this conclusion, the US
exempted imports from Canada from the safeguard measure.
17. The EC claims that by doing so, i.e., excluding Canada from the safeguard measure on wheat
gluten, the US breached the principle of parallelism recognised by the Argentina – Footwear  Panel
Report.21  It was the EC itself that provided the rationale for "the principle of parallelism” in its
submission in the Argentina – Footwear  dispute.  The EC thesis was aimed directly at demonstrating
the inconsistency of the Argentine actions under the GATT 1994 and the Agreement on Safeguards.
Accordingly, the EC expressed the view that Argentina, after having investigated imports from all
sources, and determined that serious injury had been caused by all  imports, "failed to construct a
safeguard measure that addressed the imports that were causing the injury".22   In this particular case,
both the EC and the US agreed that what is trou bling "is Argentina’s use of MERCOSUR imports for
its increased-imports analysis when there was no possibility that those imports could be included in
any safeguard action, even where those imports are demonstrably the cause of the injury suffered by
the domestic industry"23  (emphasis added).
18. In Argentina - Footwear , the facts of the case are important and, we believe, critical to the
conclusions of the Panel.24  Given that MERCOSUR members were the source of more that half of the
imports used to determine the injury, excludin g MERCOSUR imports from the application of the
safeguard measure while using these imports for the injury determination could not be justified,
especially considering the object and purpose of the Agreement on Safeguards.25
19. Canada therefore agrees also with the EC, to use its own words in the Argentina – Footwear
case, that the "US wheat gluten case is radically different to [ Argentina – Footwear ]".26  I t  i s  s e l f
evident that the methodology used by Argentina in the Argentina  – Footwear  c a s e  i s  e a s i l y
distinguishable from that used by the US in this matter.  As the EC specifically noted in the context of
the Argentina - Footwear  dispute, "the US made separate determinations concerning imports from
NAFTA members and concluded that imports from that source and, in particular, Canada did not
cause injury.  If Argentina had applied the same procedure as the US in the wheat gluten case, then
Argentina would not have been able to come to the conclusion it did."27
20. Canada agrees with the US in this case28, and the EC as it expressed itself in the Argentina –
Footwear  case, that an importing Member is free to – and indeed should  – investigate all imports into
its territory in order to "put together a complete file".29  The US methodology includes all sources of
imports (including NAFTA sources) in the injury determination, and excludes a NAFTA member
from a safeguard measure only after having made a separate determination concerning the imports
from that Member and having concluded that imports  from that source did not contribute importantly
to the injury.  The US applied this methodology in the wheat gluten investigation, and found that
imports from Canada did not contribute importantly to the serious injury.  Based on this conclusion,
                                                     
21 EC First Submission, para. 55, 60 and 103.
22 Argentina – Footwear, para. 5.124.
23 Argentina – Footwear, para. 5.124.
24 MERCOSUR imports of footwear in Argentina accounted in 1991 for only 1.90 million pairs of
8.86 million total imports (i.e. 21.4 per cent) and in 1995, for ro ughly 1/4 of the total imports, i.e. 5.83 of 19.84
million pairs;  in 1996, MERCOSUR supplied the largest percentage (55.7 per cent) of total imports of 13.47
million pairs, i.e. 7.5. million pairs (as oppose to 5.97 million pairs from third countries);  Argentina - Footwear ,
footnote 474.
25 The objectives of the Agreement on Safeguards are to "re-establish multilateral control over
safeguards and eliminate measures that escape such control”;  Preamble, Agreement on Safeguards .
26 Argentina – Footwear, para. 5.123.
27 Argentina – Footwear, para. 5.131.
28 US First Submission, para. 86.
29 Argentina – Footwear, para. 5.130.WT/DS166/R
Page 387
the US exempted imports from Canada from the safeguard measure.  If Canadian imports had
contributed importantly to the serious injury, they  would not have been excluded from the safeguard
measure.  This last distinction is very important and distinguishes clearly the USITC methodology
from the circumstances of the  Argentina – Footwear  case, in which "the principle of parallelism” was
elaborated.
21. Canada further submits to the Panel that pursuant to Article 802 of the NAFTA, a NAFTA
member contributing importantly to the injury will not be excluded from the safeguard measure
imposed by another NAFTA member.  Converse ly, only a NAFTA member found not contributing
importantly to the injury will be excluded from the safeguard measure.  Thus, the parallelism  between
the scope of the application  of safeguards measures and the actual source of the serious injury is
respected, because a separate determination has been made that the imports from that source are not
an important cause of injury.30
4. Conclusion
22. Accordingly, Canada respectfully submits that the USITC findings and recommendations
regarding imports of wheat gluten from Canada, as well as the subsequent US decision to exemptCanada from the safeguard measure on wheat gluten, are fully consistent with the WTO obligations of
the US.
                                                     
30 Given the nature of the NAFTA Article 802 exclusion (contingent on imports from the NAFTA party
not accounting for a substantial share of total imports of  the product and not contributing importantly to the
serious injury or threat thereof caused by imports of the subject goods), inclusion of a NAFTA partner - not
contributing importantly to the serious injury - in the injury inquiry would, by necessary implication, only make
a de minimis contribution to the total level of injury found to have been caused by imports.WT/DS166/R
Page 388
ANNEX 1 - FULL TEXT OF ARTICLE 802 OF THE NAFTA
Article 802:  Global Actions
1. Each Party retains its rights and obligations under Article XIX of the GATT or any safeguard
agreement pursuant thereto except those regarding compensation or retaliation and exclusion from an
action to the extent that such rights or obligations are inconsistent with this Article.  Any Party taking
an emergency action under Article XIX or any such agreement shall exclude imports of a good fromeach other Party from the action unless:
(a) imports from a Party, considered individually, account for a substantial share of total
imports;  and
(b) imports from a Party, considered individually, or in exceptional circumstances
imports from Parties considered collectively, contribute importantly to the serious
injury, or threat thereof, caused by imports.
