WORLD TRADE
ORGANIZATIONWT/DS98/R
21 June 1999
(99-2101)
Original:  English
KOREA – DEFINITIVE SAFEGUARD
MEASURE ON IMPORTS OF CERTAIN
DAIRY PRODUCTS
Report of the Panel
The report of the Panel on Korea – Definitive Safeguard Measure on Imports of Certain Dairy
Products is being circulated to all Members, pursuant to the DSU.  The report is being circulated as anunrestricted document from 21 June 1999. Pursuant to the Procedures for the Circulation and
Derestriction of WTO Documents (W T/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/DS98/R
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TABLE OF CONTENTS
Page
I. INTRODUC TION ................................................................................................................. .1
A. B ACKGROUND .............................................................................................................1
B. E STABLISHMENT AND COMPOSITION OF THE PANEL ..................................................1
C. P ANEL PROCEEDINGS ..................................................................................................1
II. FACTUAL A SPECTS............................................................................................................2
III. FINDINGS AND RECOMMENDATIONS REQUESTED BY TH E PARTIES..................2
A. E UROPEAN COMMUNITY .............................................................................................2
B. K OREA ........................................................................................................................3
IV. MAIN ARGUMENTS OF  THE PARTIES............................................................................3
A. P ROCEDURAL OBJECTIONS .........................................................................................3
1. Lack of commercial interest and good faith by the European
Communities .................................................................................................3
2. Inadequacy of the EC request for establishment of a panel ..........................4
3. The nature of the EC case and its request for rulings by the Panel...............7
B. S UBSIDIARY ISSUES ..................................................................................................11
1. Burden of proof and standard of review......................................................11
2. What are the appropriate documents to be considered by the Panel in
evaluating the analysis perfor med during the in vestigation? ......................22
C. C LAIM UNDER ARTICLE  XIX:1(a) OF GATT............................................................26
D. C LAIM UNDER ARTICLE  XIX:1(a) OF GATT AND ARTICLE  2.1 OF THE
AGREEMENT ON SAFEGUARDS .................................................................................46
E. K OREA 'S APPLICATION OF SAFEGUARD MEASURES TO AGRICULTURAL
PRODUCTS .................................................................................................................49
F. C LAIM UNDER ARTICLE  4.2(a) OF THE AGREEMENT ON SAFEGUARDS ....................51
G. C LAIM UNDER ARTICLE  4.2(b) OF THE AGREEMENT ON SAFEGUARDS ...................96
H. C LAIMS UNDER ARTICLE  5.1 OF THE AGREEMENT ON SAFEGUARDS .....................121
I. C LAIMS UNDER ARTICLE  12 OF THE AGREEMENT ON SAFEGUARD .......................137
V. THIRD PARTY ARGUMENTS ........................................................................................156WT/DS98/R
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A. U NITED STATES ......................................................................................................156
VI. INTERIM REVIEW ...........................................................................................................160
VII. FIND INGS................................................................................................................... .......160
A. P ROCEDURAL MATTERS .........................................................................................160
1. Insufficiency of the EC Request for Establishment of the Panel ..............160
2. Lack of Econom ic Inte rest ........................................................................162
3. Submission of the OAI Report..................................................................163
4. The absence of a claim by the European Communities under Article 3
of the Agreement on Safeguards ...............................................................164
B. B URDEN OF PROOF .................................................................................................164
C. S TANDARD OF REVIEW ...........................................................................................165
D. G ENERAL PRINCIPLES OF INTERPRETATION ............................................................166
E. C LAIMS UNDER ARTICLE XIX OF GATT................................................................167
F. V IOLATION OF ARTICLE 2.1 OF THE AGREEMENT ON SAFEGUARDS - FAILURE
TO ANALYZE "UNDER SUCH CONDITIONS "..............................................................170
G. C LAIMS UNDER ARTICLE 4.2 OF THE AGREEMENT ON SAFEGUARDS ....................171
1. Korea's examination of serious in jury to the domestic industry ...............171
2. Korea's examination of the causal link between increased imports and
serious in jury.............................................................................................180
H. C LAIMS UNDER ARTICLE 5.1 OF THE AGREEMENT ON SAFEGUARDS ....................183
I. C LAIMS UNDER ARTICLE 12...................................................................................186
1. Incomplete and Untim ely Notifi cations ....................................................186
2. Claim of inadequa te consultations ............................................................194
VIII. CONCLUSIONS AND RECOMMENDAT IONS .............................................................195WT/DS98/R
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I. INTRODUCTION
A. BACKGROUND
1.1 On 12 August 1997, the European Communities requested consultations with Korea regarding
a definitive safeguard measure on imports of ce rtain dairy products (WT/DS98/1).  The European
Communities made their request pursuant to Article 4 of the Understanding on Rules and Procedures
Governing the Settlement of Disputes ("DSU" ), Article XXIII:1 of the General Agreement.
1.2 On 25 August 1997 Australia, requested to be joined in the consultations (WT/DS98/2).  The
request was accepted by Korea on 28 August 1997 (WT/DS98/3).
1.3 Pursuant to this request, the European Communities consulted with Korea in Geneva on
10 September 1997 and 16 October 1997.  Australia participated in these consultations as a third
party.  No mutually satisfactory solution was reached.
1.4 On 9 January 1998, the European Communities requested the establishment of a panel with
the standard terms of reference provided by Article 7 of the DSU (WT/DS98/4).  The European
Communities made this request pursuant to Article XXIII:2 of the General Agreement on Tariffs andTrade ("GATT"), Articles 4 and 6.1 of the DSU, a nd Article 14 of the Agreement on Safeguards.  At
the Dispute Settlement Body (“DSB”) meeting of 22 January 1998, the European Communities
informed the DSB that they were for the time being not pursuing its Panel request.
1.5 On 10 June 1998, the European Communities reiterated its request for the establishment of a
Panel.
B. E
STABLISHMENT AND COMPOSITION OF THE PANEL
1.6 At its meeting on 22 July 1998, the Dispute Sett lement Body ("DSB") established a panel
pursuant to the EC's request (WT/DS98/5).  The Panel’s terms of reference are:
To examine, in the light of the relevant pr ovisions of the covered agreements cited by
European Community in document WT/DS98/ 4 the matter referred to the DSB by the
European Community in that document and to  make such findings as will assist the
DSB in making the recommendations or in gi ving the rulings provided for in those
agreements.
1.7 The United States reserved its rights as to participate in the Panel proceedings as third party.
1.8 On 20 August 1998, the Panel was constituted with the following composition:
Chairman: Mr. Ole Lundby
Members: Ms. Leora Blumberg
Ms. Luz Elena Reyes
C. PANEL PROCEEDINGS
1.9 The Panel met with the Parties on 10/ 11 November 1998 and on 16/17 December 1998.
1.10 The Panel submitted its interim report to the parties on 3 March 1999.  On 17 March 1999,
both parties submitted written requests for the Panel to review precise aspects of the interim report.
At the request of the European Communities, the Panel held a further meeting with the parties onWT/DS98/R
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29 March 1999 on the issues identified in the written comments.  The Panel submitted its final report
to the parties on 8 April 1999.
II. FACTUAL ASPECTS
2.1 This dispute concerns definitive safeguard measures imposed by Korea on imports of
skimmed milk powder preparations ("SMPP") classified under tariff headings HS 0404.90.0000 and
1901.90.2000.  On 17 May 1998, based on a request by the National Livestock Cooperatives
Federation ("NLCF") filed on 2 May 1996, the Korean Trade Commission ("KTC") decided on the
initiation of the requested investigation.
2.2 On 11 June 1996, Korea notified the WTO Committee on Safeguards under Article 12.1(a) of
the Agreement on Safeguards regarding the KTC’s initiation of a safeguards investigation and the
reasons supporting initiation.1
2.3 On 23 October 1996, the KTC completed its Investigation Report on Industrial Injury Caused
by the Increase of Certain Dairy Product Imports.  A Notice of this fact was published in Korea’s
Official Gazette dated 11 November 1996.  Non-confidential copies of the Investigation Report on
Industrial Injury by the Office of Administration and Investigation ("OAI Report") were available onrequest prior to that date.
2.4 On 2 December 1996, Korea notified the Committee on Safeguards under Article 12.1(b) of
the Agreement on Safeguards that the KTC had made a finding of serious injury to the domestic
industry caused by the increased imports of dairy products.
2
2.5 On 21 January 1997, Korea submitted a notification under Article 12(c) of the Agreement on
Safeguards.3  The notification informed the Committee that Korea proposed to apply a safeguard
measure on imports of certain dairy products.
2.6 On 31 January 1997, Korea filed a notification pursuant to Article 9, footnote 2 of the
Agreement on Safeguards regarding the non-application of safeguard measures to developing
countries.4
2.7 The final decision by Korea to apply the safeguard measure was made, and went into effect,
on 7 March 1997 .  Notice of the application of the measure was published in Korea’s Official Gazette.
2.8 On 24 March 1997, Korea submitted a supplemental notification to the Committee on
Safeguards under Article 12(c) of the Agreement on Safeguards.5 In its notification, Korea informed
the Committee that it had taken a final decision on the application of a safeguard measure on certaindairy products.
III. FINDINGS AND RECOMMENDATIONS REQUESTED BY THE PARTIES
A. E
UROPEAN COMMUNITY
3.1 The European Communities  requested the Panel to find that Korea has violated
Article XIX:1(a) of GATT and Articles 2.1, 4.2(a), 4.2(b), 5.1 and 12(1) to (3) of the Agreement onSafeguards.
                                                     
1 G/SG/N/6/KOR/2 (1 July 1996).
2 G/SG/N/8/KOR/1 (6 December 1996).
3 G/SG/N/10/KOR/1 (27 January 1997).
4 G/SG/N/11/KOR/1 (21 February 1997).
5 G/SG/N/10/KOR/1/Suppl.1 (1 April 1997)WT/DS98/R
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B. KOREA
3.2 Korea  requested the Panel to find that the European Communities has not discharged its
burden of proving that Korea failed to examine relevant facts or failed to explain adequately the basis
for its determination and, therefore, conclude that the safeguard measure on SMPP was imposed by
Korea in a manner fully consistent with its obligations under the Agreement on Safeguards.
IV. MAIN ARGUMENTS OF THE PARTIES6
A. PROCEDURAL OBJECTIONS
1. Lack of commercial interest and good faith by the European Communities
(a) Objection of Korea
4.1 Korea  raised a procedural objection alleging a lack of commercial interest by the European
Communities as well as a failure to act in good faith on their part.  The following are Korea's
arguments in support of its objection:
4.2 Korea argues that the EC submission admits that it has little or no commercial interest in
bringing this matter before the Panel.7 This admission coupled with the abortive settlement procedure
suggests that the current procedure lacks any issue in dispute between the parties and is merely an
attempt to use the DSU to establish a precedent on safeguards.  Korea is also concerned that the
European Communities interest in receiving an advisory opinion is especially onerous upon Korea
given the substantive weakness of the EC case.
4.3 During the course of these proceedings, Korea urged the Panel to consider that the EC
objective is not to preserve its rights with respect to its exports of SMPP, but to secure an advisory
opinion from the Panel.  Under these circumstances, the European Communities recourse to formal
dispute settlement represents an abuse of the WTO dispute settlement system.
4.4 Korea requests that the Panel consider the EC motives underlying recourse to formal WTO
dispute settlement proceedings .  Korea considers that the EC actions during consultations and its
expression of limited interest in its first submission are inconsistent with the object and purpose of the
WTO dispute settlement proceedings.
4.5 The DSU expressly provides that formal dispute settlement should be reserved for disputes
where Members consider, in good faith, that their interests are being impaired.8  Moreover, Article 3.7
of the DSU specifically instructs Members to exercise restraint in bringing dispute settlement casesand articulates a preference for mutually agreed solutions over resort to formal dispute settlement.
9
                                                     
6 The Panel notes that, unless otherwise specified, the footnotes in this section are those of the parties
as they appear in their different submissions.
7 See, in particular, EC’s First Submission where the European Communities states: “The EC would
stress that its complaints in this case, and notably th ose concerning the injury determination and procedural
violations, are complaints of principle and that it considers all should be addressed by the Panel in its report.”
8 Article 3.3 of the DSU provides that WTO dispute settlement is reserved for cases where a Member’s
benefits "are being impaired by measures taken by another Member." Article 3.10 states that "all Members willengage in these procedures in good faith in an effort to resolve the dispute."
9Article 3.7 provides that :
"[b]efore bringing a case, a Member shall exercise its judgement as to whether actions under these
procedures would be fruitful.  The aim of the dispute settlement mechanism is to secure a positivesolution to a dispute.  A solution mutually acceptabl e to the parties to a dispute and consistent with
the covered agreements is clearly to be preferred."WT/DS98/R
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4.6 It is important to note that a key strand of the EC case is that in some way Korea failed to
provide the requisite information to the Europ ean Communities to enable them to enter into
meaningful consultations that might lead to a settle ment (which is, after all, the key objective of the
DSU).  While Article 12 of the Agreement on Safeguards has a specific series of requirements, Korea
considers that the information provided to the Co mmittee on Safeguards more than complied with the
pro forma standards laid down by that Committee10, and that this enabled the European Communities
to enter into meaningful but ultimately unsuccessful negotiations .  Korea notes that if it had indeed
abused its obligations to provide information a nd to permit meaningful consultations, then it is
difficult to explain how the Director-General of DGI of the Commission of the European
Communities could have provided the Korean delegation with a letter accepting a settlement.11  The
fact that the Director-General had to later withdraw his acceptance of the settlement proposed by
Korea is evidence of lack of good faith on the part of European Communities, rather than on the part
of Korea.
(b) Response of the European Communities
4.7 At the first meeting of the Panel with the parties the European Communities  responded to
Korea's procedural objection as follows:
4.8 As to the alleged lack of commercial interest of the European Communities in bringing this
complaint, the European Communities would recall that in the EC - Bananas  case the Appellate Body,
in reply to an analogous objection by the European Communities, held that :
“a Member has broad discretion in deciding whether to bring a case against another
Member under the DSU.  The language of Article XX III:1 of the GATT and of
Article 3.7 of the DSU suggests, furthermore, that a Member is expected to be largely
self-regulating in deciding whether any such action would be ‘fruitful’ ”.12
4.9 As to the alleged acceptance of a settlement offered by Korea, the European Communities
assume that Korea is not seriously arguing that documents like the ones attached to its First
Submission as Exhibit Korea-11 could be considered as a proposal and acceptance of a settlement for
purposes of WTO provisions, nor, presumably, in any other legal system.  In reality, it is apparent
from that Exhibit that Korea cannot even demonstrate that it ever sent the European Communities a
formal proposal in due form, let alone that the European Communities received and accepted it.
2. Inadequacy of the EC request for establishment of a panel
(a) Objection of Korea
4.10 Korea  raises a procedural objection regarding the inadequacy of the EC request for
establishment of a panel and requests the Panel to entirely reject the EC complaint on this basis.  The
following are Korea's arguments in support of this objection:
4.11 The EC request for the establishment of the Panel does not specify the nature of its dispute
with sufficient clarity to permit Korea to conduct an effective defence .  A detailed statement of the
matter in dispute and the legal bases of the arguments is also necessary to permit third parties (who
may not be intimately familiar with the details of the dispute) to assess whether or not to intervene.
                                                     
10 WT/TC/NOTIF/SG/1 (15 October 1996).
11 See, Exhibit Korea-11
12 See, the Report of the Appellate Body in European Communities – Regime for the Importation, Sale
and Distribution of Bananas ("EC- Bananas") , WT/DS27/AB/R, 9 September 1997, paragraph 135.WT/DS98/R
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4.12 In a request for establishment of a Panel under Article 6.2 of the DSU, a Complaining Party
must «provide a brief summary of the legal basis of the complaint sufficient to present the problemclearly.»  In its request for the establishment of a Panel, the European Communities merely listed four
articles of the Agreement on Safeguards.  This listing of articles cannot satisfy the specific criteria of
Article 6.2, especially in a request relating to the determination of a domestic authority under the
Agreement on Safeguards.
13
4.13 Korea acknowledges that the Panel in EC - Bananas  found that simply listing the articles and
the relevant agreements in that case satisfied the «minimum requirements» of Article 6.2 of the DSU.
Korea suggests that the Panel should refrain from  following this interpretation, because such an
approach encourages the establishment of imprecise and potentially speculative terms of reference,
and, taking into account the general purpose of the DSU, undermines the object and purpose of
Article 6.2 .  In any event, the instant case is distinguishable from the EC - Bananas  case because,
inter alia, :
(a) each Article under the Agreement on Safeguards does not identify «a distinct
obligation,» but encompasses a multitude of distinct obligations regarding a domestic
authority’s investigation;14
(b) the Panel’s interpretation of Article 6.2 in EC - Bananas  may have been influenced
by its desire to prevent further delays in a dispute that had already been subject to two
GATT Panel reviews and years of consultations;
(c) the Panel in EC - Bananas  did not explicitly consider Article 4.4 of the DSU in
evaluating the appropriate context;15
(d) the EC approach ignores the object and purpose of Article 6.2 because it does not
identify the claims with sufficient precision to establish properly a Panel’s
jurisdiction or to give the parties and third parties sufficient notice of the claims atissue;
16 and
                                                     
13 In Argentina - Safeguard Measures on Imports of Footwear ("Argentina - Footwear") , for example,
the EC’s request, although still inadequate, included more specificity, stating that the European Communities:
"request[s] that the Panel consider and find that these measures are in breach of Argentina’s
obligations under the provisions of the Agreement on Safeguards, in particular, but not necessarilyexclusively, of Article 2 (especially the requirement of determining in an investigation that certainconditions are present and the non-discrimination obligation), Article 4 (in particular that allrelevant factors must be investigated and to demonstrate the existence of a causal link), Article 5
(especially the condition that measures must only be applied to prevent or remedy serious injury),
Article 6 (in particular the requirement of evidence of "critical circumstances") and Article 12(especially the notification obligations) of the said Agreement and in violation of Article XIX ofGATT (in particular the lack of «unforeseen developments").  WT/DS121/3 (11 June 1998).
14 WT/DS27/R/USA, paragraph 7.3 (22 May 1997).
15 Article 31 of the Vienna Convention on the Law of Treaties provides that a treaty must be interpreted
in accordance with the ordinary meaning to be given to its terms in their context .  The Panel in EC - Bananas
considered that the appropriate context for interpreting Article 6.2 was Articles 3.2 and 3.3 of the DSU, and thatsuch context does not support any interpretation not resulting in a prompt settlement of the dispute .  Id.  at
paragraphs 7.6 to 7.8 .  Korea considers that Article 4.4 of the DSU is the more relevant context, given that it is
the parallel provision to Article 6.2 addressing requests for consultations .  Article 4.4 of the DSU requires that a
request for consultations include "an indication of the legal basis for the complaint."  Assuming the mere listing
of articles satisfies Article 4.4, the drafters of the DS U must have intended that the language of Article 6.2
should be interpreted to require more specificity in a request for establishment of a Panel.
16 In Brazil - Measures Affecting Desiccated Coconut ("Brazil - Dessicated Coconut") , the Appellate
Body stated:WT/DS98/R
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(e) previous GATT practice in antidumping and countervailing duty cases provides that
the mere listing of articles is insufficient in cases involving a Panel review of a
domestic authority’s investigation.17
4.14 Further, Korea submits that the EC failure to comply with Article 6.2 of the DSU
demonstrates the European Communities lack of any fundamental economic interest in this case, its
negligent consideration of Korea’s  (and third-party Members’) rights under the DSU, and its failure
to give due consideration to the object and purpose of the WTO dispute settlement system .  To
preserve the integrity of the WTO dispute settlement system and the specific principles establishedtherein, the Panel should find that the European Communities violated Article 6.2 of the DSU and
should reject the European Communities complaint in its entirety.
18
(b) Response of the European Communities
4.15 At the first meeting of the Panel with the parties the European Communities  responded to
Korea's position as follows:
4.16 The European Communities recall that, in the EC - Bananas  case, the Appellate Body
“accept[ed] the Panel’s view that it was suffic ient for the Complaining Parties to list the
provisions of the specific agreements alleged to have been violated without setting out
detailed arguments as to which specific aspects of the measures at issue relate to which
specific provisions of those agreements”.19
                                                                                                                                                                    
"A Panel’s terms of reference are important for two reasons.  First, terms of reference fulfil an
important due process objective--they give the pa rties and third parties sufficient information
concerning the claims at issue in the dispute in order to allow them the opportunity to respond tothe complainant’s case.  Second, they establish the jurisdiction of the Panel by defining the precise
claims at issue in the dispute."  (WT\DS22\AB\R (21 February 1997) Section VI, Terms of
Reference).
17 United States - Anti-Dumping Duties on Imports of  Fresh and Chilled Atlantic Salmon from Norway ,
ADP/87, paras. 333-335 (adopted 26 April 1994);  United States - Countervailing Duties on Imports of Fresh
and Chilled Atlantic Salmon from Norway , SCM/153, paras. 208-214 (adopted 27 April 1994);
European Communities  - Imposition of Anti-Dumping Duties on Imports of Cotton Yarn from Brazil , ADP/137,
paras. 438-466 (adopted 4 July 1995);  EC - Anti-Dumping Duties on Audiotapes in Cassettes Originating in
Japan , ADP/136, para. 295 (28 April 1995 (not adopted)).  The Appellate Body in Brazil  - Dessicated Coconut
cited the cases under the Tokyo Round Anti-Dumping Code favourably in stating that a Complaining Party mustprecisely identify the claims in its request for establishment of a Panel.  (WT\DS22\AB\R (21 February 1997))
18 The Panel should not now try to assess whether the rights of Korea and third-party Members have
been prejudiced by the EC’s failure to comply with its obligations under Article 6.2.  As a previous GATT Panel
stated,
"[we] could not understand the basis on which a Panel could after the fact consider whether certain
claims might have been resolved in previous stages of the dispute settlement process had thoseclaims been raised during those stages of the process.  Nor would a Panel after the fact have abasis on which to consider whether the rights of third parties to protect their interests through
participation in the Panel process were jeopardized by the failure of a complainant to raise a claim
at the time it requested the establishment of a Panel."  ADP/136, para. 301 (28 April 1995(unadopted)).
19 See, EC - Bananas , WT/DS27/AB/R, 9 September 1997, paragraph 141.WT/DS98/R
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3. The nature of the EC case and its request for rulings by the Panel
(a) Submission of Korea
4.17 Korea  asserts that the European Communities cannot challenge, and has implicitly accepted,
the report of the investigating authority because it has not made any claims under Article 3 and 4.2(c)
of the Agreement on Safeguards.  In support of its position, Korea makes the following arguments:
(i) Article 3 of the Agreement on Safeguards
4.18 The EC claims must be viewed in the context of the terms of reference it sought when
requesting the establishment of the Panel .  The terms of reference serve as the basis upon which
panels decide cases and panels can only rule on those issues that have been raised by the complaining
party in the terms of reference.
4.19 Korea draws the Panel’s attention to the terms of reference cited by the European
Communities .  These only refer to Articles 2, 4, 5 and 12 of the Agreement on Safeguards.20  Further,
the European Communities in their First Submission and Oral Statement request that the Panel limits
its request for a ruling to whether “Korea has violated Article XIX:1(a) of the GATT and Articles 2.1,4.2(a) and (b), 5.1, and 12(1) to (3) of the Agreement on Safeguards.”
4.20 It is therefore clear that the European Communities have not invoked Article 3 of the
Agreement on Safeguards in its request for a ruling from the Panel .  Failure to invoke Article 3 has
significant implications for the EC case because Article 3.1 deals with the adequacy of the competent
authorities’ report .  The final sentence of Article 3.1 of the Agreement on Safeguards 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.”
4.21 The EC failure to invoke Article 3, whether intentionally or erroneously, leads one to
conclude that the European Communities are not challenging the OAI Report .  The European
Communities confinement of their request for a ruling to the adequacy of notification under Article 12becomes all the more clear in reviewing its answer to one of the Panel’s questions. In Korea’s view,
this question sought to clarify the nature of the EC case. 
21Korea considered that the European
Communities failed to answer this question, referrin g back to its answer in a previous question in
which they state:22
“A safeguard proceeding must be conducted in accordance with open and transparent
procedures respecting the rights of defence of parties, which are the interested economic
operators .  It is for this purpose that Article 3 of the Agreement on Safeguards requires
publication of a report ‘setting forth their findings and reasoned conclusions reached on
all pertinent issues of fact and law.’
The proper forum for discussion between WTO Members concerning the compatibility
of safeguard actions with the Agreement on Safeguards is however not the national
investigating authority or courts, but rather consultations and dispute settlement.
Accordingly, the European Communities cons ider that all the information should be
                                                     
20 WT/DS98/4 (12 January 1998).
21 Korea recalled that the question read: "Does the EC believe that the obligation in Article 3 and 4 of
the SA are evidence in the WTO notification?  Why doe s the EC concentrate its argumentation only on what
was reflected in these notifications?"
22 Korea recalled that the previous  question read: “Where should the information used and analysis
performed by the national authority of Korea for its determination of a safeguard measure be found?”WT/DS98/R
Page 8
found, or at least referred to, in the notifications .  It notes in this respect that Article 12.2
requires a Member to include in its notification 'all pertinent information.' This can be
presented in summary form, but must cover all issues and must make clear reference tothe source of the more detailed information .  It is only in this way that the objectives of
Article 12 can be achieved.”
4.22 The EC answer refers to Article 3 which ha d never been at issue between the parties .  In the
light of the Appellate Body’s ruling in India - Patent Protection for Pharmaceutical and Agricultural
Chemical Products
23 and Argentina - Measures Affecting Imports of Footwear, Textiles, Apparel and
Other Items24 that a claim “must be included in the request for establishment of a panel in order to
come within a panel’s terms of reference in a given case”, the European Communities cannot augment
the original terms of reference by invoking Article 3 at this stage of the proceedings.
4.23 The EC failure to invoke Article 3 leads to  the conclusion that the European Communities
references to serious injury in Article 4.2(a) and to  causal link in Article 4.2(b) are used as standards
of review in relation to the notification and consultation requirements of Article 12 , which Korea
maintains it has fully discharged.
(ii) Absence of claims under Article 4.2(c) of the Agreement on Safeguards
4.24 The European Communities have not made any specific claims or put forward any arguments
in relation to Article 4.2(c), and neither its First Submission nor its Oral Statement makes any
reference to Article 4.2(c) .  Further, on both occasions where the European Communities have
requested the Panel to make rulings or findings, it has omitted any reference to Article 4.2(c).
4.25 It is virtually impossible to understand what is being argued by asserting that the “relevant
factors” and “causal link” have not been fully or correctly considered, yet accepting that the
competent authorities promptly published “a detailed analysis on the case as well as the relevance of
the factors examined.” It is important for the Panel to note that the provisions of Article 4.2(c) detail a
stage subsequent to the investigation of increased imports, serious injury and a causal link betweenthe two .  The conclusion that the European Communities accept the OAI Report is only strengthened
by the EC failure to make any claims in relation to Article 3 which requires a competent authority to
publish “a report setting forth their findings and reasoned conclusions reached on all pertinent issues
of fact and law.”
4.26 Korea points out that Article 4.2(c) of the Agreement on Safeguards cannot be raised at, or
subsequent to, the rebuttal stage as an issue between the parties .  The decisions by the Appellate Body
in India – Patent Protection for Pharmaceutical and Agricultural Chemical Products
25 and Argentina
– Measures Affecting Imports of Footwear, Textiles, Apparel and Other Items26 clearly show that the
admission of new arguments at the rebuttal stage woul d be a substantial violation of due process, and
a significant violation of the respondent’s ability to defend itself.
4.27 Strict adherence to that procedural requirement is important because the ability to understand
and defend oneself against precise and comprehensible claims is vital to any system of law based on
                                                     
23 WT/DS50/AB/R (19 December  1997) AB-1997-5.
24 WT/DS56/AB/R (27 March 1997) AB-1998-1.
25 WT/DS50/AB/R (19 December 1997), AB-1995-5.
26 WT/DS56/AB/R (27 March 1997), AB-1998-1.WT/DS98/R
Page 9
due process.27  The Appellate Body in Argentina - Textiles  summarized the two-stage process under
the DSU28 as follows:29
“Under the Working Procedures in Appendix 3, the complaining party should set out its
case in chief, including a full presentation of the facts on the basis of submission of
supporting evidence, during the first stage .  The second stage is generally designed to
permit "rebuttals" by each party of the arguments and evidence submitted by the other
parties.”
4.28 Therefore, as requested by the European Communities in their First Submission and Oral
Statement, Korea requests the Panel to limit its analysis of the EC claims to examining whether
“Korea has violated Article XIX:1(a) of the GATT and Articles 2.1, 4.2(a) and (b), 5.1, and 12(1) to
(3) of the Agreement on Safeguards.”
4.29 Korea is of the view that the EC failure to  invoke Article 3 and raise any claims under
Article 4.2(c) in either its First Submission or Oral Statement can only be construed as meaning that
Articles 4.2(a) and (b) are used as standards of review in relation to the notifications and consultationsrequirements of  Article 12 of the Agreement on Safeguards .  Thus, the Panel should only examine
whether Korea’s notification and consultations under Article 12 of the Agreement on Safeguards were
timely and adequate and whether Korea imposed its safeguard measure in accordance with the
requirements of Article 5.
4.30 At the second meeting of the panel with the parties, Korea  further advanced its arguments
regarding the nature of the EC case as follows:
4.31 In Korea’s view, the unclear nature of the EC arguments stems from its apparently deliberate
strategy of claiming that only the Notifications provided by Korea under Article 12 of the Agreement
on Safeguards should be considered to determine whether the Korean safeguard measure is consistent
with Article XIX of GATT 1994 and the Agreement on Safeguards.  This lack of clarity in the ECarguments is further aggravated by confining its requests to Articles 2.1, 4.2(a), 4.2(b), 5.1 and 12(1)
to (3).  It does not cite Article 3, and has not made any claims in relation to Article 4.2(c).
4.32 Further, the European Communities expressly disregard the OAI Report, one of the central
documents by which to evaluate the compliance of Korea’s safeguard measure with the Agreement on
Safeguards.  Korea refers the Panel to the EC statement in its Rebuttal Submission:
                                                     
27 Both Panels and the Appellate Body have ruled that the DSU is such a system (see, for example,
Argentina – Measures Affecting Im ports of Footwear, Textiles, Appar el and Other Items ("Argentina  -
Textiles") , paragraph 94).
28 More specifically, as noted by the Appellate Body in Argentina  - Textiles , the Working Procedures of
the DSU divide the Panel process into two clear sections .  The first stage, in which the parties make their case
and set out their arguments is set out in paragraphs 4 and 5 .  These state:
“Before the first substantive meeting of the panel with the parties, the parties to the dispute shall
transmit to the panel written submissions in which they present the facts of the case and their
arguments.
At its first substantive meeting with the parties, the panel shall ask the party which has brought the
complaint to present its case .  Subsequently, and still at the same meeting, the party against which
the complaint has been brought shall be asked to present its point of view.”
The second stage, in which the parties rebut the claims and arguments put forward by the other parties
in the first stage, is contained in paragraph 7, which states:
“Formal rebuttals shall be made at a second substantive meeting of the panel .  The party
complained against shall have the right to take the floor first to be followed by the complainingparty .  The parties shall submit, prior to that meeting, written rebuttals to the panel.”
29 See, Argentina –Textiles at  paragraph 79.WT/DS98/R
Page 10
“The European Communities have already e xplained that the KTC report is not an
appropriate source of information to evaluate Korea’s compliance with its obligations
arising under Article XIX of the GATT 1994 and the Agreement on Safeguards.”
4.33 Accordingly, the Panel must consider the implicat ions for the EC case of its failure to invoke
Article 3, and its failure to make claims in relation to Article 4.2(c).
4.34 Korea is of the view that failure to invoke Article 3 implies that the European Communities
have accepted that:
“The competent authorities publish[ed] a report setting forth their findings and reasoned
conclusions reached on all pertinent issues of fact and law.”
4.35 Furthermore, failure to make claims under Article 4.2(c) implies that the European
Communities have accepted that:
“The competent authorities publish[ed] 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 factors examined.”
4.36 Combining the EC decision not to raise Articles 3 and 4.2(c) with its statement in its Rebuttal
Submission noted above, Korea then concludes that the European Communities want the Panel to
limit its review of the Korean investigation to its notifications under Article 12, and its obligations
under Article 5.  The EC failure to invoke Article 3 leads one to the conclusion that the European
Communities references to serious injury in Article 4.2(a) and to causal link in Article 4.2(b) are used
as standards of review in relation to the notification and consultation requirements of Article 12.
4.37 Korea cannot accept and the Panel should not accept that notifications under Article 12 have
to include all documentation and analysis undertaken  by the Korean competent authorities, including
documents and analysis proving compliance with Articles 2, and 4.2(a) and (b).  Clearly, Articles 2
and 4 have to be fulfilled by the competent authorities undertaking the investigations of increase in
imports, serious injury and a causal link between the two.  However, compliance with theserequirements has to be judged against how the competent authorities conducted that analysis, and not
against how their investigation was notified to Members.
4.38 However, the European Communities does not want to challenge the OAI Report as a relevant
document, preferring to concentrate its argumentation to challenging the quality and nature of Korea’s
notifications under Article 12.  The European Communities appear to want to disregard the factsestablished and analysis undertaken in the 85-page OAI Report, and instead judge Korea’s
compliance with the Agreement on Safeguards in relation to notifications that were only intended to
summarise Korea’s investigation.
4.39 In Korea’s view, the purpose of Article 12 is to provide WTO Members with a summary of
what happened during the investigation, including a summary of relevant facts established andanalysis undertaken.  The level of information provided should be at least sufficient to permit those
Members to enter into meaningful consultations, but Article 12 is not the basis upon which the
investigation undertaken by the national authority must be judged.  Korea submits that, as with other
proceedings, such as antidumping and CVD or safeguard measures in textiles, it is always the
governmental measure, and not a communication to the WTO that is under review as to a Member’s
conformity with the substantive provisions of the agreement in question.
4.40 By way of conclusion, Korea requests the Panel to conclude that the European Communities
are only questioning Korea’s compliance with Articles 5 and 12 of the Agreement.WT/DS98/R
Page 11
(b) Response by the European Communities
4.41 At the second meeting of the panel with the parties, the European Communities  replied as
follows:
4.42 The European Communities agree with Korea that they are not bringing a complaint under
Article 3 of the Agreement on Safeguards, nor is relying upon Article 4.2(c) thereof.  Accordingly, it
will not address the arguments developed by Korea in the first part of its Second Written Submission.
It will only say that the absence of a complaint under Article 3 does not mean that the EuropeanCommunities have accepted the content of the Investigation Report to be correct. The European
Communities are complaining that Korea’s measure does not satisfy the substantive conditions for
such measures set out in Article XIX GATT 1994 and Articles 2.1, and 4.2 of the Agreement on
Safeguards. This should be indication enough that it does not agree with the investigation report.
B. S
UBSIDIARY ISSUES
1. Burden of proof and standard of review
(a) Submission by Korea
4.43 Regarding the issues of burden of proof and standard of review Korea  submits the following
arguments:
4.44 As a preliminary matter, the Panel should properly assign the burden of proof to the parties.
The burden of proof is the fundamental obligation «of each of the parties to a dispute before an
international tribunal to prove its claims to the satisfaction of, and in accordance with the rulesacceptable to, the tribunal».
30  This fundamental obligation does not shift between the parties during
the dispute.31  To discharge its burden of proof, the party assigned such burden must present
conclusive evidence substantiating its claims, i.e., the party that is required to satisfy the burden of
proof must present more convincing evidence than the opposing party, and if the evidence is in
equipoise, the party required to satisfy the burden of proof must lose.32
4.45 The party claiming that a Member State exercised its rights inconsistently with the Agreement
on Safeguards has the obligation to prove such inconsistency.  Therefore, as the Complaining Party
asserting claims that Korea acted inconsistently with the Agreement on Safeguards, the European
Communities have the burden of proof throughout the course of this proceeding to present conclusive
evidence that their claims are true.
                                                     
30 Mojtaba Kazazi, Burden of Proof and Related Issues , A Study on Evidence Before International
Tribunals 30  (Kluwer Law International 1996).
31 Id. at 36;  Joost Pauwelyn, Evidence, Proof and Persuasion in WTO Dispute Settlement , Who Bears
the Burden ?, J.Int’l Econ.L. 1, 232 (1998).
32 Id. at 255 and 258.  WTO Panels and the Appellate Body have struggled with the proper articulation
of burden of proof and have often confused the burden of proof with the procedural evidentiary concepts of
burden of evidence or duty of passing the judge.  Th ese latter concepts are not recognized by international
tribunals.  Moreover, the shifting of a burden of evidence and the creation of "presumptions" by presenting, forexample, prima facie  evidence only inject more complexity into WTO decision making by raising the questions :
What level of evidence constitutes prima facie  evidence? What level of evidence is sufficient to rebut the
presumption?  One commentator suggests that the presumption technique creates the risk that WTO Panels
and/or the Appellate Body in exercising their discretion may use this technique, in practice, to support results-
oriented findings, i.e., shift the burden to the party that it deems should lose.  Id. at 258.  The articles referenced
above by Pauwelyn and Kazazi provide an detailed discu ssion of the proper role of the burden of proof in
international dispute settlement proceedings.WT/DS98/R
Page 12
(i) Standard of review
4.46 In light of the way the European Communities have presented their arguments in their First
Submission, it appears to be necessary for the Panel to confirm the standard of review applicable inthis case .  Korea suggests that the Panel’s role is to examine the Korean safeguard measure to
determine whether it was imposed in accordance with Korea’s international obligations under the
Agreement on Safeguards .  In conducting this examination, Korea suggests that the Panel should not
engage in a de novo  review in which it assumes the role of the investigating authority and seeks to
replace its analysis of the facts and law for those of Korea .  Nor should the Panel engage in assessing
speculative or conclusionary arguments submitted by the European Communities as to whether the
measure is appropriate or not. Instead, Korea suggests that the Panel should restrict its analysis to
making an objective assessment as to whether Korea reasonably considered all relevant facts and
adequately explained how such facts support the determination made.
4.47 In United States - Restrictions on Imports of Cotton and Man-Made Fibre Underwear
("Underwear")
33, Korea recalls the argument of the United States that a panel reviewing a safeguard
measure under the special safeguard provisions of the Agreement on Textiles and Clothing ("ATC")
should accord considerable deference to the determination by the US authorities.  After citing the
"Transformers " case where a panel refused to accord tota l deference to the domestic authority, the
Panel stated the following:
"7.12 We see great force in this argument.  We do not, however, see our review as a
substitute for the proceedings conducted by national investigating authorities or by theTMB.  Rather, in our view, the Panel’s function should be to assess objectively the
review conducted by the national investigating authority, in this case the CITA.  We
draw particular attention to the fact that a series of panel reports in the anti-dumping and
subsidies/countervailing duties context have made it clear that it is not the role of panels
to engage in a de novo  review.  In our view, the same is true for panels operating in the
context of the ATC, since they would be called upon, as in the context of cases dealing
with anti-dumping and/or subsidies/countervai ling duties, to review the consistency of a
determination by a national investigating authority imposing a restriction under the
relevant provisions of the relevant WTO legal instruments, in this case the ATC.  In our
view, the task of the Panel is to examine the consistency of the US action with theinternational obligations of the United States, and not the consistency of the US action
with the US domestic statute implementing the international obligations of the United
States.  Consequently, the ATC constitutes, in our view, the relevant legal framework in
this matter.
7.13 We have therefore decided, in accordance with Article 11 of the DSU, to make
an objective assessment of the Statement issued by the US authorities on 23 March 1995
(the «March Statement») which, as the parties to the dispute agreed, constitutes the scope
of the matter properly before the Panel without, however, engaging in a de novo  review.
[footnote omitted] In our view, an objective assessment would entail an examination of
whether the CITA had examined all relevant facts before it (including facts which might
detract from an affirmative determination in accordance with the second sentence of
Article 6.2 of the ATC), whether adequate explanation had been provided of how thefacts as a whole supported the determination made, and, consequently, whether the
determination made was consistent with the international obligations of the United
States .  [footnote omitted] We note in this respect, that in response to a question by the
Panel, the United States argued that the Panel had to examine whether the domestic
authorities had based their determination on an examination of factors required by the
                                                     
33 United States - Restrictions on Imports of Cotton and Man-made Fibre Underwear ("US –
Underwear") , WT/DS24/6, 8 November 1996.WT/DS98/R
Page 13
ATC and whether the basis for the determination was adequately explained.  In the US
view, such an approach was compatible with the standard of review adopted in the «Fur
Felt Hat» case .  [footnote omitted]34
4.48 The Panel in US - Underwear , therefore, expressly rejected that it should engage in a de novo
review in examining the US safeguard measure under the ATC.  The Panel then articulated a standard
of review intended to account for the deference that should be accorded to national authorities in their
conduct of a domestic investigation.  In applying the standard of review in US - Underwear , however,
the Panel interpreted the special safeguard provisions  of the ATC as an «exception» to Article 2.4 of
the ATC.  As such, the Panel imposed on the United States the burden of proof to demonstrate it acted
consistently with the ATC.  Unlike Article 2.4 of the ATC, the Agreement on Safeguards and the
terms contained therein should not be considered as an exception.
4.49 Therefore, consistent with the approach of the Panel in US - Underwear , in examining
Korea’s obligations in respect of the safeguard meas ure, Korea suggests that the Panel should restrict
its analysis to making an objective assessment of the facts and law as provided under Article 11 of theDSU by examining whether Korea:
(a)  examined all relevant facts before it at the time of the investigation;  and
(b) provided an adequate explanation of how the facts before it as a whole supported the
determination made.
4.50 In the view of Korea, use of the above approa ch would accord the proper amount of deference
to Korea given that the Panel is reviewing a complex administrative investigation conducted by a
Member’s administering authority.
4.51 The Agreement on Safeguards requires a Member’s competent authority to determine whether
increased imports caused serious injury to the domestic industry.  In assessing serious injury under
Article 4.2(a), the competent authority is not required to give any  specific weight or significance toany particular criterion .  Under Article 4.2(a) of the Agreement, no criterion  gives conclusive
guidance as to whether serious injury occurred .  The Agreement also does not require that each
criterion be considered in isolation .  Moreover, the Agreement on Safeguards contemplates that the
competent authority may use other factors that are more relevant to a particular domestic industry in
assessing serious injury.
4.52 The arguments raised by the European Communities in both the consultations under
Article 12 of the Agreement on Safeguards and its submissions to the Panel imply that the European
Communities are applying a very high (possibly an impossibly high) standard as to how the
competent authorities of the Members should be permitted to conduct injury investigations .  Korea
submits that Members can set their own standards which may exceed those set out in Article 4.2.
35
                                                     
34 WT/DS24/R (8 November 1996) (Emphasis in original).
35 For example, Article 10 of Regulation 3285/94, the EC’s own implementation of the Agreement on
Safeguards states:
1.  Examination of the trend of imports, of the conditions in which  they take place and of
serious injury or threat of serious injury to  Community producers resulting from such importsshall cover in  particular the following factors:
(a) the volume of imports, in particular where there has been a  significant increase, either
in absolute terms or relative to production or consumption in the Community;
(b) the price of imports, in particular where there has been a  significant price undercutting
as compared with the price of a like product in the Community;WT/DS98/R
Page 14
Each Member State of the Agreement on Safeguards is, however, only obliged to comply with the
standard of that Agreement, and not the standards used by other WTO Members.
4.53 Throughout the Uruguay Round, most major trading nations, the European Communities
included, recognized and accepted that the agricultural sector presented a number of unique issues
requiring specific and detailed consideration, and, where appropriate, the adoption of specific rules .
One of the ways in which the unique features of agriculture was recognized and dealt with was the
Agreement on Agriculture, and Article 5 of the Agreement which contains a specific, detailed
safeguard procedure.36
4.54 Korea could not invoke the special safeguard provisions of Article 5 of the Agreement on
Agriculture in this case .  Therefore, to the extent that its domestic industry was being seriously injured
by increased imports, Korea had to impose a safeguard measure consistent with the Agreement on
Safeguards.
4.55 As the general system of rules for imposing safeguard measures, the Agreement on
Safeguards will be applied to a number of different product sectors and, thus, has a degree of
flexibility built into its structure and individual terms.37  Certain injury criteria relevant to industrial or
                                                                                                                                                                    
(c) the consequent impact on Community producers as indicated by  trends in certain
economic factors such as:
- production,- capacity utilization,
- stocks,
- sales,- market share,- prices ( i.e., depression of prices or prevention of price increases which would normally
have occurred),
- profits,
- return on capital employed,
- cash flow,- employment;
factors other than trends in imports which are causing or may  have caused injury to the
Community producers concerned.
The increase in the proof of injury required by the EC as compared to the Agreement on Safeguards is
indeed noted by the European Commission in the Explanatory Memorandum to the proposal for a newRegulation implementing the Agreement (COM(94)414 at page 306) where the Commission notes:
"It should be pointed out, however,  that Community legislation already contains precise rules that
often go beyond the more general provisions of the Agreement on Safeguards .  This is the case, for
example, with the strict investigation deadlines and the more detailed list of factors to be
considered in determining serious injury and the causal link between such injury and imports."
36 The International Dairy Arrangement also made it clear that agricultural products had specific issues
that needed to be addressed.
37 See, for example, the following:
"The General Agreement, and in particular, Articles II and XI on the one hand, and Article XIX on
the other, is a balance between the need to provide the stability necessary for decisions relating to
investment and international trade and the flexibility necessary for governments to accept
international obligations."
Negotiating Group on Safeguards, Drafting History of Article XIX and Its Place in GATT,
MTN.GNG/NG9/W/7 (16 September 1987) at 3.WT/DS98/R
Page 15
manufactured products may be irrelevant when applied to agricultural products, because those criteria
are not objective and quantifiable or because they do not have a bearing on the situation of theparticular agricultural industry, i.e., they do not reflect the unique nature of the agricultural sector.
38
If particular criteria are not applicable to a specific agricultural sector, Members should be accorded
the flexibility to examine other criteria that take into account the unique or specific nature of the
products and industry under examination .  Members should also be allowed to take into account
criteria which are also relevant to the industry under examination.39  Provided that relevant criteria
have been considered and an adequate explanation as to whether or not they indicate serious injury
has been given, the Panel should defer to the Member’s determination as to whether the relevant
criteria, when considered as a whole, may lead to an affirmative determination of serious injury.
4.56 In the view of Korea, the European Communities do not and cannot discharge their burden of
proof simply by disputing the outcome of Korea’s examination of the relevant facts or by contending
that Korea has to provide an explanation of its analysis and conclusions that goes beyond the
requirement to provide an adequate explanation.  The European Communities must present conclusiveevidence that Korea failed to examine relevant facts or failed to give an adequate explanation as to
how the facts as a whole supported its determination. Korea submits that the Panel should conclude
that the European Communities have failed to pres ent evidence of this nature and that the European
Communities have, therefore, failed to discharge their burden of proof regarding their claims that
Korea acted inconsistently with the Agreement on Safeguards.
4.57 At the first meeting of the panel with the parties Korea  further advanced its arguments on the
issue of standard of review as follows:
4.58 Article 11 of the DSU obliges the Panel to make an objective assessment of the facts of the
case and the applicability of and conformity with the relevant covered agreements .  In the absence of
particular provisions on the standard of review in the Agreement on Safeguards and the GATT, thesecriteria need to be construed and considered in the light of the purpose and functions of the
Agreement on Safeguards, past practices and precedents, and the allocation of the burden of proof.
4.59 By its very nature, the Agreement on Safeguards, as much as Article XIX GATT and other
safeguard clauses, assists Governments in entering  into trade liberalizing commitments, as they may
call upon safeguards should subsequent economic difficulties arise in due course .  By its very nature,
this Agreement applies to complex and difficult constellations in difficult times .  In applying the
Agreement, Governments are, of course, bound by its rules and criteria .  But they all share a common
                                                                                                                                                                    