2. In determining whether:
(a) imports from a Party, considered individually, account for a substantial share of total
imports, those imports normally shall not be considered to account for a substantial
share of total imports if that Party is not among the top five suppliers of the good
subject to the proceeding, measured in terms of import share during the most recent
three-year period;  and
(b) imports from a Party or Parties contribute importantly to the serious injury, or threat
thereof, the competent investigating author ity shall consider such factors as the
change in the import share of each Party, and the level and change in the level of
imports of each Party.  In this regard, imports from a Party normally shall not be
deemed to contribute importantly to serious injury, or the threat thereof, if the growth
rate of imports from a Party during the period in which the injurious surge in imports
occurred is appreciably lower than the grow th rate of total imports from all sources
over the same period.
3. A Party taking such action, from which a good from another Party or Parties is initially
excluded pursuant to paragraph 1, shall have the right subsequently to include that good from the
other Party or Parties in the action in the event th at the competent investigating authority determines
that a surge in imports of such good from the other Party or Parties undermines the effectiveness of
the action.
4. A Party shall, without delay, deliver written notice to the other Parties of the institution of a
proceeding that may result in emergency action under paragraph 1 or 3.
5. No Party may impose restrictions on a good in an action under paragraph 1 or 3:
(a) without delivery of prior written notice to the Commission, and without adequate
opportunity for consultation with the Party or Parties against whose good the action isproposed to be taken, as far in advance of taking the action as practicable;  andWT/DS166/R
Page 389
(b) that would have the effect of reducing imports of such good from a Party below the
trend of imports of the good from that Party over a recent representative base period
with allowance for reasonable growth.
6. The Party taking an action pursuant to this Article shall provide to the Party or Parties against
whose good the action is taken mutually agreed trade liberalizing compensation in the form of
concessions having substantially equivalent trade effects or equivalent to the value of the additional
duties expected to result from the action. If the Parties concerned are unable to agree on
compensation, the Party against whose good the action is taken may take action having trade effects
substantially equivalent to the action taken under paragraph 1 or 3.
__________WT/DS166/R
Page 390
ATTACHMENT 3-2-2
ORAL STATEMENT OF CANADA
(21 December 1999)
TABLE OF CONTENTS
Page
1. Introduction................................................................................................................. .... 390
2. Argument..................................................................................................................... .... 390
3. Conclusion ................................................................................................................... .... 392
1. Introduction
1. The Government of Canada is appreciative of this opportunity to provide its views to the
Panel on certain matters arising in this dispute.  Cana da reserved its right to participate as third party
in these proceedings because of its substantial intere st in the matter, particularly with respect to the
EC claim regarding the exclusion of Canada from the application of the safeguard measure on wheat
gluten imposed by the United States.
2. We are fully supportive of the position of the United States on this particular issue.  We
maintain that the United States International Trade Commission (USITC) findings and
recommendations regarding imports of wheat gluten from Canada, as well as the subsequent US
decision to exempt Canada from the safeguard measure on wheat gluten, are consistent with US
obligations under the WTO agreements, in particular Article XIX of the GATT 1994 and Articles 2
and 4 of the Agreement on Safeguards.  We further maintain that the EC claim to the contrary isunfounded and as such should be rejected by the Panel.
2. Argument
3. The EC raises legal claims under both GATT 1994 and the Agreement on Safeguards
regarding the US decision to exclude imports from Canada from the application of the safeguard
measure on wheat gluten.  The EC asserts that, by doing so, the United States breached its obligationsunder Article XIX of GATT and Articles 2 and 4 of the Agreement on Safeguards.
4. Canada was exempted from the safeguard measure imposed by the United States, after the
USITC found that imports of wheat gluten from Canada and Mexico did not contribute importantly to
the serious injury.  This was done in accordance with US obligations under the North American Free
Trade Agreement (NAFTA), more particularly Article 802.
5. The EC argument appears to rely solely on the "principle of parallelism", as found in the
Panel Report in  Argentina - Safeguard Measures on Imports of Footwear  (Argentina – Footwear).
1
This Panel Report was appealed, and the decision of the Appellate Body2 was released last week.  We
take this opportunity to present our views on the decision of the Appellate Body, as it is relevant to
this matter.
                                                     
1 WT/DS121/R, 25 June 1999.
2 WT/DS121/AB/R, 14 December 1999.WT/DS166/R
Page 391
6. In its Report, the Appellate Body stated, after a short discussion of Articles 2 and 4 of the
Agreement on Safeguards, that "On the basis of this reasoning, and on the facts of this case, we find
that Argentina's investigation, which evaluated whether serious injury or the threat thereof was caused
by imports from all sources, could only lead to the imposition of safeguard measures on imports from
all sources.  Therefore, we conclude that Argentina's investigation, in this case, cannot serve as a basis
for excluding imports from other MERCOSUR member States from the application of the safeguard
measures."3
7. For these reasons, the Appellate Body ruled th at "Argentina, on the facts of this case, cannot
justify the imposition of its safeguard measures only on non-MERCOSUR third country sources of
supply on the basis of an investigation that found serious injury or threat thereof caused by imports
from all sources, including imports from other MERCOSUR member State." 4 [emphasis added]
8. It is clear from this decision that the A ppellate Body's legal conclusions regarding the
imposition of safeguard measures by a member of a customs union are directly linked to the particular
facts of the Argentina - Footwear  case.
9. The US wheat gluten case is radically different from the Argentina – Footwear  case.  This is
clearly demonstrated in Canada’s Third Party Writ ten Submission.  Now that we have the benefit of
the recent decision of the Appellate Body in Argentina – Footwear , we will reiterate these differences
in the context of the Appellate Body’s Report.
10. The USITC report clearly shows that while the United States conducted a global investigation
and examined imports from all sources, its de termination did not attribute injury from NAFTA
imports to third countries.  After the USITC made an affirmative injury determination, it conducted a
separate analysis of imports from Canada and Mexico.  Its separate examination demonstrated clearlythat Canadian imports declined significantly during the period of investigation, while overall imports
increased.
5  The USITC rightly concluded that imports from Canada did not contribute importantly to
the serious injury.  Based on this conclusion, the United States exempted imports from Canada from
the safeguard measure.
11. The separate USITC examination served as the basis for excluding imports from Canada from
the application of the safeguard measure.  The USITC, unlike the process followed in Argentina,
investigated not only whether serious injury or the threat thereof was caused by imports from
all sources, it also conducted a separate examination of imports from Canada and Mexico.  In this
separate examination, the USITC concluded that imports from Canada did not contribute importantly
to the serious injury.  On the basis of this process, the United States was therefore justified inexcluding Canada from its safeguard measure.
12. The methodology used by the United States thus excludes a NAFTA member from a
safeguard measure only after having made a separate determination concerning the imports from that
member and having concluded that imports from that source did not contribute importantly to the
injury.  The United States applied this methodology in the wheat gluten investigation.  If Canadian
imports had contributed importantly to the serious injury, then presumably they would not have been
excluded from the safeguard measure.  This last distinction is very important and distinguishes clearly
the USITC methodology from the facts of the Argentina – Footwear  c a s e ,  a s  w e l l  a s  f r o m  t h e
conclusions of the Appellate Body in the same case.
                                                     
3 Argentina - Footwear , Report of the AB, AB-1999-7, para. 113.
4 Argentina - Footwear , Report of the AB, AB-1999-7, para. 114 and 151 (d).
5 USITC Report, submitted as US Exhibit 4, p. I-19.WT/DS166/R
Page 392
3. Conclusion
13. Accordingly, we respectfully submit to the Panel that the USITC findings and
recommendations regarding imports of wheat gluten from Canada, as well as the subsequent US
decision to exempt Canada from the safeguard measure on wheat gluten, are fully consistent with the
WTO obligations of the United States.
__________WT/DS166/R
Page 393
ATTACHMENT 3-2-3
REPLIES OF CANADA TO QUESTIONS
FROM THE PANEL AND THE EUROPEAN COMMUNITY
(17 January 2000)
TABLE OF CONTENTS
Page
1. The Questions................................................................................................................ .. 393
2. Response by Canada....................................................................................................... 394
1. The Questions
The Panel has asked Canada the following questions:
Q.1. In the United States first written submis sion (para. 84), the United States asserts:
"While the United States conducted a global investigation and examined imports from all
sources, its determination did not attribute injury from NAFTA imports to third countries"  We
also note that in the ITC report (p I-18), it  states:  "Section 311 of the NAFTA Implementation
Act provides that if the Commission makes an "affirmative injury determination in an
investigation under section 202 of the Trade Act …", the Commission must also "find" whether
- (1) imports of the Article from a NAFTA country, considered individually, account for a
substantial share of total imports;  and (2) imports of the Article from a NAFTA country …
contribute importantly to the serious injury, or threat thereof, caused by imports".
Is the Panel therefore correct in understanding that imports from Canada were taken into
account in order to reach a finding of serious in jury, but that a separate causation analysis was
then performed on imports from Canada?  If so, what is the legal basis in the Safeguards
Agreement for such a separate causation analysis?
Q.2. Is the exclusion of Canada from the application of the United States wheat gluten
safeguard measure based on, or related to, Ar ticle XXIV of GATT 1994?  If so, in what way?
In addition, the  European Commission (EC) has asked:
Q.1. The EC should welcome furt her elaboration from Canada on its view that the AB report
in Argentina – Footwear  was, in its opinion, confined to the circumstances of that case, and on
how this in Canada’s opinion is consistent with Article 2(1) of the SA, and in particular its
footnote No. 1, and the text of Article 2.2 that reads as follows:
"Safeguard measures shall be applied to a product being imported irrespective
of its source ". (emphasis added)WT/DS166/R
Page 394
2. Response by Canada
1. The United States excluded Canada from the US wheat gluten safeguard measure, on the
basis of Canada’s membership in the North American Free Trade Agreement (NAFTA) and after
having performed a separate examination of imports from Canada and Mexico.
2. With respect to the legal basis in the Safeguards Agreement for such a "separate causation
analysis", Canada notes that there is nothing in the Safeguards Agreement preventing such an
analysis.  Articles 3 and 4 of the Agreement identify some general parameters for the conduct of the
injury investigation.  These Articles do not, in any way, imply that a separate analysis is prohibited.
3. A further point to recognize in this respect is that the interpretation of any particular article of
a WTO agreement cannot be conducted in isolation.  It is a well-established principle that the WTOagreements form a single undertaking.  Therefore, all WTO obligations are cumulative and Members
must comply with all of them simultaneously.
1
4. Moreover, the text of the Safeguards Agreement itself indicates that its provisions, andArticle 2.2 of the Safeguard Agreement in particular, are not to be considered in isolation from
Articles XIX and XXIV of GATT 1994.  Footnote 1 to Article 2.1 of the Safeguards Agreement
states, inter alia , that "Nothing in this Agreement prejudges the interpretation of the relationship
between Article XIX and paragraph 8 of Article XXIV of GATT 1994." 
2  The negotiators of the
Safeguards Agreement clearly recognized that there was a special relationship between Articles XIX
and XXIV:8 of GATT 1994 and that the Safeguards Agreement was to be interpreted consistently
with that relationship as it stood.  Thus the Safeguar ds Agreement, read in conjunction with the other
relevant WTO provisions, leaves open the possibility that, as the United States has done in this case
pursuant to Article 802 of the NAFTA, members of an FTA may exclude other members from theapplication of a safeguard measure.
3
5. We wish to underscore that none of the Parties in this case have challenged this principle.4
6. Regarding the question posed by the EC, Canada’s view is that the facts of this case are
fundamentally different from those under consideration in the Argentina – Footwear case.
                                                     
1 Korea – Definitive Safeguard Measure on Imports of Certain Dairy Products, Report of the Appellate
Body, WT/DS98/AB/R, 14 December 1999, para. 74;  Argentina – Safeguard Measures on Imports of Footwear(Argentina – Footwear), Report of the Appellate Body, WT/DS121/AB/R, 14 December 1999, paras. 76-98.This finding of the Appellate Body is of course consistent with the fundamental rule of treaty interpretation asset out in Article 31(1) of the Vienna Convention on the Law of Treaties, done at Vienna, 23 May 1969, 1155U.N.T.S. 331.