"Some [delegations] pointed out that it was unrealistic to set quantitative standards or automatic
criteria for the determination of injury because not all factors were quantifiable and mathematical
formulae could not be applied to all sectors of industry."
Negotiating Group on Safeguards, Meeting of 7 and 10 March 1988, MTN.GNG/NG9/5
(22 April 1988) at 5.
"This safeguard authority, or escape clause, serves as a buffer between the more open trading
environment required by the trade-liberalizing obligations of the GATT, and the dislocations ofdomestic workers and firms which sometimes result from increased competition with a wider
variety of sources."
Janet A. Nuzum, " The Agreement on Safeguards:  U.S. Law Leads Revitalization of the Escape
Clause ", in The World Trade Organization, The Multilateral Trade Framework For the 21st Century and U.S.
Implementing Legislation   407, 408 (Terence P. Stewart ed., 1996).
38 Article 4(2)(a) requires  an evaluation of "all relevant factors of an objective and quantifiable nature
having a bearing on the situation of that industry" (emphasis added) .  This appears to permit an investigation
which takes into account the specific nature of the industry.
39 In light of the fact that Article 4(2)(b) of the Agreement on Safeguards uses the term «in particular»,
factors other than those set forth in Article 4(2)(b) may be used to determine injury to a particular sector, such asagriculture.WT/DS98/R
Page 16
interest that these rules allow for adequate flexibility in responding to the difficult constellations and
difficult times .  In other words, the very function of safeguard clauses implies a considerable degree
of discretionary powers to Governments in asse ssing the situation and in determining injury.
4.60 In reviewing safeguard measures imposed by Governments, panels therefore need to focus on
whether the Government has exceeded its scope of discretionary powers .  Within the bounds of
discretionary powers, the matter therefore has to be assessed with considerable deference.
4.61 Such discretion and deference has been accorded to the operation of safeguard clauses in the
past.  The 150 measures notified under Article XIX GATT 194740 and the fact that they have not been
challenged in dispute settlement but for two cases41 proves the point in state practice.
4.62 This tradition is equally reflected in the new Agreement on Safeguards .  While there was a
need to strengthen disciplines and to prevent an a buse of the instrument, it still provides for adequate
flexibility .  Thus, Article 4.2 does not set forth a closed list of relevant factors, but allows
Governments, in assessing injury, to take into account additional criteria of particular relevance for
the sector concerned .  In the present case, it therefore was possible to look into factors of particular
relevance for agriculture, consider specific problems and factors relating to the dairy industry. All ofthis implies certain choices and therefore discretionary powers in construing and applying the injury
test.
4.63 In assessing a safeguard measure, the Panel therefore must merely engage in reviewing the
measure and its justification within the discretionary bounds of the Agreement .  It clearly must not
engage in assessing the situation anew .  It must not make an independent ex post determination based
upon arguments set forth by the complaining party .  Its task is a more limited one.
4.64 This is confirmed by recent panel practice relating to the application of safeguard clauses .  In
US - Underwear
42, the Panel was equally faced with the issue of assessing its scope and standard of
review .  It was a matter of finding, based upon Article 11 DSU, an appropriate way between Scylla
and Charybdis:  between total deference and close scrutiny .  The Panel found that total deference to
national injury determination could not live up to the standard of Article 11 DSU, while equally
rejecting the idea of full review set forth in the Transformers  case.43  Instead, it set forth the task to
"assess objectively the review conducted by the nati onal investigating authority", to mean "to review
the consistency of a determination by a national investigating authority imposing under the relevant
provisions of the relevant WTO legal instruments" (para. 7.12).
4.65 Korea submits that the same standard of examining consistency should also apply to the
Agreement on Safeguards .  As the role and functions of safeguards are alike in different agreements,
the standard of review defined and set forth by this panel should be of guidance in this first case on
the Safeguard Agreement alike .  It is therefore a matter to examine whether Korea remained within its
bounds of discretion and had consistently examined all relevant facts before it at the time of theinvestigation, and provided an adequate explanation of how the facts before it as a whole supported
the determination made.
4.66 Finally, the task of the Panel is further shaped and limited by the burden of proof in this case.
While, in US - Underwear , it was for the United States to demonstrate compliance with the safeguard
                                                     
40 GATT, Analytical Index :  Guide to GATT Law and Practice at 539-559 (6th ed 1995).
41 Working Party on Withdrawal by the United St ates of a Tariff Concession under Article XIX of the
General Agreement ("Fur Felt Hat "), GATT/CP.6/SR 19 (adopted 22.10.51);  Norway - Restrictions on Imports
of Certain Textile Products, BI SD 27S/119 (adopted 18 June 1980).
42 WT/DS24/R, 8 November 1996.
43 New Zealand - Imports of Electrical Transformers from Finland ("Transformers") , BISD 32S/55
(adopted 28 July 1985).WT/DS98/R
Page 17
clauses of the Textile Agreement due to the fact that it had been invoked as an exception, the situation
is different under the Agreement on Safeguards .  Here, it is up to the complaining Party, the European
Communities, to demonstrate that the review conducted by the national investigating authority does
not live up to the legal requirements set forth by the Agreement and exceeds the bounds of discretion .
It is up to it to demonstrate that Korea has acted inconsistently with and therefore in violation of the
Safeguard Agreement.
4.67 The objective assessment by the Panel therefore needs to rely upon the facts and arguments
put forth by Korea and those submitted by the European Communities .  It is only to the extent the
Panel concludes that facts, figures and arguments submitted by the European Communities
demonstrate that Korea had failed to provide an adequate justification of the measure imposed, i.e., an
adequate explanation as to how the facts invoked supported the determination, that a violation could
be established .  In other words, it will not be appropriate for the Panel to replace with its own figures
and arguments the determination made by Korea.
4.68 The arguments put forward by Korea in this case are shaped in accordance with this standard
of review and allocation of the burden of proof .  It is not a matter of justifying anew the measure
imposed .  Instead, Korea's arguments demonstrate that the ERUOPEAN COMMUNITIES fails to
provide evidence and arguments which would allow the Panel to conclude that Korea has acted
beyond its discretionary powers under the Agreement on Safeguards, and thus inconsistently with its
obligations under international law.
4.69 Korea also notes that most jurisdictions provide a significant degree of latitude to
investigating authorities to make injury determin ations after considering complicated economic facts.
For example, the European Communities’ courts give a very wide degree of discretion to the
European Commission in arriving at similar general economic and trade policy judgements.  These
courts will only review the Commission’s asse ssment of complex factual issues  where:
“the Commission has exceeded the scope of its discretion by a distortion or 
manifest error of assessment of the facts or by misuse of powers or an abuse of 
process”.44
4.70 However, if the EC arguments are limited to the quality, depth and breadth of Korea’s
notification and consultations and are not requiring the Panel to conduct a de novo  r e v i e w  o f  t h e
Korean competent authorities investigation, then Kore a is of the view that it has far exceeded the
requirements of the Agreement on Safeguards.
(b) Response of the European Communities
4.71 The European Communities  respond to Korea's submission as follows:
4.72 Both the European Communities and Korea agree that the appropriate standard is that in
Article 11 of the DSU, i.e.,
“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”
4.73 However opposite conclusions are drawn as to what this means in the present case.
4.74 In its First Written Submission, Korea concluded that this requires examining whether Korea:
                                                     
44 See, for example  Case C-225/91 Matra v. Commission  [1993] ECR I-3203.WT/DS98/R
Page 18
(a) examined all relevant facts before it at  the time of the investigation;  and
(b) provided an adequate explanation of how the facts before it as a whole supported the
determination made.
4.75 Korea takes this formulation to mean that it need not seek out all the facts but may content
itself with the “facts before it” and that even as regards the facts that it does have before it, it need
only provide an “adequate” explanation of how these facts “as a whole” (that is viewed globally,
rather than in detail) support its determination .  The United States apparently does not draw the same
conclusions as Korea from the same test because it comes to the conclusion that it was normallynecessary to examine the whole of the defined domestic industry and that if Korea failed to evaluate
relevant evidence, its determination would violate Article 4.2(a) of the Agreement on Safeguards.
4.76 The above formulation must be rejected since it results from Article 4.2(a) of the Agreement
on Safeguards and the precedents set by the panel reports in US - Shirts and Blouses  and US -
Underwear
45 that
• the investigating authority has to seek out and consider “all relevant facts” (and not rely on what
is “before it”);  and
• it is necessary, at a minimum, for a serious injury determination under the Agreement on
Safeguards to demonstrate that the relevance or otherwise of each of the injury factors listed in
Article 4.2(a) of the Agreement on Safeguards was properly analysed unless it is explained for
what reason the injury factor may be disregarded .  It is true that no injury factor “in isolation” can
establish serious injury but that does not excuse a failure to examine them all.
4.77 Korea then argued that “the very function of safeguard clauses implies a considerable degree
of discretionary powers to governments in assessin g the situation and in determining injury” and that
“the matter … has to be addressed with considerable deference”.
4.78 It also claimed that most domestic jurisdictions “provide a significant degree of latitude to
investigating authorities to make injury determinat ions after considering complicated facts” and even
quoted a State aid case of the European Court of Justice in support.
4.79 On the first argument brought forward by Korea, the European Communities responded that
the discretionary nature of safeguard measures which may have been accepted under GATT 1947 and
is evidenced in the low number of disputes, is no longer compatible with the WTO .  The Agreement
on Safeguards has introduced an obligation to conduct a thorough investigation as a pre-condition for
imposing measures and has removed the possibility of compensation during the first three years where
the measure is held to be in conformity with the Agreement on Safeguards .  In addition the WTO
system, characterized by binding dispute settlement, is more based on the principle of legality and less
on the principle of diplomacy than the former GATT.
4.80 The European Communities do not agree with the view that the intention of the Agreement on
Safeguards was to increase  the discretion allowed to Members .  The preamble to the Agreement on
Safeguards clearly contradicts this view since it recalls the intention of Members to reinforce thedisciplines of Article XIX of GATT and to re-establish multilateral control over safeguards.
4.81 The European Communities also reject the attempt to import domestic standards of review of
certain jurisdictions into the WTO dispute settlement.
                                                     
45 See, Panel Report in United States - Measure Affecting Imports of Woven Wool Shirts and Blouses
from India ("US - Shirts and Blouses") , 6 January 1997, WT/DS33/R; US - Underwear , WT/DS24/6, 8
November 1996.WT/DS98/R
Page 19
4.82 First, the WTO dispute settlement system serves very different purposes to national
administrative law systems .  It is not designed to establish whether an investigating authority
conducted itself in accordance with its duties but rather to adjudicate on the rights and obligations of
Members of the WTO under the WTO Agreements.
4.83 Second, even if any of the principles applied by Member jurisdictions were relevant, the
standards of all jurisdictions would have to be treated as equally valid and these standards are far too
diverse to allow useful rules to be deduced .  Terms such as “ de novo ” and “manifest error” have
specific and often differing meanings in different legal systems and so are probably best avoided as
they are susceptible of creating conflicting interpretations between Members.
4.84 Thirdly, the guiding text is Article 11 of the DSU, which requires a standard of objective
assessment of the facts .  This is the standard and the terminology to be applied by Panels.
4.85 In the present case, the European Communities are not contesting the basic economic data
produced by Korea but only its completeness and the conclusions drawn from it .  The European
Communities submit that the “objective assessment of the facts” referred to in Article 11 .  DSU
cannot be satisfied by verifying what conclusions the investigating authority came to but must include
how it came to those conclusions, that is to say its reasoning.
4.86 The European Communities recall that Panel Report Brazil – Milk Powder, also established
that it is not sufficient for an authority to refer to the evidence it considered and state its conclusion .
In the words of that panel:  “It was incumbent upon the investigating authorities to provide a reasonedopinion explaining how such facts and arguments had led to their finding.” 
46
(c) Rebuttal response of Korea:
4.87 Korea  makes the following rebuttal arguments:
4.88 First, as the complainant challenging a safeguard measure under the Agreement on
Safeguards, it is for the European Communities to show that the claims it makes against Korea areproven.
4.89 Second, Korea reiterated its previously articulated standard of review in this case, as set in
Paragraph 4.74 above and noted that the United States “agrees with Korea’s assertions concerning the
standard of review in safeguards cases.”
4.90 At the second meeting of the panel with the parties Korea  further advanced its arguments on
the issue of standard of review as follows:
4.91 Based on the EC arguments on the standard of  review in its Second Submission Korea
believes that the European Communities is either:
(a) seeking to challenge the quality of the investigation undertaken by the Korean
competent authorities;  or
(b) whether intentionally or inadvertently, confusing the standard of review to be applied
by the Panel in reviewing the Korea’s invest igation, with the standard of investigation
applicable to the Korean investigating authority.
                                                     
46 See, Panel Report on Brazil – Imposition of Provisional and Definitive Countervailing Duties on
Milk Powder and Certain Types of Milk from the European Economic Community ("Brazilian Milk Powder") ,
adopted by the Committee on Subsidies and Countervailing Measures on 28 April 1994, SCM/179, and Corr. 1,at para 286.WT/DS98/R
Page 20
4.92  Korea requests the Panel to conclude that the European Communities cannot challenge the
quality of the Korean competent authorities’ invest igation after the closing of the first round of Oral
Statements.  This results from Korea's belief that the lack of claims under Articles 3 and 4.2(c) of theAgreement on Safeguards implies that the European Communities have not at any time during these
proceedings challenged the quality of the investigation performed by Korea's competent authorities.
4.93 Korea submits that the European Communities are confusing the standard of review to be
applied to the Panel’s deliberations with the standard to be applied to the investigating authority .
Korea notes that these are different concepts and require different analysis.
4.94 The EC arguments seek to obscure Korea's si mple formulation of Standard of Review.
4.95 First, the European Communities argue that:
“Korea takes this formulation to mean that it need not seek out all the facts but may
content itself with the “facts before it” and that even as regards the facts that it does have
before it, it need only provide an “adequate” explanation of how these facts “as a whole”
(that is viewed globally, rather than in detail) support its determination.”
4.96 This attempt to misconstrue Korea’s argument must be corrected for the record .  Clearly the
standard of review articulated by Korea does not excuse the Korean investigating authority from
conducting a thorough investigation of the facts .  Korea’s formulation of the standard of review
requires the investigating authority to examine all relevant facts which have been uncovered by the
investigation based on the requirements of the Agreement on Safeguards .  The OAI Report is an 85
page document setting out numerous factual findings made by the OAI, and its analysis as to whetherserious injury had been caused to the domestic industry, and whether this serious injury was caused by
increased imports .  It should be clear from this document alone that the Korean competent authorities
undertook a thorough investigation of the case.
4.97 Second, the European Communities suggest that Korea has implied that the imposition of a
safeguard measure is “discretionary” .  This is a complete misinterpretation of Korea’s view of the
nature of safeguards .   Safeguard measures can only be imposed on the basis of the Agreement on
Safeguards and not at the discretion of any national authority .  The fundamental point is that the
underlying purpose of safeguards imposed on the basis of the Agreement on Safeguards is to provide
Members with recourse to emergency short-term measures .  This specific purpose necessitates a
reviewing body to accord a significant degree of defe rence to the investigating authority in relation to
the factual, legal and economic analysis undertaken.
4.98 Third, the European Communities refer to the panel proceedings in Brazilian Milk Powder ,
both to challenge Korea’s statement on standard of review, and its compliance with Article 4.2(a) .
Korea agrees with the earlier Panel’s statements in relation to the nature and quality of examination
that needs to be undertaken by an investigating authority, and is of the view that the Koreancompetent authorities met that standard in this case.
4.99 In fact, the Brazilian Milk Powder  case demonstrates that the Panel should determine Korea's
compliance with the Agreement on Safeguards based on the documents of the competent authorities.
For the sake of completeness, the European Communities might also  have referred the Panel to its
own arguments on standard of review in paragraph 32 of that Panel report where it approved of:
“paragraph 335 of the report of the panel on " United States - Softwood Lumber " [which]
had stated that "[t]he Panel considered that in reviewing the action of the United Statesauthorities in respect of determining the exis tence of sufficient evidence to initiate, the
Panel was not to conduct a de novo  review of the evidence relied upon by the
United States authorities or otherwise to substitute its judgement as to the sufficiency ofWT/DS98/R
Page 21
the particular evidence considered by the United States authorities.  Rather ... [it]
required consideration of whether a reasonable, unprejudiced person could have found,based upon the evidence relied upon by the United States at the time of initiation, that
sufficient evidence existed of subsidy, injury  and causal link to justify initiation of the
investigation".
47
4.100  However, the European Communities clear implica tion by referring to that Panel is that the
quality and nature of the Korean authorities’ analysis was similar to that of the Brazilian authorities .
The European Communities comparison between three paragraphs of analysis in a two page
document48 does a disservice to the 85 pages of findings and closely reasoned analysis found in the
OAI Report and the 17 page April 1 Notification.
4.101  Moreover, the European Communities reference to the Brazilian Milk Powder  panel report is
misleading . For brevity, Korea noted only two material differences between the Brazilian case and the
case under investigation, as these clearly show that  there can be no meaningful comparison between
the two:
(a) the Panel found that Brazil had not undertaken any investigation whatsoever prior to
the imposition of a provisional countervailing duty, therefore it could not have
established that the relevant elements necessary for imposition of a duty were present;
(b) the Panel found that although Brazil was required to examine certain injury criteria in
establishing material injury, it only referred to one such factor in its publisheddocuments.
4.102  Fourth, the European Communities examine Korea’s arguments concerning the level of
deference shown in national review procedures .  However, it misses or overlooks Korea’s
fundamental point .  Korea was not asking the Panel to apply any specific definitions or legal terms
when it suggested that a number of judicial systems, including those in the EU and United States,afford national authorities carrying out detailed economic analysis a great deal of discretion .  Korea’s
point is not the precise level of deference provided, but the fact that it is provided at all by courts
when reviewing complicated, factual, legal and economic analysis.
49
                                                     
47 See, Brazil Imposition of provisional  and definitive countervailing du ties on milk powder and certain
types of milk from the EEC, 28 April 1994 (SCM/179).
48 See, Korea Exhibit 17.
49 Again, Korea notes the extremely wide discretion provided to the Commission and Council of
Ministers by the European Courts of Justice, and refers the Panel to, for example, the SAM Schiffahrt  judgment
([1997] ECR I-4475), where the ECJ notes:
“23. As the case-law has firmly established, in giving the Council the task of adopting this policy a
common transport policy, the Treaty has conferred wide legislative powers upon it as regards theadoption of appropriate common rules (judgment in Case 97/78 Schumalla [1978] ECR 2311,paragraph 4).
24. In reviewing the exercise of such powers, the Court cannot substitute its own assessment for
that of the Community legislature, but must confine itself to examining whether that latterassessment contains a manifest error or constitutes a misuse of powers, or whether the authority inquestion did not clearly exceed the bounds of its discretion (judgments in Case C-122/94Commission v Council [1996] ECR I-881, paragraph 18;  C-84/94 United Kingdom v Council[1996] ECR I-5755, paragraph 58;  Case C-169/95 Spain v Commission [1997] ECR I-0000,
paragraph 34).
25. The Court's case-law also shows that where, as in this case, implementation by the Council of a
common policy requires it to assess a complex economic situation, its discretion is exercisable notonly in relation to the nature and scope of the provisions which are to be adopted but also, to aWT/DS98/R
Page 22
(d) Rebuttal response of the European Communities
4.103  At the second meeting od the Panel with the parties the European Communities  made the
following arguments:
4.104  The European Communities are not asking the Panel to redo the investigation, merely to
examine the completeness and correctness of what was investigated and to verify the soundness and
compatibility with the Agreement on Safeguards of the reasoning  of Korea in imposing the measure.
In applying this standard of review, the European Communities argue that Korea failed to investigate
all the injury factors specifically mentioned in Article 4.2 and has drawn wrong conclusions from thefacts which it did establish. In particular Korea failed to investigate profitability and employment of
the major part of the domestic industry, the dairy farms and its causality analysis is fatally flawed by
the fact that Korea ignored the protection offered the dairy farms and deliberately closed its eyes to
the impact of the “milk quality scandal” on white milk consumption, by applying circular reasoning.
4.105  Korea’s defence has generally been that it could not investigate certain injury factors because
it did not have the data. The European Communities would make two comments: first, it should have
obtained the data. The Safeguards Agreement requires an investigation (at a minimum) of all theinjury factors listed in Article 4.2 of the Agreement on Safeguards; second, Korea cannot invoke its
own failure to investigate in its defence.
4.106  A second line of defence used by Korea is to say that it could not collect the data since there
was too much of it or it was too difficult. For exam ple, it states that there are 20 000 dairy farms and it
would have been impossible to investigate transaction prices for all of them.   The EuropeanCommunities would reply that the fact that it is difficult to obtain precise information does not mean
that no attempt should be made to make an estimat e. For example it is difficult to know how much
damage is suffered by a person following a personal injury but this does not lead to judges dismissing
claims for damage
2. What are the appropriate documents to be co nsidered by the Panel in evaluating the
analysis performed during the investigation?
4.107  The European Communities in their first submission based their arguments concerning the
lack of compliance by Korea with its obligations under Articles 2 and 4
50 of the Agreement on
Safeguards on the notifications Korea had made to the Committee on Safeguards.  This situation led
to an inquiry by the Panel to the parties as to what document or documents should be considered bythe Panel as evidence of the information used and the analysis performed by Korea's competent
authorities in determining the imposition of a safeguard measure.
 51
(a) Response of the European Communities
4.108  In response to the panel's question the  European Communities  argued:
                                                                                                                                                                    
certain extent, to the findings as to the basic facts,  especially in the sense that it is free to base its
assessment,  if necessary, on findings of a general nature (judgments in Case 166/78 Italy vCouncil [1979] ECR 2575, paragraph 14;  Case 138/79 Roquette Frères v Council [1980]ECR 3333, paragraph 25).”
50 The Panel notes that these two articles refer respectively to the conditions for the imposition of a
safeguard measure and to the determination of serious injury or threat thereof necessary to impose such a
measure.
51 The Panel recalls that the question was :  "Where should the information used and analysis performed
by the national authority of Korea in its determination of its safeguard measure be found?"WT/DS98/R
Page 23
4.109  A safeguard proceeding must be conducted in accordance with open and transparent
procedures respecting the rights of defence of the parties, which are the interested economicoperators.  It is for this purpose that Article 3 of the Agreement on Safeguards requires publication of
a report “setting forth their findings and reasoned conclusions reached on all pertinent issues of fact
and law”.
4.110  The proper forum for discussions between WTO Members concerning the compatibility of
safeguard action with the Agreement on Safeguards is however not the national investigatingauthority or courts, but rather consultations and dispute settlement under the WTO .  Accordingly, the
European Communities consider that all the information should be found, or at least referred to, in the
notifications .  It notes in this respect that Article 12.2 requires a Member to include in its notification
“all pertinent information.” This can be presented in summary form but must cover all issues and must
make clear reference to the source of the more detailed information .  It is only in this way that the
objectives of Article 12 can be achieved.
(b) Response of Korea
4.111  In the response to the Panel's question, Korea  argued:
4.112  The Korean administrative process by which a safeguard measure is imposed has a number of
stages.
52
4.113  First, an interested party or parties files a petition with the KTC.  The KTC reviews the
petition to establish whether the petitioner has proper standing under Articles 32, 33 and 40 of theForeign Trade Act and Articles 64, 65, 66 and 76 of the Enforcement Decree implementing the Act.
4.114  Second, the KTC deliberates the prima facie  case to decide whether to initiate an
investigation on industrial injury.  With the Determination to Initiate an Investigation, the KTC
publishes a Public Notice of Investigation in the Korean Official Gazette, Kwanbo , which provides a
summary of the determination to proceed.  The Notice also contains details of the investigation to beundertaken;  the timetable for the various stages, and contact details for the KTC.  The initiation also
triggers a notification to the WTO Committee on Safeguards, in the form of a notice conforming to
G/SG/N/6.
4.115  In this case, the KTC made the Determination to Initiate an Investigation on 17 May 1996
(see Exhibit Korea-3).
53  The Public Notice of Initiation, which actually is a summary of the
Determination (Exhibit Korea-3), was published in Kwanbo  on 28 May 1996 (see Exhibit  Korea-4),
and this was the basis for the notification to the WTO Committee on Safeguards, G/SG/N/6/KOR/2 of
1 July 1996.
4.116  Third, the KTC forms an investigation team, normally led by an official from the Office of
Administration and Investigation (“OAI”) .  This team undertakes the investigation and is responsible
for the formulation of questionnaires, on-the-spot investigations, and the drafting of the interim report.
4.117  Fourth, prior to the finalization of the investigation report, the OAI holds a public hearing at
which the findings in the investigation report are discussed with all relevant parties present at the
hearing .  Copies of the OAI’s interim report are available to the interested parties prior to the hearing
so that the OAI can take into account observations  and comments made by interested parties at the
public hearing before finalizing the investigation report.  The date of the oral hearing is announced in
Kwanbo  to maximize transparency of this procedure.
                                                     
52 See, Exhibit Korea-12
53 Korea noted that “Public Notice of” should be deleted from the headline of Exhibit Korea-3.  The
Determination itself was not published in Korea’s Official Gazette.WT/DS98/R
Page 24
4.118  In this case, the Notice of Public Hearing was published in Kwanbo  on 25 July 1996 (see
Exhibit Korea-13).  The interim report was available from the KTC upon request as from
12 August 1996.  The Public Hearing was held on 20 August 1996.
4.119  Fifth, taking into account the above interim stage, the OAI completes its report for final
approval by the KTC commissioners.  The report includes a detailed analysis of:
(a) the product under investigation;
(b) the domestic industry;
(c) like or directly competing products;
(d) increases in the level of imports;
(e) threat of or actual serious injury to the domestic industry;  and
(f) the causal relationship between increased imports and serious injury.
4.120  The KTC deliberates the case for a determination on injury (including causal link) on the
basis of the investigation report presented to it from the OAI.  The KTC’s determination of injury,
whether affirmative or negative, is published in Kwanbo with a summary of the investigation result,
the decision of injury, further schedules and other administrative information.  The KTC’sdetermination on injury also triggers a notification to the WTO Committee on Safeguards, in the form
of notice conforming to G/SG/N/8 .  It is important to note that if the KTC makes a negative
determination on injury on the basis of the consideration on increased imports, serious injury, or
causation, the case is rejected and no further action is possible.
4.121  In this case, the OAI Report was completed on 23 October 1996, and a Notice published in
Kwanbo  on 11 November 1996 (see Exhibit Korea-7).
54  The OAI Report was the basis for the
notification to the WTO Committee on Safeguards of 2 December 1996, published by the WTO on
6 December 1996 (G/SG/N/8/KOR/1).55  This Notification stated:
“The Korean Trade Commission has not made  a decision to apply a safeguard measure
yet.  Therefore, there is no information on such a measure at this time.  The KTC will
recommend to the relevant Minister an appropriate remedial measure within 45 days of
the injury determination.”
4.122  Sixth, in accordance with Article 34(1) of the Foreign Trade Act and Articles 71, 72 and 76 of
the Enforcement Decree of the Foreign Trade Act, the KTC Commissioners then consider the OAI
Report and decide on appropriate relief measures for recommendation to the relevant Minister.56
4.123  In this case, the KTC Commissioners decided on the relief measure, namely the quota, on
2 December 1996, and recommended it on 6 December 1996 to the Minister for Agriculture and
Forestry for his deliberation.
4.124  Seventh, taking into account the outcome of “prior consultations” under Article 12.3 of the
Agreement on Safeguards, the relevant Minister takes a decision concerning the relevant relief
                                                     
54 It generally takes 2-3 weeks to prepare a notice in cooperation with the Ministry of Administration,
which is in charge of  the operation of Kwanbo .
55 It took nearly one month for the Notification to arrive at the WTO through diplomatic channels from
the KTC.
56 The KTC’s recommendation on relief measures is not made public because it is only a
recommendation that has no legal effect and that is subject to change by the relevant Minister.WT/DS98/R
Page 25
measure .  If the Minister uses any additional reasoning not found in the OAI Report, this is provided
in the relevant Notice .  However, if no additional reasoning is used, then the Minister's determination
adopts all relevant elements of the OAI Report.
4.125  In this case, Korea issued another notification to the Committee on Safeguards on
21 January 1997, by G/SG/N/10/KOR/1, published on 27 January 1997 .  The notification stated:
Pursuant to Article 12.3 of the Agreement on Safeguards, the Republic of Korea will
consult with Members having substantial interest in the products covered by thesafeguard measure, for the purpose of providing further information.  A delegation from
Korea will stay in Geneva during the week beginning 3 February 1997 to meet with those
Members, before it makes a final decision on the measure by the week beginning
24 February 1997.”
4.126  In addition, the letter enclosing the Notification reserved the right of Korea to make further
submissions to the Committee concerning the imposition of any relief measures.
4.127  Further, on 31 January 1997, Korea filed a notification with the Committee on Safeguards
concerning the application of the proposed safeguard measure to developing countries .  This was done
in accordance with footnote 2 of Article 9 of the Agreement on Safeguards (see G/SG/N/11/KOR/1 of
21 February 1997, and Exhibit EC-8).
4.128  The Minister of Agriculture and Forestry took his decision on 1 March 1997, and a Notice of
the decision was published in Kwanbo  on 7 March 1997 (see Exhibit Korea-9).
4.129  On 24 March 1997, Korea notified the Committee on Safeguards of an addendum to
G/SG/N/10/KOR/1 (G/SG/N/10/KOR/1/Suppl.1) , which was circulated on 1 April 1997.
4.130  Therefore, Korea concludes that the information used and analysis performed is found in the
seven stages set out above, including, where relevant, any additional information contained in any of
the Notifications made to the Committee on Safeguards .  Although it may be possible to conclude that
the OAI Report forms the fundamental basis of Korea’s determination, it should be clear that the KTC
and the relevant Minister together comprise the “competent authorities” and that any decision to
impose a safeguard measure must take into account prior consultations .  Accordingly, in response to
the Panel’s question as to where to find “the information used and analysis performed by the national
authority of Korea in its determination of its safeguard measure,” Korea considers that any“information used or analysis undertaken” at any time subsequent to the issuance of the OAI Report
and prior to the Minister’s final decision to implement relief measures is also relevant and needs to be
considered as part of that decision.
(c) Submission of the European Communities
4.131  In its second submission the European Communities  further argued as follows:
4.132  The European Communities have based its attempts to show that Korea’s measure was
inconsistent with Article XIX of GATT and several provisions of the Agreement on Safeguards.  In
order to arrive at this conclusion the European Communities based themselves on Korea’s
1 April 1997 Notification to the Committee on Safeguards, because it wanted to take into account all
the facts and arguments on which the final position of its authorities was based.  The European
Communities assumed that all those facts and arguments would be reflected in the 1 April
Notification in view of Korea’s multilateral obligations, at least in summary and with appropriatereference to the relevant parts of other determinat ions of its competent authorities.  Although the
European Communities were prepared to accept the 1 April 1997 Notification as the ultimate source
of the basis for Korea’s determination, even that latest document could not sustain a close scrutiny.WT/DS98/R
Page 26
4.133  The European Communities submit that, in any event, no other result is reached by looking at
the documents which Korea refers to as its “final determination” or at the KTC’s determination of
injury.  Indeed, in the course of its consulta tions with Korea the European Communities already
challenged the WTO-legality of its intended measures before the 1 April Notification was published.
4.134  This was done on the basis of information available at that stage, which did not include the
1 April Notification but rather the information provided in Korea’s documents and the explanations
provided by Korea.
4.135  The European Communities further consider that its position as to the appropriate source of
the information used and analysis performed by Korea’s authorities is confirmed by Korea’s replies to
the questions of the Panel.
4.136  In its reply to the pertinent question of the Panel, Korea has described the various procedural
steps leading to the imposition of the safeguard measure at issue in this dispute .  In doing so, it has
referred to, inter alia , several documents which were prepared by its competent authorities .  It has
also pointed out that according to its procedure these documents can be commented upon and revised
accordingly, up to and including the draft final determination.
4.137  Furthermore, Korea itself admits that the final document in its procedure was the “Notice” of
7 March 1997 (produced as Exhibit Korea-9).
4.138  That document certainly fails to be “detailed” as required by Article 4.2(c) of the Agreement
on Safeguards, be it directly, that is by the information included therein, or by reference, i.e., by the
documents which it may refer to.
4.139  In particular, the 7 March Notice, issued after the bilateral consultations with the European
Communities had taken place, does not refer to any of the information and aspects raised in those
consultations.  Thus, if the 7 March Notice and possibly prior documents are the relevant sources,
Korea disregarded, inter alia , the information provided in the consultations and without any reason
being provided.  By contrast, the 1 April Notification does take account of some of the objectionsmade by the European Communities at the consultations.
4.140  Accordingly, the European Communities consider that its reliance on the 1 April Notification
was more favourable to Korea.
4.141  Korea is itself admitting that its 1 April No tification was made to inform WTO Members of
the details of the relief measures and it intended to be a summary of the “OAI Report” and of the“additional findings” based on prior consultations .  Thus, the April Notification is the one (and only)
document accounting for those “additional findings”.
C. CLAIM UNDER ARTICLE  XIX:1(a) OF GATT
(a) Claim by the European Communities
4.142  The European Communities  claim that Korea violated Article XIX:1(a) of GATT by failing
to examine whether the import trends of the products under investigation were the result of unforeseen
developments .   The European Communities made the following arguments in support of its claim:
4.143  Article XIX:1(a) of GATT stipulates :
“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 into the territory of that contracting party in such increased quantities andWT/DS98/R
Page 27
under such conditions  as to cause or threaten to cause serious injury to domestic
producers in that territory of like or directly competitive products, the contracting partyshall be free, in respect of such product, and to the extent and for such time as may be
necessary to prevent or remedy such injury, to suspend the obligation in whole or in part
or to withdraw or modify the concession.”  (emphasis added)
4.144  It clearly results from the wording of Article XIX:1(a) 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, including tariff liberalization
according to a party’s schedules of concessions.
4.145  Tariff concessions and other obligations are listed in Article XIX of GATT as an additional
element to “unforeseen developments”, so it necessarily follows that liberalization cannot constitute
by itself such unforeseen developments. 57  If it were otherwise, a WTO Member would be allowed to
withdraw the very benefits which it had undertaken to afford e.g., by entering into tariff commitments
as soon as those benefits materialize.  This would neither be consistent with good faith interpretationof that provision nor with the liberalization aims pursued by GATT and the WTO Agreement overall.
In any event, increased imports of the magnitude at  issue in this case as a result of the tariff
concessions agreed for SMPP cannot be considered “unforeseen” within the meaning of
Article XIX:1(a).
4.146  The European Communities submit that, by failing to address how the increase in imports of
milk powder blends and foodstuff preparations was the result of “unforeseen developments”, Korea
violated the obligations which it assumed under Article XIX:1(a) of GATT.
(b) Response by Korea
4.147  Korea  responds to the EC arguments as follows:
4.148  Following unsuccessful negotiations during the Tokyo Round and after years of negotiations
during the Uruguay Round, WTO Members finally concluded the Agreement on Safeguards .  It was
intended to establish a final, complete and balanced system of rules for the imposition of safeguards,
which achieved a delicate balance among the different interests of the various groups concerned.
Article 1 of the Agreement on Safeguards expr essly states that the Agreement on Safeguards
«establishes the rules for the application of safeguard measures.» Article 1 does not provide that anydifferent or additional rules provided under Article XIX of GATT must also apply to the application
of safeguard measures.
58  Thus, in the view of Korea, the text of the Agreements supports the
interpretation that the rules established in the Agreement on Safeguards are now the sole articulation
of the rules that must be followed in the application of a safeguard measure59.  Without prejudice to
Korea’s position that it complied with all of its international obligations in applying the safeguardmeasure at issue, Korea respectfully requests that the Panel examine this case in accordance with the
interpretation of Korea.
                                                     
57 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.
58 Contrary to Article 1 of the Agreement on Safeguards, Article 10 of the Agreement on Subsidies and
Countervailing Measures states that «Members shall take all necessary steps to ensure that the imposition of a
countervailing duty . . . is in accordance with the provisions of Article VI of GATT and the terms of this
Agreement.»
59 In terms of the General Interpretative Note to Annex 1A of the WTO Agreement, the rules on the
Agreement on Safeguards must prevail over the conflicting rules in Article XIX of the GATT.WT/DS98/R
Page 28
(c) Additional arguments by the European Communities made at the first meeting of the
Panel with the parties
4.149  The European Communities  responded to Korea's Argument by asserting that:
4.150  Korea relied on a very selective - and interpolated - quotation of Article 1.  Thus, the original
Article 1, reading “This Agreement establishes rules for the application of safeguard measures which
shall be understood to mean those measures provided for in Article XIX of GATT” becomes “This
Agreement establishes the rules for the application of safeguard measures”, with the rest of the
provision eloquently omitted .  (emphasis added )
4.151  By doing so Korea simply refuses to face the fact that GATT was incorporated in the WTO
system in its entirety.  From the very inception of  the new WTO system panels have recognized that
the fragmentation of the multilateral trading system  resulting from the independent co-existence of
GATT 1947 and the so-called “side-agreements” is definitively over.60  Most recently, in Guatemala –
Anti-Dumping Investigation Regarding Portland Cement from Mexico ,61 the Appellate Body made
clear in respect of dispute settlement provisions that
“[a] special or additional provision should only be found to prevail over a provision of
the DSU in a situation where adherence to the one provision will lead to a violation of
the other provision, that is, in the case of a conflict between them”.  “[i]t is only where
the provisions of the DSU and the special or additional rules and procedures of the
covered agreement cannot  be read as complementing  each other that the special or
additional provisions are to prevail ” (emphasis in original)
4.152  It is precisely in those very same terms that the interpretative note to Annex IA to the WTO
Agreement provides that:  “In the event of a conflict  between a provision of the General Agreement
on Tariffs and Trade 1994 and a provision of another agreement in Annex IA … , the provision of the
other Agreement shall prevail  to the extent of the conflict .” (emphasis added).
4.153  The European Communities failed to see how Artic le XIX:1(a), to the extent that it requires
that the increase in imports must result from “unforeseen developments”, could be said to be in
conflict with the provisions of the Agreement on Safeguards.  Clearly, the drafters of Article XIX had
difficulties too, since they cumulated these requirements.
4.154  Furthermore, derogating from Article XIX is ce rtainly not one of the aims of the Agreement
on Safeguards.  That agreement rather aims to “clarify and reinforce the disciplines of GATT and
specifically those of Article XIX … to re-establish control over safeguards and eliminate measures
that escape such control” and recognizes that “for these purposes a comprehensive agreement,applicable to all Members and based on the basic principles of GATT, is called for” .  (emphasis in
original)
4.155  In response to a question by the Panel
62, the European Communities  further clarified their
arguments:
                                                     
60 See, the Panel Report in Brazil - Dessicated Coconut , WT/DS22/R, 17 October 1996. e.g., paras 227,
242.
61 WT/DS60/AB/R, 2 November 1998.
62 The Panel recalls that the question was:  "Please comment and discuss the legal relationship between
the provisions of the Agreement on Safeguards and those of Article XIX of GATT, in particular with referenceto 'unforeseen developments'."WT/DS98/R
Page 29
4.156  The European Communities consider that the requirement in Article XIX that safeguard
measures only be taken in the event of “unforeseen developments” remains applicable even if notrepeated in the Agreement on Safeguards.
4.157  Article 1 of that Agreement provides that “This Agreement establishes rules for the
application of safeguard measures which shall be understood to mean those measures provided for in
Article XIX of GATT”.
4.158  It is clear from the omission of the definite Article before the word “rules” in this provision
that the Agreement on Safeguards is not intended to be the exclusive source of safeguard rules.
4.159  It is true that Article 2 of the Agreement on Safeguards does not repeat the requirement of
unforeseen developments but this can be explained by the intention of the Agreement on Safeguards
to provide procedures for investigations .  Unlike increased imports, other conditions, injury and
causation, the existence of unforeseen circumst ances is something within the knowledge of
governments and does not require investigation involving economic operators .  It is of interest to note
that the requirement that the increased imports result from trade liberalization is also not mentioned inthe Agreement on Safeguards (liberalization is also of course a matter within the knowledge of
governments) .  Both these factors either exist or do not and do not need an investigation to be
established .  As is clearly stated in the preamble, the purpose of the Agreement on Safeguards was to
clarify and reinforce the disciplines of Article XIX of GATT .  The requirements of unforeseen
developments and indeed the consequences of trade liberalization were not requirements which thecontracting parties considered needed to be clarified and reinforced.
4.160  Article 11.1(a) of the Agreement on Safeguards  expressly requires that safeguard action
conform both to Article XIX GATT and to the Agreement on Safeguards .  This is especially so in
view of the fact that GATT and the Agreement on Safeguards are both contained in Annex 1A of the
WTO Agreement and the General Interpretative Note to the WTO Agreement provides that theprovisions of an agreement such as the Agreement on Safeguards should prevail over the GATT in the
event of conflict  and to the extent of the conflict .  The European Communities see no conflict between
Article XIX GATT and the Agreement on Safeguards.
4.161  In response to a request from the Panel that it clarify its interpretation of the Brazil -
Dessicated Coconut  case refered to in paragraph 4.151 above, the European Communities
responded as follows:
4.162  The European Communities have referred to the Brazil - Dessicated Coconut  case in reply to
the position taken by Korea on the issue of the “applicable law”.  Korea has argued that “the rules
established in the Agreement on Safeguards are now the sole articulation of the rules that must be
followed in the application of a safeguard measure”, to the exclusion of Article XIX of GATT,because Article 1 of the Agreement on Safeguards does not provide that any different or additional
rule under Article XIX of GATT must also apply.
4.163  The European Communities disagree with Korea and consider that the Brazil - Dessicated
Coconut  Panel Report, upheld by the Appellate Body, sup ports its view that such an express provision
is not required, but rather that GATT and the Agreement on Safeguards:
“represent an inseparable package of rights and disciplines that must be considered in
conjunction”.63
4.164  The Brazil - Dessicated Coconut  Panel also stated:
                                                     
63 Panel Report, para 227, recalled in Appellate B ody Report, p. 14 (emphasis added).  The Panel
concluded for the non-separability of Article VI of GATT and the SCM Agreement in para 257 of its Report.WT/DS98/R
Page 30
“Article VI of GATT and the SCM Agreement represent a new and different package of
rights and obligations, as among WTO Members, regarding the use of countervailing
duties. … The SCM Agreements do not merely impose additional substantive and
procedural obligations on a potential user of countervailing measures.  Rather, the SCM
Agreements and Article VI together define, clarify and in some cases modify the wholepackage of rights and obligations of a potential user of countervailing measures.” 
64
4.165  The European Communities concur with the conclusion, drawn by the United States from this
passage, that the “new package” made up by the Agreement on Safeguards and Article XIX of GATTis different from Article XIX of GATT 1947.
4.166  The European Communities however disagree with the additional conclusion drawn by the
United States as a third party in this dispute that after the entry into force of the Agreement on
Safeguards “those provisions of Article XIX that remain in force  are incorporated into the Agreement
on Safeguards” and that the requirement that “unforeseen developments” must have caused an
increase in imports is no longer applicable.  With this statement the United States seem to be
attempting to reduce the “package” to the provisions of only one part, the Agreement on Safeguards.This is the opposite of what the Appellate Body meant when it agreed that the GATT provision and
the specific agreement needed to be treated as an “inseparable package”.
4.167  The European Communities added that, on the status of GATT in the WTO system, the Brazil
- Dessicated Coconut  Panel considered:
“It is evident that both Article VI of GATT and the SCM Agreement have force, effect
and purpose within the WTO Agreement.  Th at GATT has not been superseded by other
Multilateral Agreements on Trade in Goods (“MTN Agreements”) is demonstrated by a
general interpretative note to Annex 1A of the WTO Agreement .  (footnote omitted)  The
fact that certain important provisions of Article VI of GATT are neither replicated nor
elaborated in the SCM Agreement further demonstrates this point.
65”
4.168  On the other hand, the European Communities recall that in that case the Panel did not have
to decide on the precise content of the “new package”, that is, on whether and to what extent the
GATT provision at issue (Article VI) had been modified as a result of the relevant Agreement in
Annex 1 A (the Agreement on Subsidies and Countervailing Measures).  In fact, the Panel concluded
for the inapplicability of the whole relevant “package” to the case before it.66
(d) Additional arguments by Korea made at the first meeting of the Panel with the parties
4.169  In response to a question by the Panel67, Korea  further clarified its arguments as follows:
4.170  Article XIX:1(a) of GATT 1947 provided that Contracting Parties could apply safeguard
measures in response to “unforeseen developments” resulting in increased imports that threatened or
caused serious injury to domestic producers of like or directly competitive products .  GATT includes
                                                     
64 Panel Report, para 246;  Appellate Body Report, p. 16 (emphasis in original).
65 “For example, the SCM Agreement does not replicate or elaborate on Article VI:5 of GATT, which
proscribes the imposition of both an anti-dumping and a countervailing duty to compensate for the samesituation of dumping and export subsidization, nor does it address the issue of countervailing action on behalf ofa third country as provided for in Article VI:6(b) and (c) of GATT.  If the SCM Agreement were considered tosupersede Article VI of GATT altogether with respect to countervailing measures, these provisions would loseall force and effect.  Such a result could not have been intended.” (Panel Report, para 227).
66 Panel Report, paras 231, 257.
67 The Panel recalls that the question was:  "Please comment and discuss the legal relationship between
the provisions of the Agreement on Safeguards and those of Article XIX of GATT, in particular with referenceto 'unforeseen developments'."WT/DS98/R
Page 31
the text of GATT 1947, including Article XIX.  The Agreement on Safeguards, however, does not
include the condition of “unforeseen developments.”
4.171  WTO dispute settlement panels and the Appellate Body have established that the language of
GATT and the WTO Agreements should be interpreted in accordance with the rules of interpretation
set forth in the  Vienna Convention on the Law of Treaties68 (“Vienna Convention”).  These rules
require an examination of the ordinary meaning of the words of a treaty, read in their context and in
the light of the object and purpose of the treaty involved.69
4.172  Accordingly, in its interpretation of the Agreement on Safeguards and Article XIX, Korea
first addresses the respective texts.  After having established the meaning of the texts in their context,
Korea discusses the object and purpose of the provisions at issue.  In light of the disagreement
between the parties to this dispute, Korea also analyses supplemental sources of interpretation in
accordance with the Vienna Convention in order to cl arify the meaning of the texts and the object and
purpose of the provisions at issue.70
4.173  Korea submits that the legal relationship between the Agreement on Safeguards and
Article XIX is based on the text of Articles 1 and 11.1(a) of the Agreement on Safeguards.  Article 1
states that:
“[t]his Agreement establishes rules for the application of safeguard measures which shall
be understood to mean those measures provided for in Article XIX of GATT.”
(Emphasis added).
4.174  Article 11.1(a) of the Agreement on Safeguards states that
“[a] Member shall not take or seek any emergency action on imports of particular
products set forth in Article XIX of GATT unless such action conforms with the
provisions of that Article applied in accordance with this Agreement.” (Emphasis added).
4.175  Thus, Articles 1 and 11.1(a) of the Agreement on Safeguards clearly and conclusively
establish that safeguard measures originally provided for in Article XIX may only be applied in
accordance with the rules established under the Agreement on Safeguards.
4.176  Pursuant to the express terms of Article 11.1(a), the Agreement on Safeguards and
Article XIX must be read together, and applied in accordance with the provisions of the Agreement on
                                                     