2 We note that the Appellate Body in Argentina - Footwear , para. 106-108, commented that the
footnote only applies where customs unions take action,  not the Member State.  A plain reading of the text
indicates that these comments would not apply to the last sentence of the Footnote, the language of whichclearly suggests a general application to all provisions of  the Safeguards Agreement, with no exception.  In any
event, the Appellate Body’s reasoning in paras. 84-95 in  Argentina – Footwear would confirm that the
Safeguards Agreement does not change or overrule the established meaning of Article XIX of GATT 1994,
including its relationship with to Article XXIV:8.
3 This analysis is not inconsistent with the analysis of the Panel in Argentina – Footwear , Report of the
Panel, WT/DS121/R, 25 June 1999, para. 8.97.
4 Argentina – Footwear , Report of the AB, para. 114. The Appellate Body itself stated in Argentina –
Footwear  that, "as the issue is not raised in this appeal, we make no ruling on whether, as a general principle, a
member of a customs union can exclude other members of that customs union from the application of a
safeguard measure"WT/DS166/R
Page 395
7. The Appellate Body decision in the Argentina – Footwear  case concluded that:
"In applying safeguard measures on the basis of this investigation in this case ,
Argentina was also required under Article 2.2 to apply those measures to imports
from all sources, including those from othe r MERCOSUR states.  On the basis of this
reasoning, and on the facts of this case, we find that Argentina's investigation, whichevaluated whether serious injury or the threat thereof was caused by imports from
all sources, could only lead to the imposition of safeguard measures on imports from
all sources.  Therefore, we conclude that Argentina's investigation, in this case,
cannot serve as a basis for excluding impor ts from other MERCOSUR member States
from the application of the safeguard measures.
5  (emphasis added )
8. "This investigation in this case" refers to the fact that Argentina had investigated and found
injury from all sources, including and in partic ular, MERCOSUR sources.  Argentina did not conduct
any separate analysis with respect to its MERCOS UR partners.  Therefore, under Article 2.2 of the
Safeguards Agreement, Argentina had to apply its safeguard measure to injury from those sources.  In
contrast, in the present case, the United States found, on the basis of its investigations, that Canadianimports were not contributing importantly to the serious injury.  Accordingly, it is fully consistent
with Article 2.2 of the Safeguards Agreement, interpreted in accordance with Footnote 1 and the
decision in Argentina - Footwear , for the United States to exclude Canadian imports from the
application of its safeguard measure.
__________
                                                     
5 Argentina - Footwear , Report of the AB, AB-1999-7, para. 113.WT/DS166/R
Page 396
ATTACHMENT 3-3-1
SUBMISSION OF NEW ZEALAND
(16 December 1999)
TABLE OF CONTENTS
Page
1. Factual Background........................................................................................................ 396
2. New Zealand’s Interest................................................................................................... 396
3. Standard of Review......................................................................................................... 39 7
4. Confidential Information ............................................................................................... 397
5. Causation .................................................................................................................... ..... 398
6. Application of Remedy ................................................................................................... 398
7. Necessity.................................................................................................................... ....... 398
8. Notifi cation ................................................................................................................. ..... 399
9. Consultation................................................................................................................. .... 399
10. Conclusion .................................................................................................................. ..... 399
1. Factual Background
1. Following a safeguards investigation initiated on 1 October 1997 the United States imposed a
safeguard measure on imports of wheat gluten on 1 June 1998 which consisted of a quantitative
restriction on those imports.  The United States decision to impose this safeguard measure was
notified to Members through the Committee on Safeguards on 4 June 1998.
2. On 3 June 1999, following consultations with the United States on the wheat gluten safeguard
measure, the European Communities requested the establishment of a panel to rule on the consistency
of the measure with the WTO Agreement on Safeguards (the Safeguards Agreement).  A panel was
established on 26 July 1999.  New Zealand, as well as Australia and Canada, reserved its third party
rights in this panel.
2. New Zealand’s Interest
3. New Zealand has a systemic interest in the issues before the panel.  The Safeguards
Agreement was one of the key reform commitments achieved during the Uruguay Round.  The
Agreement, which was developed in response to concerns over the use of "grey-area measures", was
intended to clarify and reinforce the disciplines of GATT 1994 and specifically those of Article XIX.As stated in the preamble, the Agreement also  aimed "to re-establish multilateral control over
safeguards and eliminate measures that escape such control", and to encourage "structural adjustment
and the need to enhance rather than limit competition in international markets".
4. In broad terms, safeguard measures under the Agreement take the form of the suspension of
concessions or obligations, which can consist of quantitative import restrictions or increases of dutiesbeyond bound rates.  Accordingly, the Safeguards Agreement falls into the narrow category of WTO
provisions allowing for suspension or modification of applicable WTO obligations, subject to meeting
specific legal requirements.  As an exporting nation, the proper implementation of the legal
requirements of the Safeguards Agreement is of fundamental importance to New Zealand.WT/DS166/R
Page 397
5. Against this background, New Zealand wishes to make the following comments on certain
issues raised in the first submissions of the European Communities and the United States.
3. Standard of Review
6. In the consideration of safeguard measures, panels are not authorised to review de novo  the
determination made by a domestic investigating authority.1  Rather, the appropriate standard of review
by a panel is to objectively assess whether the Member imposing the safeguard measure has examined
the relevant facts, whether it has adequately explained its findings and conclusions, whether the facts
support the determination, and consequently whether the determination made is consistent with the
obligations of that Member under the Safeguards Agreement.
7. In its submission, the United States stated that:
Article 4.2(c) of the Safeguards Agreement requires competent authorities to publish
an analysis of the case that demonstrates the relevance of the factors examined.
Consequently, the Safeguards Agreement does not impose an obligation on the
competent authority to explain why it found some factors irrelevant and thus did not
rely on them.2
However, relevance and irrelevance are opposite sides of the same coin. Something that is relevant
cannot be irrelevant, and vice versa.  Accordingly, an assessment of whether all relevant factors have
been adequately examined in a safeguards investigation necessarily requires an assessment of whether
those factors considered irrelevant were in fact not relevant. In order for the panel to carry out such an
assessment, explanations must be given for the co nclusions of the competent authority that certain
factors were not relevant.  A Member cannot justify its refusal to consider factors on the basis simply
of a claim that they are irrelevant.