68 Done at Vienna, 23 May 1969, 1155 U.N.T.S. 33;  8 International Legal Materials 679.
69 See, the Appellate Body Report in the United States - Import Prohibition of Certain Shrimp and
Shrimp Products  (“United States - Shrimp-Turtle ”), WT/DS58/AB/R, footnote 82 and accompanying text, citing
United States - Standard for Conventional and Reformulated Gasoline , (“United States - Gasoline ”) adopted
20 May 1996, WT/DS2/AB/R, p. 17;  Japan - Taxes on Alcoholic Beverages , (“Japan - Alcoholic Beverages ”)
adopted 1 November 1996, WT/DS8/AB/R, WT/DS10/AB/R, WT/DS11/AB/R, pp. 10-12;  India - Patent
Protection for Pharmaceutical and Agricultural Chemical Products , adopted 16 January 1998,
WT/DS50/AB/R, paragraphs. 45-46;  Argentina - Measures Affecting Impor ts of Footwear, Textiles, Apparel
and Other Items , adopted 13 February 1998, WT/DS56/AB/R, paragraph. 47;  and European Communities -
Customs Classification of Certain Computer Equipment , adopted 22 June 1998, WT/DS62/AB/R,
WT/DS67/AB/R, WT/DS68/AB/R, paragraph. 85.
70 See, United States - Shrimp , Appellate Body Report, Section VI.A, stating that “[w]here the meaning
imparted by the text itself is equivocal or inconclusive , or where confirmation of the correctness of the reading
of the text itself is desired, light from the object and purpose of the treaty as a whole may usefully be sought.”I. Sinclair, The Vienna Convention on the Law of Treaties, 2nd ed.  (Manchester University Press, 1984),
pp. 130-131.WT/DS98/R
Page 32
Safeguards.71 The Appellate Body has established that, taken together, provisions of the GATT and
the WTO Agreements  create a new “package of rights.”72  Accordingly, Korea submits that the
provisions of Article XIX have been defined, clarified, and modified according to the new “packageof rights” applicable under the Agreement on Safeguards.
4.177  Korea submits that conflicts between the provisions of Article XIX and the Agreement on
Safeguards must be resolved according to the General Interpretative note to Annex 1A  to the WTO
Agreements  (the “Interpretative Note”), which provides:
“In the event of conflict between a provision of the General Agreement on Tariffs and
Trade 1994 and a provision of another agreement in Annex 1A to the Agreement
Establishing the World Trade Organization…, the provision of the other agreement shall
prevail to the extent of the conflict.”
4.178  The provisions of the Agreement on Safeguards, therefore, prevail to the extent of conflict
with Article XIX.
4.179  Pursuant to Article 11.1(a), safeguard measures must be applied in accordance with the
Agreement on Safeguards.  The “unforeseen developments” condition cannot be applied inaccordance with the Agreement on Safeguards, because such condition is not specified in the
Agreement.  Article XIX, on the other hand, does re quire “unforeseen developments.”  This conflict
73
must be resolved according to the Interpretative Note, which requires that the Agreement on
Safeguards must prevail to the extent of conflict with Article XIX.
4.180  Because the “unforeseen developments” condition of Article XIX does not conform with the
provisions of the Agreement on Safeguards, Members are not required to consider such condition
when taking or seeking the emergency actions on imports of particular products set forth in
Article XIX of GATT.
4.181  In addition to the rule set forth in Article 11.1(a), Article 2 of the Agreement on Safeguards
provides that “[a] Member may apply a safeguard measure to a product only if that Member hasdetermined, pursuant to the provisions set forth below...” that the applicable criteria have been
established (emphasis added).  The “provisions below” of the Agreement on Safeguards do not
include the “unforeseen developments” condition.  Moreover, Article 2 continues to reiterate every
provision of Article XIX:1(a) except those rega rding “unforeseen developments” and “obligations
incurred by a contracting party under [GATT], including tariff concessions.”  Thus, the language of
                                                     
71 Although it may consider that the application of Article 11.1(a) may be inconvenient for its purposes,
the EC cannot simply ignore its legal effect.  As the Appellate Body has noted on two occasions “one of the
corollaries of the ‘general rule of interpretation’ in  the Vienna Convention is that interpretation must give
meaning and effect to all terms of the treaty.  An interpreter is not free to adopt a reading that would result inreducing whole clauses or paragraphs of a treaty to redundancy or inutility.” Appellate Body Report, Japan -
Alcoholic Beverages , pp. 11-12, citing Appellate Body Report, United States - Gasoline , p.23.
72 See, Brazil - Measures Affecting Desiccated Coconut , WT/DS22/AB/R, adopted 21 February 1997,
p.16, where the Appellate Body stated that “[t]he SCM Agreements do not merely impose additional substantive
and procedural obligations on a potential user of countervailing measures.  Rather, the SCM Agreements andArticle VI together define, clarify and in some cases modify the whole package of rights and obligations of apotential user of countervailing measures.”  (Emphasis added.)
73 In Korea's view the EC attempts to avoid “conflict” between the provisions of the agreements by
comparing Article XIX:1(a) to Article 2 of the Agreem ent on Safeguards, which can, on their face, be read
complementary to each other.  The conflict that brings the Interpretative Note into  application, however, is
between Article XIX:1(a) and Article 11:1(a) of the Agreement on Safeguards, which requires that safeguardmeasures be applied according to the Agreement on Safeguards (that does not include the “unforeseendevelopments” condition).WT/DS98/R
Page 33
Article 2 of the Agreement on Safeguards mandates the interpretation that the condition of
“unforeseen developments” is not included in the new “package of rights” in effect under WTO law.
4.182  Korea considers that its interpretation of the WTO safeguards regime reflects the object and
purpose of the Agreement on Safeguards together with Article XIX.  The preamble to the Agreement
on Safeguards includes the following as its object and purpose:
• to improve and strengthen the international trading system based on GATT;  and
• to clarify and reinforce the disciplines of GATT, and specifically those of its
Article XIX..., to re-establish multilateral control over safeguards and eliminate
measures that escape such control.
4.183  Korea considers that its interpretation of the Agreement on Safeguards and Article XIX is
also consistent with the object and purpose of the WTO Agreements  as a whole.  The Appellate Body
has noted that “[t]he authors of the new WTO regime intended to put an end to the fragmentation that
had characterized the previous system.” This intent is evident in the preamble to the WTO Agreement ,
which states, in pertinent part:
“Resolved, therefore, to develop an integrated, more viable and durable multilateral
trading system encompassing the General Agreement on Tariffs and Trade, the results of
past trade liberalization efforts, and all of the results of the Uruguay Round of
Multilateral Trade Negotiations.”
4.184  Thus, the object and purpose of the provisions at issue, and of the WTO Agreements
generally, is to introduce changes to the GATT regime that improve and strengthen the multilateral
trading system.
4.185  The object and purpose of the provisions at issue is further illustrated by practice of the
parties under Article XIX and the Agreement on Safeguards.74  Practice under Article XIX confirms
that the GATT Contracting Parties did not consider that the condition of “unforeseen developments”
was required.  For example, as early as 1951, the United States did not apply the “unforeseen
developments” condition in determining whether to impose safeguard measures.75
4.186  Significantly, the lack of subsequent practice under Article XIX reflects the view held by
many Contracting Parties that Article XIX’s pr ovisions were unrealistic and unusable.  The
proliferation of “grey area” measures since the inception of GATT 1947 is widely attributed to
Contracting Parties’ perception that the political and economic reality attendant to safeguard measures
could not be accommodated under Article XIX.
4.187  Even if it is considered that “unforeseen developments” were required under GATT 1947, but
were simply not complied with, practice by the parties confirms that “unforeseen developments” are
not required under the Agreement on Safeguards.  Safeguards practice subsequent to the WTO
Agreements ’ entry into force is generally limited to Members’ implementation of laws and regulations
consistent with the Agreement on Safeguards, especially since the instant case is the first dispute to bebrought under the Agreement on Safeguards.  According to the notifications of legislation submitted
to the Committee on Safeguards pursuant to Article 12.6 of the Agreement on Safeguards, the laws
                                                     
74 Article 31, Paragraph 3 of the Vienna Convention provides that in interpreting a treaty, “[t]here shall
be taken into account, together with the context:... (b) an y subsequent practice in the application of the treaty
which establishes the agreement of the parties regarding its interpretation[.]”
75 In 1951, the US Congress passed the Trade Agreements Extension Act, which eliminated the
“unforeseen conditions” requirement from US safeguards law.WT/DS98/R
Page 34
and regulations of the parties and third party to this dispute do not include the condition of
“unforeseen developments76”
4.188  Under the presumption that these WTO Members have implemented the measures required
under the Agreement on Safeguards in good faith, Korea submits that the absence of the “unforeseen
developments” condition indicates that such condition in their domestic legislation is not considered
to exist under the Agreement on Safeguards.
4.189  The object and purpose of the Agreement on Safeguards, as illustrated by the parties’
practice, is to improve and strengthen the multilateral trading system by introducing effective meansfor applying safeguard measures.  This object and purpose would be completely undermined by the
inclusion of the “unforeseen developments” condition.
4.190  Korea considers that the relevant texts clearly do not require the condition of “unforeseen
developments.”  To the extent that the texts are deemed ambiguous or unreasonable, however, Korea
notes that preparatory work to the Agreement on Safe guards reinforces the negotiators’ intent that the
condition of “unforeseen developments” does not apply under the Agreement on Safeguards.
77
4.191  The preparatory work to the Agreement on Safeguards provides additional guidance on the
meaning of the texts and the object and purpose of the relevant agreements.  In addition, Korea
considers that the EC imposition of the “unforeseen developments” condition on Korea, but not on
itself, would lead to a manifestly absurd and unreasonable result.78 which is not tolerated under the
Vienna Convention rules, and should be rejected by the Panel.
4.192  In reviewing the preparatory work to the Agreement on Safeguards, Korea first looks to the
language of the disputed provision.  As indicated above, the Agreement on Safeguards reiterates every
provision of Article XIX:1(a) except those regarding “unforeseen developments” and “obligations
incurred by a contracting party under [GATT], including tariff concessions.”  The Agreement on
Safeguards' negotiating drafts also reflect that the negotiators considered, and rejected, the
“unforeseen developments” requirement.79
                                                     
76 The European Communities - G/SG/N/1/EEC/1; the Republic of Korea - G/SG/N/1/KOR/1; the
United States of America - G/SG/N/1/USA/1.  Since the entry into force of the Agreement on Safeguards, the
United States has conducted the following safeguards investigations, in which “unforeseen developments” werenot considered :  Broom Corn Brooms , Inv. Nos. TA-201-65 and NAFTA 302-1, USITC Pub. 2984 (Aug. 1996);
Fresh Tomatoes and Bell Peppers , Inv. No. TA-201-66, USITC Pub. 2985 (Aug. 1996);  and Wheat Gluten , Inv.
No. TA-201-67, USITC Pub. 3088 (March 1998).
77 For an example of the Appellate Body’s r ecourse to treaty preparatory materials, see United States -
Shrimp-Turtle  Appellate Body Report, footnote 152, and accompanying text.
78 Similarly, the Oral Statement of the United States notes that requiring the “unforeseen
developments” condition would lead to yet another unreasonable result.  In particular, the United States opinesthat
“[i]t is simply not credible to suggest that a tr ade Minister would negotiate a particular concession
if it could be foreseen that such a concession would result in increased imports that, in turn, would
seriously injure an industry in the country granting the concession.  A Minister who engaged insuch conduct would, quite properly, be relieved of his or her post.”
In this regard, Korea takes note of the United States’ comment that the modification of Article XIX to
delete the condition of “unforeseen developments” was “necessary in order to reflect actual practice.”  OralStatement of the United States, p. 6, n8.  ( See, also discussion of safeguards practice under GATT at note [7],
supra.)
79 See, MTN.GNG/NG9/W/25, 27 June 1989;  MTN.GNG/NG9/W/25/Rev.1, 15 January 1990;
MTN.GNG/NG9/W/25/Rev.2, 13 July 1990;  MT N.GNG/NG9/W/25/Rev.3, 31 October 1990;
MTN.GNG/NG9/19, paragraph A.3.WT/DS98/R
Page 35
4.193  Several authors provide insight on the relationship of the Agreement on Safeguards and
Article XIX under the new WTO safeguards regime.  Professor Thiébaut Flory has opined thatArticle XIX “functioned for many years in a defective manner - moreover the Community has only
triggered the safeguard clause under Article XIX twenty times since the beginning of the 1980's.  This
very low number of inquiries displays the defective nature of the functioning of the safeguard clause
under Article XIX of the General Agreement of 1947....”
80  In the context of safeguard negotiations
during the Uruguay Round, Pierre Didier has observed with respect to the “unexpected, sudden, andlarge” conditions contemplated by the negotiating group on safeguards, that “both the US and EU
rejected this terminology as being too difficult to apply.”
81
4.194  Regarding the outcome of the Uruguay Round negotiations, Marco Bronckers notes that
“exporting interests have also lost on a couple of points in the agreement, for example:  - the
triggering condition of injury no longer needs to be attributable to ‘unforeseen developments’ or to
‘GATT obligations....”82  In addition, Janet A. Nuzum, former Commissioner of the US International
Trade Commission, has noted the change from Article XIX’s requirements that the Agreement onSafeguards does not require “unforeseeable developments and of the effect of obligations incurred by
a contracting party under [GATT] including tariff concessions....”
83  Finally, Edmond McGovern has
expressed the view that “[t]he requirements in Article XIX:1 that the injury should occur “as a result
of unforeseen developments and of the effect of obligations incurred... under this Agreement” were
not repeated in the 1994 Agreement because they were no longer of practical significance.”84  Thus,
learned commentary on the matter in dispute also leads to the conclusion that the “unforeseen
developments” condition required under the “defective” Article XIX does not apply under the
Agreement on Safeguards.
4.195  Korea submits that the new “package of  rights” in effect under the Agreement on Safeguards
and Article XIX of GATT does not include the condition of “unforeseen developments.”
(e) Rebuttal arguments made by the European Communities
4.196  The European Communities  made the following arguments in rebuttal:
4.197  In its reply to the Panel's question on Article XIX, Korea correctly refers to the interpretative
criteria set out in Article 31 of the Vienna Convention.85  Their application, to the extent that it is
correct, does not however improve Korea’s case.
                                                     
80 The Agreement on Safeguards in The Uruguay Round Results, A European Lawyers’ Perspective
(European Interuniversity Press 1996), pp. 265-66.  In support of his opinion, Prof. Flory cites to an extensive
list of GATT/WTO publicists, including :  T. Flory, Le GATT, driot international et commerce mondial  (LGDJ,
1968);  J. Jackson, World Trade and the Law of GATT  (The Bobbs-Merrill Company, 1969);  J. Jackson, The
World Trading System  (MIT, 1989);  M.C.E.J. Bronckers, Selective Safeguard Measures in Multilateral Trade
Relations  (Kluwer Law and Taxation, 1985);  Edmond McGovern, International Trade Regulation  (Globefield
Press, 1985), pp. 291-310.
81 Pierre Didier, Les principaux accords de l’OMC et leur transposition dans la Communauté
Européanne  (Bruyland, 1997) pp.271-272.
82 Marco C.E.J. Bronckers, Voluntary Export Restraints and the GATT Agreement on Safeguards, in
The Uruguay Round Results, A European Lawyers’ Perspective  (European Interuniversity Press 1996).
83 The Agreement on Safeguards, U.S. Law Leads Revitalization of the Escape Clause, in World Trade
Organization, the Multilateral Framework for the 21st Century and U.S. Implementing Legislation  (American
Bar Association, 1996) p. 413.
84 International Trade Regulation  (Globefield Press, 1998 update) p. 10.21-2.
85 Article 33 of the Vienna Convention on the Law of Treaties (1155 U.N.T.S 332) reads :  “1.  A treaty
shall be interpreted in good faith in accordance with the or dinary meaning to be given to the terms of the treaty
in their context and in the light of its object and purpose.”WT/DS98/R
Page 36
4.198  When examining the text of the provisions to  be interpreted, Korea, which seems to focus
exclusively on that of the Agreement on Safeguards, reiterates the same basic position:  because the
“unforeseen developments” requirement was not repeated in the Agreement on Safeguards, it cannotbe applied “in accordance with” that Agreement and therefore has been modified (hence repealed) by
the “new package” of rules resulting from the Uruguay Round negotiations.
4.199  The European Communities submit that lack of repetition does not amount to modification or
abrogation, certainly not in the current WTO system. The Appellate Body has reconstructed the
relationship between GATT and the other Annex 1A Agreements and has set the threshold belowwhich a Member cannot arbitrarily diminish its obligations under the WTO, notably under GATT.
4.200  The European Communities consider that lack of  repetition rather means that the Agreement
on Safeguards has not elaborated on this particular requirement, which did not need special
“clarification and reinforcement” in accordance with the agreement’s avowed objectives.  The
Agreement on Safeguards does not, by its terms, represent the exclusive source of the WTO
safeguards regime and the “unforeseen developments” requirement remains in force elsewhere in the
WTO system.
4.201  With respect to the provisions of the Agreement on Safeguards upon which Korea specifically
relies the European Communities asserted that the full text of Article 2.1, which is referred to by
Korea, can clarify its real meaning:
“1. 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 the like or directly competitive products.” (emphasis added)
If some of the requirements of Article XIX of GATT are not even referred to it is hardly surprising
that they are not elaborated upon in the provisions of the Agreement on Safeguards “set out below”.Article 2.1 therefore adds nothing to Korea’s case and by quoting it Korea falls in a rather circular
argument.
4.202  With respect to the object and purpose of the provisions in question, Korea, again focusing on
the Agreement on Safeguards, equally fails to support its case.
4.203  Korea rightly recalls that the objectives of that Agreement are to "improve and strengthen the
safeguard regime", and effectively summarizes them as "to introduce changes to the GATT regime
that improve and strengthen the multilateral tradin g system".  The European Communities argue that,
Korea has not yet demonstrated, how elimination of a requirement for the imposition of safeguard
measures would weaken, rather than strengthen , the multilateral safeguards regime and would
“completely undermine” the abovementioned objectives.86
4.204  As to the “practice” of some WTO Members the European Communities first observes that in
order to reconstruct the “object and purpose” of a treaty in terms of the Vienna Convention that
practice is irrelevant.  The “practice in the application of the treaty” is relevant under Article 31.3(b)
of the Vienna Convention as an autonomous interpretative tool, not to identify object and purpose.
4.205  Furthermore the practice which is relevant under the Vienna Convention is the one “which
establishes the agreement of the parties” on the interpretation or the application of a given treaty
                                                     
86 Eliminating the “unforeseen developments” requirement would rather frustrate the other Agreement
on Safeguards’ objective to “re-establish multilateral control over safeguards and eliminate measures that escapesuch control.” (see the Agreement on Safeguards, Preamble, para 2).WT/DS98/R
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provision.  Korea has instead only quoted implementing legislation of a few WTO Members.87
Moreover, that unilateral practice does not establish the agreement of all WTO Members on the
alleged repeal or “disappearance” of the “unforeseen developments” requirement.  Domestic
implementing legislations of other Members expressly refer to that requirement.88
4.206  Last, the European Communities recalled that they are not challenging Korea’s legislation per
se, but rather the application of a safeguard measure in a specific case, and inasmuch as it understands
that Korea’s legislation does not require Korean authorities to violate Article XIX requirements theEuropean Communities took no position on their conformity with that Article.
(i) The relationship between GATT and the other Annex 1A Agreements in the WTO system
4.207  The European Communities argue that the relationship between GATT and the other
Annex 1A Agreements provisions has, on the one hand, been regulated in the WTO system itself, and,
on the other hand, all the forms of this relationship have already been addressed in dispute settlement.
Both WTO provisions and Panel and Appellate Body Reports make clear that as a rule GATT and the
other Annex 1A Agreements apply cumulatively.  It has also been made clear that to this effect it isnot necessary that an Agreement in Annex 1A either repeat or specifically provide that a given
provision of GATT is applicable although not repeated in its text.  Thus, the rule is rather the opposite
of that put forward by Korea in its First Written Submission.
4.208  The European Communities consider that already the Brazil - Dessicated Coconut  Panel
Report, upheld by the Appellate Body, supports their view that an express provision is not required,
but rather that GATT and the Agreement on Safeguards
“represent an inseparable package of rights and disciplines that must be considered in
conjunction”.89
On the status of GATT in the WTO system, the same Panel considered:
“It is evident that both Article VI of GATT and the SCM Agreement have force, effect
and purpose within the WTO Agreement.  Th at GATT has not been superseded by other
Multilateral Agreements on Trade in Goods (“MTN Agreements”) is demonstrated by a
general interpretative note to Annex 1A of the WTO Agreement.  (footnote omitted)  The
fact that certain important provisions of Article VI of GATT are neither replicated nor
elaborated in the SCM Agreement further demonstrates this point.69
                                                     
87 The EC would note in respect of its domestic legislation, quoted by Korea as an example of
derogation from Article XIX of GATT, that Article XIX is repeatedly recalled in the preamble of CouncilRegulation (EC) No 3285/94 of 22 December 1994, inter alia in the following terms :  “Whereas the Agreement
on Safeguards meets the need to clarify and reinforce the disciplines of GATT, and specifically those of
Article XIX” (para 4 of the statement of reasons).
88 See, e.g., Japan (WTO Doc. G/SG/N/1/JPN/2, 17 July 1995);  Costa Rica (WTO Doc.
G/SG/N/1/CRI/1, 30 March 1995);  Norway (WTO Doc. G/SG/N/1/NOR/3, 2 February 1996);  and also a morerecent Member, Panama (WTO Doc. G/SG/N/1/PAN/1, 9 April 1998).  Th at not all WTO Members accept that
the “unforeseen developments” clause is no longer in force is clear when some of those Members ask otherMembers about the reasons for not including the requiremen t in their legislations and the implications thereof
(See, e.g., WTO Doc. G/SG/Q1/IND/8, Follow-up Questions Posed by J APAN regarding the Notification of
INDIA,  25 September 1998).
89 Panel Report, para 227, recalled in Appellate B ody Report, p. 14 (emphasis added).  The Panel
concluded for the non-separability of Article VI of GATT and the SCM Agreement in para 257 of its Report.WT/DS98/R
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69 For example, the SCM Agreement does not replicate or elaborate on Article VI:5 of
GATT, which proscribes the imposition of both an anti-dumping and a countervailing
duty to compensate for the same situation of dumping and export subsidization, nor doesit address the issue of countervailing action on behalf of a third country as provided for
in Article VI:6(b) and (c) of GATT.  If the SCM Agreement were considered to
supersede Article VI of GATT altogether with respect to countervailing measures, these
provisions would lose all force and effect.  Such a result could not have been intended.”
90
The European Communities submit that with the interpretation of the Agreement on Safeguards which
they proposes Korea is unduly restricting the scope of its obligations under the whole of the WTO
“package”.
4.209  As the Appellate Body observed still in the Brazil - Dessicated Coconut  case:
“The General Interpretative Note to Annex 1A was added to reflect that the other goods
agreement in Annex 1A, in many ways, represent a substantial elaboration of the
provisions of the GATT, and to the extent that the provisions of the other goods
agreements conflict with the provisions of the GATT 1944, the provisions of the other
goods agreements prevail.  This does not mean , however, that the other goods
agreements in Annex 1A, such as the SCM Agreement , supersede the GATT”.91
4.210  Thus, the Appellate Body recognized that in  the relationship between GATT and the other
goods agreements in Annex 1A, the prevalence of the latter is only to the extent of the conflict and
that otherwise this entails no "supersession".  This is otherwise consistent with the principle ofeffective interpretation of treaties, which was also recognized by the Appellate Body, according to
which every provision should be given its meaning and effect.
4.211  In Brazil - Dessicated Coconut  the Panel had already stated that failure to repeat a provision
is not dispositive and does not allow a departure from cumulative application of GATT and other
Annex 1A Agreements.
92  The Appellate Body in EC - Bananas made this point further clear when it
had to decide whether both Article X:3(a) of GATT and Article 1.3 of the Agreement on Import
Licensing Procedures applied to the European Communities import licensing procedures.93
Notwithstanding the fact that the Appellate Body fo und that “there are distinctions between [the] two
articles” (that is, that the two provisions read differently), and at the same time that they have
“identical coverage”94 (that is, regulate the same aspect of the same case in point), the Appellate Body
did not consider that they conflicted and thus that the Interpretative Note to Annex 1A applied.  As a
consequence, it found that both Article X of GATT and Article 1.3 of the Agreement on Import
Licensing Procedures were applicable.95
4.212  The European Communities submit that the hypothesis considered in the Appellate Body
Report in EC - Bananas  is different from the one at issue in the present dispute.  In fact the
Agreement on Safeguards and Article XIX of GATT do not overlap, in the sense that the “unforeseen
developments” requirement is additional and theref ore complementary to the matter regulated in the
Agreement on Safeguards.  In any event, even if these provisions overlapped, the EC - Bananas  case
law makes clear that the GATT provision is not eliminated by the system, but rather remains in force
and is applicable cumulatively with the Agreement on Safeguards.
                                                     
90 Panel Report, para 227.
91 See, Brazil – Measures Affecting Desiccated Coconut , WT/DS22/AB/R, 21 February 1997, p. 14
(italics in original, emphasis added).
92 Id., para 227.
93 See, Appellate Body Report on EC - Bananas , 9 September 1997, WT/DS27/AB/R, paras 199 ff.
94 Id., para 203.
95 Id.WT/DS98/R
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4.213  The Appellate Body in EC - Bananas also addressed the relationship between Article XIII of
GATT and the Agreement on Agriculture,96 notably to decide “whether the provisions of the
Agreement on Agriculture allow market access concessions on agricultural products to deviate from
Article XIII of GATT”.97  The European Communities had argued in this respect that concessions
made pursuant to the Agreement on Agriculture pr evailed over Article XIII of GATT, based on
Articles 4.1 and 21.1 of the former agreement.98  The Appellate Body however upheld the Panel’s
conclusion that the Agreement on Agriculture
“does not permit the European Communities to  act inconsistently with the requirements
of Article XIII of GATT.” 99
4.214  The European Communities submit that, likewise, the Agreement on Safeguards does not
authorize Korea to act inconsistent ly with the requirements of Article XIX of GATT.  Indeed the
contrary is the case since Article 11.1(a) requires Members to apply measures “in accordance with
this Agreement.”
4.215  The reasoning of the Appellate Body sheds li ght as to what is required for finding a
derogation from GATT in another Annex 1A Agreem ent.  When reviewing Article 4.1 of the
Agreement on Agriculture, the Appellate Body observed:
“we do not see anything in Article 4.1 to suggest that market access concessions and
commitments made as a result of the Uruguay Round negotiations on agriculture can be
inconsistent with the provisions of Article XIII of the GATT .  (...) If the negotiators had
intended to permit Members to act inconsistently with Article XIII of the GATT, they
would have said so explicitly.  The Agreement on Agriculture  contains several specific
provisions dealing with the relationship between articles of the Agreement on Agriculture
and the GATT.  For example, Article 5 of the Agreement on Agriculture  allows Members
to impose special safeguards measures that would otherwise be inconsistent with
Article XIX of the GATT and with the Agreement on Safeguards .  In addition, Article 13
of the Agreement on Agriculture  provides that, during the implementation period for that
agreement, Members may not bring dispute settlement actions under either Article XVI
of the GATT or Part III of the Agreement on Subsidies and Countervailing Measures .
With these examples in mind, we believe it is significant that Article 13 of the Agreement
on Agriculture  does not, by its terms, prevent dispute settlement actions relating to the
consistency of market access concessions for agricultural products with Article XIII of
the GATT.  As we have noted, the negotiators of the Agreement on Agriculture  did not
hesitate to specify such limitations elsewhere in that agreement;  had they intended to do
so with respect to Article XIII of the GATT, they could, and presumably would, have
done so.  We note further that the Agreement on Agriculture  makes no reference to  …
any ‘common understanding’ among the negotiators of the Agreement on Agriculture
that the market access commitments for agricultural products would not be subject to
Article XIII of the GATT.” 100
4.216  By this reasoning the Appellate Body set the standard which is required to find a derogation
from GATT:  unless express derogating terms are found in an Annex 1A Agreement, no action
inconsistent with GATT is allowed, even if “pursuant to” an Annex 1A Agreement.  This is exactly
the opposite of what Korea proposes when arguing that failure to repeat the “unforeseen
developments” requirement in the Agreement on Safe guards authorizes to disregard such requirement.
                                                     
96 Id., paras 153 ff.
97 Id., para 155.
98 Id., para 153.
99 Id., para 158.
100 Id., para 157 (italics in original, underlined added).WT/DS98/R
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4.217  The Appellate Body went further and also provided genuine examples of derogation from
GATT found in the Agreement on Agriculture, all of which are drafted in explicit terms, very
different from those of the Agreement on Safeguards.  The European Communities note that theAppellate Body considered that measures authorized under one of these derogations, the special
safeguard clause, would otherwise have been inconsistent with both Article XIX and the Agreement
on Safeguards.
4.218  In the light of the foregoing, the European Communities consider that the language of the
Agreement on Safeguards is not explicitly derogating from GATT, and therefore the standard set outby the Appellate Body is not met in the present case.  Accordingly, Korea is not allowed to “act
inconsistently with the requirements of” Article XIX of GATT, even if its measure had been adopted
“pursuant to”, or “in accordance with”,  the Agreement on Safeguards.
4.219  The Appellate Body further considered
101 Article 21.1 of the Agreement on Agriculture,
which expressly regulates the relationship with GATT in the following terms:
“The provisions of GATT and of other Multilateral Trade Agreements in Annex 1A to
the WTO agreement shall apply subject to the provisions of this Agreement.” (emphasis
added)
In spite of the explicit and strong language of that provision, the Appellate Body could still reach the
conclusion that the Agreement on Agriculture does not permit a WTO Member to act inconsistently
with the requirements Article XIII of GATT.
4.220  The European Communities submit that a different conclusion cannot be warranted in the
present case.  The provisions of the Agreement on Safeguards referred to by Korea do not even
include language as strong as the one emphasized above102, and aim more at restricting Members’
conduct (Article 2.1, Article 11.1) or at setting out the general scope of the Agreement (Article 1) than
at regulating the relationship with GATT.
4.221  In the light of the foregoing the European  Communities reiterate that the Agreement on
Safeguards does not include an express derogation from GATT.  Therefore, it does not authorize
WTO Members, including Korea, to act inconsistent ly with the requirements of Article XIX, and
notably with the “unforeseen developments” requirement.
4.222  The fourth form of relationship between the provisions of GATT and those of other
Annex 1A Agreements is one of conflict, not solved a priori by the system itself by a derogation rule.
The General Interpretative Note to Annex 1A  governs all cases not expressly regulated in the
following terms:
“In the event of a conflict  between a provision of the General Agreement on Tariffs and
Trade 1994 and a provision of another agreement in Annex 1A … , the provision of the
other Agreement shall prevail  to the extent of the conflict .” (emphasis added).
4.223  The Appellate Body had most recently an opportun ity to clarify the meaning of this criterion
of relationship – conflict – in Guatemala – Anti-Dumping Investigation Regarding Portland Cement
from Mexico .  The Appellate Body made clear, in respect of dispute settlement provisions, that
                                                     
101 Id., para 155.
102 In the EC - Bananas  case the United States argued that the language of the Agreement on
Agriculture could not authorize a Member to act incons istently the requirements of GATT, and is now arguing
that mere failure to repeat the “unforeseen developm ent” clause in the Agreement on Safeguards or the
requirement to adopt measures “in accordance with” such agreement is su fficient to entail “subsumption” of
Article XIX of GATT.  The EC considered it difficult to see how these positions can be reconciled.WT/DS98/R
Page 41
“[a] special or additional provision [laid down in a “covered agreement”] should only be
found to prevail over a provision of the DSU in a situation where adherence to the one
provision will lead to a violation of the other provision, that is, in the case of a conflict
between them”.   “[i]t is only where the provisions of the DSU and the special or
additional rules and procedures of the covered agreement cannot  be read as
complementing  each other that the special or additional provisions are to prevail .” 103
4.224  In the EC view, it is precisely in terms of “prevalence” and “conflict” that the General
Interpretative Note to Annex 1A  to the WTO Agreement is drafted.
4.225  The European Communities maintain that Korea has not shown how Article XIX:1(a), to the
extent that it requires that the increase in im ports and the conditions thereof must result from
“unforeseen developments”, could be said to be in conflict with the provisions of the Agreement on
Safeguards.  Clearly, the drafters of Article XIX thought that it was possible to meet all these
requirements, since they cumulated them in the same provision.
4.226  In a case where a conflict cannot be shown, the Appellate Body confirmed that special and
additional provisions apply together with the basic GATT provisions and complement each other.104
Accordingly, it reversed the Panel’s finding that Article 17 of the Anti-Dumping Agreement  "provides
for a coherent set of rules for dispute settlement specific to dumping cases ... that replaces  the more
general approach of the DSU."105
4.227  In summary, in the EC view, the rela tionship between GATT and other Annex 1A
Agreements is exhaustively regulated in WTO rules, as interpreted in Panel and Appellate Body
decisions.  That relationship can be expressed in terms of cumulation (the normal situation);
differences (speciality);  express derogation (conflict solved a priori  by the Drafters of the WTO
Agreement);  conflict.  Only in the latter two hypotheses listed do the provisions of other Annex 1A
Agreements prevail over those of GATT.  The use of the term “subsumption” merely confuses the
issue.  If this term means derogation or conflict, then the Agreement on Safeguards prevails .  If not, it
does not.  In the case of the Agreement on Safeguards and Article XIX of GATT no case of
derogation or conflict has been identified and therefore Article XIX and the Agreement on Safeguards
apply cumulatively. Korea has not demonstrated that a conflict exists, and therefore that it was
justified in not examining whether the increase in imports of SMPP was the result of “unforeseendevelopments”.  Accordingly, the Panel should find that it violated Article XIX:1(a) of GATT as it
did not proceed to that examination before imposing the safeguard measure on SMPP at issue in this
dispute.
(f) Rebuttal arguments made by Korea
4.228  Korea  makes the following rebuttal arguments:
4.229  Korea considers that the applicable law in this dispute is the Agreement on Safeguards.
Korea considers that the provisions in Article XIX of GATT regarding “unforeseen developments”
and “of the effect of the obligations incurred” are no longer part of the package of rights and
                                                     
103 See, Appellate Body Report on Guatemala – Anti-Dumping Investigation Regarding Portland
Cement from Mexico , WT/DS60/AB/R, 2 November 1998, para 65 (italics in original, underlined added).
104 The Appellate Body addressed another specific derogation clause embodied in the WTO system –
namely Article 2.1 of the Understanding on Rules and Procedures Governing the Settlement of Disputes  (“the
DSU”), regulating conflicts between the DSU and specific dispute settlement rules procedures in the “covered
agreements”.  As it found that the criterion laid down therein (the existence of a “difference” between general
and special rules) was not met, it confirmed that ge neral and special rules and procedures had to “apply
together” (para 65 of the Report).
105 See, the Appellate Body Report, para 68 (underlined added).WT/DS98/R
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obligations applicable to the imposition of safeguard measures.  For the reasons set out in
Paragraphs 4.170-4.195.
4.230  Korea expressed puzzlement with the EC statement that:
“Unlike increased imports, other conditions, injury and causation, the existence of
unforeseen circumstances is something with in the knowledge of governments and does
not require investigation involving economic operators.  It is of interest to note that the
requirement that the increased imports result from trade liberalization is also not
mentioned in the Agreement on Safeguards(liberalization is also of course a matterwithin the knowledge of governments).  Both these factors either exist or do not and do
not need an investigation to be established.”
4.231  Korea noted that, under the EC logic, “unforeseen developments” or “of the effect of the
obligations incurred” either exist or do not exist, are strictly within the “knowledge” of each Member,
and do not need an investigation to be established.  Under this articulation, presumably, the only basis
for the Panel to find that Korea violated Article XIX of GATT is if the factors “do not exist.”  As an
alternative argument, Korea respectfully submits that such factors exist:
(a) the increased imports resulted from  “unforeseen developments” because Korea did
not foresee that the European Communities would take the unprecedented step of
emptying its inventories of SMPP on the Korean market in order to take advantage of
the lower Korean tariff on SMPP versus milk powder negotiated pursuant to the
Uruguay Round;  and
(b) the increased imports resulted from “the effect of the obligations incurred” because
they resulted from the tariff concessions negotiated under the Uruguay Round and
GATT balance-of-payments ("BOP") process.
(g) Additional arguments by the European Comm unities made at the second meeting of the
Panel with the parties
4.232  At the second meeting of the panel with the parties, the European Communities  observed
that:
4.233  Korea both dismissed the “unforeseen development” requirement as repealed by the
Agreement on Safeguards, and tried to justify its measure under that clause .  As the European
Communities have constantly said, and Korea has not challenged, it is hard to see how a deepimbalance in the tariff bindings of two compet ing products like SMPP and milk powder would not
lead to a relative change in imports.  The European Communities would also recall in this connection
that in cases where a WTO Member miscalculated its concessions and is facing difficulties as a result
of its tariff commitments it is entitled to negotiate and modify its schedule under Article XXVIII of
GATT.  It may not however use safeguard measures to achieve this result where the conditions fortheir application are not met.
4.234  As to the negotiating history of the Agreement on Safeguards, the European Communities
observed the following.
4.235  
Korea's view is that the requirement of unforeseen developments in Article XIX was in
conflict with the Safeguards Agreement and therefore not applicable was supported by Mr Didier in a
book published in 1997 where he reported that an early draft contained a provision “that there has
been an unexpected, sudden and large increase in the quantity of such product being imported” but
that this was later dropped.WT/DS98/R
Page 43
4.236  Mr Didier considered that this provision related to the requirement of unforeseen
developments in Article XIX.  Korea argues from this that there was an intention to delete therequirement of unforeseen developments. It is intere sting to note that later in the same contribution
Mr Didier develops his thesis further.  He considers that there is a need for a requirement of
unforeseen developments since it cannot be any increase of imports which can be argued to cause
injury which should be allowed to justify safeguard measures, but only increases which result from
abnormal or unexpected situations.
106
4.237  In fact, a closer look at the deleted draft text demonstrates that it had nothing to do with the
requirement of unforeseen developments. Mr Didier was mistaken and could have saved himself the
trouble of trying to invent a replacement for “unforeseen developments”. The draft in fact referred to
an unexpected increase of imports not of unforeseen developments leading to  an increase in imports.
4.238  One way of understanding the requirement of unforeseen developments is to consider the
continuum of causality starting with trade liberalis ation, running into unforeseen developments which
result in increased imports which occur under conditions which are such that serious injury results.This starts with loss of sales, continues with loss of sales and production, falling capacity utilisation,
losses and finally unemployment.
4.239  In fact one might say that unforeseen developments is a defining feature of safeguard
measures since it defines the circumstances in which they may become justified. As Korea said,
Article 1 of the Safeguard Agreement expressly refers Article XIX as defining what a safeguardmeasure is.
4.240  In other words, Article XIX tells you what a safeguard measure is and the Safeguard
Agreement tells you how to apply it. The conseque nce of this was however not mentioned by Korea.
It is that the Safeguard Agreement is not exhaustive.
(h) Additional arguments by Korea made at the second meeting of the Panel with the
parties
4.241  At the second meeting of the panel with the parties, Korea  further advanced its arguments
under Article XIX:1(a) as follows:
4.242  Korea has pointed out that this requirement was omitted from the Agreement on Safeguards,
and maintains that it no longer applies.  The Eu ropean Communities refer to Article XIX GATT, and
claims that the obligation to show “unforeseen developments” still exists.
4.243  First, if one looks at the Agreement on Safeguards, it is clear that it was meant to strike a new
balance and move beyond Article XIX GATT, which had proved to be difficult to apply in practice.
In its first Article, the Agreement states that it:
“establishes rules for the application of safeguard measures which shall be understood to
mean those measures provided for in Article XIX of GATT.”
107
In other words, Article XIX GATT tells one what a safeguard measure is, and this new Agreementtells one how ('the rules for the application') to take those measures.
                                                     
106 Pierre Didier, Les principaux accords de l’OMC et leur transposition dans la Communauté
Européanne  (Bruyland, 1997) p. 272, where reference is made to the need to “limiter la prise de mesures aux
cas sinon anormaux, du moins imprevus”.
107 See, Article 1 of the Agreement on Safeguards.WT/DS98/R
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4.244  Second, in furtherance of the above purpose, Article 2 of the Agreement then goes on to lay
out the 'conditions' for taking safeguard measures.  Interestingly, it repeats almost verbatim what was
said in Article XIX:1(a) GATT, except that:
(a) it removes some language, specifically the “unforeseen developments” language and
the requirement to show that the difficulties were the “result of . . . the effect of the
obligations incurred by the contracting pa rty under this Agreement, including tariff
concessions”;  and
(b) adds some other language:  that the increase in quantities of imports can be either
“absolute or relative to domestic production”;  and
(c) makes explicit that the measures must be non-discriminatory, i.e., the safeguard
should apply to imports from all sources.
4.245  Where a text is adopted almost word-for-word, but makes certain omissions and additions to
it, it stands to reason that those omissions and additions were deliberate.  The preparatory work to the
Agreement on Safeguards further supports this conclusion .  According to the respected academic
Pierre Didier, "a 1990 draft of an agreement included ['unforeseen developments'] and amplified it by
imposing the obligation to establish an 'unforeseen, sudden and significant increase'.  Both the
United States and the EU rejected this terminology as being too difficult or restrictive to apply."108
The entire reference to “unforeseen developments” was then dropped .  However, now the European
Communities want to characterize omission of the “unforeseen developments” criteria as a mere
“failure to repeat” that language .  Why would this deletion have happened, and why would the
European Communities argue that it was too difficult and restrictive to apply if the obligation to
consider “unforeseen developments” remained via Article XIX?
4.246  Third, contrary to the EC assertions, Korea considers that the removal of the obligation
regarding “unforeseen developments” was intended to strengthen the multilateral safeguard regime.
The European Communities contend that Korea has not demonstrated why this would be the case.  Asstated above, both the United States and the EU considered that the “unforeseen developments”
requirement was too difficult and restrictive to apply, and Korea seriously doubts whether it still
served in state practice.  The inability of Members to determine the scope of their rights under
Article XIX led to the proliferation of “grey area” measures.  By improving the safeguard regime and
eliminating unworkable obligations, the drafters intended to strengthen the safeguard regime byensuring that Members resorted to emergency action under the Agreement on Safeguards, rather than
use trade-disruptive and non-transparent “grey area” measures.
4.247  Fourth, the European Communities assert that if the drafters had wanted to deviate from
Article XIX, they had to do so expressly, and cites the EC - Bananas
109 Appellate Body report as
support for this contention.  Korea notes that EC - Bananas  case dealt with a different agreement, the
Agreement on Agriculture, in which the drafters made express derogations.  An example is Article 5
of the Agreement on Agriculture, although, Korea noted that Article 5 only makes an express
derogation from Article II:1(b) GATT, not from Article XIX and the Agreement on Safeguards.
4.248  However, nowhere in the Agreement on Safeguards is there an express derogation .  While the
Agreement is full of fundamental changes (see, fo r example, the requirement to wait three years
before retaliating against certain safeguard measures110  (which is contrary to Article XIX:3(a)), or the
requirement not to reduce the quantity of imports below that of a representative past period (which is
                                                     
108 Les pricipaux accords de L’OMC et leur  transoposition dans la Communaute Europeene
(Bruyland, 1997) pp.271-272
109 Appellate Body Report on EC - Bananas , WT/DS27/AB/R, 9 September 1997, at para. 155.
110 Article 8(3) of the Agreement on Safeguards.WT/DS98/R
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contrary to Article XIX:1(a))111,  the Agreement did not need to expressly signal every derogation.
Any doubt as to the precedence of those provisions over the provisions of Article XIX GATT isresolved by the General Interpretative Note to Annex 1A  of the WTO.  Indeed, if express derogations
were required, one would wonder why this Interpretative Note was included.
4.249  Furthermore, the European Communities fail to mention that the Appellate Body in EC -
Bananas only addresses the situation where the relevant WTO Agreement does not specifically deal
with the subject matter of the relevant Article under GATT.  In its Second Submission, the European
Communities quoted a lengthy paragraph from the Appellate Body's report in EC - Bananas .  The
European Communities, however, tellingly omitted the second sentence of the paragraph that states
that '[t]here is nothing in Articles 4.1 or 4.2, or in any other Article of the Agreement on Agriculture,
that deals specifically with the allocation of tariff quotas on agricultural products.'  In other words,
no Article of the Agreement on Agriculture addressed the subject matter of Article XIII of GATT.
The Appellate Body went on to conclude 'Therefore, the provisions of the GATT, including
Article XIII, apply to market access commitments concerning agricultural products, except to the
extent that the Agreement on Agriculture contains specific provisions dealing specifically with the
same matter.' 112 (emphasis added).
4.250  Here, the Agreement on Safeguards does explicitly deal with the conditions for adopting
safeguard measures, under the very heading “conditions”.  The Agreement on Safeguards specifically
lays out the conditions for adopting a safeguard.  “Unforeseen developments” is not one of them.
4.251  Furthermore, if one reads the relevant texts according to the European Communities position,
there would be a conflict between Article XIX and the Agreement on Safeguards.  If one adheres to
Article 2 of the Agreement on Safeguards and a dopts a safeguard measure without meeting the
“unforeseen developments” requirement, one would be in conformity with the Agreement on
Safeguards but in violation of Article XIX.  The General Interpretative Note to Annex 1A of the WTOclearly provides that in case of conflict between the GATT and an Agreement (like the Agreement on
Safeguards), it is the Agreement, not the GATT, that takes precedence.
4.252  In that regard, this case is not the same as Guatemala - Anti-dumping Investigation Regarding
Portland Cement from Mexico
113, to which the European Communities refer .  That case involved the
overall rules applying to dispute settlement in the WTO and the specific rules applying to anti-dumping, and the Appellate Body found that both sets of rules fit together to form a 'comprehensive,
integrated dispute settlement system for the WTO Agreement .'
114  Even there, the Appellate Body said
that if there were a conflict between the two sets of rules, the special anti-dumping rules would prevail
in case of conflict.  The Appellate Body clarified that a conflict would exist where “adherence to one
provision will lead to a violation of the other provision”.115  Korea believes that here, such a conflict
exists.
4.253  Finally, Korea questioned whether the European Communities even really believed in its own
argument, noting that it did not include the “unforeseen developments” requirement in its own rules
for the application of safeguard measures.116  Its officials proceed with a set of rules that tell them
everything they need to show in order to adopt a safeguard measure, yet that regulation does not
mention or even refer to a couple of extra important requirements.
                                                     
111 Article 5(1) of the Agreement on Safeguards.
112 Appellate Body Report on EC - Bananas , WT/DS27/AB/R, 9 September 1997, at para. 155.
113 Appellate Body Report on Guatemala - Anti-dumping Investigation Regarding Portland Cement
from Mexico , WT/DS60/AB/R, 2 November 1998.
114 Appellate Body Report on Guatemala - Anti-dumping Investigation Regarding Portland Cement
from Mexico , WT/DS60/AB/R, 2 November 1998, para. 66.
115 Appellate Body Report on Guatemala - Anti-dumping Investigation Regarding Portland Cement
from Mexico , WT/DS60/AB/R, 2 November 1998, para. 65.
116 EC Regulation 3285/94 on the common rules for imports, OJEC 1994 L349/53.WT/DS98/R
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4.254  To shift attention from the discrepancy betwee n its argument now and its own implementation
of the Agreement on Safeguards, the European Communities refer to the legislation of a few other
countries in which the “unforeseen developments” requirement was included.  However, it is notdisputed that WTO Members are permitted to adopt rules that are more restrictive of their use of
safeguard measures than required by the WTO rules. What is at issue is what those WTO rulesrequire.  Korea maintains that those rules do not condition adoption of a safeguard measure on a
showing of “unforeseen developments.”
117
D. CLAIM UNDER ARTICLE  XIX:1(a) OF GATT AND ARTICLE  2.1 OF THE AGREEMENT ON
SAFEGUARDS
(a) Claim by the European Communities
4.255  The European Communities  claim that by failing to analyse the conditions under which the
imported products enter the import market Korea has violated its obligations under Article XIX:1( A)
of GATT and Article 2.1 of the Agreement on Safeguards.  The following are the EC arguments in
support of this claim:
4.256  Recalling and developing Article XIX:1(a) of GATT, Article 2.1 of the Agreement on
Safeguards provides 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 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).
4.257  In this respect the European Communities observe that, as they did with the “unforeseen
developments” clause, by including a reference to the conditions of importation in the text of
Article XIX:1(a) and of Article 2 of the Agreement on Safeguards, the drafters of both agreements
have excluded that the volume and rate of increase of the imports be in itself sufficient to justifysafeguard action.
4.258  However, Korea limited its consideration to the increase in imports and failed to examine
under which conditions these occurred and in particular the prices at which the product was imported.
The European Communities therefore submit that Kor ea failed to comply with its obligations under
Article XIX:1(a) and Article 2 of the Agreement on Safeguards, to address whether the conditionsunder which importation of the products being investigated occurred were of such nature as to cause
serious injury to the domestic industry producing like or directly competitive products.
4.259  At the first meeting of the panel with the parties, the European Communities  further
advanced their arguments under Article XIX:1(a)  of GATT and Article 2.1 of the Agreement on
Safeguards as follows:
4.260  By requiring that serious injury result both from an increase in imports and from the
conditions under which this increase takes place, Article 2 of the Agreement on Safeguards clearly
indicates that those “conditions” also need to be assessed.  Among them, the European Communities
asserted that import prices and their impact on domestic prices are clearly in the forefront.
                                                     
117 However, “unforeseen” factors were present in this case, as the Korean Government did not foresee
that the EC would dramatically shift the balance of exports from milk powder to SMPP in order to take
advantage of the Korean tariff structure.  According the EC’s formulation of “unforeseen circumstances”, the
existence of such factors is simply a question of fact, and will justify the imposition of a safeguard measureprovided all other required conditions are present.WT/DS98/R
Page 47
4.261  In its April Notification to the Committee on Safeguards Korea attempts to dispose of this
requirement in two lines reading “Although the sales price of imported products rose by 381 Won/kgduring the period under investigation, the sales price of domestic milk powder dropped by
360 Won/kg.”  When reviewing the price conditions in its First Submission the European
Communities, meant that in the EC view this was insufficient and Korea had failed to indicate
whether and how import prices depressed or otherw ise adversely affected those of domestic products.
4.262  In response to a question by the Panel
118, the European Communities  further clarified that
they believe that among the conditions to be considered under Article 2.1 price is paramount but other
conditions such as superior quality or advertising can also be imagined in certain cases.
(b) Response by Korea
4.263  In response to a question by the Panel119 Korea  argued that the "under such conditions"
language contained in Article 2.1 of the Agreement is merely part and parcel to the causality
requirement that must be demonstrated under Article 4 of the Agreement on Safeguards.  This
language does not impose any separate or distinct obligation.
4.264  The special safeguard provision of the Agreement on Textiles and Clothing (ATC) supports
this interpretation.  Article 6 of the ATC states that a Member must demonstrate that “a particular
product is being imported into its territory in such increased quantities as to cause serious damage, or
actual threat thereof, to the domestic industry.”  The drafters did not consider it necessary to add the
term “under such conditions,” although a finding of causation is presumably still required.  Inaddition, the superfluous nature of the language “under such conditions” is also supported by the fact
that the Guide to GATT Law and Practice prepared by the GATT/WTO Secretariat refers to all other
language except “under such conditions” in analyzing identical language under Article XIX of GATT
1947.
4.265  The object and purpose of the Agreement on Safeguards is to accord Members the right to
impose a safeguard measure as a last resort when increased imports are causing injury or threat of
injury to a particular domestic industry.  The Agr eement does not specify that causation must be based
solely on price undercutting or on any other factor.  Increased imports may displace competing
domestic products, and cause injury to a particular domestic industry, for a wide range of reasons,
including image, quality, style, structure of the industry, technical assistance, etc.  A Member couldalso find causation when the prices of imports are increasing, because the prices of domestic products
may still be selling at a loss or at a level that gives insufficient return on investment.  Provided a
Member demonstrates that increased imports are causing serious injury or threat thereof to the
domestic industry and provided it discounted injury potentially caused by other factors, the panel
should find that such Member satisfied its obligations under Articles 2 and 4 of the Agreement onSafeguards.
(c) Rebuttal arguments made by the European Communities
4.266  The European Communities  made the following arguments in rebuttal:
4.267  Korea has not rebutted EC claim that it did not analyse the impact of import prices on the
domestic prices of raw milk and milk powder and, to the extent that it gathered information in this
                                                     
118 The Panel recalls that the question was :  "What factors, other than price, can be considered under
the proposition 'under such conditions as to cause or threaten  to cause injury . . . ', mentioned in paragraph 2.1 of
the Agreement on Safeguards?"
119 The Panel recalls that the question was :  "What factors, other than price, can be considered under
the proposition 'under such conditions as to cause or threaten  to cause injury . . . ', mentioned in paragraph 2.1 of
the Agreement on Safeguards?"WT/DS98/R
Page 48
respect, this information could not support a finding that the conditions under which imports increased
were such as to cause serious injury.  Furthermore, Korea did not indicate any other prevailing
“conditions” that it considered relevant under Article 2.1 of the Agreement on Safeguards, but simplyomitted to review whether that provision was fulfilled.  In its reply to the Panel’s questions, the
European Communities has indicated what those factors, in addition to prices, can be, for instance, the
quality of the imports or their promotion on the importing market could also be relevant, as could e.g.,
the rapidity of market penetration (as opposed to market share).
4.268  Although there is a table in Korea’s Notification of 24 March giving prices of domestic milk
powder and imported SMPP, Korea has failed to conduct any analysis of these prices. The European
Communities consider that it is not sufficient simply to compare these prices.  The products involved
in this case, raw milk, milk powder and SMPP are substitutable and competing to some extent but still
have different characteristics and different uses. Indeed, Korea asserts that, "most Korean users of
milk powders state … that the domestic products are of higher quality than the imported SMPP."
Furthermore, the KTC investigation report highlights the differences between these products in
relation to their end uses. It is stated in the report 
 that the Food Industry Handbook allows different
end uses for them.  No analysis is given of the proportion of the market held by the products for which
SMPP can be used, in comparison with the products for which milk powder can be used or with those
produced from raw milk.  The conclusion is that a direct comparison cannot be made between milk
powder and SMPP, firstly because of the different characteristics of the products and secondly
because of the different opportunities for their end use. Korea is wrong to assume price undercuttingon the part of SMPP imports simply because they were available at a lower price than domestic milk
powder. No mention is made in Korea’s Notification or the KTC Report of how the differences in the
two products, both in terms of inherent characteristics and end use, were taken into account in the
price comparison.  Indeed, comparing the price differences between domestic milk powder and
imported SMPP is analogous to comparing prices between butter and margarine. In many markets theprice of these competing and substitutable products will be very different.
4.269  In the response to questions by the Panel
120 posed at the second meeting, the European
Communities  further clarified their arguments as follows:
4.270  The "under such conditions" requirement must primarily be related to the imported products
and not to the domestic market .  Semantically, the term “under such conditions” in Article 2.1 relates
to the imported product and not to the state of the domestic market or the industry which are
susceptible to be affected by the increased imports .  One of the conditions of imports which is always
present and always relevant is price.
4.271  It is clear from the presence of the word “and” in Article 2.1 that “under such conditions”
constitutes a separate requirement from imports being “in such increased quantities”.
4.272  The conditions under which the imports occur, together with increased imports, are at the
beginning of the causality continuum which terminates in the injury.  In fact they are not quite at the
beginning, they come after trade liberalization and unforeseen developments.  The important point is
that the increased imports and the “such conditions ” causally precede the injury.  Accordingly, the
criteria which are relevant for establishing the conditions under which imports take place are not the
same as the ones determining the causal link.  In other words, the criteria examined under this concept
of “under such conditions” relate to the objective existence of certain conditions whereas causalityrequires a reasoned analysis of cause and effect between increased imports and those conditions on
                                                     
120 The Panel recalls that the questions were :  "Article 2 of the Safeguard Agreement refers to 'under
such conditions' .  Does 'under such conditions' refer to criteria related to the imports? the domestic market? or
both?" "Does 'under such conditions' constitute a sepa rate requirement from the increased imports causing
injury?" "What is the difference between the criteria examined under the concept 'under such conditions' andthose to be examined under the causal link?WT/DS98/R
Page 49
one side and injury on the other side. Concretely, the examination of the concept of “under such
conditions” will require an examination of prices whereas an examination of the causal link willrequire an examination of the way in which those prices cause injury to the domestic industry .  The
existence of low-priced imports by itself is not injury, it is only a circumstance susceptible to lead to
injury.
(d) Rebuttal arguments made by Korea
4.273  Korea  makes the following rebuttal arguments:
4.274  Article 2 of the Agreement on Safeguards ( Conditions ) provides that a Member may apply a
safeguard measure to a product if :
“that Member determine[s], pursuant to the provisions set out below, that such product is
being imported into its territory in such in creased 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)
4.275  Korea complied with the conditions established under Article 2 because it complied with
Articles 4.2(a) and (b) in making its determination of serious injury and causal link, with Article 5 in
applying the safeguard measure, and with Article 12 in properly notifying and consulting with the
Committee on Safeguards and interested Members.
4.276  In response to questions by the Panel121 posed at the second meeting, Korea  further clarified
its arguments as follows:
4.277  In Korea’s view the language “under such conditions” can only be interpreted as relating to
imports.
4.278  Korea considers that “under such conditions” is part and parcel of the causality analysis.  This
language does not impose any separate or distinct obligation on the investigating authorities.
4.279  Korea is of the view the criteria examined by  the investigating authorities under the concept
“under such conditions” are not different from those examined under causal link.  In other words, it is
the conditions under which imports enter a market that link such imports to the serious injury to the
domestic industry.
E. KOREA 'S APPLICATION OF SAFEGUARD MEASURES TO AGRICULTURAL PRODUCTS
(a) Submission by Korea
4.280  Korea  makes the following submission concerning the nature of the Korean dairy industry,
and the application of a safeguard measure to an agricultural product:
4.281  The Agreement on Safeguards is the general safeguard mechanism under the WTO system,
and its provisions are applicable to most products covered by the WTO system .  Other safeguard
measures are applicable to sectors that raise specific or unique issues, most notably, textiles and
agricultural products .  These other safeguard measures are designed to provide the appropriate degree
                                                     
121 The Panel recalls that the questions were :  "Article 2 of the Safeguard Agreement refers to 'under
such conditions' .  Does 'under such conditions' refer to criteria related to the imports? the domestic market? or
both?" "Does 'under such conditions' constitute a sepa rate requirement from the increased imports causing
injury?" "What is the difference between the criteria examined under the concept 'under such conditions' andthose to be examined under the causal link?WT/DS98/R
Page 50
of sensitivity required by those sectors or products .  The Agreement on Safeguards inevitably does not
afford the same sensitivity to the agricultural sector as the Agreement on Agriculture.
4.282  Article 5 of the Agreement on Agriculture recognizes the unique nature of agricultural
markets and how even short term and relatively minor increases in imports can produce dramatic
dislocations in the relevant industry .  As a consequence, Article 5 has a much lower threshold for
action than the Agreement on Safeguards .  However, Korea was unable to invoke Article 5 of the
Agreement on Agriculture to remedy serious injury to its dairy markets caused by increased imports .
Instead, Korea followed the procedures under the Agreement on Safeguards and still concluded thatserious injury had been caused to its domestic industry, even though the standards for the imposition
of safeguard measures under the Agreement on Safegu ards are higher than those under the Agreement
on Agriculture.
(b) Response of the European Communities
4.283  The European Communities  respond to Korea's submission as follows:
4.284  The European Communities consider that evaluating whether Korea’s measure would have
been consistent with the Agreement on Agriculture, and notably its Article 5, falls outside the terms ofreference of this Panel.  In any event, Korea canno t compensate the fact that it could not invoke the
safeguard provision of the Agreement on Agriculture by arbitrarily lowering the standard of
Article XIX of GATT and of the Agreement on Safe guards.  Furthermore, quantitative measures, and
for four years, are clearly not contemplated in Article 5 of the Agreement on Agriculture.
(c) Rebuttal response of Korea:
4.285  Korea  makes the following rebuttal arguments:
4.286  As the general system of rules for imposing safeguard measures, the Agreement on
Safeguards will be applied to a number of different product sectors and, thus, has a degree of
flexibility built into its structure and individual terms.
4.287  Certain injury criteria relevant to industrial or manufactured products may not be relevant
when applied to agricultural products because those criteria are not of an objective and quantifiable
nature having a bearing on the situation of the particular agricultural industry, i.e., they do not reflect
the unique nature of the agricultural sector.
122
4.288  If particular criteria listed in Article 4.2(a) of the Agreement on Safeguards are not relevant to
a specific agricultural sector, Members should be accorded the flexibility to examine other listedcriteria that more fully take into account the unique or specific nature of the products and industry
under examination .  Members should also be allowed to take into account unlisted criteria that are
relevant to the industry under examination.
123
4.289  At the second meeting of the panel with the parties, Korea further advanced its arguments
regarding the Agreement on Agriculture as follows:
                                                     
122 Article 4.2(a) requires  an evaluation of “all relevant factors of an objective and quantifiable nature
having a bearing on the situation of that industry” .  This appears to permit an investigation that takes into
account the specific nature of the industry.
123 In light of the fact that Article 4.2(a) of the Agreement on Safeguards uses the term “in particular”,
factors other than those set forth in Article 4.2(a) may be used to determine injury to a particular sector, such asagriculture.WT/DS98/R
Page 51
4.290  Korea’s purpose in referring to the Agreement on Agriculture, and Article 5 in particular, was
to show that:
(a) in any investigation of any industry under the Agreement on Safeguards, the products
and industry in question need to be carefully considered and any specific aspects
identified need to be factored into the re levant determinations of serious injury and
causation.  Certain injury criterion may be relevant in one case but not in others.  This
view is shared by the Government of the United States
(b) due to circumstances beyond its control, Korea was required to investigate the dairy
industry under the Agreement on Safeguards, as opposed to the Agreement on
Agriculture.  The Government of Korea undertook a full and proper investigation of
its dairy industry under the Agreement on Safeguards, but would under normal
circumstances have been able to use the specific provisions of the Agreement on
Agriculture.  Korea does not claim that it could replace the higher investigation
standards of the Agreement on Safeguards with the lower standards of the Agreementon Agriculture, and the Panel must be clear that the Korean competent authorities
complied fully with the requirements of the Agreement on Safeguards, and in no way
referred to the standards applicable under the Agreement on Agriculture.
F. C
LAIM UNDER ARTICLE  4.2(a) OF THE AGREEMENT ON SAFEGUARDS
(a) Claim by the European Communities
4.291  The European Communities  claim that Korea violated Article 4.2(a) of the Agreement on
Safeguards by failing to show that serious injury occurred to the domestic industry.  The following are
the EC arguments in support of that claim:
(i) The definition of the “domestic industry”
4.292  Article 4.1.(c) of the Agreement on Safeguards provides that:
“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.”
4.293  For the purposes of its safeguard investigation, Korea defined124 the “domestic industry” as :
“the industry that produces raw milk and milk powder.  These products are directly
competitive with the imported products under investigation .  Raw milk producers consist
of dairy farming households and milk processing companies which directly operate their
own dairy farms;  milk powder producers are livestock co-operatives and milkprocessing companies, including producers, who commission processing to third parties
because of the absence of facilities for manufacturing milk powder.”
4.294  The European Communities agree with Korea that this is an appropriate definition of the
domestic industry. Production of raw milk and milk powder are interconnected and complementary
activities .  Not only does each depend on the other to be able to conduct its own business, but many
                                                     
124 See, Paragraph III.2 of the Notification of 1 April 1998, G/SG/N/10/KOR/1/Suppl.1
(Exhibit EC-10).WT/DS98/R
Page 52
raw milk producers are also milk powder producers or own milk powder producers (the livestock
cooperatives are owned by dairy farmers).
4.295  The European Communities however take issue with the fact that Korea did not apply this
domestic industry definition consistently for its determination of serious injury .  Some injury factors
were either examined only for the raw milk industry and others only for the milk powder industry .  In
many cases there is not even any explanation as to why only part of the domestic industry was
examined and the only apparent explanation is that examination of the other part would not have
supported a finding of serious injury .  In other cases, the evaluation of the injury factors is flawed for
other reasons . The incomplete examination of the injury  factors arising out of the inconsistent
application of the domestic industry definition and the other errors committed by Korea in the
evaluation of injury factors renders the determination contrary to Article 4.2(a) of the Agreement on
Safeguards.
(ii) Failure to examine correctly all relevant factors of an objective and quantifiable nature
having a bearing on the situation of the domestic industry
4.296  Article 4.2.(a) of the Agreement on Safeguards requires that the serious injury investigation
evaluate all relevant factors of an objective and quantifiable nature having a bearing on the situation
of the domestic 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.
4.297  This provision lays down the principle that an injury investigation must be complete (“all
relevant factors”) .  Only factors that are not relevant, or not objective or quantifiable, or do not have a
bearing on the situation, may be excluded .  Clearly, it is necessary to examine a factor before it can be
considered that it is not relevant, or not objective or quantifiable, or does not have a bearing on the
situation .  The European Communities note that this position has been supported in two recent Panel
reports125 which dealt with the standard of “serious damage” set forth in Article 6.3 of the ATC.126
Both Panel reports stressed the obligation to examine each of the enumerated injury factors .  In the US
- Underwear  case, the Panel criticized the United States for providing inconsistent and inadequate
information.  The Panel in the US - Shirts and Blouses case stated that “at a minimum, the importing
Member must be able to demonstrate that it has considered the relevance or otherwise of each of thefactors listed [...]”.
127  Since the United States did not examine eight of these factors in the context of
the particular industry without giving any explanation for not doing so, the requirements of Article 6
of the Agreement on Textiles and Clothing were not respected.128
4.298  Even though the wording of Article 6.3 of the Agreement on Textiles and Clothing is slightly
different from Article 4.2 (a) of the Agreement on Safeguards, both provisions nevertheless contain alist of injury factors which shall be evaluated by th e investigating authority.  Therefore, in accordance
with the rationale stated in the above Panel reports, the European Communities submit that, at a
minimum, a serious injury determination under the Agreement on Safeguards must demonstrate that
the relevance or otherwise of each of the factors listed in Article 4.2(a) of the Agreement on
                                                     
125 See, Panel report in US - Shirts and Blouses , 6 January 1997, WT/DS33/R; US - Underwear ,
WT/DS24/6, 8 November 1996 .  Both Panel reports were subject to review by the Appellate Body which did,
however, not rule on the standard of serious damage.
126 “In making a determination of serious damage, [...] the Member shall examine  the effect of those
imports on the state of the particular industry, as reflected in changes in such relevant  economic variables as
output, productivity, utilization of capacity, inventories, market share, exports, wages, employment, domestic
prices, profits and investments;  none of which, either alone or combined with other factors, can necessarily give
decisive guidance.” (emphasis added)
127 See, US - Shirts and Blouses , para. 7.26.
128 See, id. at para. 7.52.WT/DS98/R
Page 53
Safeguards was considered .  The European Communities would further submit that that provision
requires each injury factor to be properly analysed unless it is explained for what reason the injuryfactor may be disregarded.
4.299  With respect to each of the factors set out in Article 4.2(a), the European Communities made
the following arguments:
(a) Rate and amount of the increase in im ports in absolute and relative terms
4.300  This factor was not fully examined by Korea with regard to the products which were finally
covered by the measures .  Paragraph IV.2 of the Notification of 1 April 1997, merely explains that
there was an increase in absolute and relative terms for products within the headings of the
Harmonized Tariff Schedule of Korea 0404.90.0000 and 1901.90.2000 .  However, Korea excluded
certain products from the scope of the measure such as milk mineral (calcium) concentrated product,
Chilean special products and raw material for production of Cerelac of Nestlé .  No allowance is made
for these excluded products in assessing the increase of imports .  Indeed, during the dispute settlement
consultations, Korea stated that it was not even in a position to give a reasonable estimate of thevolume of the excluded products during the investigation period .  Furthermore Korea did not consider
the increase in imports in relation to the decline in imports of milk powder, which is a like product.
(b) Share of the domestic market taken by increased imports
4.301  This requirement was examined by Korea in Paragraph IV.3.4. of the Notification of
1 April 1997 where it is explained that the total market share of domestic raw milk and milk powderdeclined some 5.7 percentage points from 91.1 per cent to 85.4 per cent during the investigation
period.  Although this is one of the factors on which Korea subsequently relies to conclude that there
was serious injury in its conclusion (Paragraph IV.4 of the Notification of 1 April 1997), there is no
explanation of why such a small decrease in market share should be a cause for concern, let alone
supportive of a serious injury finding .  The only comment made in the Notification of 1 April 1997 is
designed to excuse the small increase in market share from 1995 to 1996 as being “a temporary
phenomenon triggered by sales of milk powder below manufacturing cost in order to reduce
inventories which was incurring storage costs and expenses”.
(c) Changes in the level of sales
4.302  This factor was to some extent examined in Paragraph IV.3.3 of the Notification of
1 April 1997 in the form of an examination of “consumption of domestic raw milk (including milk
powder)”. Again this was remarkably stable at 1,844,463 tons in 1993, 1,947,128 tons in 1994,
1,947,965 tons in 1995, and 984,934 tons during the first half of 1996 (presumably equivalent to
2 times 984,934, that is 1969,868, tons for a full year) .  Korea states that there was a decrease in 1996,
but this seems to be an error on its part.
(d) Production
4.303  This factor was examined by Korea .   As explained in Paragraph IV.3.1 of the Notification of
1 April 1997, production of raw milk and milk powder increased 3.2 per cent in 1994, 4.2 per cent
in 1995 and 4.4 per cent during the first half of 1996. Korea does not attempt to present this as
“serious injury” but merely to explain it away by stating that
“the production of raw milk cannot be temporarily reduced without resorting to the
slaughter of dairy cows .  Rather than reducing the size of their herds - the average size of
which is quite small - Korean dairy farmers continue normal levels of raw milk
production even during periods of weak demand, since excess raw milk is supplied to the
livestock co-operatives for conversion into milk powder.”WT/DS98/R
Page 54
4.304  In the EC view Korea's explanation is not credible .  Korea is not describing a “temporary”
increase in production but a continuous increase over a period of three years .  Not only can production
be adjusted by varying the use of feed and additives and other technology, dairy cows have in anycase a useful life of eight to ten years which means that 10 to 12 per cent are inevitably retired or
slaughtered every year .  Production can be reduced when necessary even in dairy farms and the fact
that it nonetheless continues to increase in Korea demonstrates that there can be no serious injury.
(e) Productivity
4.305  This factor was examined only concerning the raw milk industry .  According to
Paragraph IV.3.2 of the Notification of 1 April 1997, productivity of dairy farmers has "slightly
increased" .  In fact, productivity in Korean dairy farms has been quite significant.  Again, Korea
attempts to explain this away with some remarkable reasoning, stating that :
“This indirect indication of increased productivity is found to be the result of advances in
technology, not of changes in the market condition.  The fact that the domestic industry
stagnated in spite of increased productivity, indicates that the injury to the domestic
industry was caused not by its internal factors but by external factors, i.e., increased
imports.”
In effect, Korea assumes the conclusion to which it wishes to arrive at (injury or “stagnation”) in
order to explain away a positive factor and attribute the assumed stagnation to imports.
4.306  A further defect in this Paragraph of the Notification of 1 April 1997 is that productivity was
not evaluated at all regarding the milk powder industry but an “explanation” is given for its absencesince it is stated that
“Because the production of milk powder is greatly affected by the supply and demand of
raw milk, and as production facilities cannot accommodate drastic changes in the short
term, a review [of] productivity can be replaced by a review of the production level.”
This explanation is, however, in the EC view insu fficient, because, contrary to this explanation,
productivity is a distinct factor listed in Article 4.2.(a) of the Agreement on Safeguards .  The
examination of this factor cannot be replaced by the examination of another factor.
4.307  In reality, the productivity of the milk powder industry can be expected to have increased
since its total production has increased and there is no indication that the installed production capacity
has been increased.
4.308  In the EC opinion examination of the injury factor of productivity does not support a serious
injury finding, but rather the reverse.
(f) Capacity utilization
4.309  This factor was also addressed only concerning the raw milk industry .  According to
Paragraph IV.3.2 of the Notification of 1 April 1997, “capacity utilization was always 100 per cent inthe raw milk industry since raw milk is produced by dairy cows, which cannot be left idle like some
other form of production.”
4.310  The European Communities maintain that this is not a serious examination of the injury
factor .  A farm which can support 100 cows can choose to only have 80, if economic conditions
require this . Capacity utilization in the milk powder industry is not even mentioned.  In reality, Korea
has simply not examined capacity utilization for the domestic industry at all.WT/DS98/R
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(g) Profits and losses
4.311  Profitability of the raw milk industry was examined by Korea in terms of the profit or loss per
unit of production in Paragraph IV.3.9 of the Notification of 1 April 1997 and in the form of a
“financial analysis” in Paragraph IV.3.10 of the Notification of 1 April 1997, but in both cases only in
respect of the milk powder industry.
4.312  Korea considered exclusively the financial condition of the co-operatives and the milk
powder operations of the milk processing companies and neglected to consider the profitability ofdairy farmers .  This gives a misleading picture because one of the most significant factors governing
the profitability of the dairy cooperatives and milk processing companies is the price which they must
pay for their raw material, and this price is inversely related to the profitability of the dairy farmers.
For example, a 20 per cent increase in the guaranteed milk price would give a considerable increase in
profitability to the dairy farmers but would severely squeeze the operating margins of the dairy
cooperatives milk and processing companies.
4.313  The “financial analysis” in Paragraph IV.3.10 of Korea’s Notification of 1 April 1997 reviews
the turnover and operating profit/loss of two large co-operatives and four milk processing companies.
4.314  The profitability of these companies varies enormously .  Of the two co-operatives referred to
by Korea in its Notification of 1 April 1997, Seoul Dairy was making large and increasing profits,
whereas Pusan-Kyungnam Dairy Co-operative was making large and increasing losses .  If the figures
for Seoul dairy were combined with those of any co-operative other than Pusan-Kyungnam Dairy Co-operative the picture would have been of large and increasing profits.
4.315  Similarly, in the case of the milk processing companies, Korea has omitted from its sample
the second and third largest amongst them in terms of milk powder production, Maeil and Namyang,
which coincidentally are extremely profitable.
4.316  The European Communities therefore conclude th at Korea’s examination of the profitability
of the domestic industry is not in conformity with Article 4.2(a) of the Agreement on Safeguards since
it does not examine the whole of an interconnected industry.
(h) Employment
4.317  This factor was only examined by Korea with regard to raw milk producers in
Paragraph IV.3.6 of the Notification of 1 April 1997, where it is shown that the number of dairyfarmers is slowly decreasing .  The European Communities would observe however that within the
context of increasing production of dairy farms, this is indicative of a healthy consolidating industry
and certainly not of serious injury.
4.318  There is no evaluation of the employment injury factor with regard to the milk powder
industry.  Korea merely states that employment of milk powder industry is difficult to evaluate.However, this statement is clearly insufficient since at least a reasonable estimate would have to be
provided in an acceptable serious injury investigati on; the investigating authority is obliged to collect
such data or explain why reliable collection is impossible.
(i) Other factors
4.319  Korea examined and referred to other factors in its conclusion that are not contained in the list
in Article 4.2(a) of the Agreement on Safeguards.WT/DS98/R
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4.320  The first of these is sales prices, which is examined by Korea in Paragraph IV.3.7 of the
Notification of 1 April 1997, but only with regard to m ilk powder, it being stated that the price of raw
milk is kept stable by the government (in fact it is regularly increased).Korea states that:
“The sales price of milk powder by the livestock cooperatives (periodic average price)
fell from 5,354 Won/kg in 1993 to 5,294 Won/kg in 1994, increased slightly to
5,388 Won/kg in 1995, and decreased sharply to 4,994 Won/kg during the first four
months of 1996.  There was no correlation be tween such change and seasonal factors.”
4.321  Objective examination of these figures shows remarkable stability in the price obtained, there
being an increase  over the three years 1993 to 1995 .  Only in 1996 is there a decrease .  Korea forgets
to mention in this regard the special factor whic h it stressed when explaining away the increased
market share of the domestic industry in 1996 – that this was “a temporary phenomenon triggered by
sales of milk powder below manufacturing cost in order to reduce inventories which was incurring
storage costs and expenses”.129  Thus the European Communities conclude that it is apparent that sales
prices of raw milk are increasing and the sales price of milk powder is stable, except for “a temporary
phenomenon” in 1996 .  This does not support a serious injury finding.
4.322  The second additional injury factor considered by Korea in its conclusion is the level of
inventory of domestic milk powder.
4.323  The evolution of inventory is described in Paragraph IV.3.5 of the Notification of
1 April 1997 .  It is explained that:
“Inventories of domestic milk powder totalled 4,509 tons at the end of 1993, 1,517 tons
in 1994, 6,565 tons in 1995 and 14,994 tons at the end of June of 1996, reflecting
inventory ratios of 2.4 per cent in 1993, 0.8 per cent in 1994, 3.3 per cent in 1995, and
13.0 per cent during the first half of 1996 vis-à-vis the total demand.  The total value of
inventories of milk powder at the end of June 1996 was estimated at 92,633 million Won
(about US$122 million).”
Thus inventories increased from a low level from the end of 1995, the total in 1996 being still only
13 per cent. Korea does not say on what basis these figures are calculated but assumes they all relate
to an annual figure for total dema nd for milk powder (not just milk) .  This is still only about one and a
half month’s milk powder supply and the European Communities consider this not to be a high level
and certainly not indicative of serious injury .  No explanation is given by Korea as to why this level of
inventory should be considered undesirable. In fact at their peak level in May 1996 milk powder
stocks were equivalent to less than one month's domestic milk production.
4.324  According to Article 4.1(a) of the Agreement on Safeguards, serious injury shall be
understood to mean a significant overall impairment in the position of the domestic industry.
4.325  In the EC view Korea’s determination of the ex istence of serious injury cannot be justified by
the injury factors which it cites in this regard, even if they could be considered complete and to the
extent that they may be considered correct.
4.326  Korea’s conclusion on serious injury is set out in Paragraph  IV.4 of the Notification of
1 April 1997 as follows:
“It was determined that the domestic industry was suffering serious injury based on, inter
alia, the following facts :  the market share of domestic  raw milk decreased
between 1993 and June 1996 :  inventory of domestic milk powders grew from 4,509 tons
                                                     
129 Para. IV.3.4. of the Notification of 1 April 1997.WT/DS98/R
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in 1993 to 14,994 tons in June 1996;  sales price witnessed a drop while manufacturing
costs increased;  livestock cooperatives' ordinary income steadily decreased andregistered a huge loss in the first half of 1996;  seven livestock cooperatives had a debt to
equity ratio exceeding 1,000 per cent while six cooperatives depleted their
paid-in-capital;  and employment decreased.”
4.327  With respect to the factors cited by Korea the European Communities make the following
arguments:
• Market share - The European Communities submit that a decline of 5.7 percentage points from
91.1 per cent to 85.4 per cent during the investigation period cannot be considered supportive of afinding of serious injury.
• Increase in inventory  - The European Communities do not consider, and find no explanation by
Korea why, an inventory level equivalent to one and a half months total demand can beconsidered supportive of a finding of serious injury .  The increase of inventory occurred at the
end of 1995.
• Sales price drop while manufacturing costs increased  - The European Communities assume that
Korea is not suggesting that the increase in manufacturing costs can be blamed on imports,according to Korea’s own data, sales prices of raw milk are increasing and the sales price of milk
powder is stable, except for what it has termed a “temporary phenomenon” in 1996 .  This is
therefore also not supportive of a finding of serious injury.  In this connection the European
Communities would stress that the price of imported SMPP or a price difference between it and
domestic milk powder are not identified as an element of alleged serious injury .  Indeed, it could
not have been since Korea, for its own reasons, did not investigate prices or price differences orindeed the price relationship between SMPP and the different categories of milk powder
(skimmed and whole) .  The prices which are given in the table on page 11 of the Notification of
1 April must represent some kind of average of various categories of product and are in any event
not comparable between imports and domestic products.
• The financial situation of certain livestock co-operatives .  The European Communities note that
the situation of these livestock co-operatives cannot be considered to support a finding of serious
injury for the domestic industry as a whole which consists not only of the livestock co-operatives
but also of milk processing companies and dairy farmers.
• Decrease in employment .  The European Communities note that this finding relates exclusively to
the dairy farmers and, since their production has increased, is indicative of a healthy consolidatingindustry and certainly not of serious injury.
4.328  Korea does preface its list of injury factors on which it based its determination with the words
“in particular” .  However, none of the other factors support the determination.  Indeed, the limited
data supplied by Korea does not show an industry in distress.  Several injury indicators in fact pointed
at a positive development and were disregarded by Korea.
4.329  The domestic industry in this case is characterized by increasing production and productivity.
The only information available on employment is the gradual decrease in the number of dairy farmers,which is a positive indicator in the light of increasing production and is also an objective of Korean
government policy .  Furthermore, since production and prices of raw milk increased, domestic sales
must have increased in 1995 and the first half of 1996.   Market share of raw milk and milk powder
fell by only 5.7 percentage points from 1993 until 1995 but increased again in 1996 .  Korea itself
stated that this was only a temporary phenomenon, but, in any event, such a small decrease cannot beaccepted as an indicator of a significant overall impairment of the industry.WT/DS98/R
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4.330  The only clearly negative factor is the difficult financial situation of some of the dairy
cooperatives .  However, the financial position of these companies appears to be very variable and in
any case is of lesser importance than the raw milk industry, even according to the incomplete andinconsistent investigation conducted by Korea.
4.331  The European Communities consider that on the basis of the limited data provided by Korea,
the picture that emerges is that even if the domestic industry is consolidating (a feature which it shares
with many other OECD countrie s), it is nonetheless healthy .  There is no evidence of a “significant
overall impairment of the domestic industry” which would be required to support a finding of seriousinjury.
4.332  Therefore the European Communities conclude that Korea violated Article 4.2(a) of the
Agreement on Safeguards by making a determination of serious injury which is unsupported by the
facts.
(b) Response by Korea
4.333  Korea  responds to the EC arguments as follows:
4.334  In order to impose a safeguard under Article 2 of the Agreement on Safeguards, Korea must
show that:
(i) a product is being imported into its territory in such increased quantities;
(ii) as to cause or threaten to cause serious injury;
(iii) to a domestic industry;
(iv) producing a like or directly competitive product.
4.335  In its attempts to depict the Korean dairy industry as being healthy, the European
Communities provide the Panel with incorrect or misleading facts and unsubstantiated allegations .
The European Communities even engage in the selective use of evidence and also discards the
relevant parts of the evidence when they do not suit its purpose.
4.336  When it cannot produce evidence in support of its contention, the European Communities
conveniently claim that Korea did not consider various serious injury criteria.  In the view of Korea,
the EC claim that Korea did not take into account certain injury criteria may stem from its failure to
examine the investigation report
130 and related documents131 which were made publicly available at the
time of  the public hearing .  However, it is clear that during the course of the Article 12 and
Article XXII negotiations, all the issues considered by Korea in its investigation, and reported to theCommittee of Safeguards and the Members, were exhaustively discussed with the European
Communities.
4.337  A review of the investigation report and the interim report shows that Korea considered all
relevant factors «of an objective and quantifiable nature having a bearing on the situation of that
industry.» As the industry in question was an agricultural one and given the unique nature of
                                                     
130 Korea made the results of the injury investigation publicly available and the EC obtained a copy
thereof.  The Korean version was tr anslated into English by the EC and was referred to many times during the
consultations.  Korea even took the step to point out numerous translation errors for the benefit of the EC during
the prior consultations.
131Korea made public the interim investigation report which was used and distributed at the public
hearing to determine whether a safeguard measure should be applied,  at which the Netherlands Embassyofficial, Agriculture Counsellor A C van Arnhem was present.WT/DS98/R
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agriculture recognized by the WTO Members, Ko rea examined the following criteria during its
investigation .  These elements taken together as a whole, pointed to an industry suffering serious
injury.
(i) Domestic industry and like or directly competing products
4.338  Korea determined that the "domestic industry" under investigation was the industry that
produces raw milk and milk powder .  These products are directly competitive with the products under
investigation132.  As established by the relevant Korean law, and consistent with the Agreement on
Safeguards, the investigation discounted the import activities of the "domestic industry" .  Korea notes
that the European Communities agree with this definition of "domestic industry" and does not appear
to dispute its definition of "directly competitive products".
(ii) Increase in imports
4.339  During the investigation period (January 1993 - June 1996), imports of SMPP increased as
follows:133
IMPORTS OF SMPP
Year Amount (tonnes) Per cent
Increase
1993 3,217
1994 15,561 384%
1995 28,007 80%
1996 (1-6) 16,320 16.9%
Based on the above data, Korea found that imports increased in absolute terms during the period of
investigation.
4.340  There was also a significant increase in imports of SMPP relative to domestic production of
raw milk, as evidenced by the following:134
IMPORTS OF SMPP RELATIVE TO DOMESTIC PRODUCTION
Year Annual Growth Rate of
Raw Milk ProductionAnnual Growth Rate
of  Imports of SMPP
1994 3.2% 384%
1995 4.2% 80%
1996 (1-6) 4.4% 16.9%
(iii) Serious Injury
(a) Profit and loss of the domestic industry, declining prices, and sales below production costs
4.341  During the period of investigation, the livestock cooperatives incurred an operating loss of
755 million Won in 1993, 622 million Won in 1994, 1,244 million Won in 1995, and 681 million
Won in the first four months of 1996 from their milk powder operations, representing an annual lossrate (defined as operating loss over net revenue) of -6.3 per cent, -6.5 per cent,  -10.7 per cent, and -
                                                     
132 See, Notification, paragraph III.2.
133 See, Notification IV.2.
134 See, Notification, paragraphs IV.2 and IV.3.1.WT/DS98/R
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29.5 per cent, respectively. Given that dairy farmers owned and capitalized the livestock cooperatives,
these losses reflect injury to the dairy households.
4.342  Similarly, the processing companies experienced losses from their milk powder operations.135
The difference between sales price and production cost per kilogramme (periodic average price) was
as follows:136
PROFIT\LOSS FROM MILK POWDER BUSINESS
Year Profit\Loss per kg
(Won)
1993 196
1994 -130
1995 -472
1-6/1996 -1,184
4.343  In the raw milk sector, Korea suggests a reference price for raw milk to promote fair
transactions between individual dairy farmers and large users, such as the processing companies.
Using the suggested reference price as a surrogate, however, the dairy farms experienced a declining
profit margin during the investigation period.
PRICE AND PRODUCTION COST OF RAW MILK
1993 1994 1995 1996
Reference Price (Won/100kg) 41,400 41,400 41,400 45,600
Prod. Cost (Won/100kg) 13740,084 38,861 41,255 46,499
Difference 1,316 2,539 145 -899
The above figures show that the difference between the suggested reference price and production cost
had declined until 1996 when this price did not even cover production costs.  The combination of this
declining profit margin and the compensatory practice of  providing  70-80 per cent in cash and the
rest in kind for purchases of raw milk by the cooperatives during difficult periods aggravated the
weak financial condition of the dairy farms.
4.344  In the milk powder sector, the price is set by market forces.  During the period of
investigation, with the exception of 1993, domestic milk powder prices were less than production
costs.  This loss grew larger each year.
PRICE AND PRODUCTION COST OF KOREAN MILK POWDER
1993 1994 1995 1996
Sales Price (Won/kg) 5,354 5,296 5,388   4,994
Prod. Cost (Won/kg) 5,158 5,426 5,860   6,178
Profit\Loss    196  -130  -472 -1,184
Korea is not suggesting that the increase of manufacturing cost can be blamed on imports.  However,
the low price of imports had a suppressing effect on the price of domestic raw milk and milk powder,
suppressing the price of raw milk to levels that in 1996 did not even cover the production costs.
                                                     
135 See, Notification IV.3.10.b.ii.
136 See, Notification IV.3.7, and the table on page 11 thereof.
137 Source :  NLCF .  These production costs were obtained by surveying 150 dairy farms.WT/DS98/R
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4.345  Korea determined that these sales below cost s indicated serious injury to the domestic
industry, especially given that both milk powder producers and dairy farmers (by virtue of theirownership of the cooperatives) share in the losses from such sales.
(b) Increase in inventory
4.346  Korea determined that inventories of milk powder increased and remained at high levels
during the period of investigation.
138
INCREASE IN INVENTORY
Year Inventory (tonnes) Per cent
IncreaseInventory Ratio
in Months139
1993 4,509 4.4
1994 1,517 -66.4% 1.5
1995 6,565 332.8% 7.4
1996 (1-6) 14,994 342.7% 8.1
The total value of  inventories as of June 1996 was estimated at 92,633 million Won (about
US$122 million).140
4.347  Given the unique nature of dairy industries generally and the Korean dairy industry
specifically, as discussed in detail above, Kore a considered that the accumulation of inventories
indicated serious injury to the domestic industry.
(c) The rise in unemployment
4.348  During the period of investigation, the number of dairy farms declined by approximately
20 per cent, from 28,219 in 1993 to 22,725 in 1996.  This decline occurred even though Korea sought
to assist the domestic industry by providing long-term loans of up to 300 million Won141 per farm to
improve the industry’s competitiveness.  Unemployment rose despite the fact that virtually all 28,219
dairy farms obtained long-term loans.142
(d) Debt-to-equity ratio and capital depletion
4.349  Prior to the increased imports of SMPP in 1993, the domestic industry derived profit from
selling raw milk, and producing  milk powder .  As a result of the circumvention of the 220 per cent
agreed tariff rate on milk powders, and the import into Korea of SMPP at a 40 per cent tariff rate, loss
began to accumulate rapidly in the Korean livestock cooperatives .  The table below shows the losses
accruing to livestock cooperatives from production of milk powder, and its overall contribution to
their annual debt.
                                                     
138 See, Notification, IV.3.5.
139 Inventory ratio is defined as the inventory amount divided by the production of milk powder.
140 See, Notification, IV.3.5.
141 Approximately US$220,000 based on October 1998 exchange rates.
142 Source :  MAF .  The objective of the loan programme was not to «consolidate» or «rationalize» the
industry, since Korea provided financial assistance to k eep dairy farms in the business.  The long-term loans
were not provided, for example, to encourage the dairy farmers to relocate and find other livelihood, given thatthe loans were earmarked solely for dairy business purposes and that the farmers had to repay the loans even ifthey ceased to operate in the dairy business.WT/DS98/R
Page 62
PERCENTAGE OF DEBT INCURRED BY COOPERATIVES FROM THEIR MILK
POWDER OPERATIONS
 (Unit :  million Won)
1991 1992 1993 1994 1995 1996
Annual Debt (A) 12,010 10,364 82,560 43,630 42,267 32,543
Profit and Losses from Milk
Powder Business (B)1,814 2,240 482 -330 -1,651 -12,502
Ratio (B/A) 15.1% 21.6% 0.6% -0.8% -3.9% -38.4%
(e) Inability to invest in research and development
4.350  The continued loss by cooperatives caused by SMPP further exacerbated and accelerated the
underinvestment in new facilities at a time when the cooperatives needed to upgrade facilities andequipment to remain competitive .  Their inability to attract investment is what led Korea to provide
financial assistance through the Livestock Development Fund
143 under the Dairy Cow
Competitiveness Enhancement Programme.
4.351  Because the livestock cooperatives were unable to operate at a reasonable profit level, they
could not make the necessary investments in research and development.  Thus, the domestic industryproduces only two types of milk powder (skimmed and whole) and has not been able to expand into
the production of the other diverse forms of milk powders and milk powder preparations which are
produced by exporting nations.
(f) Loss of market share
4.352  The share of the domestic market occupied by both domestic raw milk and milk powder
producers fell during the period of investigation from 91.1 per cent to 85.4 per cent, with only a slight
increase in the first half of 1996 attributable to below cost sales of domestic milk powder made as a
defensive measure to alleviate the financial burden.
4.353  Given the unique nature of agricultural sectors generally and the Korean dairy industry
specifically, Korea considered that the decline in market share for both raw milk and milk powderduring the period of investigation indicated serious injury to the domestic industry.
144
4.354  When the market share figures of raw milk and milk powder are disaggregated, the proportion
of the consumption of milk powder in Korea taken by SMPP increased dramatically.
MILK POWDER MARKET SHARE OF SMPP
Year Market Share
1993 10.7%
1994 38.4%
1995 60.6%
1996 (1-6) 69.4%
4.355  It is important to note that any increase in market share of  SMPP must be correlated to the
rate of increase in milk powder consumption in Korea .  In this regard, total consumption of milk
                                                     
143 Funds are established and operated by the govern ment to provide assistance to specific sectors
which cannot attract investments.
144 For reference, see  the recent US International Trade Commission report in Wheat Gluten , Inv. No.
TA-201-67, USITC Pub. No. 3088 (Mar. 1998) at I-16 and II-25, where the US ITC found serious injury eventhough the overall increase in the market share of imports was 8.8 per cent.WT/DS98/R
Page 63
powder increased by 34.3 per cent in 1994, 14.1 per cent in 1995, and 14.5 per cent for the first
six months of 1996.145  Given the low prices of imported SMPP and their functional substitutability
with Korean raw milk and milk powder, an increa se in Korean consumption effectively only benefits
suppliers of the cheaper imported SMPP .  As the increase in imports of SMPP displaces both
domestically-produced raw milk and milk powder, it is to the direct detriment of the Korean
cooperatives and dairy farmers.
(g) Consumption
4.356  The consumption of domestic raw milk (including milk powder) was 1,844,463 tonnes
in 1993, 1,947,128 tonnes in 1994, 1,947,965 tonnes in 1995, and 984,934 tonnes during the first half
of 1996, reflecting a distinct decreasing trend from 5.6 per cent in 1994, to 0.0 per cent in 1995, and to
-2.0 per cent during the first half of 1996 .  Consumption of domestic milk powder decreased relative
to the total milk powder consumption during the period of investigation .  The domestic milk powder
consumption rate was 40 per cent in 1993, 30 per cent in 1994, 23 per cent in 1995, and 28 per cent in
the first six months of  1996.146
4.357  The consumption of white milk (only produced from Korean raw milk), the predominant end
use of raw milk fell, with the exception of 1994, during the investigation period, from
1,287,000 tonnes in 1993, to 1,374,000 tonnes in 1994, to 1,319,000 tonnes in 1995, and to 610,000
tonnes for the first six months of 1996 .  The fall in consumption resulted in a decline of market share
of white milk by nearly 10 per cent from 63 per cent to 53.7 per cent between 1993 and the first sixmonths of 1996.
147
4.358  On the other hand, the consumption of flavoured and fermented milk (which primarily use the
cheaper imported SMPP) increased during the investigation period .  Flavoured milk increased from
123,000 tonnes in 1993, to 176,000 tonnes in 1994, to  255,000 tonnes in 1995, and to 133,000 tonnes
for the first six months of 1996, representing an increase rate of 43.5 per cent in 1994, 44.6 per centin 1995, and 10 per cent in the first six months of 1996 .  The market share of flavoured milk increased
from 6 per cent to 11.7 per cent during the period of investigation .  The consumption of fermented
milk surged from 466,000 tonnes in 1993, to 525,000 tonnes in 1994 to 539,000 tonnes in 1995 to
297,000 tonnes in the first six months of 1996 .  The annual increase rate was 12.7 per cent in 1994,
2.8 per cent in 1995, and 7.3 per cent in the first six months of 1996 .  The market share of fermented
milk increased from 22.8 per cent in 1993 to 26.2 per cent in the first six months of 1996 .  Korea
determined that the import of the cheaper SMPP was the primary reason for the processing companies
to increase the production of flavoured and fermented milk and curtail the production of white milk
that can only be produced from domestically-produced raw milk.
148
4.359  Korea considered that the data above indicated that consumption of downstream products
made from Korean raw milk and milk powder were d eclining, resulting in an overall decline in the
consumption of domestic raw milk and milk powder.
                                                     