4. Confidential Information
8. In making safeguards investigations, a Member may consider information from the petitioners
of a confidential nature.3  New Zealand does not contest that the protection of such confidential
information, including from the respondents in the safe guards investigation, may be appropriate at the
time of the investigation. However, New Zealand considers that a Member cannot justify a measure as
being consistent with its obligations under the WTO without disclosing to the panel and the parties the
information on which it relies.  A panel cannot determine whether a measure is in conformity with the
Safeguards Agreement without access to all relevant information.4
9. The Appellate Body in Canada – Aircraft5 has recently made clear that the provisions of the
Understanding on the Rules and Procedures of Di sputes Settlement (DSU) for the protection of
confidential information are adequate to protect that information in dispute settlement proceedings.
New Zealand therefore considers that parties must release to a panel and to the parties involved all
information, including confidential information, on which it relies to justify its safeguard measure.
                                                     
1 See United States - Restrictions on Imports of Cotton and Man-Made Fibre Underwear
(WT/DS24/R), 8 November 1996, paras 7.12 and 7.13;  United States - Measure Affecting Imports of Woven
Wool Shirts and Blouses from India (WT/DS33/R), 6 January 1997, para 7.17;  Korea - Definitive SafeguardMeasure on Imports of Certain Dairy Products (WT/DS98/R), 21 June 1999, p 166;  Argentina - SafeguardMeasures on Imports of Footwear (WT/DS121/R), 25 June 1998, paras 8.117 to 8.121.
2 First submission of the United States, para 58.
3 Safeguards Agreement, Article 3.2.
4 See also para 49 of the first submission of the European Communities.
5 Canada - Measures Affecting the Export of Civilian Aircraft (WT/DS70/AB/R), 2 August 1999.WT/DS166/R
Page 398
5. Causation
10. The Safeguards Agreement provides in Article 2.1 that:
A Member may apply a safeguard measure to a product only if that Member has
determined, pursuant to the provisions set out below, that such product is being
imported into its territory in such increased quantities, absolute or relative to domesticproduction, and under such conditions as to cause or threaten to cause  serious injury
to the domestic industry that produces like or directly competitive products.
This provision does not say that increased imports need only be "a" cause, a partial cause, or just a
substantial cause of serious injury to the domestic industry. It requires that serious injury to the
domestic industry must be caused   by increased imports.
11. Article 4.2(b) of the Agreement provides that:
When factors other than increased imports are causing injury to the domestic industry
at the same time, such injury shall not be attributed to increased imports.
6
The United States claimed that this provision does not require Members imposing a safeguard
measure to quantify and deduct from total injury the specific effects caused by other factors.7  It cited
in support United States - Salmon8, a case that examined Article 3:4 of the Tokyo Round Anti-
Dumping Code which contains similar language to that in Article 4.2(b) of the Safeguards Agreement.
The panel in United States - Salmon  said that, in making its determination on causation, a Member
need not seek out on its own initiative other possible factors of injury beyond those raised by the
parties.  The panel did not, however, state or imply that the language of Article 3:4 of the Anti-
Dumping Code meant that a Member need not quantify or deduct from total injury the specific effectsof other factors shown to have caused injury.
9
6. Application of Remedy
12. Once the legal conditions for taking a safeguard measure have been established, the
Safeguards Agreement imposes obligations on Members with regard to the application of theparticular safeguard measure selected.  These include restrictions on the extent of application of the
measure (Article 5), and procedural requirements to notify the measure and consult with affected
Members (Article 12).  These obligations apply to measures actually taken by Members and not to
measures previously considered as possible measures to be taken, or measures recommended by the
competent authorities.
10
                                                     
6 This language first appeared in negotiating drafts of the Safeguards Agreement in the "Brussels text"
of 6 December 1990.
7 First submission of the United States, paras 130 and 131.
8 United States - Imposition of Anti-Dumping Duties on Imports of Fresh and Chilled Atlantic Salmon
from Norway (ADP/87), BISD 41s/229, adopted by the Committee on Anti-Dumping Practices on27 April 1994.
9 United States - Imposition of Anti-Dumping Duties on Imports of Fresh and Chilled Atlantic Salmon
from Norway  (ADP/87), BISD 41s/229, adopted by the Committee on Anti-Dumping Practices on
27 April 1994, paras 550 to 555.
10  See the first submission of the European Communities, paras 106, 107, 115, and 116.WT/DS166/R
Page 399
7. Necessity
13. Thus, the obligation in Article 5.1 of the Safeguards Agreement to apply safeguard measures
only to the extent necessary to prevent or remedy serious injury and to facilitate adjustment is not
fulfilled if it is applied to a measure previously considered as a possible measure to take, or
recommended by the competent authorities, which is not then imposed without modification.  Theobligation is only fulfilled if it is applied to the actual safeguard measure imposed by a Member.
11
8. Notification
14. Articles 12.1 and 12.2 of the Safeguards Agreement require a Member "proposing to apply" a
safeguard measure to notify that measure to the Committee on Safeguards, and to provide the
Committee with all pertinent information on the measur e.  This obligation to notify applies to the
actual measure imposed, and is not fulfilled by notification of a different measure from the one
imposed.12
Furthermore, Article 12 of the Agreement imposes the obligation to notify on "the Member proposingto apply a measure".  These words indicate that the actual measure imposed must be notified to the
Committee on Safeguards prior to that measure being imposed.  After the measure has been imposed,the Member will no longer be "proposing to apply" the measure, but rather will be "applying" the
measure.
13
9. Consultation
15. Article 12.3 of the Safeguards Agreement requires a Member imposing a safeguard measure
to provide adequate opportunity for prior consultations with Members having a substantial interest in
the measure as exporters of the product concerned.  Those consultations must have as an objective,inter alia , reaching an understanding on ways to maintain a substantially equivalent level of
concessions and other obligations to that existing under GATT 1994 between it and the exporting
Members which would be affected by the measure.