145 Source :  MAF.
146 See, Notification IV.3.3 .  The consumption of domestic milk powder increased in the first half
of 1996 because the price fell from a high of 5,388 Won/kg in 1995 to a low of 4,994 Won/kg in the firstsix months of 1996 .  The fall in the price is attributable to an acute rise in inventory from 6,565 tonnes in 1995
to 14,994 tonnes in the  first half of 1996, an increase of 342.7 per cent, caused by the single largest increase
between 1995 and 1996 .  The sharp increase in inventory amount compelled the cooperatives to sell milk
powder at below production cost .  Source :  MAF.
147 Source :  MAF
148 Source :  MAFWT/DS98/R
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(h) Productivity and capacity utilization
4.360  Korea asserted that capacity utilization is an example of an injury criterion which is relevant
to industrial goods but is not necessarily useful in  assessing serious injury to an industry in the
agricultural sector .  In the case of industrial goods such as autos, a high capacity utilization ratio of
plants would be regarded as a positive indicator for the industry.  This, however, is not the case in the
raw milk/milk powder industry.
4.361  Korea emphasized that capacity utilization of both the raw milk and milk powder sectors was
fully considered in the serious injury determination.  Korea fails to understand the basis on which theEuropean Communities claim that there is "no examination of capacity utilization" in view of the fact
that the interim investigation report explicitly  dealt with that issue.
149
4.362  After considering capacity utilization for the  milk powder sector, Korea determined that this
element did not accurately reflect the condition of the domestic industry  because the unused portion of
raw milk became larger as SMPP replaced raw milk, livestock cooperatives’ and processing
companies’ intake of the unsold raw milk quantity for conversion into milk powder increased, thereby
increasing the milk powder industry’s capacity utilization;  however, despite the increase in capacityutilization, the raw milk converted into milk powder became unsaleable inventory .  Thus, capacity
utilization was not a suitable criterion for injury determination purposes and the investigating
authority placed less emphasis on this factor than other injury elements.
4.363  In connection with capacity utilization of raw milk, the investigating authority found that the
rate of utilization was 100 per cent, since all cows had to be milked .  Here again, however, like the
milk powder sector, high capacity utilization does not signal a healthy industry.  Raw  milk had been
substituted for by cheaper SMPP imports and the excess ( i.e, unsold) raw milk, due to its
perishability, was turned into unsaleable milk powder inventory.  Accordingly, after due
consideration, Korea discounted capacity utilization in determining the existence of serious injury to
the domestic industry.
(i) Production
4.364  Korea considered the raw milk and milk powder production data in its injury analysis and
concluded that it was not an appropriate measure for determining the state of the domestic industry .  It
is true that raw milk production rose by 3-4 per cent during the investigation period .  However, the
excess raw milk was not consumed and thus became milk powder inventory.
4.365  The demand for flavoured and fermented milk products also increased, but such products
were largely made from the cheaper imported SMPP which displaced the domestically-produced raw
milk and milk powder.
4.366  In response to a question by the Panel
150, Korea  further clarified certain aspects of the injury
investigation concerning the calculation of the manufacturing costs for the domestic industry:
4.367  The figures of the production costs of raw milk were calculated by adding the costs for feed,
hired labour, depreciation, family labour, interest, and for miscellaneous items such as veterinary
services and medicines, and by subtracting income from by-products.  The annually published and
                                                     
149 See, Exhibit Korea-5.  A copy of the interim investigation report was publicly available to everyone
and was distributed to all attendants of the public hearing, including the Agriculture
Counsellor A C Van Arnhem of the Netherlands Embassy.
150 The Panel recalls that the question was :  "In Korea’s first submission, you refer to “production costs
of raw milk.”  Could you please provide evidence on how these calculations were performed.  Could you also do
the same for “production costs of Korean milk powder”."WT/DS98/R
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publicly available “Annual Report of Livestock Produ ction Cost Survey” by NLCF contains detailed
figures for the production costs of raw milk.  These figures are as follows:
 PRODUCTION COST OF RAW MILK (WON/100KG)
1993 1994 1995 1996
Feed 18,209 18,730 20,028 22,432
Hired labour 303 362 536 612
Depreciation 7,067 7,256 7,395 7,538
Family labour 14,382 13,264 13,975 14,816
Interest 6,188 5,116 5,935 6,472
Miscellaneous 3,012 3,322 3,604 3,934
By-products 9,077 9,189 10,218 9,305
Production costs 40,084 38,861 41,255 46,499
4.368  Data for production cost of Korean milk powder was calculated by the total manufacturing
cost over amount of production of milk powder pr oduced by the NLCF, which appear in pages 46 and
54 of the OAI Report.  Total cost of manufacturing c onsists of raw material cost, labour cost and other
expenses as is shown in the following Table, reproduced from pages 46 and 54 of the OAI Report.
TOTAL MANUFACTURING COST OF THE NLCF (UNIT :  MILLION WONS, WON/KG)
1993 1994 1995 1996.1.-4.
Total manufacturing cost (A) 16,917 13,576 20,491 18,911
- raw material cost (B) 13,996 11,428 16,992 16,209
- labour cost (C) 1,181 961 1,451 772
- other expenses (D) 1,740 1,187 2,047 1,931
Raw material cost/total
manufacturing cost (%, B/A)82.7 84.2 82.9 85.7
Amount of production (E, tonnes) 13,512 9,495 15,719 10,401
Per unit manufacturing cost (F) 5,158 5,426 5,860 6,178
Sales price (G) 5,354 5,294 5,388 4,994
Difference in prices (G-F) 197 -132 -472 -1,184
4.369  With regard to the exclusion of certain products from the final measure Korea  in answer to a
question by the Panel151 made the following arguments:
4.370  The precise amount of products excluded and the methodology used to exclude them are set
out on page 7 of the OAI Report.  The European Communities obtained a copy of the OAI Report at
the KTC’s Public Hearing on 20 August 1996. The European Communities provided the Government
of Korea with a translation during the consultations. Thus, the European Communities has already hadaccess to the figures at issue.
4.371  Based on the analysis of the exporters’ responses, the OAI concluded that certain items falling
under the same HS code number as that of the SMPP should be excluded from the application of the
safeguard measure on the ground that:
                                                     
151 The Panel recalls that the question was: "In para graph 51 of Korea's oral statement to the first
meeting of the Panel, you appear to refer to some products which would have been excluded from the
application of the final safeguard measure.  Is this statement accurate?  Were any of these products (or any other
products) excluded by Korea when it conducted its investigation, in particular, for the injury analysis?  If so,please explain the methodology Korea used in doing so as well as the criteria it used to perform suchassessment."WT/DS98/R
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- they were not simple mixtures of whey powder or starches with milk powder
prepared solely for the purpose of evading comparatively high tariffs;
- they were commonly traded products, and not exclusively targeted at
countries with high negotiated tariffs such as Korea; and
- the import volume was very small.
4.372  Also in response to a question of the Panel152 Korea  offered the following clarification on the
relation between SMPP imports and milk powder imports:
4.373  Korea’s notification of 24 March 1997 and th e OAI Report provide th e import figures for
SMPP at the second paragraph of section IV.2 .  It also provides the equivalent figures for imports of
milk powder in paragraph V.2.2 of the same Notification.
Imports of milk
powderImports of
SMPPTotal imports SMPP’s share of
total imports
1993 14,843 3,217 18,060 17.8%
1994 11,581 15,561 27,142 57.73%
1995 7,576 28,007 35,583 78.78%
1996 (1-4) 583 16,320 16,903 96.6%
4.374  The volume of total imports of milk powder and SMPP increased by approximately 90 per
cent over the investigation period, and within that total increase, SMPP’s share increased from
17.8 per cent to 96.6 per cent. Therefore, the conclusion that the increase in imports of SMPP faroutweighs the decrease in imports of milk powder is evident.
4.375  The Panel also asked
153 Korea  to clarify its arguments on the composition of the domestic
industry and to summarize how the serious injury factors were considered for the whole domestic
industry.  The following constitutes Korea's response:
4.376  Article 2-1 of Korea’s Regulation on Relief of Injury to Domestic Industry Caused by Imports
states:
“(i)  ‘Domestic industry’ shall mean all the domestic producers who produce products of
the same kind as or products having directly competitive relations with imported goods
concerned;  or a group of the domestic producers of the above product whose collective
production accounts for a major portion of the total domestic production.
(ii)  If a domestic producer concurrently takes part in the import of the product
concerned, only his domestic production shall be included in the domestic industry.  If a
domestic producer turns out more than one product, only the production of the product
concerned shall be considered as domestic industry under consideration.”
4.377  The OAI Report in delineating the domestic industry states:
                                                     
152 The Panel recalls that the question was :  "Please  provide supporting evidence that the increased
SMPP “far outweighed” the drop in imports of milk powder paying the agreed tariff rate."
153 The Panel recalls that the question was :  "Please provide the panel with a detailed explanation of the
factors you used to identify one single domestic industry (composed of raw milk and milk powder).  In addition,
Article 4.1(a) provides “’serious injury’ shall be understood to mean a significant overall impairment in theposition of the domestic industry” .  Please provide a summary and clarification as to how the factors considered
led to a determination of serious injury to the whole of the domestic industry."WT/DS98/R
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“Domestic industry cited in this survey m eans natural milk industry and powdered milk
industry which produce natural milk and powdered milk having direct competitiverelations with imports .  Natural milk producers include dairy farms and dairy firms that
directly run ranches .  Powdered milk producers are the NLCF and dairy firms and
include those who have no powdered milk production facilities and produce powdered
milk on a piecemeal basis.”
4.378  The OAI’s position is also reflected in the Notification of 24 March 1997.
154  In making this
conclusion, the OAI considered overlapping commercial use among raw milk, milk powder, and
SMPP, and resulting commercial competition among those products .  The detailed analysis is also set
out in the OAI Report.
4.379  In determining whether the whole domestic industry was suffering serious injury by reason of
increased imports of SMPP, the competent authorities considered the relevant factors set out in
Article 4.2(a) for the whole domestic industry.  In instances where a factor was not relevant to a
particular sector of the domestic industry (because it was not of an objective and quantifiable nature
having a bearing on the state of that industry), the competent authorities explained the basis for
disregarding this factor or the reason why this factor still provided an indication of injury to the whole
domestic industry.
4.380  Korea evaluated the following factors as summarized in its first submission and explained in,
inter alia , the OAI Report and the 24 March Notification :
(a) the rate and amount of the increase in imports of the product concerned in absolute
and relative terms;155
(b) the share of the domestic market taken by increased imports156;
(c) changes in the level of sales;157
(d) production;158
(e) productivity;159
(f) capacity utilization;160
(g) profits  and losses;161  and
(h) employment.162
                                                     
154 G\SG\N\10\KOR\1\Suppl.1, page 7.
155 OAI Report at Section V, Notification at Section IV.2.
156 OAI Report at Sections VI.2 (a) and (b), Notification at Section IV.3.4.
157 OAI Report at Sections VI.2 (a) and (b) (sales were compared for the livestock cooperatives given
the non-availability of sales for individual dairy farmers), Notification at Section IV.3.9 and 10.
158 OAI Report at Sections VI.2 (a) and (b), Notification at Section IV.3.1.
159 OAI Report at Section VI.2 (a), Notification at Section IV.3.2.
160 See, Exhibit Korea-5 for the discussion of this in the OAI’s Interim Report circulated at the public
hearing .  Further, the Notification of 1 April 1997 made it plain that capacity utilization was unhelpful in
analyzing the serious injury to both the raw milk and milk powder sectors, and so was discounted.
161 OAI Report at Section VI.2 (a) and (b) (the pr ofits and losses were compared for the livestock
cooperatives given the non-availability of profits and losses for individual dairy farmers), Notification atSection IV.3.10.
162 OAI Report at Sections VI.2(a)(2) and  (b)(5), Notification at Section IV.3.6.WT/DS98/R
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The competent authorities also considered additional relevant factors indicating serious injury
including:
(i) inventory;163
(ii) investment;164
(iii) price;165  and
(iv) other financial indicators including debt-to-equity ratios and capital depletion.166
4.381  Based on their evaluation of the above factors, the competent authorities considered that the
whole domestic industry was suffering serious injury.
(c) Additional arguments by the European Communities made at the first meeting of the
Panel with the parties
4.382  At the first meeting of the panel with the parties, the European Communities  further
advanced their arguments under Article 4.2(a) as follows:
(i) Industry definition
4.383  Korean dairy farmers are characterized by having small farms (average 25 cattle per farm),
high costs and low productivity and being subject to a high level of government intervention.  Inrecent years there has been a decline in the number of dairy farms, but an increase in the number of
cattle and in milk production, both absolutely and per head.  This shows that the Korean dairy farmers
are undergoing a process of consolidation, similar to that of many other dairy producers in the most
advanced economies, whereby the smallest, least ef ficient farms are being absorbed and investment
for improvements is being targeted on the remaining larger, more efficient farms.
4.384  This process of rationalization and consolidation is encouraged by the Korean Government.
Financial stimulus is given by the Dairy Cow Competitiveness Enhancement Programme introduced
in 1994, under which the Korean Government gives loans to dairy farmers to improve their facilities.
Korea has declined to give details of the level of expenditure committed to this programme.
However, the success of governmental intervention can be seen by the facts :  between 1993 and 1996
the number of dairy farms decreased by 22 per cent, but the number of dairy cattle increased by
1.6 per cent and milk production by 9.5 per cent.
4.385  Despite the fact that the Korean dairy farmers are still rather inefficient by international
standards, Korean milk production has increased almost continuously for the past 20 years and rose
by 17 per cent in the most recent five-year period for which figures are available (1991-96).Production is continuing to rise and it is anticipated that it will increase by a further 2-3 per cent
in 1998.
4.386  These production increases are rendered possible by the system operated by the Korean
Government, under which producers are guaranteed a very high price for their raw milk, for unlimited
quantities and irrespective of domestic demand.  Like the production, this guaranteed price has alsoregularly increased over the course of the last 20 years, so that Korean milk producer prices at the                                                     
163 OAI Report at Section VI.2 (a) and (b), Notification at Section IV.3.5 (inventory in the raw milk
sector was estimated by examining inventory in the milk powder sector).
164 OAI Report at Sections VI.2(a)(3) and  (b)(4).
165 OAI Report at Sections VI.2(b)(3), Notification at Section IV.3.7 (given the non-availability of sales
transaction price for raw milk, sales transactions of milk powder were used as a surrogate).
166 OAI Report at Section VI.2, Notification at Section IV.3.10.WT/DS98/R
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time of the safeguard investigation were among the highest in the world, second only to Japan during
the period of investigation.  Korea has admitted that the price of raw milk “is maintained at a stablelevel fixed by the government” and that the price of raw milk was also increased twice during the
investigation reference period.
167  Although Korea terms these prices as “suggested”, they are
identical to the ones that it submitted to the OECD as domestic prices within the framework of OECD
Members’ reporting obligations.
(ii) Failure to examine correctly all relevant factors of an objective and quantifiable nature
having a bearing on the situation of the domestic industry
4.387  The European Communities consider that the evaluation of injury factors conducted by Korea
is incomplete in the following respects:
• for the raw milk industry, Korea failed to evaluate the profits and losses of the raw milk industry
• with regard to the milk powder industry, Ko rea did not examine productivity, and employment
• there is in reality no examination at all of capacity utilization.
4.388  In addition, the evaluation of many other factors is seriously flawed.  These are:
• the rate and amount of the increase in imports of the product concerned in absolute and relative
terms (inclusion of excluded products),
• changes in the level of sales (incorrect calculation),
• profits  and losses (failure to exclude effects of other activities of the co-operatives)
• sales prices (failure to take account of the fact that 1996 below cost sales were a “temporary
phenomenon”)
• inventory (no reason why inventory levels indicated should be a cause for concern).  This is a
matter which the European Communities will clarify below.
4.389  Therefore the European Communities conclude that Korea violated Article 4.2(a) of the
Agreement on Safeguards by making an incomplete and flawed evaluation of the injury factors.
(a) Profitability
4.390  The European Communities noted that Korea s upplied for the first time some data on
profitability of dairy farmers in its First Written Submission.  The European Communities considered
that: first, Korea’s late submission of information demonstrates that those data could indeed have been
gathered and supplied, contrary to what Korea had claimed when the European Communities made
their objections during the consultations, and second, the information which is now supplied confirmsthe EC case.
4.391  The European Communities asserted, based on Korea’s data, that in 1994, which witnessed
the imports’ sharpest increase, farmers’ profitability was also at its peak. The absence of correlation
between increase in imports and profitability further demonstrates the absence of causal link between
profitability and the increase in imports.  In reality the profitability of Korean dairy farmers is
determined by government decisions on the “reference price” .  Korea's table on price and production
                                                     
167 See, WTO Doc. G/SG/N/10/KOR/1/Suppl.1, 1 April 1997, p. 10, paragraph IV.3.7 (Exhibit EC-10).WT/DS98/R
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cost of raw milk shows that the decrease in profitability is due to an increase in production costs
which of course has nothing to do with imports of SMPP.
(b) Inventory
4.392  Apart from the size of the stocks, the other important point is the timing of the increase.  The
European Communities presented the following graph:
Evolution of Milk Production and Consumption and Milk Powder Stocks in Korea 
January 95 to June 96
050,000100,000150,000200,000250,000
Jan-95
Feb-95Mar-95
Apr-95May-95 Jun-95 Jul-95
Aug-95
Sep-95Oct-95Nov-95Dec-95
Jan-96Feb-96
Mar-96 Apr-96
May-96
Jun-96
MonthQ
u
a
n
t
i
t
y
 
t
on
n
e
sMilk powder stocks
Milk production
Milk consumption
4.393  The European Communities argued this graph show s very clearly that the increase in stocks
occurred in November 1995 immediately following the serious decrease in consumption caused by the
“pus milk” scandal .  Moreover, the graph shows clearly that the increase in stocks coincided with
steadily increasing milk production.  In the light of the above, the European Communities reiterate
their conclusion that the inventory level reported by Korea could not be considered “excessive”, and
that its origin is to be found in a cause which is very different from imports of SMPP.
(c) Employment
4.394  The figures given by Korea in connection with employment in fact only relate to the numbers
of dairy farm households - which the European Communities take to mean farms .  This of course isWT/DS98/R
Page 71
not a measure of employment, especially in a period where farms are consolidating and increasing in
size (a development encouraged by Korean government policy).
4.395  The European Communities reiterated that employme nt is an injury factor expressly listed in
Article 4.2 Agreement on Safeguards and Korea has completely failed to investigate it.
(d) Debt
4.396  The European Communities  note with equal intere st that in order to emphasize the problems
of one part of its industry - farmers - which it omitted to consider in its determination, Korea is nowable to supply data on their debt, and even comparing the household debt increase rate of dairy
farmers with that of other farmers.  The comparability of the debt level of dairy farmers and the other
farmers is expressed in the graph below submitted by the European Communities:
Average Indebtedness
02,0004,0006,0008,00010,00012,00014,00016,00018,000
1993 1994 1995 1996
YearU
S
d
o
ll
a
r
sDairy
Farming
Household
This graph, drawn from Korea’s own data, shows th at although there was an increase of indebtedness
in 1994 (a year of high profits for the Korean dairy industry as we have just seen), the indebtedness of
the dairy industry is following exactly the same trend as Korean farming generally.
4.397  The European Communities too recalled that an incentive to accumulate debt can also stem
from the favourable credit conditions that Korea adm its its dairy industry can enjoy as a result of the
Dairy Cow Competitiveness Enhancement Programme.
4.398  In the EC view the figures in the table on the percentage of debt incurred by cooperatives
from their milk powder operations submitted show a declining trend in indebtedness throughout the
investigation period of 1993 to 1996 which is a healthy trend.  Also, the evolution of profits andWT/DS98/R
Page 72
losses shows no correlation to indebtedness .  The figures do not correspond for example, the high
profits in 1992 were followed by an increase of debt in 1993.  But more fundamentally, Korea is
comparing apples and pears by calculating a ratio of profits and losses from milk powder business byannual (that is presumably accumulated) debt corresponding to all business sectors of the co-
operatives .  The information is simply misleading and in no measure supports Korea’s findings.
(e) Research and Development
4.399  In the EC view Korea’s First Written Submission contains a new and remarkable argument –
that the ability of the domestic industry to invest in research and development was being impaired.There is no basis for this in the Notification and indeed no figures for such investment are given .  The
European Communities submit that this new attempt of justification of the finding of serious injury
must be disregarded.
(f) Loss of Market Share
4.400  It is always possible to make figures appear more impressive by reducing the denominator
and this is what in the EC view what Korea does in its First Written Submission by expressing
imports of SMPP as a percentage of the milk powder market.  The domestic industry definitioncovered all milk production and therefore the appropriate figures are for this market .  The total market
share of domestic raw milk and milk powder declined some 5.7 percentage points from 91.1 per cent
to 85.4 per cent during the investigation period.  The European Communities do not see how this can
be considered indicative of serious injury.
(g) Consumption
4.401  In the EC view, Korea makes an admission in its First Written Submission when it stresses
the importance of the switch in Korea from the c onsumption of “white milk” to the consumption of
flavoured and fermented milk and that the latter is directly at the expense of the former.  Korea
suggests that since flavoured and fermented milk can be more easily manufactured using imported
SMPP, this demonstrates serious injury .  This is not the case .  The trend identified by Korea
demonstrates that the decrease in domestic milk production was at least partially caused by a change
in consumer preferences in Korea .  This is an additional factor contributing to the situation of the
domestic industry which Korea failed to take into consideration under the second sentence of
Article 4.2(b) .  This is an additional violation.
(h) Capacity utilization
4.402  Korea asserts that evidence of its investigation into this factor can be found in the KTC’s
Interim Report.  This might be true, but it simply overlooks the point that the factors leading to the
imposition of a safeguard measure should be at the basis of the final decision, which is at issue in this
procedure on “Definitive Safeguard Measures on Imports  of Certain Dairy Products”.  In the absence
of even a reference to the interim report on th is aspect in the final measure, the European
Communities fail to see how it could have been understood that the preliminary determination would
not be, precisely a preliminary one but a definitive one
(d) Additional arguments by Korea made at the first meeting of the Panel with the parties
4.403  At the first meeting of the panel with the parties, Korea  further advanced its arguments under
Article 4.2(a) as follows:
4.404  As to the more general substantive points raised by an examination of serious injury and
causation, Korea maintains:WT/DS98/R
Page 73
(a) the Agreement on Safeguards does not require application of  all the specific injury
criteria set out in Article 4, but refers Members to criteria that should be considered ifrelevant, and of an “objective and quantifiable nature”
(b) the Agreement on Safeguards does not provide any indication as to how these criteria
of injury are to be assessed .  In the view of Korea, it is not possible to challenge a
safeguard measure by examining individual injury criteria, since individual criteria
need to be correlated to general trends and to other relevant criteria .  For example,
could an examination of changes in domestic production indicate anything about
serious injury unless correlated to data concerning changes in imports and
consumption?;  and
(c) the Agreement on Safeguards does not require that a Member show causation in
specific manner.
4.405  WTO Members should be allowed to set more onerous standards than the Agreement on
Safeguards for the imposition of safeguard measures (as indeed the European Communities do) .
Korea only has to comply with Agreement on Safeguards .  In its view, the consideration of this case,
and the notification and consultation procedures were in full conformity with that Agreement.
4.406  Looking at the injury criteria it considered as relevant, objective and quantifiable, the Korean
investigation concluded that the imports of cheap SMPP had increased, that serious injury had been
suffered by the domestic industry, and that the serious injury was caused by the increased imports.The Korean investigation took into account a number of factors demonstrating a causal link between
the increased imports and serious injury, and discounted factors that had an insignificant or limited
effect.
4.407  More specifically, there was an increase in imports both in absolute and relative terms .
In 1993, the amount of SMPP imported was 3,217 tonnes .  The amount increased to 15,561 tonnes
in 1994, 28,007 tonnes in 1995 and 16,320 during the first half of 1996 .  Based on the above data,
Korea found that imports had increased during the period of investigation.
4.408  There was also a significant increase in imports of SMPP relative to domestic production of
raw milk .  While the annual growth rate of raw milk production was 3.2 per cent in 1993, 4.2 per cent
in 1995, and 4.4 per cent in the first half of 1996, the annual growth rate of SMPP was 384 per centin 1994, 80 per cent in 1995, and 16.9 per cent in the first half of 1 996.
4.409  Korea also undertook a profit and loss analysis of the Korean industry, which also showed
serious injury .  Both the raw milk and milk powder sectors of the Korean industry incurred heavy
losses during the investigation period .  As to the raw milk sector, the European Communities claimed
in its First Submission that the dairy farmers of Korea are guaranteed a “very high price” by theGovernment. However, the reference price was only suggested and not guaranteed, and did not even
cover the cost of production .  For example, in 1996, the production price per 100 kg was 899 Won
above the suggested reference price.  The milk powder sector also showed a great loss .  The slight
profit of 196 Won per kg in 1993 turned into a heavy loss of 1,184 in 1996.  There was also a
significant rise in unemployment in the domestic industry due to the imports of cheap SMPP.
(e) Rebuttal arguments made by the European Communities
4.410  The European Communities  made the following arguments in rebuttal:WT/DS98/R
Page 74
(i) The Requirements of Article 4.2(a) Agreement on Safeguards
4.411  In essence, the European Communities  complain that Korea should have investigated all the
relevant facts, and not, as put forward by Korea, “the facts before it” .  The investigating authority
must gather all the facts which are available in order to conduct an assessment of the facts as a whole.
This is necessary to meet the requirements of Article 4.2 of the Agreement on Safeguards, notably
that the authority must conduct an evaluation (“detailed analysis of the case under investigation”) and
that, in addition to it, it must engage in a “demons tration of the relevance of the factors examined”).168
4.412  Korea omitted consideration of certain of the injury factors listed in Article 4.2(a) .  Also,
certain conclusions drawn by Korea could not be supported by the facts listed, or could not logically
follow from them .  As a previous Panel once had the opportunity to note, it is not sufficient for an
authority to refer to the evidence it considered and state its conclusion:
“It was incumbent upon the investigating au thorities to provide a reasoned opinion
explaining how such facts and arguments had led to their finding.” 169
4.413  In addition, Article 4.2(a) of the Agreement on Safeguards and the precedents quoted in the
EC First Written Submission170 confirm that the standard of review is for the Panel to verify whether
the investigating authority considered “all relevant  facts”, not “the facts before the investigating
authorities”.
4.414  Korea cannot excuse its failure to consider all the relevant facts and all the injury factors
mentioned in Article 4.2(a) Agreement on Safeguar ds by claiming that it need only provide an
adequate explanation of how the facts before it as a whole  supported its determination.  The European
Communities submit that it is necessary, at a minimum, for a serious injury determination under the
Agreement on Safeguards to demonstrate that the relevance or otherwise of each of the factors listed
in Article 4.2(a) of the Agreement on Safeguards was considered.  The European Communities would
further submit that that provision requires each injury factor to be properly analysed unless it is
explained for what reason the injury factor may be disregarded.  It is true that no injury factor “inisolation” can establish serious injury but that does not excuse a failure to examine them all.
(ii) Failure to examine correctly all relevant factors of an objective and quantifiable nature
having a bearing on the situation of the domestic industry
(a) Profitability and prices
4.415  The 24 March 1997 Notification of Korea provided no information as to the profitability of its
dairy farmers.  It was only in its First Written Submission that Korea, for the first time, supplied data
in this respect, and subsequently stated, in answer to a question by the European Communities, that
surveys on production cost are implemented every year, including during the period of the KTC
investigation. This, in the first place, shows that contrary to what Korea has said, it was possible to
gather those data and meet the obligation to consider them in the investigation.
                                                     
168 See, Article 4.2(c) of the Agreement on Safeguards, summarizing this.
169 See, Panel Report on Brazil – Imposition of Provisional and Definitive Countervailing Duties on
Milk Powder and Certain Types of Milk from the European Economic Community , adopted by the Committee
on Subsidies and Countervailing Measures on 28 April 1994, SCM/179, and Corr.1, para 286.
170.See, Panel Report in US - Shirts and Blouses , 6 January 1997, WT/DS33/R; US - Underwear ,
WT/DS24/6, 8 November 1996.WT/DS98/R
Page 75
(1) Raw milk prices
4.416  The European Communities have explained their vi ew that the “suggested price” for milk in
Korea, although arguably not formally binding, has considerable practical force. The European
Communities based its assumption on Korea’s statement, in its 24 March Notification, that
“The price of milk powder is subject to change according to market forces of supply and
demand, although that of raw milk is maintained at a stable level fixed by the
government”. 171
4.417  Additionally, the Dairy Industry Promotion Act states:
"Article 3 (the Dairy Committee)
a) The Dairy Committee, which belongs to the Minister of Agriculture and
Forestry, shall be established to deliberate on important matters for dairy
industry promotion.
b) The organisation, tasks and operations of the Dairy Committee shall be
determined by Presidential Ordinance."
 
"Article13 (maintenance of prices)
(1) The Minister of Agriculture and Forestry is able to decide specifications and
appropriate prices of raw milk in consultation with the Dairy Committee."
 
"Article 14 (mediation of disputes)
(1) In case there is a dispute concerning raw milk transactions, both parties or one party
of the dispute are able to apply for mediation to the Minister of Agriculture and Forestry.
(2) In case there is an application for mediation in accordance with the previous
provision, the Minister of Agriculture and Fo restry shall make a mediation and decision
in consultation with the Dairy Committee.
The details such as methods and procedures of the mediation stipulated in the previous
provision shall be determined by Ordinance of the Ministry of Agriculture and Forestry."
4.418  Furthermore, if a particular milk processor is paying to dairy farmers less than the prices
decided by MAF, dairy farmers have the legal right to take the milk processor to court on the basis ofthe Dairy Industry Act. In fact, a group of dairy farm ers are presently carrying out legal action against
Haitai Dairy on the grounds that they did not receive the guaranteed raw milk price decided by MAF
under the Dairy Industry Act.
172
                                                     
171 See G/SG/N/10/KOR/1/Suppl.1, 1 April 1997, Section IV.3.7, p. 10 (emphasis added).
172 For example, the following article appeared in the Agriculture, Fisheries and Livestock News of
October 19, 1998 (Exhibit EC-23).
"Subject : The Ministry of Agriculture and Forestry (MAF) urged Haitai Dairy Co., Ltd. to pay
unpaid prices of raw milk, 12.3 billion won (approx. US$ 9.8 million) as soon as possible.
MAF has urged Haitai Dairy, which applied for the court mediation for rescheduling of debt
repayment to the Suwon District Court, to pay raw milk prices, which are generally recognised asWT/DS98/R
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4.419  The European Communities argue that Korea admits that the "suggested prices" are
sufficiently reliable to justify a conclusion on the profitability of the raw milk producers, that is, dairy
farms.  Further strong supporting evidence that the price set by Ministry of Agriculture and Forestry("MAF") is a guaranteed minimum price is found in the statistics for the production cost of milk
powder supplied by Korea in answer to a question by the Panel .  These were not previously made
available .
4.420  Taking the 1993 figures in Korea’s table as an example:
The manufacturing cost for milk powder (F in the table) is stated as 5,158 Won/kg.
The proportion of this cost which is accounted for by the raw material is stated as 82.7 per
cent, giving a price of 5,158 x 82.7 per cent = 4,266 Won/kg.
Korea has stated that the ratio between milk powder and raw milk is 1:10 ( i.e., 10 units of raw
milk are needed to produce 1 unit of milk powder).
The price at which the raw milk producers sold to the milk powder companies can therefore
be shown to be 4,266 ÷ 10 = 427 Won/kg.
The MAF price for raw milk in 1993 was 394 Won/kg, so the milk powder companies were
paying on average 8 per cent above the MAF price.
4.421  Performing this calculation for all of the relevant years gives the following results:
SELLING PRICE OF RAW MILK FOR MILK POWDER PRODUCTION, 1993-96
  1993  1994  1995  1996 (1-4)
 Manufacturing cost (W/kg)  5,158  5,426  5,860  6,178
 Raw material as % of total  82.7%  84.2%  82.9%  85.7%
 Raw milk selling price  427  457  486  529
 MAF price (W/kg)  394  394  414  431
 Premium for raw milk sold
for milk powder over the
MAF price + 8.3%  + 16.0%  + 17.4%  + 22.7%
4.422  based on this information, the European Communities observed:
• Firstly, actual raw milk sales prices, do respect the MAF prices and on average are higher.173
Since the sale prices of raw milk for milk powder production would be expected to be at the lower
end of the market, (Korea has stated that it is surplus raw milk production which goes for milk
powder) prices for other purposes can be expected to be higher.
                                                                                                                                                                    
wages, as soon as possible. On October 15, 1998 Mr. Nam-Chul Kim, Director of the Livestock
Administration Division of MAF stated ‘Raw milk prices have to be generally recognised as
wages’ and ‘when the payment of raw milk prices is continuously deferred, dairy farmers willhave difficulties in keep a normal level of living, and will have difficulties in paying for animalfeed, and will be eventually bankrupt.
If Haitai Dairy does not pay for the prices of raw milk appropriately, the Government will be
forced  to take appropriate measures. In relation to this matter MAF asked the Suwon District
Court to give cooperation so that the prices of raw milk for which payment is deferred will be paid
regardless of the application for the court mediation for rescheduling of debt repayment."
173 See, WTO Doc. G/SG/N/10/KOR/1/Suppl.1, 1 April 1997, Section V.2.4, p. 17, where Korea
describes the price set by the government as a “base price”.WT/DS98/R
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• Secondly, the Korean Government did in fact have available to it information on raw milk
transaction prices, at least on an overall basis, which would have enabled it to include an
examination of this in the safeguards investigation.
(2) Dairy farm profitability
4.423  Regarding the profitability of dairy farms, Kor ea indicated in the bilateral consultations with
European Communities that this could not be examined by the KTC investigation because this
information was not available.  In its First Written Submission Korea contradicts this by seeking to
demonstrate the poor level of profitability of its dairy farms by using on the one hand the government“suggested” prices as a “surrogate” for actual transaction prices, and on the other hand production
costs, which it now admits are “annually published  and publicly available” in the ‘Annual Report of
Livestock Production Cost Survey’.
4.424  The EC assertion that "producers are guaranteed a very high price for their raw milk" is borne
out, and even extended, by the additional information supplied by Korea .  It is stated that “the MAF
suggests the raw milk price reflecting changes in the production cost” .  This implies that MAF has
knowledge of the production costs each year and uses them to set a “suggested price” which willguarantee a profit to dairy farmers .
4.425  Korea uses profitability figures to show the supposed injury caused to dairy farmers .
However, these profitability figures are based only on MAF reference prices which, as has been
shown above, are a minimum rather than a norm to be followed.
4.426  The European Communities maintain that the figu res provided in Korea's table on price and
production costs of raw milk may be misleading .  The cost of raw milk production is compared there
only with the MAF reference price .  However, if the cost of production is compared with the price
received for milk powder production, a very different picture emerges:
PROFIT MARGIN OF DAIRY FARMERS SELLING RAW MILK FOR MILK
POWDER, 1993-96
  1993  1994  1995  1996
 Reference price (W/kg)174 394  394  414  431
     
 Production cost  (Won/kg)  401  389  413  465
 Sale price for milk powder  427  457  486  529
 Difference :  profit (W/kg)  + 26  + 68  + 73  + 64
 Profit as % of production
price 6.5%  17.5%  17.7%  13.7%
 
4.427  Based on this table, the European Communities assert that, at least as far as sales of raw milk
for milk powder are concerned, these remained very  profitable for the dairy farms throughout the
KTC investigation period .  In fact, at the very time when imports of SMPP increased significantly,
in 1994 and 1995, the profitability of dairy farms in this area increased significantly too.
4.428  Therefore, not only was the profitability of dairy farmers significantly greater than Korea has
indicated, but also there is no evidence of injury at the time when SMPP imports were increasing .
Not only did Korea not properly investigate this issue when this was perfectly feasible, but it is also
clear that the result of this investigation would have been that no injury was being caused to dairyfarms.
                                                     
174 The reference prices shown in Korea’s First Submission do not coincide with those submitted by
Korea to the OECD .  In this table the latter figures have been used.WT/DS98/R
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4.429  Korea’s reply to a question by the European Communities indicate the magnitude of
government loans for each dairy farm – this also is newly supplied information.
KOREAN GOVERNMENT LOANS TO DAIRY FARMS, 1993-96
  No of dairy farms
receiving loans % of total dairyfarms receiving
loans Total value of
loans (million
Won) Average loan per
household (Won)
 1993  19,306  68.4%  3,911  202,000
 1994  19,549  76.2%  69,402  3,550,000
 1995  20,052  85.3%  72,936  3,637,000
 1996  13,353  60.4%  91,959  6,887,000
 
This table shows that the vast majority of Korean dairy farmers175 are in receipt of very generous
loans, at a time when their operations were rather profitable .  Also, there seems to have been a clear
shift in government policy in 1996, lending substant ially more money, but to only two-thirds of the
number of farmers compared with the previous year.
(3) Milk powder prices and profitability
4.430  As regards milk powder prices, which are provided in the 24 March Notification176, the
European Communities recall that they show a remark able stability and that the decrease in the first
four months of 1996 is explained by Korea itself as a “temporary phenomenon”, which thereforecannot, explain the reduction in profitability.
4.431  The table on the selling price of raw milk for milk powder production 1993-96, in the EC
view clearly demonstrates that the problems facing the milk powder companies during the period of
the KTC investigation stem principally from the increasingly high prices which they were having to
pay for their raw material, prices which were increasing even faster than the guaranteed MAF price .
This shows that any decline in profitability of the milk powder companies can be directly related to a
corresponding increase in the profits of the dairy farmers, since the cost of the raw material accounted
for between 82.7 per cent and 85.9 per cent of manufacturing costs in the period 1993-96.
4.432  Referring to the basic economic laws of supply and demand, one would conclude that this
increase in the price of raw milk for milk powder production must be due to a shortage of supply of
the raw material .  This entirely reasonable hypothesis would serve to explain why Korean dairy
companies increased their imports of SMPP during the KTC investigation period.
4.433  In fact, Korea states that “the shortage of milk began to be eliminated from the end of 1994” .
This begs the question as to when the shortage actually ended (when was the end rather than the
beginning of the end?) It also fails to explain why raw material prices for milk powder continued to
rise so much after the end of 1994 and why over 7,500 tonnes of milk powder was imported in 1995,
in addition to the increased imports of SMPP.
4.434  In conclusion, it is obvious to the European Communities that neither the imports of a given
product nor their trends have any relation whatsoever with the production costs of the competing
domestic products and therefore with any decrease in profitability resulting from an increase in such
costs .  Korea milk powder companies’ profits are crucially dependent on the cost of the raw material .
In the period 1993-96 they were paying a price significantly higher than the MAF price for their raw
                                                     
175 It should also be noted that the above figures contradict the assertion by Korea that  it sought to
assist the domestic industry by providing virtually all 28,219 farms with loans to improve their competitiveness .
At no time in the four years indicated above did the government provide loans to more than 20,052 farms, only69.6 per cent of the total 28,219 farms quoted – this is, in the EC's view hardly “virtually all”.
176 See, WTO Doc. G/SG/N/10/KOR/1/Suppl.1, 1 April 1997, Section IV.3.7, p. 10.WT/DS98/R
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material .  Profitability could have been very easily restored by reducing their raw milk purchase price,
and it is not clear why this step was not taken.
(b) Employment
4.435  The European Communities observed that, in relation to dairy farms the only evidence
brought forward is the decline in the number of farms .  In its view, the European Communities have
put forward to demonstrate that this is largely due to a consolidation and rationalization in the
industry.  None the less the questions remain .  In Korea’s reply to a question by the European
Communities it is stated that “there is no difference between the terms ‘dairy farms’ and ‘dairy
households’”.  A number of points remain unclear, due to Korea’s asserted failure to investigate basic
data on this point, in particular :
the number of people in the households who are actually employed on the farms;
the number of people outside of the households who are employed on the farms;
the number of people in the ‘households’ who can be considered as full-time farmers;
the number of people in the households who are not full-time but generate the majority of
their income from the farms;
the age structure of the dairy farmers
4.436  Without an investigation of such data it is impossible to reach an appropriate conclusion on
employment patterns in the dairy farms.
(c) Cheese imports
4.437  Another possible causal factor which was not examined in any way by Korea is the level of
cheese imports .  This is rather surprising in view of the statement in the OAI Report notes that cheese
imports have “direct influence on consumption of domestic raw milk.”177 This is followed by the
equally puzzling assertion that “considering the characteristics of the analysis, data on cheese importswas excluded”, without giving any justification for such an exclusion.
(f) Rebuttal arguments made by Korea
4.438  Korea  makes the following rebuttal arguments:
4.439  As an initial matter, Korea notes that in conducting its analysis, the Korean authorities
explained that:
“[b]ecause the raw milk and milk powder are inextricably linked, it is useful to analyse
both industries as a whole, and then  examine the milk powder separately .  Towards this
end, the investigation team will first analyse the raw milk industry which includes milk
powder industry and then conduct a separate an alysis of the milk powder industry for the
sake of clarity.”
178
                                                     
177 See, OAI Report, p. 16, footnote.
178 OAI Report at 37 .  The competent authorities determined that milk powder and SMPP are not like
products due to the differences in physical characteristics as SMPP contains on average 80 per cent milk
powder. However, they are directly competitive products .  The Government of Korea respectfully suggests that
the Panel should compare SMPP with milk powder on a 1 to 1 basis, not just in relation to 80 per cent of SMPPas the EC contends in its First Submission .  SMPP cannot be divided, whether commercially or actually, into
milk powder and other ingredients.WT/DS98/R
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(i) Imports of SMPP in absolute and relative terms.
4.440  Under Article 4.2(a) of the Agreement on Safeguards, the competent authorities must
examine the rate and amount of the increase in imports of the product concerned in absolute andrelative terms.  The competent authorities stated th at “[i]t is essential to examine whether the import
of SMPP subject to investigation increased absolutely or whether they increased relatively compared
to domestic production.”
179  The Korean authorities examined imports of SMPP in absolute terms:
IMPORT OF SMPP SUBJECT TO INVESTIGATION180
(unit :  tonnes, thousand dollars, %)
1993 1994 1995 Jan.-Aug. 1996
Increase
rate(%)Increase
rate(%)Increase
rate(%)
QuantityValue3,217
7,03715,561
32,851384
36628,007
59,83780
8222,140
55,02116.9
40.7
  Source :   Korea International Trade Association (KITA)
4.441  The Korean authorities noted an absolute increase from 3,217 tonnes in 1993 to 15,561 tonnes
in 1994, 28,007 tonnes in 1995 and 22,140 tonnes in 1996 (Jan.-Aug.), reflecting an increased rate of
384 per cent in 1994 from the previous year, 80 per cent in 1995 and 16.9 per cent in the first six
months of 1996.
4.442  The Korean authorities then examined imports of SMPP in relative terms:
RELATIVE CHANGE OF IMPORT SHARE IN DOMESTIC DEMAND181
(unit :  tonnes)
1993 1994 1995 Jan.-Jun. 1996
Increase
rate(%)Increase
rate(%)Increase
rate(%)
Total Demand (A) 2,025,063 2,218,738 9.6 2,303,795 3.8 1,153,964 -2.3
Production of  raw milk 1,857,873 1,917,398 3.2 1,998,445 4.2 1,069,224 4.4
Import of SMPP (B) 3,217 15,561 384 28,007 80 16,320 16.9
Market Share of  SMPP(B/A, %)1.6 7.0 - 12.2 - 14.1 -
  Source :  MAF and KITA
  Notes :  Market share is computerized by using the figures calculated in terms of imported raw milk.
The table above indicates the relative increase in imports of SMPP was 384 per cent as compared to
3.2 per cent increase in the production of raw milk in 1994, 80 per cent as compared to 4.2 per centin 1995, and 16.9 per cent as compared to 4.4 per cent in the first half of 1996.
                                                     
179 OAI Report at 32.
180 OAI Report at 32.  See, also Notification IV.2.  Contrary to the EC’s claim that Korea failed to
remove the volume of “excluded” products before doing its calculations, Korea refers the Panel to the OAIReport at 7.
181 OAI Report at 35.  See, also Notification at IV.2 and IV.3.1.WT/DS98/R
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(ii) Profits and losses
4.443  The Korean authorities determined that it was no t feasible to accurately calculate the income
of all 23,000 Korean dairy households, which are, for the most part, small and unsystematic.182
Because profits and losses of the dairy households were not available183, the competent authorities
used profit and loss information from the cooperatives’ milk processing activities as a surrogate for
the profits and losses of the domestic industry covering dairy households and livestock cooperatives .
The aggregate ordinary profit of all 14 livestock cooperatives in milk processing activities decreasedfrom 6,720 million Won in 1993, 4,721 million Won in 1994, 209 million Won in 1995 to
-17,546 million Won during the first half of 1996, while the ratio of ordinary income (loss) to sales
(expenditure) decreased from 1.4 per cent, 0.8 per cent, 0.0 per cent to -5.3 per cent, respectively.
184
As explained by the Korean authorities in the OAI Report:
“[s]ince the livestock cooperatives, which are comprised of dairy households producing
raw milk, distribute their profits to their members, the livestock cooperatives’ profits and
losses are directly linked to the raw milk producers’ income.185
4.444  The Korean authorities examined whether the livestock cooperatives made sales below
manufacturing costs and determined that the sales price of milk powder was higher than the
manufacturing costs by 196 Won/kg in 1993.  However, the cooperatives incurred losses of
132 Won/kg in 1994 and the negative margin grew larger to 472 Won/kg in 1995 and further to
1,184 Won/kg in the January-to-April period of 1996.186
PRICE AND PRODUCTION COST OF KOREAN MILK POWDER
(unit :  Won/kg)
1993 1994 1995 1996(1-4)
Sales Price1875,354 5,294 5,388 4,994
Production Cost1885,158 5,426 5,860 6,178
Profit\Loss189196 -132 -472 -1,184
4.445  To complete the analysis of profit and loss of the entire domestic industry, the Korean
authorities also examined the profit and loss statements for milk processing companies that produce a
majority of milk powder within this sector .  Additionally, they reviewed profit and loss data for two
livestock cooperatives which also account for a majority of milk powder production within this
sector190.
                                                     
182 Notification at IV.3.10.a.
183 Using the suggested reference price as a surrogate for the raw milk price, it should also be noted that
dairy households experienced declining profit margins during the investigation period.
184 Notification at IV.3.10.a.
185 OAI Report at 41.  See, also Notification at IV.3.10.a.  In its response to a question by Korea, the
EC states that the price paid by the cooperatives for milk powder is inversely related to the profitability of dairyfarmers.  Korea submits that where, as in this case, the cooperatives are required to purchase raw milk from
dairy farmers at a price that is unprofitable for the farmer s (either because the price is below cost or because the
payment is in part in the form of milk powder) and convert the raw milk into unsaleable inventory, no suchinverse relationship exists.
186 OAI Report at 54.  See, also Notification at IV.3.8-.9.
187 OAI Report at 47.
188 OAI Report at 53
189 Id.
190 OAI Report at 50.  See, also Notification at IV.3.10.b. Contrary to the EC’s erroneous observations
in its First Submission where it states that ‘Korea’s examination of the profitability of the domestic industry isnot in conformity with Article 4.2(a) of the Agreement on Safeguards since it does not examine the whole of anWT/DS98/R
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4.446  The authorities examined sales and gross profit(loss), operating loss, and ordinary loss.191
Non-confidential information regarding this examin ation included (a) a decreasing trend in the two
cooperatives’ net turnover from milk powder operations from 11,937 million Won in 1993,9,533 million Won in 1994, 11,589 million Won in 1995, and to 2,310 million Won during the first
four months of 1996
192, (b) a decrease in the turnover from milk powder operations of the milk
processing companies from 21,010 million Won in 1994 to 19,750 million Won in 1995193, (c) an
increase in operating losses from the milk powder operations of the livestock cooperatives from 755
million Won in 1993, 622 million Won in 1994, 1,244 million Won in 1995, and 681 million Won inthe first four months of 1996,
194 and (d) an increase in corresponding operating losses sustained by
milk processing companies from 680 million Won in 1994 to 1,330 million Won in 1995.195
4.447  In conclusion, the competent authorities considered the profit and loss of the dairy households
by looking at the profit and loss of the livestock cooperatives to which they belong and of which they
are shareholders .  Because livestock cooperatives are owned by dairy farmers who contribute to the
paid-in capital, the health of the dairy households may be considered through the financial position of
the livestock cooperatives .  Facts set out in the OAI Report indicated that the livestock cooperatives
incurred serious losses during the investigation period .  Therefore, the OAI found that the depression
in domestic prices caused by the imports of cheap SMPP prevented the livestock cooperatives from
increasing their sales prices.196  By the same token, milk processing companies incurred losses
because their milk powder was more expensive than SMPP197.
(iii) Sales and sales price
4.448  As the European Communities correctly indica ted in their first submission, the competent
authorities examined changes in the level of sales based on an examination of consumption
information for domestic raw milk.  The consumption of domestic raw milk was:
 “1,844,463 tons in 1993, 1,947,128 tons in 1994, 1,947,965 tons in 1995, and
984,934 tons in the January-June period of 1996.  The consumption increase rate was5.6 per cent for 1994, 0.0 per cent for 1995, and -2.0 per cent for the January-June period
of 1996.
198”
4.449  The Korean authorities also examined prices for the entire domestic industry.  Because Korea
recommends a reference price for raw milk, while the price for milk powder varies in accordance with
changes in supply and demand in the market,”199 the Korean authorities reviewed the price of milk
powder .  However, it should be noted that any impact of declining domestic milk powder prices
adversely affected the entire domestic industry, since raw milk producers own the livestock
cooperatives.200  The authorities identified the following trend in nominal prices:201
                                                                                                                                                                    
interconnected industry’, the Korean authorities carried out a profit and loss analysis covering the entire
domestic industry.
191 OAI Report at 50.
192 Notification at IV.3.10.b.i.
193 Id.
194 Notification at IV.3.10.b.ii.
195 Id.
196 OAI Report at 62.
197 Id.
198 OAI Report at 38.  See, also Notification at IV.3.3.
199 OAI Report at 48.  See, also Notification at IV.3.7.
200 Korea refers the Panel to the more detailed discussion of prices in the context of causal link below.
201 In its Response to a question by Korea, the EC states that “it does not entirely understand what is
meant by Korea with the term ‘real price’.  The real pr ice of a product is its price adjusted by the rate of
inflation which reflects, for example, increases in produc tion costs.  In developing countries like Korea, whichWT/DS98/R
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CHANGES IN SELLING PRICES OF DOMESTIC MILK POWDER202
(unit :  Won/kg.)
1993 1994 1995 1996. 1-4
Prices 5,354 5,294 5,388 4,994
Data :  Provided by NLCF to the KTC.
Note :  According to the Dairy Handbook, whole milk powder price, which stood at 5,100 Won/kg. in 1993 declined to
4,700 Won/kg. in 1994.
4.450  The Korean authorities also examined price data from May to August 1996 and determined
based on confidential data that the most recent prices for domestic whole milk powder ranged from
2,900 to 4,500 Won/kg and skimmed milk powder from 3,800 to 4,200 Won/kg.203 The OAI Report
considered and evaluated the decline in prices, but given the confidentiality attached to actual sales
prices could only publish the following table:
TREND OF DOMESTIC MILK POWDER PRICES204
Date Seller (Cooperative) Buyer (Firm) Price (Won/kg.) Volume (kg.)
Whole
Milk
Powder96-8-24 Seoul Milk Producers Urimil Co. x,xxx Xx
96-7-29 Chongju  Milk Producers Haptong Co. x,xxx x,xxx
96-4-27 Kwangju/Chonnam Puch'on Co. x,xxx x,xxx
96-7-4 Kwangju/
ChonnamUgwang Co. x,xxx xx,xxx
96-5-31 Kyongnam Dairy Sobu Co. x,xxx x,xxx
96-7-29 Kyongnam  Dairy Sobu Co. x,xxx x,xxx
Skimmed
Milk
Powder96-5-29 Taebaek Sejin Co. x,xxx xx,xxx
96-8-26 Umsong Namyang co. x,xxx xx,xxx
Data :  Provided by NLCF to the KTC.
4.451  In conclusion, the Korean authorities determined that the decline in sales of domestic
products would have been much higher and more rapid had the Korean milk powder producers not
sold milk powder at below production cost.
4.452  Regarding the suggested reference prices for ra w milk Korea stated that the NLCF recognizes
the suggested reference price for raw milk established by the Government of Korea. This scheme in
no way guarantees the Korean dairy farmer a profit205. Indeed, in certain years, the price suggested by
the Government of Korea was lower than the average production cost of the Korean dairy farmer206.
                                                                                                                                                                    
have annual inflation rates of several percent, what really  matters is the trend of the real price, rather than its
nominal price .  Real price of domestic milk powder declined substantially during the investigation period.
202 OAI Report at 48.  See, also Notification at IV.3.7 (inc luding the price comparison table).
203 OAI Report at 48.
204 Id.
205 See Notification Pursuant to Article 12.1.(C) of the Agreement on Safeguards,
G/SG/N/10/KOR/1/Suppl. 1, (1 April 1997), Paragraph V.2.4. See also EC’s First Submission, Exhibit EC-10.
206 It is important to note that the prices suggested by the Government of Korea, while slowly
increasing, do not fully reflect the increase in the prices wi thin Korea. Therefore, the real price equivalent has inWT/DS98/R
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Further, in times of difficulty, it is normal for the livestock cooperatives to pay dairy farmers partially
in kind. This usually takes the form of 70-80 per cent cash and up to 20-30 per cent milk powder207.
4.453  Korea considers that the EC’s statement that "producers are guaranteed a very high price for
their raw milk" is misleading. The price suggested by the Government of Korea, particularly when
compared to the production cost, is not very high. Furthermore, the Korean government does not
impose a guaranteed price, but only provides a suggested reference price to facilitate a fair transaction
between individual dairy farmers and large users of raw milk, such as processing companies.  This
price is forecasted by the government taking into account inflation and production costs. It does notnecessarily result in a price  that covers  production costs, which was the case in 1996.
4.454  The Korean government does not set a guaranteed price, but only provides a suggested
reference price.  In addition, dairy farmers may sell a virtually unlimited quantity of their production,
but when the market for milk powder declines and inventories rise, as was the case during the
investigation period, cooperatives often pay for raw milk in a combination of cash and milk
powder
208.
(iv) Employment
4.455  The Korean authorities found that the number of dairy households declined during the
investigation period as seen in the following table:
                                                                                                                                                                    
fact declined. For the period 1982-1996,  farmers, including dairy households saw an increase of 81.1 per cent in
the cost of their inputs (as a result of inflation), while the government suggested price for raw milk onlyincreased by 37.7 per cent. See  Ko rean National Statistical Office, Major Statistics of the Korean Economy,
1998.3, p.151.
207 See, for example, the Livestock Farming Newspaper  dated 30 April 1996 (see Exhibit Korea-1)
noted that:
"Financial difficulties facing small-scale dairy cooperatives have been aggravated due to the
increased milk stockpile, so that most of them are paying partly in milk powder for purchases ofraw milk’, said an official of the NLCF.
He added ‘For example, recently Kyungnam Dairy Cooperative and Pusan-Kyungnam Milk
Cooperative are making payments in kind for up to 20 per cent of their purchases of raw milk. If
the milk powder stockpile continues to increase, dairy cooperatives will have to pay in milk
powder and not in cash.’
In addition, he urged the Government to establish policy measures for reducing the current huge
milk powder stocks."
208 The percentage increase in the membership of the NLCF increased during the investigation period.
This increase was a direct result of the increase in imports of SMPP, since as these replaced Korean raw milk,
farmers that had sold raw milk directly to processing companies were now faced with stiff competition from
SMPP. In order to get rid of the raw milk, they had to sell to cooperatives, and in order to sell to cooperatives,they had to be members of those cooperatives.WT/DS98/R
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CHANGES IN THE NUMBER OF DAIRY HOUSEHOLDS209
1993 1994 1995 1996. 1-6
Increase Rate
(%)Increase Rate
(%)Increase Rate
(%)
Number of DairyHouseholds28,219 25,667 -9.4 23,519 -8.4 22,725 -3.9
4.456  Contrary to the EC claims, the reduction in the number of dairy households is not a result of
any Korean Government programmes .  Indeed, the dairy households were provided with loans from
the Livestock Development  Fund to maintain their competitiveness:210
4.457  With respect to domestic milk powder production, the Korean authorities stated:
“As the milk powder production became automa ted, the number of workers employed in
milk powder production decreased over the years.  Currently, very few people are fully
employed for the exclusive purpose of engaging in milk powder production.  Workers
producing other dairy products are used temporarily, when needs arise, to engage in milk
powder production.  Accordingly, employment and wage are insignificant factors in
operating milk powder business.211”
4.458  Therefore, because unemployment increased in the raw milk sector and was an insignificant
factor in the milk powder sector, the Korean auth orities considered that employment declined during
the period of investigation for the whole domestic industry.212
(v) Inventory
4.459  For the domestic industry as a whole, the Korean authorities examined changes in the level of
inventory.  The authorities stated:
“The amount of domestic milk powder in inventory was 4,509 tons at the end of 1993,
1,517 tons at the end of 1994, 6,565 tons at the end of 1995, and 14,994 tons at the end of
June 1996.  As such, the inventory rate of raw milk which slightly decreased from 2.4 per
cent in 1993 to 0.8 per cent in 1994 increased to 3.3 per cent in 1995 and further to
13.0 per cent in the January-June period of 1996.  The total value of raw milk inventoryas of June 1996 is 92,633,000,000 Won.”
213
                                                     
209 OAI Report at 40.  See, also Notification at IV.3.6.
210 Loans were not provided to co nsolidate or rationalize the industry since these loans were not
provided to encourage dairy farmers to re locate and find other means of livelihood .  The loans were paid
exclusively for dairy business purposes and the farmers had to repay the outstanding loans amounts once theyleft the dairy industry .  The EC’s reference to the Dairy Industry Plan which sought to reduce the size of the
Korean dairy industry by 5.9 per cent is irrelevant since the Plan only took effect in August 1997 and the
investigation of the dairy industry in this case ended in October 1996.
211 OAI Report at 49.  See, also Notification at IV.3.6.
212 Contrary to the EC’s contentions, the Korean authorities did investigate employment for the whole
domestic industry and considered that declining dairy farming households properly represented decliningemployment in the Korean dairy industry.  In response to a question by Korea, the EC tells Korea how tointerpret its data on dairy households and essentially refers to any examination of a factor that differs from how
the EC would have examined such factor as the failure to  examine the factor at all.   Korea considers that the
Panel should not evaluate this case based on the EC’s view of how the EC itself would have conducted theinvestigation.
213 OAI Report at 38.  See, also Notification at IV.3.5.WT/DS98/R
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4.460  Increase of milk powder inventory is clear evidence of serious injury in this case not only to
the milk powder industry, but also to the entire domestic industry .  As explained above, raw milk that
is not consumed has to be converted into, inter alia,  milk powder .  Conversion only increases supply
and inventory of milk powder .  Therefore, increased milk powder inventory not only indicates
oversupply of milk powder but also demonstrates displacement of domestic raw milk by cheap
imported SMPP, thus signifying serious injury to the entire domestic industry.
4.461  The Korean authorities then presented the supply and demand for raw milk (including milk
powder)  as follows:
SUPPLY AND DEMAND OF RAW MILK (INCLUDING MILK POWDER)214
1993 1994 1995 1996. 1-6
Increase
Rate (%)Increase
Rate(%)Increase
Rate(%)
Total Demand (A) 2,025,063 2,218,738 9.6 2,303,795 3.8 1,153,964 -2.3
Domestic Raw MilkConsumed (B)1,844,463 1,947,128 5.6 1,947,965 0.0 984,934 -2.0
Production (D) 1,857,873 1,917,398 3.2 1,998,445 4.2 1,069,224 4.4
Inventory (E) (in terms of
Raw Milk)4,509
(45,090)1,517
(15,170)-65.4 6,565
(65,650)332.8 14,994
(149,940)342.7
Inventory Rate (E/A, %) 2.4 0.8 - 3.3 - 13.0 -
Domestic Raw Milk's Market
Share (B/A, %)91.1 87.8 - 84.6 - 85.4 -
Data :  MAF
Notes :  1) Total demand reflects demand for raw milk, imported milk powder, SMPP, and milk powder in stock.
2) Inventory, inventory rate and the consumption amount are calculated based on the amount of milk
powder calculated in terms of the conversion ratio when converting milk powder to raw milk.
4.462  The increased inventory incurred a significant amount of costs.215  Even if depreciation is
disregarded, the cost of inventory amounted to 17.3 billion Won (approximately US$21.6 million)
during the investigation period .  The inventory costs during the first six months of 1996 alone were
5.8 billion Won (approximately US$7.3 million), and the domestic producers were compelled to incur
the full inventory cost because, unlike the European Communities, Korea does not subsidize the
inventory costs of  milk powder.
(vi) Investment
4.463  The Korean authorities evaluated investment in the raw milk and milk powder sectors of the
domestic industry.  The only investment information for the raw milk sector was based on the amount
allocated to dairy farmers by the Dairy Cow Competitiveness Enhancement Programme.216  T h i s
project was necessary because of the inability of the raw milk sector to attract investment.217  T h e
                                                     
214 OAI Report at 39.
215 Notification at IV.3.4
216 OAI Report at 40.
217 Id.WT/DS98/R
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authorities also evaluated investment in the livesto ck cooperatives as an indicator of injury to the
whole industry, given the ownership of the cooperatives by the raw milk producers.218  T h e
authorities’ evaluation showed, inter alia , that total investment, which includes research and
development, declined significantly over the inve stigation period and that there was virtually no
investment made in the milk powder industry for purposes of expanding production facilities.219
(vii) Share of the domestic market taken by SMPP
4.464  The Korean authorities examined the share of the total domestic market (consisting of
domestic raw milk, domestic milk powder, imported milk powder, and imported SMPP), and found
that the share of the domestic market taken by SMPP increased by 12.5 per cent during the
investigation period.220
4.465  Korea would like to clarify one point that may have caused confusion in interpreting the
actual market share of SMPP in the Korean domestic market .  According to the figures set out on
page 58 of the OAI Report, the market share of SMPP increased from 1.6 per cent in 1993 to 7 per
cent in 1994, 12.2 per cent in 1995 and 14.1 per cent in the first six months of 1996 .  This represents a
net increase in the market share of 12.5 per cent during the investigation period .  Because the product
under investigation is only SMPP, the table at page 58 of the OAI Report represents an accurate
measure of SMPP’s share of the total market.  While the market share of SMPP increased from
1.6 per cent to 14.1 per cent during the investigation period, the market share of imported milk
powder and SMPP increased by 5.7 per cent221(although the market share of SMPP increased by
12.5 per cent the market share of imported milk powder decreased by 6.8 per cent) .  This is reflected
in the Table on page 17 of the OAI Report.  However, as the product under investigation is SMPP,
only the market share of SMPP must be emphasized, not the combined market share of imported milk
powder and SMPP.
(viii) Capacity utilization
4.466  The Korean authorities examined capacity utilization for both the raw milk and milk powder
sectors of the domestic industry in the interim injury investigation report .  In both sectors, capacity
utilization was discounted in determining serious injury because it was considered of limited
relevance, i.e., it was not “of an objective and quantifiable nature having a bearing on the state of that
industry”, and was therefore omitted from the final OAI Report .  For the raw milk sector, “[c]apacity
utilization was always 100 per cent  since raw milk  is produced by dairy cows, which cannot be left
idle like some other forms of production.”222
                                                     
218 OAI Report at 49.
219 Id.  Contrary to the EC’s Oral Statement, page 49 of the OAI Report shows that consideration of
investment was not “new and remarkable”.
220 OAI Report at 58 .  Korea agrees with the United States comment in its third party oral submission
that “Article 4.2(a) contains no numerical test or threshold requirement for market penetration, explicit or
implied .  Instead, Article 4.2(a) requires that the competent authority evaluate ‘all relevant factors,’ of which the
percentage share of the domestic market is only one.”.  Korea cited the United States  Wheat Gluten  case in its
first submission to highlight the fact that a low market penetration rate does not preclude competent authorities
from making an affirmative serious injury finding based on all relevant factors and such a low rate may even besignificant based on “the nature of the product and the nature of competition in the market.
221 The EC simply alleges, whether erroneously or intentionally, that a decline of 5.7 per cent points (in
market share) cannot be considered supportive of a finding of serious injury .  The allegation is totally wrong in
that the number of 5.7 per cent refers to the imported milk powder and SMPP combined, not the product subject
to injury investigation, namely the SMPP.
222 Notification at IV.3.2.  See, also OAI Report at 36 (“The collection of raw milk from dairy farmers
does not change simply because there is a change in demand.”) .  The EC states that the Korean authorities’
examination of capacity utilization was, in its view, no t “serious” because a Korean dairy farmer with 100 cowsWT/DS98/R
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4.467  For the milk powder sector, the authorities examined capacity utilization in their interim
report223 but determined that this factor had limited relevance because:
“Raw milk, milk powder and SMPP can be used  as raw materials to produce fermented
milk, flavoured milk, ice cream and other marketable milk products.  An increase in
SMPP affects the amount of domestic milk powder consumed and also impacts the milk
powder inventories and prices.  An increase in the import of SMPP also affects the
amount of raw milk consumed which in turn affects the milk powder inventories and
prices.224”
4.468  In other words, “the absolute increase of [SMPP] led to a drastic increase in the surplus of
raw milk, all of which was then converted into milk powder.” 225  The necessity of converting excess
raw milk to milk powder means that high capacity utilization rates do not necessarily indicate an
absence of injury, especially when the milk powder remains as unsold inventory.  Therefore, capacity
utilization was considered to have only limited relevance as an injury factor.
(ix) Production and productivity
4.469  The Korean authorities examined production information for the whole domestic industry,
stating that:
 “[t]he production amount of domestic raw milk [including milk powder] was
1,857,873 tons in 1993, 1,917,398 tons in 1994, 1,998,445 tons in 1995, and 1,069,224
tons in the January-to-June period of 1996.  The increase rate was 3.2 per cent for 1994,
4.2 per cent for 1995, and 4.4 per cent for the January-June period of 1996.”226
4.470  The authorities reasoned that an increase in production in the domestic industry does not
necessarily indicate the existence or absence of injury.  As they stated:
“The production of raw milk cannot be temporarily reduced without resorting to the
slaughter of dairy cows.  Rather than reducing the size of their herds - the average size of
which is quite small - Korean dairy farmers continue normal levels of raw milkproduction even during periods of weak demand, since excess raw milk is supplied to the
livestock cooperatives for conversion into milk powder.
227
4.471  Milk processing companies decreased their purchases of raw milk from dairy households,
while increasing their purchase of cheaper SMPP .  As milk processing companies curtailed their
purchases of domestic raw milk, Korean dairy households were forced to turn to the livestockcooperatives, which were obliged to collect the unsold raw milk produced by their member dairy
households.  In short, the absolute increase of  SMPP led to a drastic increase in the surplus of raw
milk, all of which was then converted into milk powder.
228”
                                                                                                                                                                    
“can choose to only have 80, if economic conditions requ ire this.”  Korea does not consider that the slaughtering
of 20 per cent of Korea’s dairy cows is a viable remedy to the serious injury caused by increased imports of
SMPP from the EC.
223 See, Exhibit Korea-5.
224 OAI Report at 37.
225 Notification at IV.3.1.  Contrary to the EC’s contention, the Korean authorities examined the
relevance of capacity utilization during its investigation
226 OAI Report at 38.  See, also Notification at IV.3.1.
227 Notification at IV.3.1.
228 Notification at IV.3.1.  See, also OAI Report at 36-38 .  In its First Submission, the EC argues that
the Korean competent authorities’ reasoning is, in its view, not credible.  The EC contends that technology(feed, additives, etc.) exists to vary production and 10-12 per cent of dairy cows are retired or slaughtered everyWT/DS98/R
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4.472  As to productivity, given the nature of the industry, the authorities evaluated this criterion in
terms of production for the whole domestic industry.229  Productivity alone was considered of limited
relevance because the increase of “productivity” in the raw milk sector ( i.e., increased production of
raw milk despite the declining number of dairy households) was attributable to advances in
technology230 and because the increased “productivity” in the milk powder sector ( i.e., increased
production compared to stable factors of production) was attributable to the fact that increased
amounts of raw milk were required to be converted into milk powder, which remained as unsoldinventory.
231  In the dairy industry, increased productivity in the milk powder sector, in fact, suggests
injury to the whole domestic industry.
4.473  Contrary to the EC claims, the authorities examined productivity for the whole domestic
industry.  Moreover, the authorities did not “replace the examination” of one factor with another.  The
authorities examined productivity and determined that it was not strictly relevant ( i.e., not of an
objective and quantifiable nature having a bearing on the situation of that industry).
4.474  Thus, the Korean authorities considered production and properly concluded that changes in
productivity were not appropriate indicators of serious injury because it was not possible to curtail
production of raw milk without slaughtering cows, and so any surplus had to be converted, inter alia,
into milk powder.
(g) Additional arguments by the European Comm unities made at the second meeting of the
Panel with the parties
4.475  At the second meeting of the panel with the parties, the European Communities  further
advanced their arguments under Article 4.2(a) as follows:
(i) Profitability
4.476  The European Communities  reiterated their view that Korea did not investigate the
profitability of dairy farmers during its investigation, only the profitability of the milk powderproducers.
4.477  In reply to the EC complaints during the consultations, Korea claimed both then and
subsequently in its Notification of 24 March 1997
232, that it could not carry out a profitability analysis
for the dairy farmers because they were too numerous.  However, in its first written submission it
produced for the first time a comparison of prices and production costs based on a survey of 150 dairy
                                                                                                                                                                    
year.  Through these means, the EC considers that dairy farms can reduce production whenever necessary.
Korea considers that the EC is again simply conducting its own unsubstantiated investigation of Korea’s dairyindustry.  The EC ignores the fact that in Korea’s relatively underdeveloped dairy industry composed of
approximately 23,000 individual dairy households, any potential technological advancement is used to increase
production, and dairy cows cannot be slaughtered “when necessary” in response to increased SMPP imports.Moreover, although it is feasible to reduce the produc tion capacity of cows through reduction of feed, the EC
fails to point out that once a cow’s output has been reduced in this way, it is almost impossible to increase itagain.
229 See, OAI Report at 38;  Notification at IV.3.2.
230 Technological advancements include, inter alia , construction of open sheds equipped with fan
ventilation systems to keep temperatures at an optimum le vel, use of milking machines to collect milk, including
installation of pipelines to collect milk, and use of total mixed ration (TMR) system to provide adequatenutrition to cows.  Dairy cows are very sensitive to te mperature and their production varies according to their
surrounding temperature.  At a temperature ranging between 4 and 27 degrees Celsius, dairy cows produce anoptimum amount of milk, approximately 25 kg.  If the temperature increase to 30 degrees or above, output is
reduced to 80 per cent.  At 40 degrees or above, it falls to 40 per cent.  See, United States Feed Grains Council,
Dairy Feeding Guide  at 117.
231 Id.
232 See, paragraph 3.10(a) at page 12.WT/DS98/R
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farmers which showed high profits in 1994 declin ing to a small loss in 1996 because a steadily
increasing reference price did not keep up with the increase in production costs.  Furthermore Korea
admitted that production costs are calculated and published on an annual basis (in the ‘Annual Reportof Livestock Production Cost Survey’) and that the “suggested reference price” is set with the aim of
covering the costs of production.
4.478  In the EC view this proves that Korea did have access to the information and therefore could
have investigated profitability of dairy farmers.
4.479  The European Communities do not accept Korea's r easoning, that the livestock co-operatives’
profits and losses are directly linked to the raw milk producers’ income because the dairy farms own
the cooperatives.  In fact, the livestock cooperatives’ profits have an inversely proportional
relationship to the income of the dairy farmers .  If the price of raw milk increases, dairy farmers make
more profit and milk powder producers and livestock cooperatives make less.
4.480  Korea also provided data showing the manufactu ring cost of milk powder and the percentage
represented by raw milk.  This allows calculation of the average price obtained for this raw milk by
the dairy farmers .  This calculation shows that dairy farmers were obtaining more than the suggested
price and that this positive margin was increasing over the period a healthy situation for dairy farmers .
Of course the figures can be adjusted to take into account other costs but, they will still show a margin
over the suggested price.
4.481  Admittedly these deduced prices only relate to sales for milk powder production .  But Korea
itself insists that only surplus milk which cannot be di sposed of in sales of fresh milk is sold for milk
powder .  Accordingly, the dairy farms must have been obtaining even better prices for their other milk
sales.
4.482  The EC table on the profit margin of dairy fa rmers selling raw milk for milk powder shows
the profit levels of the dairy farms for sales of raw milk for milk powder, which would tend to
represent the lowest price received for raw milk .  Rather than a profit situation degenerating into loss,
as Korea has claimed in its own figures, this Table shows precisely the opposite, that dairy farms were
becoming increasingly profitable during the investigation period.
4.483  From another perspective the tables on selling price of raw milk for milk powder, above at
paragraph 4.426,  production and profit margin of dairy farmers selling raw milk for milk powder,
show that the steadily increasing profit levels obtained by the dairy farms were squeezing the marginsof the milk powder companies and reducing their profitability.
4.484  By only looking at the profitability of the smal l part of the domestic industry that was losing
money to the larger part which was profiting at its expense, Korea has failed to properly examine
profitability and its injury finding cannot be co nsidered in conformity with the Agreement on
Safeguards.
(ii) Employment
4.485  In he EC view the number of dairy farms cannot be taken as a measure of employment as
Korea has done .  This is especially so in view of the fact that the number of cows per farm and
productivity were increasing – i.e., the industry was consolidating. As the European Communities
pointed out  this is a perfectly healthy development.
4.486  Korea has not responded to this objection and persists in confusing  the number of dairy
households (that is farms) with employment levels in dairy farms.
4.487  In the EC view, therefore Korea has not properly examined employment.WT/DS98/R
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(iii) Investment
4.488  Investment was not identified as an injury factor in Korea’s 24 March Notification but the EC
comments on it because it features in Korea’s submissions to the Panel.
4.489  There are numerous inadequacies in this attempt to justify a finding of injury ex post facto on
the basis of investment.  For example, Korea states that the losses suffered by cooperatives led to their
inability to attract investment and this led Korea to provide financial assistance through the Livestock
Development Fund.  However, Korea later states that “the only investment information for the rawmilk sector was based on the amount allocated to dairy farmers by the Dairy Cow Competitiveness
Enhancement Programme . (footnote omitted)  This project was necessary because of the inability of
the raw milk sector to attract investment.”  In the EC view the economic data relied upon by Korea
seems to change from one submission to the next.
(iv) Livestock cooperatives’ volume of raw milk collected
4.490  Korea claims that dairy farms were forced to turn to the livestock cooperatives, which were
obliged to collect the unsold raw milk.  Membership of NLCF increased from 85 to 99 per cent overthe investigation period.
4.491  In fact, analysis of the figures provided by Korea shows that the increased purchases of raw
milk by the livestock cooperatives were due primarily to increases in their membership, and that the
proportion of their members milk which they actually collected declined steadily between 1993
and 1996, as shown in the table below.
1993 1994 1995 1996
Proportion of dairy farmers
who are NLCF members (A)85.5% 91.2% 93.3% 99.9%
Proportion of raw milk
production collected by
NLCF (B)41.36% 42.80% 44.30% 45.30%
Proportion of NLCF
members’ milk collected byNLCF (= B÷A)48.4% 46.9% 47.5% 45.3%
The percentage of milk collected by cooperatives is calculated as a percentage of total milk
production and increases from 41.36 per cent to 45.3 per cent over the reference period .  This is in
fact a lower proportionate increase than the increase of the Membership and therefore demonstrates
that the proportion of milk collected by the cooperatives was declining.  Consequently there cannothave been any change in the ability of dairy farms to dispose of their milk to other purchasers at prices
well above the suggested price. Again  in the EC view this does not suggest injury but rather the
contrary.
(v) Production and productivity
4.492  The European Communities refer to Korea's second written submission where Korea states
that
“Productivity alone was considered of limited relevance because the increase of
“productivity” in the raw milk sector ( i.e., increased production of raw milk despite the
declining number of dairy households) was attributable to advances in technology and
because the increased “productivity” in the milk powder sector ( i.e., increased production
compared to stable factors of production) was attributable to the fact that increasedWT/DS98/R
Page 92
amounts of raw milk were required to be converted into milk powder, which remained as
unsold inventory .  In the dairy industry, increased productivity in the milk powder sector,
in fact, suggests injury to the whole domestic industry.”
4.493  In the EC view this paragraph sh ows injury (if such it is) caused by one part of the industry
(the raw milk producers who were increasing production) to another (the cooperatives who were
obliged to buy milk at fixed prices).
4.494  This injury (if such it is) is not caused by imports but technological advances, according to
Korea.
4.495  This technological advances increase the production and profitability of dairy farms and
contributes to producing a surplus of milk at a time of declining consumption at least in 1995-96 .
This in turn is what has led to an increase in milk powder inventories.
4.496  The effect of increasing production of raw milk colliding with its decreasing consumption and
a stable level of imports of SMPP has been graphically illustrated by the European Communities .  A
remarkable coincidence is evident between the decrease in consumption starting in November 1995
and the increase in stocks.
(vi) Price relationships
4.497  A fundamental criticism of Korea’s determination is that it has not conducted an investigation
into the prices of the imported products and their possible effect on the domestic industry .
4.498  Korea claims that it did examine prices and “undercutting” and refers to page 62 of the OAI
Report (English version) .  The figures presented there show SMPP at half the price, tonne for tonne,
of domestic milk powder.  But, In the EC view this is like comparing the prices of butter and
margarine.  It is clear that the characteristics and uses of a product like the domestic one, pure milk
powder, cannot be the same as that of a product like the imported one, SMPP, which is only a mixture
containing milk powder.  Indeed Korea asserts that  “most Korean users of milk powders state ... that
the domestic products are of higher quality than the imported SMPP.”  Not only are the characteristicsof the products different but so also are their uses .  Korea admits that "SMPP was an effective
substitute for domestic raw milk and milk powder in most industrial uses", but not in all.
4.499  These differences clearly have an impact on pricing decisions for both products.  However
Korea made no analysis of the extent to which substitution may take place or what the proper price
relationship should be.
4.500  It is accepted that the products compete but so for example do Whisky and Sochu.  That does
not make them of equal value.
(h) Additional arguments by Korea made at the second meeting of the Panel with the
parties
4.501  At the second meeting of the panel with the parties, Korea  further advanced its arguments
under Article 4.2(a) as follows:
4.502  Korea asserted that the European Commun ities raised two fundamentally inconsistent
arguments:
(a) that the OAI Report is not the appropriate source of relevant information for review
of Korea’s obligation, yet the European Communities seek to make arguments in
relation to Korea’s failure to comply with Articles 2 and 4;  andWT/DS98/R
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(b) that this report “has only been made recently available”.
If the OAI Report is not a relevant source of material for its review, why does the European
Communities complain that they have only just re ceived that Report (which Korea maintains is
untrue), and what relevance do arguments under Articles 2 and 4 relating to establishment of the
increase in imports, serious injury and causal link between the two have if the investigation
undertaken by the Korean authorities is not at issue?
4.503  Regarding the EC specific arguments on Article 4.2(a) and (b), Korea notes the perils inherent
in permitting a Member to substitute its own analysis and conclusions for that already undertaken by
the investigating authority of another Member .  Such investigations require an analysis of complicated
factual, legal and economic issues, and these are simply not amenable to second-guessing by any third
party, least of all a complainant.
4.504  In Korea's view the European Communities build a major part of their Rebuttal Submission
around their calculation of the price of raw milk from the price of milk powder produced by the
NLCF .  This analysis calls for a number of comments:
(a) First and most importantly, there is no reliable way of arriving at an accurate or
appropriate transaction price for raw milk in Korea, since there are more than
20,000 vendors .  As noted at page 41 of the OAI, Section IV.3.10a of the
Notification, this is why the OAI did not undertake such a calculation .  Korea is not
seeking to arrive at a more accurate selling price for raw milk than that arrived at bythe European Communities, but is simply seeking to show that it is not possible to
arrive at an accurate figure, and any attempt will not be a basis for a rational analysis;
(b) However the European Communities make their calculations, the reality is that it is
not feasible to produce “actual raw milk sales prices” .  Such prices are only found in
the individual contracts between the dairy farmers and their purchasers, and are notdisclosed to third parties .  It strains credibility for the European Communities to
assert that “the Korean Government did in fact have available to it information on
raw milk transaction prices, at least on an overall basis”;
(c) Even if the Panel considers that it is possible to adopt the broad methodology
attempted by the European Communities, which Korea does not, then lookingspecifically at the EC table on the selling price of raw milk for milk powder
production, see paragraph 4.420, Korea notes that the European Communities have
assumed, incorrectly, that the NLCF’s “raw material cost” is identical to the cost of
raw milk .  The NLCF’s “raw material” cost includes several elements of cost which
were incurred after the purchase of raw milk from the farmer, and so cannot form partof the farmers’ selling price .  In order to begin to work back from the NLCF’s
manufacturing cost to the price of raw milk paid to the farmer, these subsequent costs
would need to be deducted .  The two most significant costs are collection (including
transportation from the farm to the NLCF’s production facility), and the cost of
packaging the finished milk powder .  In 1993
233, for example, the NLCF reported that
its collection cost  (including transportation) of raw milk from the farm to its milk
powder production facilities was 40.6 Won/kg .  Further, in the same year, the NLCF
packaging cost was 5.9 Won/kg .  In order to eliminate these two elements from the
“raw material cost” of the NLCF, it is necessary to deduct approximately a further
10.9 per cent from the “raw material cost” .  After such deduction, and on the basis of
the EC methodology (which Korea reiterates is not an appropriate method to derive
                                                     
233 Korea understands that this method would need to be applied to all other years.WT/DS98/R
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the selling price of raw milk), the prices paid by the NLCF to farmers for their raw
milk often did not exceed the MAF suggested reference price;  and
(d) Finally, farmers occasionally are paid by the NLCF in milk powder as opposed to
cash.  While such payments in kind reduce the farmers’ feed costs, they also affect
their cash flow derived from the selling price, and so this also needs to be taken into
account in assessing the validity of the EC calculations.
4.505  Further, the errors in methodology noted abov e in relation to calculation of price are then
brought forward into the discussion on profitabil ity, where further assumptions Korea views as
spurious are added into the process .  As Korea has consistently pointed out, there is no reliable data
available on the profitability of Korean dairy farmers .  The information provided in Korea’s First
Submission, and seized upon by the European Communities as some form of ex post facto  reasoning,
was only provided to rebut the EC claims about “guaranteed profits” for dairy households .  It cannot
be construed as a basis for calculating the profitability of Korean dairy farmers .  In quoting Korea’s
answers to the Panel's questions, and in its suggestion that either Korea engaged in ex post facto
analysis, or failed to use all available evidence, the European Communities appear to have forgottenor omitted to refer to Korea’s answers to the EC questions, which also deal with profitability where
Korea clearly and unequivocally states that:
“Korea provided the information on production costs to rebut the EC characterization of
the suggested reference price as a price ‘under which producers are guaranteed a very
high price for their raw milk, irrespective of how much they produce and irrespective ofdomestic demand’.”
4.506  The European Communities assert that they understand the data better than the Korean
authorities’, arguing that “MAF has knowledge of production costs each year.” This is untrue.
Through the NLCF, the MAF has access to an annual survey of 150 dairy farmers’ production costs.
However, this is not a comprehensive data series, and certainly not one that the Korean authorities feltthey could use in investigating serious injury caused by imports of SMPP .  Korea wonders whether,
had it used this sample of 150 dairy farms, the European Communities would now be arguing that 150
farms was unrepresentative.
4.507  Further on profitability, the European Communities assert that “this increase in price of raw
milk for milk powder production must be due to a shortage of supply of the raw material.” Koreanotes:
(a) that inflation, a common phenomenon in a number of countries, including in EU
Member States caused increases in actual price .  Even if the nominal price of raw
milk increased, its real price adjusted by the overall inflation rate might have fallen,
reflecting excess supply of raw milk as a result of the increase in imports of SMPP;and
(b) milk powder inventory levels never fell below 1.5 months of supply, and were usually
much higher.
Therefore, in Korea's view the EC conclusion is entirely inaccurate.
4.508  Finally, on profitability, the European Communities appear to argue that the milk powder
producers could have reduced or eliminated the serious injury by reducing their raw milk purchase
price .  While, this sounds easy, it would have involved  increasing the serious injury to Korean dairy
farmers, and Korea finds it unacceptable to be offered advice on operation of free markets in dairy
products from the regulator of one of the most protected dairy markets on earth.WT/DS98/R
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4.509  The European Communities attempt to show that  the suggested reference price for raw milk
in Korea is more than a mere suggestion, and cites various examples .  As Korea has consistently
stated the Government price for raw milk is a suggested reference price and is not binding upon any
parties .  The European Communities cite Article 13 of the Dairy Industry Promotion Act.  This
merely establishes the framework in which the suggested reference price can be established .  It does
not provide any compulsion or impose any sanction on any party that fails to follow such a suggested
reference price .  Therefore, while the DIPA establishes that a suggested reference price can be set,
dairy farmers and milk processing companies remain free at all times to establish their own prices at
which they buy and sell raw milk.
4.510  In Korea's view the European Communities seek to re-investigate the issue of milk powder
stocks .  The European Communities graph on milk powder inventories,234 is based on three erroneous
arguments:
(a) Although the milk powder stocks increased abruptly during November 1995 to
December 1995, the increase since January 1996 reflected other factors including theeffects of increased imports of cheap SMPP;
(b) actual consumption of milk returned to around the historic three year average as from
early 1996;
(c) the statistical and econometric models used by the OAI showed that the effect of the
“milk quality” controversy disappeared as from January 1996 .  Use of the
econometric causality tests showed that the import of cheap SMPP was the cause of
the increase in milk powder inventory during the entire investigation period.
4.511  During the investigation, the OAI concluded that, although the “milk quality” controversy had
an impact on milk powder inventory for a few months, it was the import of cheap SMPP that caused
the increase in inventory during the investigation period.
4.512  In Korea's view, the European Communities purport to understand the status of loans to dairy
farmers better than the Korean Government .  Korea reiterates that during the course of the
investigation period “virtually all” farms received the loan .  Korea provided information on the loans
provided to dairy farmers during the period of investigation .  During this period, the Livestock
Development Fund made almost 72,000 indi vidual loans to 28,000 dairy households .  The recipients
of loans in one year do not necessarily need or apply for a loan in subsequent years .  Therefore, while
there was no year in which loans were made to all 28,000 households, during the period of
investigation, loans were made to “virtually all” households .  Further, loans were not given to dairy
farms for the purpose of leaving the dairy industry , but to virtually all dairy households for the
purpose of improving their competitiveness, thus ensuring they have an option to remain in theKorean dairy industry.
4.513  The European Communities again seek to fulfil th e role of investigating authority by arguing
that Korea “failed to tackle [employment] in an adequate manner.”  As Korea has noted repeatedly,
data on changes in the employment of individuals  in the Korean dairy industry is simply not available,
and so the Korean authorities used changes in the number of dairy households as a surrogate .  The EC
suggested analytical framework is simply not  applicable to the Korean dairy industry .  The
framework, while possibly appropriate for a large-scale dairy farm in the Netherlands or Denmark,ignores the fact that Korean dairy farms are on the whole small scale family businesses, and represent
one part of the economic activity of some members of that family .  It is not possible to determine how
much time each person spends working on that business, and what proportion of that time is devoted
                                                     