14
16. In these circumstances too, the obligation contained in Article 12.3 relates to the actualsafeguard measure imposed.  Adequate opportunity for meaningful consultations on that measuremust be provided prior to the measure coming into effect.  The consultations must also address the
issue of maintaining a substantially equivalent level of concessions.
15
10. Conclusion
17. The Safeguards Agreement seeks to ensure that emergency action by Members is taken only
in a form consistent with their WTO obligations.  As such, the Agreement allows Members to suspendobligations and modify and withdraw concessions, provided that in doing so they fulfil the
                                                     
11  See the first submission of the European Communities, paras 106, 107, 115, and 116.
12  See the first submission of the European Communities, paras 163 to 170.
13 See the first submission of the European Communities, paras 165 and 168.
14 The objective of maintaining a substantially equivalent level of concessions is set out in Article 8.1
of the Safeguards Agreement.
15 See the first submission of the European Communities, paras 171 to 178.WT/DS166/R
Page 400
requirements of the Agreement.  These include requirements that safeguard measures may be used
only to address serious injury caused by increased imports, and that safeguard measures must be
applied only to the extent necessary to prevent or remedy serious injury and to facilitate adjustment.WT/DS166/R
Page 401
ATTACHMENT 3-3-2
ORAL STATEMENT OF NEW ZEALAND
(21 December 1999)
TABLE OF CONTENTS
Page
1. Introduction................................................................................................................. .... 400
2. The Safeguards Agreement............................................................................................ 400
3. Legal Arguments............................................................................................................. 4 00
4. Conclusion ................................................................................................................... .... 402
1. Introduction
1. New Zealand’s Oral Statement today is a brie f synopsis of our written third party submission
which was forwarded to the Panel and other parties on 16 December 1999.  It attempts to highlight
some of the key issues that were discussed more fully in that submission.
2. The Safeguards Agreement
2. The Safeguards Agreement establishes rules for the application of safeguard measures as
provided for in GATT Article XIX.  It was a key achievement of the Uruguay Round, aimed at
meeting concerns over the use of "grey-area measures" by clarifying and reinforcing the disciplines of
that Article, re-establishing multilateral control ov er safeguards and eliminating measures that escape
such control, encouraging structural adjustment, and enhancing rather than limiting competition in
international markets.
3. The Safeguards Agreement allows safeguard measures in the form of the suspension of
GATT concessions or obligations, by quantitative restrictions or by tariff increases beyond bound
rates.  Accordingly, it falls into the narrow category of WTO provisions allowing for suspension ormodification of applicable WTO obligations, provided specific legal requirements are met.
4. As an exporting nation, the proper implementation of the legal requirements of the Safeguards
Agreement is therefore of fundamental importance to New Zealand.
3. Legal Arguments
5. Against this background, New Zealand wishes to make a few comments on certain issues
raised in the first submissions of the European Communities and the United States.
3.1 Standard of Review
6. It is now well-established that in the consideration of safeguard measures, panels are not
authorized to review de novo  the determination made by a domestic investigating authority.  Rather,
the appropriate standard of review by a panel is to objectively assess whether the Member imposing
the safeguard measure has examined the relevant facts, whether it has adequately explained its
findings and conclusions, whether the facts support the determination, and consequently whether theWT/DS166/R
Page 402
determination made is consistent with the obligations of that Member under the Safeguards
Agreement.
7. For the purposes of such an assessment, relevance and irrelevance are opposite sides of the
same coin.  Something that is relevant cannot be irrelevant, and vice versa.  An assessment of whether
all relevant factors have been adequately examined in a safeguards investigation necessarily requiresan assessment of whether those factors considered irrelevant were in fact not relevant.  In order for the
panel to carry out such an assessment, explanations must be given for the conclusions of thecompetent authority that certain factors were not relevant.  A Member cannot justify its refusal to
consider factors on the basis simply of a claim that they are irrelevant.
3.2 Confidential Information
8. In making safeguards investigations, a Member may consider information from the petitioners
of a confidential nature.  Article 3.2 of the Safeguards Agreement provides for the protection of that
confidential information, including from the responde nts in the safeguards investigation, at the time of
the investigation.  However, a Member cannot justify a measure before a panel as being consistentwith its obligations under the WTO without disclosing to the panel and the parties the information on
which it relies.  A panel cannot determine whether a measure is in conformity with the Safeguards
Agreement without access to all the relevant information.
9. The Appellate Body has recently made clear that  the provisions of the DSU for the protection
of confidential information are adequate to protect that information in dispute settlement proceedings.
New Zealand therefore considers that parties must release to a panel and to the parties involved all
information, including confidential information, on which it relies to justify its safeguard measure.
3.3 Causation
10. Article 2.1 of the Safeguards Agreement provides that a safeguard measure may be applied to
a product only where that product is being imported into its territory in such increased quantities and
under such conditions as to cause or threaten to cause  serious injury to the domestic industry that
produces like or directly competitive products.  It does not say that increased imports need only be "a"
cause, a partial cause, or just a substantial cause of serious injury, or threat thereof, to the domestic
industry.  It says that serious injury, or threat thereof, to the domestic industry must be caused  by
increased imports.
11. Article 4.2(b) of the Agreement then says that when factors other than increased imports are
causing injury to the domestic industry at the same time, such injury shall not be attributed to
increased imports.  The panel ruling in the case of United States - Salmon  considered similar language
in the context of Article 3:4 of the Tokyo Round An ti-Dumping Code.  That panel said that a Member
making its determination on causation need not seek out on its own initiative other possible factors of
injury beyond those raised by the parties.  Contrary to the assertion contained in the submission of theUnited States, however, the panel did not state or imply that this language means a Member need not
quantify or deduct from total injury the specific effects of other factors shown to have caused injury.
3.4 Application of Remedy
12. Once the legal conditions for taking a safeguard measure have been established, the
Safeguards Agreement imposes obligations on Members with regard to the application of the
particular safeguard measure selected.  These include restrictions on the extent of application of the
measure in Article 5, and procedural requirements to notify the measure and consult with affected
Members in Article 12.  These obligations apply to safeguard measures actually taken by MembersWT/DS166/R
Page 403
and not to measures previously considered as possible measures to be taken, or measures
recommended by the competent authorities but not imposed in the form recommended.