234 Exhibit EC-26WT/DS98/R
Page 96
to dairy production, and therefore Korea believes that the EC arguments do nothing to prove that
Korea failed to comply with its obligations under Article 4.
4.514  Korea understands the European Communities to be arguing that, in addition to the
comparison of any quality differences between milk powder and SMPP in establishing “like” or
“directly competitive product”, the Korean authorities were also required to take any differences in
quality into account in assessing price undercutting .  Korea notes that the Korean authorities took the
quality differences into account in deciding that milk powder and SMPP were directly competitive,
which the European Communities appear not to dispute .  Had Korea found that the products were not
directly competitive, no further investigation would have taken place.
4.515  During the course of the second meeting of th e parties, Korea provided two rebuttals to the
inferences drawn by the European Communities from the table in paragraph 4.491 relating to the
volume of raw milk collected by livestock cooperatives. First, the figures provided cannot be used to
provide any reliable conclusion, since the figure of 45.3 per cent provided for in the second row for
1996 is a half-year figure, whereas all other figures provided are full year figures. Second, even if the
figures could provide a reliable basis for the analysis proposed by the European Communities, they donot reflect the EC conclusion. The proportion of NLCF members milk collected by the NLCF does
not “decline steadily between 1993 and 1996”, since the figures for 1995 show an increase over 1994.
G. C
LAIM UNDER ARTICLE  4.2(b) OF THE AGREEMENT ON SAFEGUARDS
(a) Claim by the European Communities
4.516  The European Communities  claim that Korea violated Article 4.2(b) of the Agreement on
Safeguards because it failed to show the existence of a causal link between the increased imports and
the serious injury to the domestic industry.  The following are the EC arguments in support of this
claim:
(i) The inadequacies of Korea’s analysis under the first sentence of Article 4.2(b) of the
Agreement on Safeguards
4.517  In the EC view, Korea’s attempted demonstration of causal link was as follows:
(a) It described the rising market share of SMPP out of total domestic consumption
(domestic raw milk (including milk powder), imported milk powder, and SMPP) and
the even more rapidly rising market share when compared with domestic and
imported milk powder and SMPP .  (Paragraph V.1.1 of the 1 April 1997 Notification).
(b) It recalled the stable level of prices for imported SMPP and the allegedly falling prices
for domestic milk powder using the same figures as in Paragraph IV.3.7 of the
Notification (which are discussed in Section C.3(c)(ix) above) and claimed that as the
share of imported products in total consumption increased, the sales price of domestic
milk powder dropped and that therefore increased imports of the products subject toinvestigation caused the price of domestic milk powder to drop. (Paragraph V.1.2 of the
1 April 1997 Notification).
(c) It next described the slow increase in the share of livestock co-operatives' raw milk
collection in Korea increased (from 40.56 per cent in 1990 to 41.14 per cent in 1991,
40.19 per cent in 1992, 41.36 per cent in 1993, 42.80 per cent in 1994, 44.30 per cent
in 1995, and 45.30 per cent for the first four m onths of 1996) and alleged that this was
because milk processing companies reduced purchases of domestic raw milk andpurchased more imported products.  It concl uded that increased imports of the products
subject to investigation had an adverse effect on the “white market milk” sector.WT/DS98/R
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(d) It finally alleged that the price difference between the imported and domestic products
forced domestic producers to decrease their pr ice to the point of sales below cost,  and
to stockpile excess inventory of unsold milk powder .  For good measure it alleges that
increasing competition from imported products caused the number of dairy farmers to
decrease.
(a) The rising market share of SMPP
4.518  It is true that the market share of SMPP as measured by Korea was rising .  The figures given
are however, in the EC view misleading because th e total production used to calculate market share
(the denominator of the fraction in the calculation) included in each case imported milk powder.
Much of the increase of imports of SMPP was at the expense of imported milk powder .  Including
imported milk powder in the denominator means that a simple substitution of SMPP for imported
milk powder with no loss of sales or market shar e for domestic products would give a result showing
an increase of market share for SMPP .  A more accurate presentation is that given by Korea in
Paragraph IV.3.4 of the 1 April 1997 Notification.
(b) The falling prices for domestic products
4.519  The price of imported SMPP was stable during the reference period as was the price of
domestic milk powder except for what Korea itself describes the temporary phenomenon at the
beginning of 1996 .  Korea’s claim that increased imports of SMPP coincided with falling price of
domestic products and its deduction that the first caused the second are in the EC view demonstrablyfalse.
4.520  The European Communities recalled Korea’s precise reasoning:
“Analysis showed that as the share of impor ted products in total consumption increased,
the sales price of domestic milk powder dropped from 5,354 Won/kg in 1993 to
4,994 Won/kg for the four months of 1996.  Thus, increased imports of the productssubject to investigation caused the price of domestic milk powder to drop.”
Korea’s case is that increased market share  for SMPP caused a decrease in the price  of domestic milk
powder .  It is not arguing that low prices  for SMPP caused a decrease in the price of domestic milk
powder .  This is logical to the extent that it did not id entify low prices for SMPP as an injury factor in
its examination or its conclusion in Paragraph IV.4 of its Notification of 1 April 1997. To haveestablished low or falling prices for imported SMPP as an injury factor, Korea would have had to
carry out a price investigation which it did not for its own reasons.
4.521  It is true that the share of imported products (that is SMPP) increased.  However, this increase
occurred throughout the period whereas the sales price of domestic milk powder only dropped at the
end of the period .  Therefore Korea’s statement that they dropped at the same time is incorrect.
4.522  According to Korea’s own figures, the price in 1995 was 5,388 Won/Kg, which represents an
increase  over 1993 and 1994 .  The whole decrease on which Korea is relying occurred in the first four
months of 1996, during what it has itself termed a “temporary phenomenon” .  The deduction of
causality which relies purely on the supposed simultaneity of the effects described is therefore
incorrect and unjustified.  In fact in the EC  view the correct conclusion is the opposite :  that is there is
no causal relation between the increase in market share of imported SMPP and the decrease in price in
domestic milk powder which occurred at the beginning of 1996.WT/DS98/R
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(c) The increase in the share of livestock co-operatives' raw milk collection in Korea
4.523  The figures given by Korea on this point show a slowly but steadily rising proportion of raw
milk collection by co-operatives from 1990 to 1996 .  This establishes the opposite of what Korea
seeks to prove because increases in imports of SMPP did not affect a trend which already existed
before their liberalization.
(d) Imports forced domestic producers to decrease their prices to below cost and reduce the
number of dairy farmers
4.524  The prices of domestic milk powder as well as imported SMPP were stable except for the
temporary phenomenon at the beginning of 1996 .  The fact that domestic sales came to be made
below cost is entirely due to the increase in the cost of production which obviously has nothing to do
with imports (but was due to government imposed price increases for raw milk from dairy farmers).
4.525  There is a suggestion for the first time in Paragraph V.1.4 of the Notification that a “price
difference” between imported SMPP and domestic milk powder was relevant to the analysis of the
causal link .  This is inconsistent with all the previous arguments of Korea and in particular with its
failure to identify the prices of SMPP or even a price difference between SMPP and domestic milkpowder as an injury factor.
4.526  Also, imports had no effect on the number of dairy farmers since they received guaranteed
and rising prices for their milk and increased their production and productivity .  The reduction in
numbers was due to healthy consolidation and the increase in the size of farms in accordance with
Korean government policy.
(ii) The problems of the domestic industry were due to other factors – second sentence of
Article 4.2(b) of Agreement on Safeguards
4.527  The European Communities consider that any problems the domestic industry may have had
were due to other factors than imports of SMPP and most notably the high and increasing price
guaranteed to Korean dairy farmers fo r their milk by the Korean Government .  Korea claims to
examine these factors in Paragraph V.2 of its Notification of 1 April 1997.  However, in the EC view,
Korea’s examination of other factors that could have caused or contributed to any problems of the
domestic industry is incomplete, the European Communities also believes Korea should have
considered the extent to which Korean domestic industry itself imported SMPP and benefited
therefrom .  Korea’s assumption that such imports by the domestic industry could be considered to
cause injury to that same domestic industry requires at the very least a justification – which Korea has
nowhere provided.
(a)  Milk quality scandal
4.528  Korea deals with this issue in Paragraph V.2.1 of its Notification of 1 April 1997 as follows:
“After examining the facts related to the controversy which occurred from October to
November 1995, it was acknowledged that this incident did reduce the demand for
market milk, though only temporarily.  It was determined that the controversy ceased to
be a cause of reduced market milk demand in January 1996.  The quality dispute affected
only three months of consumption out of an investigation period totalling 42 months.  No
evidence was submitted by any of the parties concerned which demonstrated that the
injury caused by the quality dispute was as serious or persistent as that caused by
increased imports.”WT/DS98/R
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However, in the EC view there was a much greater and more persistent effect on consumption of milk
in Korea and stocks than claimed by Korea .  The rise of inventory occurred at exactly the time the
milk quality scandal erupted and that therefore the milk quality scandal was the major cause of the
increase in milk powder stocks in Korea in early 1996.
4.529  The European Communities note that even Korea admits that there was an effect both on
consumption and stocks .  It rejects the analysis of these effects by other parties but fails to make any
analysis itself or to make any allowance for them in its own determination and in particular toexamine how it might have effected the state of stocks and sales of milk powder in the first four
months of 1996 on which Korea relies so heavily throughout its Notification (a price decrease and
increased sales of milk powder by domestic producers which Korea describes as a “temporary
phenomenon”).
(b) Effect of reduced imports of milk powder
4.530  Korea examines this issue in Paragraph V.2.2 of its Notification of 1 April 1997 .  It
constitutes in effect an attempt to deal with the objections to Korea’s presentation of the "increasingmarket share of SMPP".
“It has been noted that the increase in imports of the products under investigation
contributed  to a reduction in imports of milk powder from 14,843 tons in 1993,
11,581 tons in 1994, 7,576 tons in 1995, to 583 tons in the first half of 1996.  However, it
has also been noted that there is an important difference between the imports of theproducts under investigation and those of milk powder.  The milk powder imported by
ROK in 1993-1994 was to supplement the shortage of domestic raw milk and milk
powder, and was allocated to users at reasonable prices.”
Thus, Korea admits a simultaneity between the decline of imports of milk powder and the increase in
imports of SMPP but attempts to show that the imports of milk powder were not damaging whileimports of SMPP were .  However, it is fundamental to Korea’s safeguard measure (see
Paragraph III.1 of the Notification of 1 April 1997) that SMPP is a “directly competitive product” for
raw milk and milk powder and that it was used for the same purposes .  If imported milk powder was
apt to “supplement the shortage of domestic raw milk and milk powder” then so should imported
SMPP.
4.531  Korea also alleges that milk powder “was allocated to users at reasonable prices”, and
suggests that SMPP was not .  However, Korea’s Notification is noteworthy for its absence of any
price analysis and the Korea’s injury determination in Paragraph IV.3.4 of the Notification of
1 April 1997 makes no reference to low prices for SMPP .  Korea cannot therefore rely on differences
of prices which it has not investigated in its consideration of causal link.
(c) Review of demand
4.532  In paragraph V.2.3.6 of the Notification of 1 April 1997 Korea examines demand.  The
European Communities disagree that the demand trends for processed products can be dismissed as
Korea does in that paragraph V.2.3.6 .  A substantial part of the increased imports may well have been
used for processing into other dairy products such as ice cream, confectionery, yoghurt, cheese
because of increased demand for these products .  Korea admits that production and consumption of
certain dairy products increased during the investigation period, but has declined to give precisefigures, so this cannot be comprehensively verified .  Instead Korea rather peremptorily concludes that,
“no connection could be established between the effect on these dairy products and injury to domesticWT/DS98/R
Page 100
industry”.235  The logic behind this conclusion is not clear, since it is based on the prior assumption
that the raw milk and milk powder industry has suffered serious injury.
(d) Review of government price decisions
4.533  The brevity of Korea’s examination of this issue in Paragraph V.2.4 of the Notification of
1 April 1997 belies its importance .  It can be quoted in full:
“The price of raw milk is determined by the government by taking into account
production costs, influence on domestic commodity prices, domestic supply and demand,
etc.  The price set by the government is not an obligatory price but rather a base price forcontracts between dairy farmers and milk processing firms.  Therefore, this did not affect
the domestic industry adversely.  If the government had not set a base price and the
livestock cooperatives had refused to collect raw milk, dairy farmers would have been
directly injured.”
4.534  The point about government price increases for raw milk is that they are likely to increase
costs and supply beyond what the market for milk powder can bear and will give rise to precisely the
difficulties of increasing stocks and pressure on margins for processing companies that are inevidence here .  That is why the issue should have been examined seriously by Korea.
4.535  The European Communities do not know what Korea means by the term “base price” .  It has
always understood the price set by the Korean Government to be always followed in practice.
However, Korea has itself stated elsewhere in the same Notification that the price of raw milk “is
maintained at a stable level fixed by the government” and that the price of raw milk was alsoincreased twice during the investigation reference period.
236
4.536  The European Communities submit that the last sentence of this Paragraph V.2.4 appears to
be an admission that dairy farmers have not been injured since the government has set a base price
and the livestock cooperatives have not refused to collect raw milk.
(e) Other factor - Imports of SMPP by the domestic industry
4.537  Korea did not consider the effect of imports of SMPP by the domestic industry during the
period of investigation .  This is an essential condition for establishing a causal link.  Since Korea
failed to address this issue it cannot be determined whether, even if it is assumed that injury was
suffered by the Korean industry, a causal link can be established between increased imports and the
condition of the domestic industry.
4.538  The European Communities submit that any problems that domestic industry may have been
suffering are not caused by imports of SMPP but by other factors and in particular by the inevitable
conflict between a government policy of fixing and regularly increasing the domestic price for raw
milk paid to dairy farmers causing increased production and a higher cost of milk for milk processors
and co-operatives with insufficiently rising domestic demand.  By wrongly attributing these problemsto imports of SMPP on the basis of an inadequate and incomplete investigation of causal link, Korea
has violated Article 4.2(b) second sentence.
(b) Response by Korea
4.539  Korea  responds to the EC arguments as follows:
                                                     
235 Notification of 1 April 1997, p.17, para. 2.3.6.
236 Notification of 1 April 1997, p. 10, para IV.3.7.WT/DS98/R
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(i) Consideration of causation
4.540  Korea established a clear and strong causal link between the increased imports of SMPP and
the serious injury suffered by the domestic industry.237  This link relies on an understanding of the
relationship between the supply of raw milk and the production of milk powder .  Korea found that the
increased imports of the cheaper SMPP replaced raw milk and domestic milk powder in a number of
key uses .  Demand for domestic products decreased as a result of an increase in the import of cheaper
SMPP, which in turn suppressed the sales price of domestic products .  Further, the reduction in
demand for domestic products resulted in more raw milk having to be collected by the livestock
cooperatives to be turned into milk powder .  As the demand and price of milk powder had been
suppressed by the imports of SMPP, both losses and inventory increased, with the consequent
inability to operate at a reasonable level of profit, increase of debt, and failure by the cooperatives and
farmers to invest in the dairy industry.
4.541  Korea determined that increased imports of SMPP gained a significant proportion of the
Korean milk powder market at the expense of domestic milk powder.238
MILK POWDER MARK ET SHARE OF SMMP
1993 1994 1995 1996 (1-6)
Total Consumption in the Milk
Powder Market  (tonnes) (A)30,181 40,532 46,254 23,532
Imports of SMPP (tonnes) (B) 3,217 15,561 28,007 16,320
SMPP’s Share of the Milk
Powder Market (%)(B/A)10.7 38.4 60.6 69.4
4.542  Korea also determined that increased imports were significantly undercutting the prices of
domestic producers.239
PRICE COMPARISON BETWEEN DOMESTIC PRODUCTS AND SMPP
1993 1994 1995 1996 (1-4)
Price of Raw Milk240 (Won/kg)
(A)4,100 4,100 4,100 4,560
Price of Domestic Milk Powder
(Won/kg) (B)5,354 5,296 5,388 4,994
Price of SMPP in Korea
(Won/kg) (C)2,590 2,500 2,530 2,971
Difference (C-A) -1,510 -1,600 -1,570 -1,589
Difference (C-B) -2,764 -2,796 -2,858 -2,023
This wide price differential between domestic milk powder and imported SMPP forced Korean
producers to lower their price of domestic milk powder to levels that eventually could not even cover
costs.
4.543  In addition to the suppression of prices for both raw milk and domestic milk powder and the
attendant losses connected with this suppression,  SMPP imports increasingly displaced domestic
inputs in the production of downstream products .  During the investigation period, Korea determined
                                                     
237 See, Notification V.
238 See, Notification V.1.1.
239 See, Notification V.1.2.
240 The price of raw milk was calculated by taking into account that 10 units of raw milk are used to
produce one unit of milk powder.WT/DS98/R
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that consumption of flavoured and fermented milk, which use the cheaper imported SMPP, increased
at the expense of white milk, which can only be made from domestic raw milk241.
CHANGE IN MARKET SHARE FOR MILK PRODUCTS
1993 1994 1995 1996.1-6
White Milk 63.0% 61.4% 57.8% 53.7%
Flavoured Milk 6.0% 7.9% 11.2% 11.7%
Fermented Milk 22.8% 23.5% 23.6% 26.2%
Prior to the market liberalization in 1993, the production of flavoured milk remained constant.  It is
only after the surge in imports of SMPP into the Korean market that the production of flavoured milk
increased at the expense of white milk.  Looking at the production ratio of Korean white milk and
comparing it to the increase in production of flavoured milk, the effect of SMPP imports onconsumption of domestic raw milk is pronounced.
242
CHANGES IN MARKET SHARE OF WHITE MILK
 AND FLAVOURED MILK
1990 1991 1992 1993 1994 1995 1996(1-6)
White Milk 92.9% 92.4% 92.4% 91.3% 88.6% 83.8% 82.1%
Flavoured Milk 7.1% 7.6% 7.6% 8.7% 11.4% 16.2% 17.9%
Indeed, the usage rate of imported SMPP by the five leading processing companies which
manufacture final dairy products using SMPP showed a significant increase:243
USAGE RATE OF SMPP BY PROCESSING COMPANIES
Year Usage Rate
1993 3%
1994 23.8%
1995 29%
1996 (1-4) 53.3%
The impact of SMPP's replacement of domestic raw milk and milk powder can also be witnessed in
the decreased profitability of the livestock cooperatives, which are owned by dairy farmers .  Their
decreased income had repercussions on other elements affecting the overall health of the domestic
industry, including, for example, profitability, in ventory, employment and the inability to invest in
research and development.
4.544  Further, during the period of investigation, imports of SMPP increased at a more rapid rate
than the decline in imports of skimmed and whole milk powder.
                                                     
241 Source :  MAF
242 See, Notification V.1.3.
243 Source :  MAFWT/DS98/R
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DIFFERENCES IN THE VOLUME OF IMPORTED
MILK POWDER AND SMPP
(UNIT :  TONNES)
Year Imported Milk Powder SMPP244Difference
1993 14,843 3,217 -11,626
1994 11,581 15,561 3,980
1995 7,576 28,007 20,431
1996 (1-6) 583 16,320 15,737
4.545  Against this background, Korea reached the conclusion that serious injury to the Korean dairy
industry had been clearly caused by the increased imports in that:
(a) Korean market share of raw milk and milk powder decreased;
(b) Market share of Korean white milk (which can only be made from domestic raw
milk) declined, while market share of flavoured and fermented milks (which can, and
did, use imported milk powder) increased;
(c) Under normal market conditions, milk processing companies purchase raw milk and
domestic milk powder as inputs for the production of end products.  Because raw
milk is perishable, excess raw milk not sold to the domestic market, or used by theprocessing companies, must be sold to the cooperatives for conversion into milk
powder.  During the investigation period, the processing companies increasingly
replaced raw milk and domestic milk powder with much cheaper SMPP.  As a result,
excess raw milk was converted into unsaleable milk powder which remained in
inventory and accumulated to high levels;
(d) As inventory levels increased, the livestock cooperatives were compelled to sell the
milk powder stock at prices below their production costs and saddled with a heavier
debt load that in turn contributed to the higher leverage ratio and further depletion of
capital;
(e) The membership of the NLCF increased during the investigation period .  This
increase was a direct result of the increase in imports of SMPP, since, as these
replaced Korean raw milk, farmers that had previously sold raw milk directly toprocessing companies were now unable to do so because they were faced with stiff
competition from the cheaper imported SMPP .  In order to find an outlet for the raw
milk, they had to sell to cooperatives, and in order to sell to cooperatives, they had to
be members of those cooperatives;
(f) As Korea has no developed export market for the accumulated milk powder, and in
any case would be price-uncompetitive when compared to the subsidized or dumped
milk powder available in the world market, there was no effective outlet for this
inventory, thus only having a suppressive effect within Korea;
(g) The losses incurred by Korean milk powder producers were substantial and  increased
over the investigation period .  These losses were in large part attributable to price
suppression and displacement of raw milk and milk powder by the imports of the
cheaper SMPP;
                                                     
244 See, Notification IV.2.WT/DS98/R
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(h) As a direct result of the above, average household debt of dairy farmers doubled
during the investigation period, and despite the long-term loans (which were
unrelated to an increase or decrease in production) provided to virtually all dairyfarmers, employment of Korean dairy farmers fell by approximately
5,500 households .  The decrease in the number of farms was propelled by the
cooperatives’ inability to compensate fully the dairy farmers for their raw milk,
because SMPP was replacing domestic products, causing a rise in inventory and
decreasing profits.  During difficult periods, including during the investigation period,the livestock cooperatives are required to purchase raw milk from dairy farms and
pay 70-80 per cent in cash and the remainder in milk powder, further exacerbating the
harm to operating margins of the dairy farms;
245
(i) The severe revenue problems suffered by the cooperatives were in large part  passed
onto the farmers .  These problems caused disinvestment and severely limited
investment  in dairy production techniques and R&D in the milk powder sector,
which produces only two types of  milk powder, as compared to the multitude of milkpowder types produced by the major exporting countries.
(ii) Other potential causal factors analysed and discounted
4.546  In addition, Korea considered other factors which could have been a cause of the serious
injury noted above.
246  Korea undertook an extensive analysis of the effect of the «milk quality»
controversy on inventory .  It rejected the analyses suggested by both the KFIA247 and the exporters,
and used its own, which led it to conclude that the effect of the controversy lasted three months and
ceased to be a cause of reduced raw milk demand by January 1996.248
4.547  Korea also considered whether the increase in imports of SMPP during the period under
investigation had led to a decrease in the overall imports of milk powder.249 Imports of milk powder
were within the import framework for milk powders negotiated by Korea as part of the Uruguay
Round .  Under this framework, milk powder (as opposed to  SMPP) was subject to an agreed tariff rate
of 220 per cent which permitted its import to be controlled in an agreed and transparent manner .
However, imports of SMPP circumvented this structure and were able to be imported at a much lower
tariff rate than milk powder .  The increased imports of SMPP far outweighed the drop in imports of
milk powder paying the agreed tariff rate, and so there was no reason to conclude that the effect of the
increase in imports of SMPP was offset by the decrease in milk powder.
4.548  In relation to demand, Korea considered whether the serious injury was caused by changes in
domestic demand, and concluded that such changes did not cause serious injury .  The European
Communities dispute Korea’s conclusion that  "no connection could be established between the effect
on these dairy products and injury to the domestic industry250."  However, it is clear that there is no
necessary connection between an increase in production and consumption of products using SMPP on
the one hand, and injury to the domestic industry on the other .  As noted above, no individual criteria
of serious injury can be determinative on its own, and must be considered in conjunction with all
other relevant criteria.
                                                     
245 See, Exhibit Korea-1.
246 See, Notification at Paragraph V.2
247 See, Notification at Paragraph V.2.1.a.
248 See, Notification at Paragraph V.2.1.
249 See, Notification at Paragraph  V.2.2
250 See, Notification at V.2.3.6.WT/DS98/R
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(c) Additional arguments by the European Communities made at the first meeting of the
Panel with the parties
4.549  At the first meeting of the panel with the parties, the European Communities  further
advanced their arguments under Article 4.2(a) as follows:
(i) Invocation of new arguments
4.550  The European Communities  based their analysis of the lack of causal link first on the
reasons given by Korea in its Notification of 1 April 1997 and second on a consideration of factorswhich Korea had failed to consider or make allowance for.
4.551  In the EC view Korea in its First Written Submission seeks to rely on a completely different
reasoning in order to try to establish causation .  There is little similarity between Korea's First Written
Submission on this point and Section V.1 of the Notification and Korea is clearly trying to justify its
measure ex post .  Most notable are arguments for the first time about the increasing membership of
the NLCF, the unavailability of any export market, “price suppression”, the “displacement” of
domestic milk and milk powder by imported SMPP, the doubling of dairy farm debt and finallydisinvestment and limited investment in Resear ch and Development.  The European Communities
submit that the safeguard measure must be judged in the basis of the reasons given in the Notification
and that ex post  rationalizations are not admissible.
4.552  In particular the European Communities take issue with Korea’s contention that it determined
that increased imports were significantly undercutting domestic production .  There was no
investigation of this matter and no consideration of the proper relationship between the prices of
imported SMPP and domestic milk powder.
4.553  In any event, The European Communities believe that the new reasoning also does not
establish any causal link.  However, regarding the notion that imports forced an increase in the
membership of the NLCF and therefore injury, the European Communities note with interest theaffirmation by Korea that the membership of the NLCF now accounts for 99 per cent of dairy farmers
and that the NLCF has committed itself to pay the Korean Government recommended prices.
Assuming this to be true, the European Communities do not see how it helps to establish causality.
This high membership demonstrates that the dair y farmers are shielded from any possible adverse
effects .  The cause of the increased stock levels of NLCF members would seem to be sales to it by
dairy farmers.  This would therefore represent one part of the Korean industry (dairy farmers) causing
injury to another part (co-operatives) and establishes no direct link with imports.
(ii) The consequences of the “pus milk” scandal
4.554  In the EC view the real cause of the increase in stocks in late 1995-1996 was, the “pus milk”
scandal .  At the end of 1995, the Korean public reduced its milk consumption when certain dairies
started to accuse others of supplying “pus milk” from cows with mastitis .  There was no doubt no
truth in these allegations but they were made and did have an effect .  The European Communities
submitted a press Article describing the background to this issue.
4.555  Korea is fairly brief on this matter in its First Written Submission .  Its explanation is worth
quoting:
“Korea undertook an extensive analysis of the effect of the «milk quality» controversy on
inventory .  It rejected the analyses suggested by both the KFIA and the exporters, and
used its own, which led it to conclude that the effect of the controversy lasted three
months and ceased to be a cause of reduced raw milk demand by January 1996”
(footnotes omitted).WT/DS98/R
Page 106
No detail is given of the analyses which led to this conclusion .
4.556  The Notification of 1 April 1997 had stated that the KFIA had failed to take account of the
seasonal variations. The graph below, submitted by the European Communities, show a clear seasonalvariation in milk consumption in Korea with a substantial decrease in winter.  It also shows that milk
consumption was increasing in each period .  In 1995-96 there is a sudden dramatic drop which
exceeds the previous seasonal variations and brings consumption back to levels of three years earlier.
It is easy to understand why this, against a background of increasing dairy production and inflexible
supply due to de facto  assured prices would have led to the increase of stocks.WT/DS98/R
Page 107
1993/4
1994/51995/6Milk Consumption in Korea
July to June
80,00090,000100,000110,000120,000130,000140,000150,000160,000
Sept. Dec.
MonthT
onn
es
July. August. Oct. Nov. Jan. Feb. March. April. May. June.WT/DS98/R
Page 108
4.557  The European Communities therefore maintain that  the situation of the Korean industry could
not be considered to be one of “significant impairment” necessary to establish “serious injury” and in
any event had nothing to do with rising imports of SMPP but was instead the result of the “pus milkscandal” in conjunction with rising and inflexible production caused by high quasi-guaranteed prices.
4.558  The European Communities submitted a graph (reproduced below) illustrating their
conclusion on this matter .  It shows the development of imports of SMPP and the evolution of stocks.
Increased stock levels is a problem which arose from November 1995 .  It shows no correlation at all
with imports of SMPP but very much so with the “pus milk scandal”.WT/DS98/R
Page 109
Milk Powder Stocks And Imports of SMPP
02,0004,0006,0008,00010,00012,00014,00016,00018,000
janv-95
févr-95
mars-95
avr-95mai-95
juin-95 juil-95
août-95 sept-95
oct-95nov-95
déc-95janv-96
févr-96mars-96avr-96mai-96
juin-96
Montht
o
n
n
e
sMilk powder stocks
SMPP importsWT/DS98/R
Page 110
(d) Rebuttal arguments made by the European Communities
4.559  The European Communities  made the following arguments in rebuttal:
4.560  Korea’s measure cannot be justified on the basis of reasons which were not considered by the
investigating authorities and are not reflected in Korea’s 24 March Notification .  In any event those
put forward by Korea in its First Written Submission do not establish a causal link between imports of
SMPP and the injury allegedly suffered by the Korean domestic industry.  In particular, the European
Communities recall that Korea did not demonstrate any causal effect between prices  of imported
SMPP and those of domestic milk powder or raw milk.
4.561  Furthermore, as regards the effects of the milk quality scandal, the European Communities
note that Korea alleges to have relied on three econometric models to dismiss the importance of the
quality scandal in explaining the situation of its domestic industry .  Having examined the information
included in the “OAI Report” which Korea has referred to, the European Communities consider that
such information does not provide the explanation that Korea claims and that it has therefore not
established that the “Pus Milk” Scandal did not cause or contribute to the injury.
4.562  First of all, the calculations of those models are based on production of milk, not on
consumption.251 The European Communities assume that production refers to white milk since only
this, and not production of raw milk would approximate to consumption of white milk, because of the
short shelf life of white milk .  It is also remarkable that Korea considers that “there are various factors
that can influence milk consumption, such as, among others, the change of consumption patterns,
weather, etc.” This statement is used to explain away the relevance of the milk quality scandal, butthese factors are nowhere considered when examining the impact of imports of SMPP.
4.563  But the most important point is that Korea’s deductions from its own figures and models 
252
involve completely circular reasoning.  Each of the three graphs deriving from the econometric
models shows a decrease in milk production lasting through June 1996 (and possibly beyond, as no
figures are given beyond that date) :  in June 1996 a decrease of between 13,000 and 17,000 tonnes of
milk production is still evident (depending on which model is considered).  These results are
dismissed by the statement, “The gap shown from February 1996 is attributable to factors other than
quality dispute.”253 Which other factors? Were  these investigated? And where are the results of such
investigation given?
4.564  The OAI Report also notes that “The investigation authority drew this conclusion on the basis
of the nature and short duration of the quality dispute.”254 The issue at stake is not the duration of the
dispute, but the duration of its remaining in the public consciousness so as to affect consumption of
milk – this is likely to be considerably longer th an the dispute itself, but Korea failed to conduct any
research to establish the length of this latter period of time.  Thus Korea’s conclusion that the “Pus
Milk” Scandal did not have a lasting effect on stocks is not supported by its own models and isderived from and peremptory statement that it was of short duration .  As stated above the reasoning is
circular.
4.565  The European Communities affirm that Korea’s attempted ex post justifications are not based
on the investigation and therefore not admissible.  In addition the further information Korea has
supplied to attempt to dismiss the “Pus Milk” Scandal as a factor shows circular reasoning and simply
confirms that this factor was not properly considered.
                                                     
251 See, the OAI Report, Exhibit Korea-14, p. 68-70.
252 See, the  OAI Report, graph on p. 70.
253 See, the OAI Report, p. 69.
254 Id.WT/DS98/R
Page 111
(e) Rebuttal arguments made by Korea
4.566  Korea  makes the following rebuttal arguments:
4.567  Based on its examination of the dairy industry, the Korean authorities concluded that the ease
with which imported SMPP could replace domestic raw milk and milk powder meant that SMPP was
an effective substitute for domestic raw milk and milk powder in most industrial uses. This was
evidenced by the increased amount of SMPP used by the major food processing companies. Given
this fundamental fact, the Korean authorities then examined the price at which the SMPP wasimported into Korea and found that it considerably undercut the domestic price of both raw milk and
milk powder .  This price undercutting not only caused a drop in the consumption of domestic milk
powder but also reduced raw milk consumption .  Conversely, the market share of SMPP in uses such
as flavoured and fermented milks increased dramatically at the expense of domestic milk powder and
raw milk .  Also, the absolute increase in imports of SMPP far outweighed any drop in the imports of
milk powder.
4.568  The price undercutting caused an increase in inventory of milk powder .  A further
consequence of the imports of cheap SMPP was that the percentage of raw milk collected from dairy
farms by livestock cooperatives for conversion into  milk powder increased as processing companies
which traditionally purchased raw milk from dairy households opted to buy the cheaper imported
SMPP.  The increase in inventory, combined with  the relatively limited shelf-life of milk powder,
caused the market price of  milk powder to become depressed still further.
4.569  Strong competition from cheap imported SMPP also caused a drop in the revenue and
profitability of the dairy households, the cooperatives, and the processing companies .  The dairy
households now had more limited sales opportunities for their raw milk, which out of necessity had to
be turned into milk powder, thus increasing the supply of milk powder and inventory, and depressing
its price .  The losses on sales of milk powder affected the revenue and profitability of the processing
companies and the cooperatives, and as the cooperativ es are owned by the Korean dairy farmers, these
farmers bore part of their losses.
4.570  Decline in profitability of the entire domestic industry also caused an increase in
unemployment and a drop in the level of investment in dairy farming, including, inter alia,  research
and development.
4.571  In particular, Korea considers that the investigation demonstrated the existence of a causal
link
255 based on the Korean authorities’ examination of the following:
(i) Substitution of domestic product by SMPP
4.572  The authorities examined the extent to which cheap SMPP imports replaced domestic
products and stated that:
“[a]n analysis of the written answers submitted by Lotte Confectionery and four other
manufacturers shows SMPP replaced domestic product as the share of SMPP used by
these companies grew from 3.0 per cent in 1993 to 53.3 per cent in the January-April
                                                     
255 Korea again reminds the Panel that the EC has accepted that the competent authorities published (a)
“a report setting forth their findings and reasoned conclusions reached on all pertinent issues of fact and law”and (b) “promptly, in accordance with the provisions of Article 3, a detailed analysis of the case underinvestigation as well as a demonstration of the relevance of the factors examined.”WT/DS98/R
Page 112
period of 1996.  The decrease in the purchase of domestic product by users affected the
level of inventory of domestic milk powder.256”
SUBSTITUTION OF SMPP257
(UNIT :  TONNES)
93 94 95 Jan.-Apr
1996
Lotte SMPP - x,xxx x,xxx Xxx
Domestic Raw milk
Milk powderxxx
x,xxxxxx
x,xxxxxx
xxxXxx
Xxx
Lotte Samgang SMPP - xxx - -
Domestic Raw milk
Milk powderxx
xxx-
xxx-
xxxXxx
Xxx
Crown SMPP xxx xxx xxx Xxx
Domestic Raw milk
Milk powder-
--
--
--
-
Haitai SMPP xx xxx x,xxx Xxx
Domestic Raw milk
Milk powderxxx
xxxxxx
xxx-
x-
x
Korean Yakult SMPP - - xxx x,xxx
Domestic Raw milk
Milk powderxx,xxx
x,xxxxx,xxx
x,xxxXx,xxx
x,xxxxx,xxx
xxx
SMPP
(calculated in terms of raw milk,
A)341
(3,410)3,298
(32,980)3,777
(37,770)2,382
(23,820)
Domestic
Raw milk
Milk powder
Total  (calculated in
terms of raw milk,B)46,305
6,351
109,81550,036
5,551
105,54647,310
4,523
92,54012,635
821
20,845
Share(A/<A+B>, %) 3.0 23.8 29.0 53.3
Source :  Written answers of  users provided to the KTC
Note :  1. The total amount of raw milk, milk and skimmed milk
2.The share is computerized by using the figures calculated in terms of domestic raw milk.
(ii) Effect of the increased import of SMPP on domestic prices
4.573  The Korean authorities next determined the effect of the increased imports of SMPP on
domestic prices.  The authorities examined the following:
“Import price (Won/kg) of SMPP was 1,750 Won in 1993, 1,689 Won in 1994,
1,709 Won in 1995, and 2,008 Won in the January-April period of 1996.  Its sales price
(Won/kg) was 2,590 Won in 1993, 2,500 Won in 1994, 2,530 Won in 1995, and
2,971 Won in the January-April period of 1996258.”
                                                     
256 OAI Report at 66.
257 OAI Report at 28.
258 OAI Report at 62.  See, also Notification at IV.3.7.WT/DS98/R
Page 113
As for the domestic milk powder, the sales price (Won/kg) was 5,354 Won in 1993, 5,294 Won
in 1994, 5,388 Won in 1995, and 4,994 Won in the January-to-April period of 1996.259
PRICE COMPARISON BETWEEN IMPORTS AND DOMESTIC PRODUCTS260
(unit :  Won/kg, Won, %)
93 94 95 96.1-4
SMPP Import Price (CIF) 1,750 1,689 1,709 2,008
Domestic Sales Price (A) 2,590 2,500 2,530 2,971
Domestic
ProductsSales Price (B) 5,354 5,294 5,388 4,994
Manufacturing Cost (C) 5,158 5,426 5,860 6,178
Difference (B-C) 196 - 132 - 472 - 1,184
   Price Gap B-A 2,764 2,794 2,858 2,023
SMPP’s Domestic Market Share( %) 1.6 7.0 12.2 14.0
Notes: 1) US$=800 Won
2) Domestic Sales Price = Import Price + (Import Price x Customs Duty (40 per cent)) + (Import Price  x
Expenses and Profit (8 per cent))
3) Domestic Products are based on milk powder.4) SMPP Market Share = Amount Imported/Amount Consumed
5) Sales Price is average sales price of milk powder produced by the livestock cooperatives.
6) Manufacturing cost is the average manufacturing cost of milk powder produced by the livestock
cooperatives.
7) As of August 1996, domestic skimmed milk powder sells at 3,800 Won/kg and the imported SMPP sells
at 2,956 Won/kg, the margin being 844 Won/kg.
4.574  The Korean authorities then explained:
(a) “The sales price of SMPP undercut the sales price of the domestic milk powder by
2,764 Won in 1993, 2,796 Won in 1994, 2,858 Won in 1995, and 2,023 Won in the
January-April period of 1996.  Because the sales price of SMPP was approximately
half the price of domestic milk powder, the volume of import of SMPP increased
rapidly during the period of investigation.
(b) Because SMPP penetrated the domestic market by taking an increasingly large
market share and significantly undercutting the price of domestic milk powder, the
price of domestic milk was depressed from 5,354 Won in 1993 to 4,994 Won in the
January-April period of 1996.
(c) As the increased import of SMPP depressed domestic price of milk powder, domestic
producers’ losses grew larger as the domestic sales price could not be increased tokeep pace with the rate of production cost increase.  These losses were 196 Won
in 1993, turning to a loss of 132 Won in 1994, a larger loss of 472 Won in 1995 and a
further loss of 1,184 Won in the January-April period of 1996.
(d) In sum, it is apparent that the increase of SMPP and its rapid rise in the market share
caused a depression of the domestic sales price which fell below the production costas of 1994.  The large losses have been increasing and this combined with domestic
sales price below production cost are causing injury to the domestic industry.
261”
                                                     
259 OAI Report at 63.  See, also Notification at V.1.2.
260 OAI Report at 63.  See, also Notification at V.1.2.
261 OAI Report at 63.  See, also Notification at V.1.2.  Korea submits the following regarding the EC’s
arguments:WT/DS98/R
Page 114
4.575  Therefore, the Korean authorities found that the sales prices for imports of SMPP were
significantly undercutting the sales prices of domestic milk powder.  As a result, the price of domestic
milk powder was severely depressed causing serious injury to the domestic industry.
(iii) Livestock cooperatives’ volume of raw milk collected
4.576  The Korean authorities also examined the effect of the low price of SMPP imports on the
amount of raw milk collected by the livestock cooperatives.  The authorities stated:
“The livestock cooperatives’ volume of raw milk collected from dairy households was
40.56  per cent in 1990.  The rate grew to 41.36  per cent in 1993, to 42.80  per cent
in 1994, to 44.30  per cent in 1995, and to 45.30  per cent in January-June period
of 1996.”262
“The increased import of SMPP caused the livestock cooperatives to increase theirpurchase of raw milk from dairy households, because processing companies that
traditionally purchased raw milk from dairy households opted to purchase the much
cheaper SMPP.  The increased collection of raw milk by the livestock cooperatives
caused the deterioration of their business operation, because the displaced raw milk hadto be converted into milk powder in ventory (see VI.2.A. first paragraph).
263”
LIVESTOCK COOPERATIVES’ VOLUME OF RAW MILK COLLECTED264
(UNIT:%)
1990 1991 1992 1993 1994 1995 1996.1-6
Cooperatives’ Portion 40.56 41.14 40.19 41.36 42.8 44.3 45.3
Compared Against Basis Year 100 101.4 99 101.9 105.5 109.2 112
Data :  Provided by the MAF and NLCF to the KTC
Note:  Basis year 1990
4.577  In Korea's view, the above table refutes the EC argument that raw milk collection by the
cooperatives was “slowly but steadily rising” and the increases in SMPP imports “did not affect a
trend.”  As the table shows, the cooperatives’ portion actually declined to below its 1990 level in 1992and the portion increased substantially during the investigation period by approximately 12 per cent
from 1990 to June 1996 and by 10 per cent from 1993 to June 1996.
(iv) Production of white milk and flavoured milk
4.578  The Korean authorities also examined the extent to which the cheaper SMPP caused the shift
from the production of white milk (which can only use domestic raw milk as an input) to theproduction of flavoured milk.  The authorities stated:
                                                                                                                                                                    
In its First Submission, the EC contends that the competent authorities limited their analysis to whether
increased market share caused a decrease in domestic milk  powder price.  Korea, however, directs the Panel to
the price information for SMPP on page 63 of the OAI Report and in section V.1.2 of the Notification.
In its First Submission, the EC argues that the competent authorities focused solely on the decline in
domestic milk powder prices at the end of the investigation.  To the contrary, the competent authorities
examined the decline in price at the end of th e period, the declining price in real terms ( i.e., price adjusted by the
overall inflation rate) compared to in creases in production costs, and the significant difference in price levels
between imports of SMPP and domestic milk powder.
In its First Submission and in its Oral Statement, the EC makes several statements that demonstrate it
has, intentionally or unintentionally, ignored the OAI Report and the Notification.  Korea refers the EC to the
OAI Report at 63 and the Notification at IV.3.7 and V.1.2.
262 OAI Report at 64.
263 OAI Report at 64.  See, also Notification at V.1.3.
264 OAI Report at 64.WT/DS98/R
Page 115
 “Of the total amount of milk produced, white milk accounted for 92.9  per cent in 1990,
92.4  per cent in 1991 and 92.4  per cent in 1992, maintaining almost the same level.
However, the share of white milk decreased with the rapid increase in import of SMPP.
The share of white milk fell to 91.3  per cent in 1993, to 88.6  per cent in 1994, to 83.8  per
cent in 1995, and to 82.1  per cent in the January-June period of 1996.
The decline in the production of white milk occurred because the domestic producer
chose to use the cheaper SMPP to produce flavoured milk which was favoured by thewholesalers and retailers for the product’s higher profit margin.
The decline in the share of white milk which can only be produced from domestic raw
milk depressed the demand for domestic raw milk.
265”
PORTION OF WHITE MILK IN RELATION TO FLAVOURED MILK PRODUCED
(UNIT :  %)
1990 1991 1992 1993 1994 1995 1996.1-6
White Milk 92.9 92.4 92.4 91.3 88.6 83.8 82.1
Flavoured Milk 7.1 7.6 7.6 8.7 11.4 16.2 17.9
 Data :  Provided by  the MAF to the KTC
4.579  Thus, the cheap SMPP caused a shift of production from white milk to flavoured milk.  This
shift led to a decline in the use of raw milk by the milk processing companies which in turn led to the
increased collection of raw milk by the livestock cooperatives for conversion into milk powder.
Contrary to the EC contention, the Korean authorit ies considered that the shift to flavoured milk
production was not the result of consumer preferences but because the cheaper SMPP allowed for therealization of higher profit margins.  The European Communities are simply expressing their
disagreement with the judgement of the Korean authorities without any evidence. However, the
Korean authorities must be accorded due deference in  interpreting the data collected rather than being
second guessed by a third party.
(v) Impact of SMPP on the sale of domestic products
4.580  The Korean authorities examined the impact of cheap SMPP imports on the sale of domestic
products.  First, with respect to the decline in price, the authorities stated that “[t]he comparatively
cheaper priced SMPP and the increased volume of SMPP caused the sales price of domestic milk
powder to fall [in real and nominal terms], resultin g in the loss of sales revenue in the [specified
amounts from 1993 to] the first four months of 1996.”  Second, with respect to the loss of sales
revenue due to loss of customers, “[b]ecause the imported SMPP is cheaper than the domestic raw
milk and milk powder, [two entities] incurred a loss in sales revenue amounting to a total of x,xxxmillion Won in the period of 1995 to April 1996 as a consequence of their erosion of the customer
base
266.”
(vi) Market share of SMPP against total demand
4.581  With regard to the market share taken by the increased imports of SMPP, the Korean
authorities found that:
“Import of SMPP amounted to 3,217 tons in 1993, 15,561 tons in 1994, 28,007 tons
in 1995, and 16,320 tons in the January-to-June [period] of 1996.  In terms of the
                                                     
265 OAI Report at 64.  See, also Notification at V.1.4.
266 OAI Report at 66.WT/DS98/R
Page 116
increase rate, it was 384.0  per cent in 1994, 80.0  per cent in 1995, and 16.9  per cent in the
January-June period of 1996.
The market share of SMPP against total demand was 1.6  per cent in 1993, 7.0  per cent
in 1994, 12.2  per cent in 1995, and 14.1  per cent in the January-June period of 1996, the
rate growing larger every year.267”
CHANGES IN MARKET SHARE OF SMPP
(UNIT :  TON)
1993 1994 1995 1996.1-6
Increase
rate(%)Increase
rate(%)Increase
rate(%)
Total Demand (A) 2,205,063 2,218,548     9.6 2,303,795   3.8 1,153,964 - 2.3
Production (B) 1,857,873 1,917,398    3.2 1,998,445   4.2 1,069,224   4.4
Import of  SMPP
 (C)3,217 15,561 384.0 28,007 80.0 16,320 16.9
Market
Share of SMPP
 (C/A, %)1.6 7.0 - 12.2 - 14.1 -
  Data :  provided by MAF and KITA to the KTC
4.582  Therefore, the Korean authorities found that SMPP’s share of total demand (which includes
domestic raw milk, domestic milk powder, imported milk powder and imported SMPP) increased
during the investigation period from 1.6  per cent in 1993 to 14.1  per cent in the first half of 1996,
representing a net increase in market share of 12.5  per cent.
4.583  The Korean authorities determined the extent to which increased imports of SMPP replaced
decreased imports of milk powder.  The Korean authorities noted:
“As the import of SMPP increased, its market share in the milk powder sector rose from
10.7  per cent in 1993 to 38.4  per cent in 1994, further to 60.6  per cent in 1995 and to
69.4  per cent in the January-June period of 1996.”268
As the import of SMPP increased, however, the amount of milk powder imported decreased from14,843 tons in 1993 to 11,581 tons in 1994, to 7,576 tons in 1995, and further down to 583 tons in the
January-June period of 1996.
269
                                                     
267 OAI Report at 58 and 59.  See, also Notification at V.1.1.
268 OAI Report at 60.
269 OAI Report at 61.  See, also Notification at V.1.1.WT/DS98/R
Page 117
CHANGES IN MILK POWDER PRODUCTS DOMESTICALLY CONSUMED270
(UNIT :  TONNES)
1993 1994 1995 1996.1-6
Increase
rate(%)Increase
rate(%)Increase
rate(%)
Milk Powder Consumed (A)-Domestic Milk PowderConsumed30,181
12,19140,532
12,468    34.3
     2.346,254
10,69014.1
- 14.323,532
   6,629    14.5
    11.6
Supply Production (B)
Amount Imported
-Milk Powder- SMPP (C)13,512
18,060
14,843
3,2179,495
27,142
11,581
15,561- 29.7
  50.3
- 22.0
384.015,719
35,583
   7,576
28,00765.6
30.9
- 35.0
  80.015,058
16,903
     583
16,320    93.3
      5.0
 - 84.0
   16.9
Total 31,572 36,637 16.0 51,302   40.0 31,961    25.9
Inventory 4,509     1,517      - 66.4      6,565 332.8 14,994 342.7
SMPP’s Market Share (C/A) 10.7         38.4 -          60.6 -          69.4 -
  Data:  provided by  MAF, KITA to  the KTC
4.584  The imports of milk powder essentially entered at a tariff rate exceeding 200  per cent, while
imports of SMPP entered at a rate of only 40  per cent.271  Given the tariff differential, imports of
SMPP replaced the entire volume of imported milk powder during the investigation period and also
captured all of the 90  per cent increased volume of total milk powder and SMPP imports.272  Thus, the
European Communities claim argument that “much of the increase” of SMPP was at the expense ofimported milk powder ignores the fact that  the Korean authorities determined that the imports of
SMPP far outweighed the decline in milk powder imports.
273
(vii) The Korean authorities considered the extent to which other factors were causing injury to
the domestic industry
4.585  The Korean authorities evaluated the following other factors:
(a) The milk quality dispute
4.586  The Korean authorities evaluated the arguments presented by interested parties, including the
Korea Food Industry Association (“KFIA”) a nd the Korea Dairy Cow Breeding Association
(“Breeding Association”).274  The KFIA contended that the milk quality dispute contributed 87.17  per
cent to the rise in the milk powder inventory and the increase in SMPP contributed 4.80  per cent.275
The Breeding Association contended that increased imports of SMPP contributed 61.9  per cent to the
increased milk powder inventory and the milk quality dispute contributed 17.0  per cent.276
4.587  The Korean authorities rejected the analysis of the KFIA based on flaws in its data and
analysis.277  The authorities also rejected the Breeding Association’s analysis because it failed to
submit basic materials to support its claims.278  Instead, the authorities developed three statistical and
                                                     
270 OAI Report at 61.
271 Id.
272 Id.  See, OAI Report at 61;  Notification at V.2.2 (“the imports of products under investigation grew
by 24,790 tons, while those of milk powder fell by 7,267 ton.
273 OAI Report at 61;  Notification at V.2.2.
274 OAI Report at 67-68.  See, also Notification at V.2.1.
275 OAI Report at 67.  See, also Notification at V.2.1.a.
276 OAI Report at 67.
277 See, OAI Report at 68;  Notification at V.2.1.a.
278 See, OAI Report at 68.WT/DS98/R
Page 118
econometric models for estimating the volume of milk production for the period covering
November 1995 to June 1996, assuming the quality dispute had not occurred.279 The authorities
concluded that “[b]ased on the results of three models, the figures reflecting the difference betweenestimated and actual volume of milk production indicate that the quality dispute no longer had effect
as of January 1996.
280” As part of the OAI’s investigation to determine causality, the OAI also
employed a commonly-used econometric technique called the “Granger causality test” .  The test
results, checking up to six lags in variables to maximize accuracy, indicated that the increased imports
of SMPP caused serious injury to the domestic industry.281  Taken together, the Korean authorities
determined that while the milk quality dispute had an effect for a few months, the imports of SMPP
had a negative effect on the domestic industry throughout the entire investigation period.
(b) Influence of reduced imports of milk powder
4.588  The Korean authorities evaluated the influence of reduced imports of milk powder in its
causation analysis.  The Korean authorities essentially determined that:
“[d]uring the period of 1993-1995 the imports of products under investigation grew by
24,790 tons, while those of milk powder fell by 7,267 tons.  Therefore, the decreasedimports of milk powder had a very slight, albeit positive, impact on the injury to the
domestic industry compared with the increased imports of the products under
investigation.
282”
(c) Review of demand
4.589  The Korean authorities also examined other factors potentially causing serious injury to the
domestic industry relating to demand for domestic raw milk and milk powder.  With respect to
consumption, they stated that “given the overall increase in consumption, the injury to the domestic
industry is not attributable to a decrease in consumption.” 283 With respect to whether the shift to
flavoured milk from white milk was based on changing consumer preferences, the authorities found
that the shift was “attributable to milk processors seeking to change the production structure in order
to maximize their profits through the use of cheaper imported products, as opposed to changes in
consumer preference.” 284  With respect to consumption of final dairy products, they determined that
dairy products consumption increased during the pe riod from 1993 to June 1996, and “[t]herefore, it
was not regarded as a cause of injury to the domestic industry.”285
4.590  With respect to the effect of the situation in other dairy products sectors, the Korean
authorities examined the white milk, milk powder preparation, evaporated milk, butter, and cheese
sectors.  Because the production and consumption of  these dairy products increased during the period
                                                     