13. For example, the obligation in Article 5.1 of the Safeguards Agreement to apply safeguard
measures only to the extent necessary to prevent or remedy serious injury and to facilitate adjustment
is only fulfilled if it is applied to the actual safeguard measure imposed by a Member.  Similarly, theobligation in Articles 12.1 and 12.2 of the Safeguards Agreement on a Member proposing to apply a
safeguard measure to notify that measure applies to the actual measure imposed, and is not fulfilled by
notification of a different measure from the one imposed.  In addition, the obligation contained in
Article 12.3 to provide adequate opportunity for prior consultations with Members having a
substantial interest in the measure relates to the actual safeguard measure imposed.  Adequateopportunity for meaningful consultations on that measure must be provided prior to the measure
coming into effect.
4. Conclusion
14. The Safeguards Agreement seeks to ensure that emergency action by Members is taken only
in a form consistent with their WTO obligations.  As such, the Agreement allows Members to suspendobligations and modify and withdraw concessions, provided that in doing so they fulfil the
requirements of the Agreement.  These include requirements that safeguard measures may be used
only to address serious injury caused by increased imports, and that safeguard measures must be
applied only to the extent necessary to prevent or remedy serious injury and to facilitate adjustment.
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Page 404
ATTACHMENT 4
PROCEDURES GOVERNING PRIVATE CONFIDENTIAL INFORMATION
(1 February 2000)
I. BASIC PRINCIPLE
1. The treatment of information as "private confidential" under these procedures imposes a
substantial burden on the Panel and the parties.  The indiscriminate designation of information as
"private confidential" could limit the ability of a party to include fully in its litigation team
individuals who have particular knowledge and expertise relevant to presenting the party's case,impede the work of the Panel and complicate the Panel's task in formulating credible public findings
and conclusions.  Accordingly, while the Panel reco gnizes that parties have a legitimate interest in
protecting sensitive "private confidential" information, the Panel expects that parties will exercise
the utmost restraint in designating information as "private confidential".
II. DEFINITIONS
"approved person” means:
(i) a Panel member;(ii) a representative; or(iii) a Secretariat employee.
“capital city office” means the buildings and grounds of the United States Trade Representative in
Washington, DC, United States of America, and buildings and grounds of the European Commission
in Brussels, Belgium.
“conclusion of the Panel” means when, pursuant to DSU Article 16.4, the Panel report is
(i) adopted;(ii) not adopted;(iii) the Panel report is appealed and the report of the Appellate Body is adopted; or
when the authority for establishment of the Panel lapses pursuant to DSU Article 12.12.
“private confidential information” means any inform ation that is designated as such by the party
submitting the information, that is not otherwise available in the public domain, and that was
identified by the United States International Trade Commission (the "ITC") as confidential business
information for the purposes of ITC Investigati on No. TA-201-67 concerning Wheat Gluten and, forWT/DS166/R
Page 405
this reason, was deleted from the public version of the ITC Report of March 1998 (Publication
3088).1
“designated as private confidential" means:
(i) for printed information, clearly marked with the notation ‘PRIVATE
CONFIDENTIAL INFORMATION’ and with the name of the party that first
submitted the information;
(ii) for binary-encoded information, clear ly marked with the notation ‘PRIVATE
CONFIDENTIAL INFORMATION’ on a labe l on the storage medium, and clearly
annotated in the binary-encoded files with the notation ‘PRIVATE
CONFIDENTIAL INFORMATION’ and with the name of the party that first
submitted the information; and
(iii) for uttered information, declared by the speaker to be “Private Confidential
information” prior to the disclosure, and id entified with the name of the party that
first submitted the information.
“dispute” means the complaint brought by the European Communities concerning the imposition by
the United States of the definitive safeguard measure in the form of a quantitative limitation on
imports of wheat gluten effective as of 1 June 1998, WT/DS166, entitled "United States – DefinitiveSafeguard Measures on Imports of Wheat Gluten from the European Communities".
“DSU” means the WTO Understanding on Rules a nd Procedures Governing the Settlement of
Disputes.
"Geneva mission" means the buildings and grounds of the United States and the European
Communities at 1-3 Avenue de la Paix, 1211 Geneva and 37-39 Rue de Vermont, 1202 Geneva,
respectively.
“information” means:
(i) printed information;(ii) binary-encoded information stored in computer diskettes, computer disc drives,
CD roms, or other electronic media; or
(iii) uttered information.
“Panel” means the WTO panel established pursuant to DSU Article 6 by the 26 July 1999 decision
of the WTO Dispute Settlement Body to examine the dispute.
“Panel meeting” means a substantive meeting of the Panel with the parties or any interim review
meeting of the Panel with the parties, as described in the working procedures of DSU Appendix 3.
“Panel member” means a person serving on the Panel.“Panel process” means the process of the Panel as described in relevant provisions of the DSU.
                                                     
1 For greater clarity, such information shall not include the additional information submitted by the
United States in US-Exhibit 10 in this dispute.WT/DS166/R
Page 406
“party” means the European Communities or the United States.
 “premises of the WTO” means buildings and grou nds of the WTO at Centre William Rappard, Rue
de Lausanne 154, Geneva, Switzerland.
“representative” means any person that a Member selects to act as its representative, counsel or
consultant during the dispute and whose selection as such has been notified to the Chairman of the
Panel and to the other party, but in no circumstances shall this definition include an employee,
officer or agent of a private company engaged in wheat gluten production.
“Secretariat” means the Secretariat of the World Trade Organization.“Secretariat employee” means a person employed or appointed by the Secretariat who has been
authorized by the Secretariat to work on this dispute and whose authorization has been notified to theChairman of the Panel, including without limiting th e generality of the foregoing, interpreters and
transcribers present at the Panel hearings.
“secure location” means a locked storage receptacle on the premises of the WTO chosen by the
Secretariat to provide secure storage for private confidential information.
“submit” means:
(i) the filing by a party of printed or binary-encoded information at the Secretariat
during the dispute;
(ii) the filing by a party of printed or binary-encoded information with the Panel during
a Panel hearing; or
(iii) the uttering of information during a Panel hearing.
III. SCOPE
1. These procedures apply to all private confidential  information submitted during the Panel
process, but do not apply to a party with respect to private confidential information first submitted
by that party, including in derivative form.
IV. OBLIGATION ON PARTIES
1. Each party shall ensure that its representatives comply with these procedures.
V. SUBMISSION BY A PARTY
1. When submitting information, a party may designate all or any part or parts of that
information as private confidential information.  Pr ivate confidential information shall be submitted
in three copies:  one copy of the private confidenti al information shall be provided to the Secretariat,
and two copies shall be provided to the other party.  Of the two copies for the other party, one copy
is for that party’s Geneva mission, and one copy is for that party’s capital city office.
2. Where a submission by a party incorporates private confidential information first submitted
by the other party, that submission shall clearly identify all such information, as set forth in Article II
of these procedures concerning “designated as private confidential”.WT/DS166/R
Page 407
3. If, taking into the account the Basic Principle stated in Article I, the Panel considers that a
party has designated as private confidential info rmation which is not reasonably entitled to such
treatment, the Panel may decline to consider such information.  In such a case, the party submitting
the information may, at its discretion:
(i) withdraw the information, in which case the Panel and the other party shall promptly
return the information to the party submitting it; or
(ii) withdraw the designation of the information as private confidential.
4. When submitting printed or binary-encoded private confidential information, the party shall
also provide:
(i) a non-private confidential edited version, redacted in such a manner as to convey a
reasonable understanding of the substance of the information;
(ii) a non-private confidential summary in sufficient detail to convey a reasonable
understanding of the substance of the information; or
(iii) in exceptional circumstances, a written statement:
(a) that such a non-private confidential edited version or non-private confidential
summary cannot be made, or
(b) that such a non-private confidential edited version or non-private  confidential
summary would disclose facts that the party has a proper reason for wishing tokeep private confidential.
5. If the Panel considers that a non-private confidential edited version or summary does not
fulfill the requirements of paragraph 4(i) or (ii), or that such exceptional circumstances as justify a
statement pursuant to paragraph 4(iii) do not exis t, the Panel may decline to consider the private
confidential information in question.   In such a case, the party submitting the information may, at its
discretion,
(i) withdraw the information, in which case the Secretariat and the other party shall
promptly return the informatio n to the party submitting it; or
(ii) comply with the provisions of paragraph 4 to the satisfaction of the Panel.
6. When uttering private confidential information at a Panel meeting, the speaker shall also
provide a brief non-private confidential oral statement in sufficient detail to convey a reasonableunderstanding of the substance of the information that will be uttered.
VI. STORAGE
1. The Secretariat shall store all private confidential information submitted in the secure
location when not in use by an approved person.
2. Each party shall store all private confidential information submitted to it by the other party
in a locked storage receptacle, to which only approved persons have access, at the premises of its
Geneva mission or its capital city office, when not in use by an approved person.WT/DS166/R
Page 408
3. An approved person shall take all necessary precautions to safeguard private confidential
information when in use and when being stored.
VII. VIEWING AND SUMMARIZING
1. Private confidential information submitted by a party and stored at the Geneva mission or
capital city office of the other party may only be viewed by an approved person acting as
representative of that other party.
2. An approved person viewing or hearing private confidential information may take written
summary notes of that information for the sole purpose of the Panel process.
VIII. COPYING, DISTRIBUTION AND REMOVAL
1. Private confidential information shall not be copied, distributed, or removed from the
premises of the WTO, or from the premises of a party's Geneva mission, or from the premises of a
party’s capital city office, except as specifically provided in these Procedures.
2. Notwithstanding paragraph 1. above, a party may bring with it to a Panel meeting, for the
sole purpose of that meeting, one of the two copies of private confidential information that it has
received from the other party under these procedures, and shall immediately thereafter return anyand all such information to the locked storage receptacle at its premises.
3. Notwithstanding paragraph 1. above, a Panel member may make and remove from the
premises of the WTO a copy of private confidential information.  Any copies of private confidential
information removed from the premises of the WTO by a Panel member shall be used exclusively bythat Panel member for the purpose of working on the dispute, and shall be returned to the Secretariat
upon conclusion of the Panel.  Copies of private confidential information removed from the premises
of the WTO by a Panel member shall be stored in a locked receptacle.
IX. DISCLOSURE AT A PANEL MEETING
1. A party that wishes to submit private confidential information during a Panel meeting shall
so inform the Panel prior to doing so.  The Panel shall exclude persons who are not approved
persons from the meeting for the duration of the submission of such information.
X. PANEL REPORT
1. The Panel shall not disclose private confidential information in its report, but may make
statements of conclusion drawn from such information.
XI. TAPES AND TRANSCRIPTS
1. Any tapes and transcripts of Panel meetings at which private confidential information is
uttered shall be treated as private confidential information under these procedures.
XII. RETURN OR DESTRUCTION
1. After the conclusion of the Panel, the Secretariat and the parties shall:WT/DS166/R
Page 409
(i) return any printed or binary-encoded private confidential information (including any
notes taken pursuant to paragraph VIII:2 above) in their possession to the party that
first submitted such private confidential in formation, or certify in writing that any
such private confidential information has been destroyed, unless that party agrees
otherwise;
(ii) destroy all tapes and transcripts of the Panel hearings that contain private
confidential information and certify in wr iting that this has been done, unless the
parties mutually agree otherwise.
2. If the Panel Report is appealed, the Secretariat shall transmit any printed or binary encoded
private confidential information, plus all tapes and transcripts of the Panel hearings that contain
private confidential information, to the Appellat e Body as part of the record of the Panel
proceedings.  The Secretariat shall transmit such information to the Appellate Body separately from
the rest of the record and shall inform the Appellate Body of the special procedures that the Panelhas applied with respect to such private confidenti al information.  The parties shall comply with any
directive of the Appellate Body regarding disclosure of private confidential information to parties or
third parties as the Appellate Body may deem appropriate.
__________