279 Id.  In its First Submission, the EC contends that the competent authorities “fail[ed] to make any
analysis” of the effects of the milk quality dispute.  In its Oral Statement, the EC states that “[n]o detail is givenof the analyses which led to this remarkable conclusion” and that the milk quality dispute was “lightlydismissed.”  Korea again suggests that the EC review the OAI Report of which it has had a copy in English atleast since early 1997.
280 OAI Report at 69.
281 The Granger causality test indicated for example, that the increased imports of SMPP caused an
increase in milk powder inventory at 5 per cent level of significance .  In hypothesis testing 5 per cent level of
significance means that the level of confidence of the test result is 95 per cent (see, for example,Damodar N. Gujarati, Basic Econometrics , 2
nd. Edition, McGraw Hill :  NY, 1988, p. 99).
282 Notification at V.2.2.
283 Notification at V.2.3.1.
284 Notification at V.2.3.2.  In its Oral Statement, the EC disagrees with the competent authorities’
judgement on this issue.  Korea considers that the EC should not be allowed to assume the role of theinvestigating authority.
285 Notification at V.2.3.3.WT/DS98/R
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of the survey and because their use of domestic raw milk and domestic milk powder also increased,
the authorities found that “no connection could be established between the effect on these dairyproducts and injury to [the] domestic industry.” 
286
(d) Review of price decision by the government
4.591  Finally, the Korean authorities evaluated any potential injury caused by the suggested
government price for raw milk.  The authorities found that the suggestion of such a price did not
adversely affect the domestic industry because it was not obligatory and was intended as a suggestedreference price for contracts between dairy households and milk processing firms.
287
(f) Additional arguments by the European Comm unities made at the second meeting of the
Panel with the parties
4.592  At the second meeting of the panel with the parties, the European Communities  further
advanced their arguments under Article 4.2(b) as follows:
4.593  The European Communities point to the flaws in the conclusions drawn from by Korea from
its econometric models.  The models do show a shortfall in consumption continuing until June 1996but it is then stated at pages 68 to 70 of the OAI Report that this cannot be due to the milk quality
dispute as this ended in February.  No other explanation is advanced for the shortfall.  This is
perfectly circular reasoning.
4.594  Korea alleges it performed a “Granger causality test”, without in any way explaining where it
is to be found in the OAI Report, how this test wo rks, precisely what its results demonstrated, what
variables were used in relation to “checking lags”, what level of statistical accuracy was demonstrated
in the test results, etc.  This test has never been mentioned before by Korea and cannot be taken
seriously without considerably more information being given as to its nature and its application to this
situation .  Indeed, the European Communities asked, what happens when it is applied to the milk
quality scandal?
(g) Additional arguments by Korea made at the second meeting of the Panel with the
parties
4.595  At the second meeting of the panel with the parties, Korea  further advanced its arguments
under Article 4.2(b) as follows:
4.596  The European Communities argue that the econometric models used by the OAI were flawed
in that they examined production, instead of consumption .  Korea notes that:
(a) The OAI assumed that production is equal to the consumption of milk, which is a
realistic assumption, and the difference between production and consumption data
was so small as to be statistically insignificant;
(b) The statistical and econometric models actually focussed on the difference between
actual and forecasted production, and not production itself;  and
(c) Finally, and most importantly, the Granger Causality test, which checked the
causality from increase of imports of SMPP to increase in inventory did not use data
such as production or consumption.
                                                     
286 Notification at V.2.3.6.
287 See, Notification at V.2.4.WT/DS98/R
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4.597  In response to a question by the Panel288, Korea  explained that in order to establish any causal
relationship between the imports of SMPP and the increase in inventory, the OAI used the
econometric technique referred to as “Grainger Causality” test.  The following parameters ortechniques were applied:
The period of the data covered January 1993 to June 1996;
The statistical software “Eviews” was used
X-11 Arima multiplicative method was used to remove seasonality;
Since the level terms of most variables are non-stationary, a unit root test was applied, this
being an augmented Dickey-Fuller test, with constant and no-trend term;
Akaike information criterion was adopted to get optimal lags in the right-hand variable; and
Lags up to six were checked on the right-hand side of the equation used in the Augmented
Dickey-Fuller test.
The calculated ADF statistics were the following:
level of import of SMPP was -1.163, which is not significant at any reasonable level of significance;
level of inventory of milk powder was 0.284 , which is not significant at any reasonable level of
significance;
first differentiated value of import of SMPP was –8.159 , which is significant at 1 per cent level of
significance; and
first differentiated value of inventory was –2.976, which is significant at 5 per cent level of
significance.
4.598  Therefore the calculated ADF statistics showed that the import of SMPP and inventory of
milk powder are integrated of order one, like most other macroeconomic time series.  As the first
differenced variables were revealed to be stationary, they were used to obtain the result of causalitytests. The most commonly used causality test is the Granger test, and this was used to obtain the
result.  Pairwise Granger causality tests, checking lags up to 6, revealed that imports of SMPP caused
an increased in inventory of milk powder at 5 per cent in four out of six cases and at 10 per cent in
one case. The causation was negated at 10 per cent only in one out of six cases.  The calculated F
statistics were the following:
one lag case: F(1,36) = 1.850;
two lag case: F(2,34) = 2.733;
three lag case: F(3,32) = 3.583;
four lag case: F(4,30) = 5.681;five lag case: F(5,28) = 4.314;
six lag case: F(6,26) = 5.394.
4.599  Therefore, on the basis of the above, the OAI concluded that the econometric causality tests
revealed a causal relationship running from the import of SMPP to the increase in inventory of milk
powder.
4.600  In response to a question by the Panel
289, Korea  clarified the substitutability of raw milk, milk
powder and SMPP.  As stated in Section II.2 of  the OAI Report, SMPP can substitute domestically
                                                     
288 The Panel recalls that the question was: “How was the ‘Granger’ test applied in this case?”
289 The Panel recalls that the question was:  "In Korea's first submission, it is stated that SMPP products
are competing directly with domestically-produced raw mi lk and pure milk powders.  Could Korea elaborate?
Does this mean that 1 unit (say 1 Kg) of SMPP can substitute 1 unit of milk powder and/or 1 unit of raw milkfor the production of downstream products?  Please provide the Panel with exact figures for each of thedownstream product ( e.g., yoghurt, flavoured milk, ice-cream, cheese etc…). Was the Korean TradeWT/DS98/R
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produced raw milk and milk powder to produce flavoured milk, fermented milk, ice cream and
cookies .  Based on the import clearance document submitted by foreign exporters, the Korean
authorities verified that SMPP can be used to produce milk based beverages, ice cream and cookies .
That the imported SMPP and domestic milk powder are in directly competitive relationship is
evidenced by the fact that the primary difference between the two products is that the former contains
75 per cent to 85 per cent milk powder and 15 per cent to 25 per cent whey or malt concentrate.290
Moreover, for commercial purposes, the imported SMPP and domestic products share common end
uses.  Imported SMPP and domestic products can be used to produce flavoured milk, fermented milk,
ice cream and cookies.291  As a further indication that the imported SMPP and domestic products are
directly competitive products, the Korean authorities found that, of the total purchase of basic
materials, five dairy processing companies increased their purchases of SMPP from 3 per cent in 1993
to 23.8 per cent in 1994, 29 per cent in 1995 and 53.3 per cent in January-April 1996.292
4.601  In producing flavoured milk and cookies, one unit (1 kilogram) of SMPP can substitute one
unit(1 kilogram) of milk powder or ten units of raw milk .  In producing ice cream and fermented milk,
one unit of domestic milk powder can be  replaced by anywhere between 0.8 to 1.2 units of SMPP,
depending on the dairy processing company.  The Korean authorities decided that the use of one to
one substitution rate between imported SMPP and domestic milk powder to produce ice cream and
fermented milk was appropriate because, based on the data collected, the usage rate would average
out to one unit to one unit rate.
4.602   The Korean authorities were aware that (1) the domestic products and the imported SMPP
had physical differences but shared common end uses and (2) substitutability between the imported
SMPP and domestic milk powder was on a one unit to one unit basis and that ten units of raw milk are
needed to produce one unit of milk powder.  The conversion rate of ten raw milk units to one milk
powder unit is reflected in various places of the OAI Report.  For instance, charts in Sections III.5.A
and VI.2.A reflect this conversion rate.  The substitution rate of one unit to one unit between SMPP
and milk powder is reflected in the Note at the bottom of the chart in Section III.5.A which states “for
computation of demand and self sufficiency rates, the amounts of SMPP and imported milk powder
calculated in terms of domestically produced raw milk were used.”  Although this is not the most
eloquent translation, it indicates that the Korean auth orities were familiar with the fact that ten units of
domestic raw milk were equivalent to one unit of SMPP or one unit of imported milk powder.
H. CLAIMS UNDER ARTICLE  5.1 OF THE AGREEMENT ON SAFEGUARDS
(a) Claim by the European Communities
4.603  The European Communities  claim that Korea violated Article 5.1 of the Agreement on
Safeguards by failing to show that the measure was necessary to prevent or remedy serious injury andto facilitate adjustment;  by failing to demonstrate that a quota was the most suitable to prevent or
remedy serious injury and to facilitate adjustment;  and by imposing a quota lower than the average of
imports in the last representative three-year period preceding the application of the measure for which
statistics were available .  The following are the EC arguments in support of these claims:
4.604  Article 5.1 of the Agreement on Safeguards provides that
“A Member shall apply safeguard measures only to the extent necessary to prevent or
remedy serious injury and to facilitate adjustment .  If a quantitative restriction is used,
                                                                                                                                                                    
Commission aware of these facts at the time of its investigation?  Did it take them into account in its report and
if so how, and where is it indicated in the OAI Report?
290 See, OAI Report at Section II.4
291 See, OAI Report at Section IV.1.B.(4).(a)
292 See, OAI Report at Section IV.1.B.(4).(B).(i)WT/DS98/R
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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 necessaryto prevent or remedy serious injury.  Members should choose measures most suitable for
the achievement of these objectives”.
Even if Korea’s analysis of serious injury and causation were correct, the European Communities
submit that Korea violated Article 5.1 of the Agreement on Safeguards by failing to show that the
quota which it applied was necessary and the most suitable to remedy the injury and facilitateadjustment.
4.605  The fact that safeguard measures are “limitative and deprivational in character or tenor and
impact upon Member Countries and their rights and privileges and upon private persons and their
acts” was clearly recogn
ized by the Appellate Body in its report in US - Underwear .293 In the light of
that characterization, the Appellate Body drew the conclusion that an importing Member should not
be allowed “an enhanced ability to restrict the entry into its territory of goods in the exportation of
which no unfair trade such as dumping or fraud or deception of origin is alleged to be proven” by
taking safeguard action beyond the strict limits laid down in the relevant WTO provisions, which
would result in "excluding more goods from the territory of the importing Member".294
4.606  Some of the limits built in the WTO safeguard measures regime relate to the measures
themselves, notably to their scope, level and type.  Those limits are laid down in Article 5.1.  Besides
recalling that safeguard measures must be necessary to remedy serious injury, as provided for inArticle XIX:1(a),
295  Article 5.1 of the Agreement on Safeguards further requires that the temporary
protection from foreign competition must be necessary  to facilitate adjustment.296  The rationale for
this provision is clearly that protection of an inefficient industry sector with no recovery prospects by
means of safeguard measures should be excluded.
4.607  It follows from the foregoing that a Member of  the WTO seeking to take a measure under the
Agreement on Safeguards must show that such a measure is, in its scope and level, necessary to
remedy the injury suffered by the domestic industry and necessary to facilitate its adjustment.  In this
respect the European Communities note that Korea failed to provide any justification as to the reasons
why the quantitative restrictions applied were necessary to remedy the alleged serious injury and to
facilitate adjustment.  In particular, Korea did not submit any information as to adjustment plans torestore the domestic industry’s competitiveness while temporarily shielding it from foreign
competition.  On the contrary, Korea took safeguard action in the context of a protected market.  It is
clear to the European Communities by omitting to give any consideration to adjustment plans, a
fortiori  Korea has failed to examine how that measure could be necessary, or even helpful, to their
implementation.
4.608  For these reasons, the European Communities submit that Korea violated its obligations under
Article 5.1, first sentence of the Agreement on Safeguards.
                                                     
293 See, Appellate Body report in US - Underwear , 10 February 1997, p. 9.
294 Id.
295 Article XIX:1(a) refers, in virtually identical terms, to the “extent and time necessary to remedy the
injury”.
296 See, also the Preamble of the Agreement on Safeguards, second to last paragraph, “[r]ecognizing the
importance of structural adjustment and the need to enhance rather than limit competition in internationalmarkets”.WT/DS98/R
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(i) The most suitable measures to remedy serious injury and facilitate adjustment
4.609  Article 5.1, last sentence, of the Agreement on Safeguards, further building upon the remedial
character and the adjustment objective of safeguard measures, also requires Members to "choose
measures most suitable for the achievement of these objectives."  The ordinary meaning of this clause
already suggests that both the objective to remedy th e injury and the objective to facilitate adjustment
also limit the type of measure which a Member may adopt, in addition to its level or scope.  This
construction is further reinforced in the light of the principle of effective interpretation of treaties,based on which where a treaty provision can be subject to several possible interpretations, preference
should be accorded to the one giving that provision its effect.
297  In fact, if the second sentence of
Article 5.1 were also to be interpreted as a limit to the level or scope of a measure, rather than as
including some additional element, it would be redundant in the light of the first sentence.
4.610  The conclusion that the choice of the type of safeguard measure is limited under Article 5.1 of
the Agreement on Safeguards is confirmed if that provision is interpreted in its context.  In fact the
Agreement on Safeguards includes a partially different regime for quotas and tariff measures.  In thefirst place, a maximum limit to the level of pr otection, additional to the injury level and the
adjustment required, is imposed by Article 5.1, second sentence, providing that “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.”
 Second, in case of provisional measures Article 6 of the Agreement on Safeguards
limits the possibility of action to tariff measures only.   Also, the different nature and impact of the
various protection measures has been expressly recogn ized in the regulatory framework established by
the WTO Agreement and its annexes.  Specifically, Members recogn ized that “price-based measures”,
that is, “measures with an impact on the price of imported goods” “have the least disruptive effect on
trade”.298
4.611  It follows from the foregoing that if a WTO Me mber seeks to take a safeguard measure, the
choice of the type of measure also needs to be justified in terms of its adequacy to remedy injury and
facilitate adjustment.  The European Communities therefore conclude that, by failing to consider
whether other types of measure than a quota would be the most suitable to remedy serious injury and
to facilitate adjustment, Korea further violated its obligations under Article 5.1 of the Agreement onSafeguards.
(ii) Quota lower than average of imports in the last representative three-year period preceding
the application of the measures for which statistics were available
4.612  Article 5.1, second sentence, of the Agreement on Safeguards provides that
“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.”
(emphasis added).
                                                     
297 The principle of effectiveness in treaty interpretation was recognized as an appropriate interpreting
principle by the Appellate Body in US - Underwear , p. 5.
298 See, the Understanding on the Balanc e-of-Payments Provisions of the General Agreement on Tariffs
and Trade 1994 , para. 2.  Para. 3 is even more explicit in providing that “Members shall seek to avoid the
imposition of new quantitative restrictions for balance-of-payments purposes unless, because of a critical
balance of payments situation, price-based measures cann ot arrest a sharp deterioration (…).  In those cases in
which a Member applies quantitative restrictions, it shall provide justifications as to the reasons why price-based
measures are not an adequate instrument to deal with the balance-of-payments situation.”WT/DS98/R
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4.613  The average of imports into Korea for July 1993-June 1996 was lower than the average for
the period January 1994-December 1996.  The European Communities submit that, by calculating the
quota level on the basis of import data relating to the period July 1993-June 1996, rather than to theperiod January 1994-December 1996, the Korean authorities violated Article 5.1 of the Agreement on
Safeguards, second sentence, since July 1993 - June 1996 data did not relate to the “last three
representative years for which statistics are available” and the resulting quota was lower than allowed
by that provision, without justification being provided.
4.614  In order to demonstrate this claim the Euro pean Communities first examine the meaning of
Article 5.1, second sentence of the Agreement on Safeguards, and then turns to the three years which
are relevant under that provision.
(a) Article 5.1 of the Agreement on Safeguards
4.615  Article 5.1 of the Agreement on Safeguards is cl early intended to avoid the quota being set at
a level unrelated to historical import flows prior to its imposition, which would prove particularly
disruptive for exporters.  By limiting in principle the minimum quota level to the average of the last
three representative years the Agreement on Safeguards establishes a presumption that for quotas suchlevel is the maximum restriction which would be justifiable as “necessary” within the meaning of
Article 5.1 Agreement on Safeguards.  It is only if the Member seeking to apply a safeguard measure
in the form of a quota is able to show that a quota level based on those data is not sufficient to remedy
the serious injury in a specific case that a lower quota may be imposed.  Since Korea has not
considered the issue of necessity at all, it has taken no steps to rebut this presumption.
(b) The last three representative years for which statistics are available
4.616  In order to determine the “last three representative years” which Korea should have used in
setting the quota level, the following issues must be addressed :  (i) the starting time from which to
calculate the three years, (ii) the availability of statistics for those three years and (iii) the
representativity of those data.
(1) Starting time
4.617  As regards the relevant time to decide which are the last three years’ available import
statistics pursuant to Article 5.1 Agreement on Safeguards, the ordinary meaning of the provision
already makes clear that it is the moment when a decision to take a measure in the form of a quota has
been taken and the quota level is to be decided.  The context of the second sentence of Article 5.1further reinforces that interpretation.  In fact the first sentence of Article 5.1 makes clear that the
provision relates to the time when a Member “applies” safeguard measures.  The Appellate Body
Report US - Underwear  removed any doubt as to the meaning of the term, by pointing out that the
word "apply", when used as here in respect of a governmental measure - whether a statute or an
administrative regulation – means, in ordinary acceptation, putting such measure into operation.”
299
Thus, the European Communities submit that the starting time for the assessment of the “last three
years” is the moment when action in the form of a quota was taken and the quota was calculated.
Therefore, it is from that moment that a country should look retrospectively at imports trends until it
finds three representative years of data.  A final decision on a definitive safeguard measure in the
form of a quota was taken by Korea on 7 March 1997.300
                                                     
299 Id., p. 8.
300 See, WTO Doc. G/SG/N//10/KOR/1/Suppl/1, 1 April 1997, p.1 (Exhibit EC-10).WT/DS98/R
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(2) Availability of the data relating to the relevant period
4.618  The import statistics considered by the KTC in determining the appropriate level of the
quantitative restriction relate to the period July 1993 through June 1996.301  While data relating to that
period were certainly “available” within the meaning of Article 5.1 when the quantitative restriction
level was set, it remains to be clarified whether more recent information was also available.  In this
respect the European Communities submit that, as made clear from Korea's Statistical Yearbook of
Foreign Trade for 1996302, import data relating to the whole 1996 were available to the Korean
authorities before the amount of quota was finally calculated and that these data should therefore have
formed the basis for calculation of the quota level.
(3) Representativity
4.619  The European Communities submit that Korea comple tely failed to address, either expressly
or impliedly, the issue of whether the statistics on which it relied to set the quota level were indeed
“representative”.  The ordinary meaning of the term and its context make clear that “representative”
refers to import trends.  The aim is to avoid the in clusion of periods where trade flows were abnormal.
However, no such evaluation of the quality of the data relied upon is included in any of Korea’s
notifications to the WTO.
4.620  Moreover, the European Communities further contend that, if such evaluation had been
carried out, it would have led to exclude data relating to the second semester of 1993 as not
“representative” within the meaning of Article 5.1 of the Agreement on Safeguards.  As indicated inKorea’s Schedule of concessions, imports of item 1901.90.2000 (“food preparations”) into Korea
were still subject to Balance-of-Payment restrictions during that period.
303  Therefore, although the
relevant tariff rates had been lowered to 40 per cent as of the beginning of 1993, their imports did not
take place under conditions which would have made them “representative”.  This is an additional
reason to conclude that Korea should have based its quota on the period January 1994-December 1996.  In the light of the foregoing the European Communities consider that Korea based
its calculation of the quota level on data that did not relate to the last three representative years
available within the meaning of Article 5.1 of the Agreement on Safeguards.
4.621  In response to a question of the Panel
304 the European Communities  further clarified their
arguments under Article 5:
4.622  The first and second sentences of Article 5.1 contain complementary obligations which all
have to be respected.  The first and third sentences of Article 5.1 apply on their face to all safeguard
measures .  The second sentence contains an additional obligation which only applies to quantitative
restrictions.
4.623  Also in response to a question of the Panel305 the European Communities  further argued:
                                                     
301 See, Exhibit EC-8.
302 See, Exhibit EC-20.
303 See, Exhibit EC-17.
304 The Panel recalls that the question was :  " If a quota is established based on the level of imports for
the three representative years, does the importing country still have an obligation to prove that such level wasnecessary? In other words does the level established pursuant to the three representative years constitute aminimum quota, the level of which must still be proven to be "necessary"? Please comment and discuss the
relationship between the first and second sentence of Article 5.1 of the Agreement on Safeguards.
305 The panel recalls that the question was :  "If there is no such period of three representative years
because good under investigation have been the object of restrictions (GATT/WTO compatible or not) how
should the importing country proceed to assess such necessary level of quota?"WT/DS98/R
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4.624  The second sentence of Article 5.1 contains an additional obligation for quantitative
restrictions .  If there is no representative three year period the Member must then base its measure on
“the level necessary to prevent or remedy serious  injury”, according to the second part of that
sentence .  The rule in the first part may still be relevant as a guide.
(b) Response by Korea
4.625  Korea  responds to the EC arguments as follows:
4.626  Korea based its quota level on the average of imports for the three years from July 1993-
June 1996.  Korea initiated its safeguards investigation in May 1996.  After that date, imports ofSMPP would be expected to increase abnormally, as foreign exporters and their Korean customers
increase their volume of imports in anticipation of a safeguards measure.  In fact, the use of three
«representative» years was intended to prevent foreign exporters from manipulating quota levels by
flooding the market with imports just prior to the decision to impose a safeguard measure.  Therefore,
Korea considered that the second half of 1996 was not «representative,» and it excluded imports from
this period in calculating the quota level.  Korea considered that the quota levels chosen were the most
suitable for achieving the “objectives” identified in Article 5.1, i.e., preventing or remedying the
serious injury and facilitating adjustment to the domestic industry in Korea.
306
4.627  Pursuant to a question by the Panel307 Korea  further clarified its arguments under Article 5 as
follows:
4.628  In the view of Korea, the first two sentences of Article 5.1 of the Agreement on Safeguards do
not impose a general obligation on Members to demonstrate that the specific level of quota that theydecided to impose as a safeguard measure is necessary to prevent or remedy serious injury and to
facilitate adjustment.  Such an obligation only arises if the level of such quota is lower than the
average imports during the three most recent representative years for which statistics are available.
As the wording of the second sentence of Article 5.1 makes clear, Members must only justify the level
of quotas if it is different ( i.e., lower) than the average imports during the three most recent
representative years.
4.629  The first clause of Article 5.1 does not impose any obligation but merely states a basic
principle regarding the application of safeguard measures.  This basic principle is that Members
should apply safeguard measures only to the extent necessary to achieve the objectives of safeguard
measures ( i.e., to prevent or remedy serious injury and to facilitate adjustment).  This basic principle
is generally applicable whether the safeguard measure imposed is a tariff, a tariff-quota, or a quota.
The first clause of Article 5.1 cannot be read as imposing an obligation on Members to demonstrate
that a particular level of tariff or quota is necessary to prevent or remedy serious injury and to
facilitate adjustment.  Article 5.1 does not identify objective criteria that may be used to calculate thelevel of tariff, tariff-quota, or quota that would “remedy” serious injury or “facilitate adjustment”under the unique circumstances facing particular industries.
4.630  The second sentence of Article 5.1 only applies when a Member imposes a safeguard measure
in the form of a quota.  To give Members useful guidance, the drafters of this sentence established a
                                                     
306 See, Exhibit Korea-8 in which only one of the se ven KTC commissioners considered that a tariff
rate quota was the more appropriate measures for dealing with the serious injury caused by the increasedimports.
307 The Panel recalls that the question was :  "If a quota is established based on the level of imports for
the three representative years, does the importing country still have an obligation to prove that such level was
necessary?  In other words, does the level established pursuant to the three representative years constitute aminimum quota, the level of which must still be proven to be 'necessary'?  Please comment and discuss therelationship between the first and second sentence of Article 5.1 of the Agreement on Safeguards."WT/DS98/R
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minimum quota level that would be deemed necessary to achieve the objectives of imposing a
safeguard measure.  This level is set at the average of imports during the three most recentrepresentative years for which statistics are available.  To the extent that the quota is set at that level
or at a higher level, Members are not required to prove that this quota level is necessary.  This is not a
strict minimum quota, however because the second se ntence of Article 5.1 permits a Member to set a
quota at a lower level than the average imports during the three most recent representative years,
provided it presents clear justification that such lower level is necessary.  If a Member decides toimpose a quota that is not lower than the average imports during the three most recent representative
years, it is not required to provide any explanation or justification as to the necessity of this quota
level.
4.631  With regard to tariff-based safeguard measures, Article 5.1 does not obligate Members to
provide any explanation or justification of the level of such measures.  It is not for Korea to speculate
why the drafters felt that a benchmark was necessary for quotas but not for tariff-based measures.
The fact that the second sentence of Article 5.1 only refers to quotas, however, can only mean thatthere is no requirement to demonstrate that the level of a tariff-based measure is necessary to achieve
the objectives pursued.  In Korea’s view, the obligation to justify the level of the safeguard measure
only exists if the measure is a quota and if such quota is set at a level lower than the average imports
during the three most recent representative years for which statistics are available.
4.632  In this case, Korea determined that application of a safeguard measure was necessary to
remedy serious injury and facilitate adjustment because “[w]hile it was determined that the domestic
industry has been suffering from serious injury caused by increased imports, the injury has not been
relieved even by the continuing efforts of the relevant authorities and the petitioner .  In this regard, it
is agreed that the appropriate relief measures should be taken to resolve the problem.” 
308  Based on
the guidance provided in the second sentence of Arti cle 5.1, Korea rejected the alternatives suggested
by the petitioner and recommended a quota at a level based on the three most recent representative
years for which statistics were available.309
4.633  In response to another question by the Panel310 Korea  also argued that:
4.634  In the view of Korea, Article 5.1 does not impose an obligation on Members to demonstrate
that a particular level of a tariff (or tariff-quota) is necessary or that it is the most suitable means toremedy injury and facilitate the adjustment .  In this respect, it is important to distinguish between two
issues :  (i) whether the particular type of safeguard measure ( i.e., tariff, quota, tariff-quota) is the most
suitable means for achieving the objectives sought,  and (ii) whether the level of the tariff, quota, or
tariff-quota imposed (as the most suitable measure) is necessary to achieve such objectives.  In this
regard it is necessary to consider the first and third sentences of Article 5.1 .  The first sentence states
the basic principle that a safeguard measure should be applied only to the extent necessary to prevent
or remedy serious injury and to facilitate adjustment.  The third sentence of Article 5.1 provides there
is no obligation to demonstrate that a tariff (or tariff-quota) is the most suitable measure to achieve
these objectives, nor to demonstrate that the level of such tariff (or tariff-quota) is necessary or
appropriate to achieve these objectives.
4.635  In this case, it is noteworthy that the KTC Commissioners examined the relief measures
requested by the petitioner, including:
                                                     
308 See, Exhibit Korea-8, at 3.
309 Id.
310 The Panel recalls that the question was :  "Do you consider that under Article 5.1 of the Agreement
on Safeguards the importing country needs to show that a safeguard measure, in the form of a tariff (or tariff-quota), is necessary and the most suitable means to remedy the injury and facilitate the adjustment?  Do youneed to show that the level of the tariff (or tariff-quota) was appropriate?"WT/DS98/R
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reclassify the tariff  treatment of SMPP into the same category of dutiable items as skimmed
or whole milk powder;
increase the customs duties on SMPP to the level of milk powder for four years;  andrestrict the import volume to 10,000 tons per year for four years.
311
4.636  The KTC stated that:
[b]efore recommending the relief measures, the KTC commissioners agreed that close
considerations should be made beforehand for each relief measure on its impacts on thedomestic dairy industry, national economy, and bilateral/multilateral trade.  In this
regard, the KTC examined the information investigated by the OAI, the relevant articles
of the multilateral regulations, the opinions of authorities concerned, and the relief
measures stipulated in the Foreign Trade Act and the Enforcement Decree of the Act.
Based on all these examinations, the KTC reviewed the petitioner’s request for relief
measures.
312
Korea also examined whether a tariff-quota would be more appropriate and what the appropriate
duration for the application of the measure should be.313  Based on its examination, the KTC
recommended that the appropriate duration of the measure was four years and that the measure should
be in the form of a quantitative restriction in the amount not exceeding the average of the import
levels for the three most recent representative years for which statistics were available.314
4.637  In another response to a Panel question, Korea  further clarified its arguments on the
"representative" three-year period for purposes of Article 5.1:
4.638  Korea considers that each of the three years prior to the filing of a safeguards petition is
normally representative of the import levels on which a quota restriction may be based, absent clear
justification otherwise and notwithstanding the existence of import restrictions during any particular
year.  The “representative” nature of imports under Article 5.1 of the Agreement on Safeguards mustbe determined with reference to the normal level of imports for the particular Member concerned,
regardless of any import “restrictions” then in force.  Notably, “representative” under Article 5.1
cannot reasonably be interpreted to mean “fully liberalized” or absent any tariff or non-tariff
restriction potentially affecting imports.
(c) Additional arguments by the European Communities made at the first meeting of the
Panel with the parties
4.639  At the first meeting of the panel with the parties, the European Communities  further
advanced their arguments under Article 5.1 as follows:
4.640  The European Communities  noted that in their endeavours to justify the exclusion of the
second semester of 1996 by saying that in that period imports would have “increased abnormally” inanticipation of the measure.  The European Communities  would like to recall that in 1996 imports
recorded an increase of approximately 15 per cent as compared to 1995, which increase appears much
less “abnormal” i.e., more “representative”, than the increases of approximately 384 per cent
from 1993 to 1994 and 80 per cent from 1994 to 1995.  The European Communities  would also
recall that, as demonstrated by its Exhibit EC-20 and not contested by Korea, full 1996 data were
available when the quota was finally decided.
                                                     
311 See, Exhibit Korea-8, at 3.
312 Id. at 3-4.
313 Id. at 4-5 (see minority opinion of Jeong Mun-Su).
314 Id. at 4.WT/DS98/R
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(d) Additional arguments by Korea made at the first meeting of the Panel with the parties
4.641  At the first meeting of the panel with the parties, Korea  further advanced its arguments under
Article 5.1 as follows:
4.642  Korea not only fully complied with its obligations under Article 5 of the Agreement on
Safeguards, but also exercised its good faith in expanding the amount of the quota based on requests
during consultations from the European Communities  and other WTO Members.  In its decision of
2 December 1996, the KTC Commissioner evaluated the appropriate relief measures, stating that“[b]efore recommending the relief measures, the KTC commissioners agreed that close considerations
should be made beforehand for each relief measure on its impacts on the domestic dairy industry,
national economy, and bilateral/multilateral trade.” 
315  The KTC then listed the information examined
regarding the range of proposed relief measures.  A majority of the KTC Commissioners then
determined that a quota was the most suitable relief measure, with one commissioner offering a
minority opinion that a tariff-rate quota would be preferable.
4.643  Korea does not understand the EC argument that Korea failed to consider whether other types
of measures would have been more suitable.316  In Korea's view, the European Communities are
simply wrong.
4.644  The volume of the quota was based on the average level of imports of the three most recent
representative years for which statistics were then available, from June 1993 to June 1996.  Korea
refused to increase the quota further by including the remainder of 1996 in the historical bases forcalculating the quota.  This period was not representative because exporters can be expected to
increase artificially the volume of their exports in anticipation of the safeguard measure.
4.645  During consultations under Article 12.3 of the Agreement on Safeguards, the European
Communities objected to the calculation of the quota level.  After considering the European
Communities concerns, Korea decided, in good faith, and without being obligated to do so, to raisethe quota level by almost 5,000 tons.
(e) Rebuttal arguments made by the European Communities
4.646  The European Communities  made the following arguments in rebuttal:
4.647  In the EC view a “necessity” requirement is embodied in Article 5.1 of the Agreement on
Safeguards, which requirement must be met in order for a measure to be authorized under thatprovision .  A general “necessity” requirement is laid down in the first sentence.  Furthermore, there is
a specification of that requirement for safeguard measures in the form of quantitative restrictions to
the effect that, in principle, quota level lower than  the average of imports in the three representative
years is not (never) necessary, unless clear justification is given in this respect.  Of course, this
principle cannot entail at all that whichever is in compliance with that threshold is automaticallynecessary.
4.648  The European Communities further maintain that the years used by Korea to calculate its
quota level were not the “last three representative available”.  In the case at issue in this dispute,
Korea has neither calculated the quota consistently with this required threshold nor, a fortiori , has
been able to show that it did.
4.649  The interpretation of Article 5.1 of the Agreement on Safeguards, in the light of its wording,
context and purpose and in accordance with the principle of effective treaty interpretation, mandates
                                                     
315 See, Exhibit Korea-8.
316 Id.WT/DS98/R
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this conclusion :  each provision was drafted with its own meaning and must be given its autonomous
meaning when being interpreted.  On the contrary, by denying the binding character of the necessity
requirement except within very strict limits, Korea is trying to unduly reduce the scope of itsobligations under the WTO Agreements, and thus the rights arising thereunder to the European
Communities.  Reduction or modification of rights and obligations is emphatically not allowed under
the WTO.
317
(i) Necessity is a requirement laid down in Article 5.1, first sentence in respect of all safeguard
measures
(a) Wording
4.650  The European Communities reiterate that the term “necessity” is binding language, both in
the first and in the second sentence of Article 5.1 of the Agreement on Safeguards.  Both sentences
impose obligations upon WTO Members wishing to adopt safeguard measures to do so only to the
extent they are necessary to prevent or remedy serious injury and to facilitate adjustment, although the
second is a specification of the first one, applicable in respect of one type of measure only.  As the
Appellate Body pointed out in US - Underwear , far from suggesting non-binding character,
“a contention of necessity may be seen to assume that no other recourse is available to
the importing country.” 318
4.651  The European Communities find it curious that, in trying to unduly restrict its obligations and
EC rights under the Agreement on Safeguards, just as it does for its obligations arising under
Article XIX of GATT, Korea is using the opposite tactics.  In the case of Article XIX, lack ofrepetition of the “unforeseen developments” requirement in the Agreement on Safeguards is deemed
to show its abrogation by the latter.  In the case of Article 5.1 of the Agreement on Safeguards, in
spite of repetition of the word “necessary” in two consecutive sentences of the same Article, Korea is
able to deny the binding character of the word in the first sentence but finds unexpectedly that it is
binding in the second sentence– be it by further limiting the scope of that more specific obligation.
(b) Context
4.652  The same conclusion is compelled by the interpretation of the provision in its context.  First,
the term “necessary” is reiterated in the second sentence of Article 5.1, which constitutes the most
immediate “context” of the first sentence.  Repetition of a term which is binding by its ordinary
meaning confirms that use of that term is not accidental or inaccurate, and instead represents adeliberate choice of the drafters.  Second, the same term is used elsewhere in the WTO system -
notably in provisions derogating from the libera lization principle embodied therein - with the same
binding meaning.  Article XIX itself embodies virtually identical language and authorizes safeguard
measures “to the extent and for such time as may be necessary to prevent or remedy serious injury”.
Furthermore, Article XX of GATT allows measures to be taken if e.g., “(a) necessary to protect public
morals”, “(b) necessary to protect human health”.
4.653  Comparison with other WTO Agreements regulating trade defence measures also shows that
when the drafters have wanted to be permissive as to the maximum level allowed for one of such
measures they have used much less strong language.  Article 9 of the Agreement on Implementation
of Article VI of the General Agreement on Tariffs and Trade 1994 (“the Anti-Dumping Agreement”),
                                                     
317 See, Article 3.2 and 3.9 of the DSU, respectively providing :  “Recommendations and rulings of the
DSB cannot add or diminish the rights and obligations provided in the covered agreements” and “The provisions
of this Understanding are without prejudice to the rights of Members to seek authoritative interpretation of
provisions of a covered agreement through decision-making under the WTO Agreement” (emphasis added).
318 See, Appellate Body Report in US - Underwear , 10 February 1997, WT/DS24/AB/R, p. 11.WT/DS98/R
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provides on the one hand, that anti-dumping duties can never exceed the dumping margin.  By
contrast, it further stipulates that:
“It is desirable that the imposition [of an anti-dumping duty in cases where all
requirements for the imposition have been fulfilled] be permissive and that the duty be
less than the margin if such lesser duty woul d be adequate to remedy the injury to the
domestic industry.”
This provision shows that the drafters of the WTO Agreement have chosen a much softer language
when intending to express an absence of obligation.  It also shows that there is a difference in the
regime adopted for dumping measures and for safeguard measures, which is otherwise logical having
regard to the different situation – unfair trade practices, fair trade - which dumping and safeguard
measures are respectively aimed to remedy.
(c) Purpose
4.654  The purpose of the “necessity” requirement is to avoid that measures, which are recognized as
“limitative and deprivational in character or tenor and impact upon Member Countries and their rightsand privileges and upon private persons and their acts”,
 319 not be abused.  In the light of that
characterization, in US - Underwear , the Appellate Body drew the conclusion that an importing
Member should not be allowed “an enhanced ability to restrict the entry into its territory of goods in
the exportation of which no unfair trade such as dumping or fraud or deception of origin is alleged or
proven”320 by taking safeguard action beyond the strict limits laid down in the relevant WTO
provisions, if that action would result in “excluding more goods from the territory of the importing
Member.” 321  As already noted, the aim of the Agreement on Safeguards is to “clarify and strengthen”
and to “re-establish multilateral control” over safeguards 322 rather than to broaden the authorization to
apply them.
4.655  That the safeguard measure at issue in this dispute was not “necessary” to remedy serious
injury flows from the fact that there was no such injury, and certainly not serious injury resulting from
the imports of SMPP.  Furthermore, irrespective of whether a country is always obliged to introduce a
structural adjustment plan together with a safeguard measure, in this particular case Korea did, by its
own admission, introduce the Dairy Industry Plan “to facilitate adequate adjustment in the Korean
dairy sector”, but did not show the necessity of the measure to attain the adjustment objective.  Therewas no mention of the link between the measure and the adjustment objective within the broader
framework of actions taken in this connection.  Accordingly, the European Communities reiterate
their conclusion that Korea did not show that the measure it adopted was “necessary”, thereby
violating Article 5.1 of the Agreement on Safeguards.
(ii) The necessity requirement is strengthened in Article 5.1, second sentence in respect of
safeguard measures taking the form of quantitative restrictions
4.656  As Korea itself admits, by virtue of the second sentence of Article 5.1 a necessity requirement
is imposed in respect of safeguard measures taking the form of quantitative restrictions.  Article 5.1 of
the Agreement on Safeguards is clearly intended to avoid a quota being set at a level unrelated to
                                                     
319 See, Appellate Body Report in US - Underwear , 10 February 1997, WT/DS24/AB/R, p. 9 (emphasis
added).
320 Id.
321 Id. (emphasis added).
322See, Preamble of the Agreement on Safeguards, second last para., whereby Members  “[recognize]
the importance of structural adjustment and the need to enhance rather than limit competition in international
markets”.WT/DS98/R
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historical import flows prior to its imposition, which would prove particularly disruptive for
exporters :  in other words, a quota which would afford an importing country
“an enhanced ability to restrict the entry in to its territory of goods in the exportation of
which no unfair trade such as dumping or fraud or deception of origin is alleged to be
proven”323
4.657  The prohibitive, rather than permissive, language of the provision limits in principle the
minimum quota level to the average of the last three representative years the Agreement on
Safeguards and establishes a presumption that for quotas such level is the maximum restriction whichwould be justifiable as “necessary” within the meaning of its Article 5.1 :  “such a measure shall not
reduce the quantity of imports below the level of a recent period”.  It is only if the Member seeking to
apply a safeguard measure in the form of a quota is able to show that a quota level based on those data
is not sufficient to remedy the serious injury in a specific case that a lower quota may be imposed, and
then only if “clear justification” is provided.  Therefore, the second sentence of Article 5.1 embodies
an “enhanced requirement” of necessity when Members want to impose a safeguard measure in the
form of a quantitative restriction.
4.658  That in principle a quota level below the three representative years is not (never) “necessary”
does not entail at all, and indeed is quite the opposite of, saying that whichever quota is in compliance
with that threshold is automatically “necessary” a nd authorized.  First, because the first sentence of
Article 5.1, which is binding, has general scope (that is, applies to all measures).  Second, because if it
could be admitted that a quota in accordance w ith the three-year threshold is “automatically”
necessary without demonstration (as suggested by Korea), one would arrive at the unreasonable and
absurd result that “necessity” must be shown in respect of a tariff measure, or any measure other than
quota, and not for a quota. Of course, Korea can arrive at this unreasonable and false conclusion
because it starts from a wrong premise ( i.e., that the first sentence does not impose any obligation on
WTO Members).
(iii) Korea has imposed a quantitative restriction at a level which is below the average laid down
in Article 5.1, second sentence, without “clear justification”
4.659  The European Communities maintain that the “thr ee most recent years for which statistics are
available” are to be assessed relative to the moment when the quantitative measure is imposed.
Because Article 5.1 of the Agreement on Safeguards regulates the “application” of safeguardmeasures, i.e., the moment when measures are taken, it is appropriate to consider that moment to
assess the relevant three years retrospectively .  Furthermore, that sentence uses the term “recent
period” in connection with the reference to imposition of the measure.  It is otherwise logical that
calculation of the level of a measure follows the decision to adopt a measure.
4.660  On the contrary, there is no reference, in the second sentence of Article 5.1, to the initiation of
the proceeding.  It is clear that referring to that moment could allow the importing country to
purposefully choose the initiation time of an investigation.  As to availability of data, February 1997
data for all 1996 were available – a fact that is evidenced by Exhibit EC-20 and that Korea has not
challenged.
4.661  As to representativity of the data, imports of the second semester of 1996 could not be
excluded on grounds of non-representativity, certainly not on the criterion invoked by Korea because
there is no “manipulation” by exporters in the sense (massive, or “abnormal” raise in imports) givenby Korea to the term.  The increase in imports from 1995 to 1996 is lower than the increase from 1994
to 1995, yet Korea had no difficulty in considering “representative” both 1994 and 1995.
                                                     
323 See, Appellate Body Report in US - Underwear , 10 February 1997, WT/DS24/AB/R, p. 9.WT/DS98/R
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4.662  In any event, Korea took into account data relating to a period (June 1996) subsequent to the
initiation of the investigation324, and itself contradicts the criterion which it now proposes .  The
possible attempts of the exporters to increase exports ahead of the adoption of safeguard measures
either are presumed to materialize with opening, or are not.  Moreover, in US - Underwear  the
Appellate Body, after having referred to the binding character inherent in the word “necessity”, as
lack of alternatives available to the importing country, concluded that the need to prevent or deal with
a “flood of imports”, invoked by the United States to justify retroactive application of its measure,could have been dealt with by measures alternative to such a supplementary restriction – for example
with the adoption of urgency measures.  The European Communities note that analogous measures are
equally available under the Agreement on Safeguards. 
325
4.663  The European Communities maintain that full 1996 data were more “representative” 326 than
the second semester of 1993, relied upon by Korea, and notes that there is no trace of explanation
about representativity in the Notice of  7 March 1997, by which Korea finally imposed the safeguard
measure at issue in this dispute.327  Therefore, even as regards the representativity of the data used to
calculate the quota, Korea’s measure did not meet Article 5.1 requirements and should be found to be
in violation thereof.
(iv) Korea has not shown that the measures were th e “most suitable” for the achievement of their
objectives
4.664  Regarding the “suitability” of the measure chosen, in the EC view Korea arrives at the final
reduction of its Article 5.1 obligations, by denying the binding character of this requirement without
any reasoning.  At the same time, Korea again refers to the OAI Report in support of its position .  The
European Communities assert that the OAI Report is not an appropriate source of information to
evaluate Korea’s compliance with its obligations arising under Article XIX of GATT and the
Agreement on Safeguards.  In connection with this specific requirement it would add that, just as forthe other requirements imposed by Article 5.1 of the Agreement on Safeguards, there is no
explanation of Korea’s choice to impose a quantitative measure in the only document which followed
the 1 April Notification to the Committee on Safeguards, and by which Korea definitively imposed
the measure.  As Korea changed the reference period for calculating the quota as compared to what it
had announced in January 1997, and did not refer to any other documents as possible sources ofexplanation in its Notice, it did not come to a definitive reasoning in this respect.  This further
confirms that its measure is inconsistent with the requirements of Article 5.1.  The EC considers that it
is not sufficient for the investigation authorities to note the arguments and conclude.  They must state
its reasons.   In particular, it is not sufficient and legitimate to examine only the measures requested
by a petitioner in order to comply with the re quirement to choose the “most suitable measure”
pursuant to Article 5.1, third sentence of the Agreement on Safeguards.  This represents an undue
                                                     
324 See, WTO Doc. G/SG/N/6/KOR/2, 1 July 1996 (Exhibit EC-1)
325 See, Article 6 of the Agreement, reading :  “In critical circumstances where delay would cause
damage which would be difficult to repair, a Member may take a provisional safeguard measure pursuant to a
preliminary determination that there is clear evidence th at increased imports have caused or threaten to cause
serious injury.”  To be noted that Article 6.11 of the Agreement on Textiles and Clothing is drafted in extremely
similar conditions :  “11. In highly unusual circumstances, where delay would cause damage which would be
difficult to repair, [safeguard] action under paragraph 10 may be taken provisionally on the conditions that the
request for consultations and notification to the TMB shall be effected within no more than five working days
after taking the action”
326 The EC agrees with Korea’s reply to a question of the Panel, that “representative” does not
necessarily means “fully liberalized ”, it rather means “not abnormal” .  For example, customs tariffs resulting
from bindings are not “extraordinary” restrictions in the WTO system, therefore it seems clear that their
presence would not deny representativity of a given period .  On the contrary, measures taken for Balance-of-
Payment reasons are clearly excep tional measures and may possibly have a more uncertain impact.
327 See, Exhibit EC-9, corresponding to Exhibit-Korea-9.WT/DS98/R
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weakening of that requirement and would leave the decision within the hands of the very industry
seeking safeguard protection.
(f) Rebuttal arguments made by Korea
4.665  Korea  makes the following rebuttal arguments:
4.666  In its Report, the OAI concluded with a section on remedies .  This section, after setting out in
full the provisions of Articles 8 and 12 of the Agreement on Safeguards stated:
“In light of trade relations, if import is restricted by means of tariff rate increase or
quantitative restriction, EU member states, Australia and New Zealand, which areleading exporters, may protest .  Therefore, it is advised that, before a safeguard measure
is taken, bilateral consultations should be held with the major exporting countries.
After rendering a determination on injury to the domestic industry, the KTC must notify
the WTO Committee on Safeguards of such determination.
Meanwhile, the WTO Agreement on Safeguards stipulates that if a safeguard measure is
taken due to the absolute increase of import volume, as is the case in this investigation,
interested Members cannot take retaliatory measures within three years after the effectivedate of the measure.”
328
4.667  The KTC Commissioners then examined and rejected the relief measures requested by the
petitioner.  In rejecting the alternatives suggested by the petitioner, and instead recommending to the
Minister of Agriculture and Forestry a quota at a level based on the three most recent representative
years for which statistics were available329, the KTC stated that:
“[b]efore recommending the relief measures, the KTC commissioners agreed that close
considerations should be made beforehand for each relief measure on its impacts on the
domestic dairy industry, national economy, and bilateral/multilateral trade.  In this
regard, the KTC examined the information investigated by the OAI, the relevant articles
of the multilateral regulations, the opinions of authorities concerned, and the reliefmeasures stipulated in the Foreign Trade Act and the Enforcement Decree of the Act.
Based on all these examinations, the KTC reviewed the petitioner’s request for relief
measures.
330 ”
4.668  The Korean authorities also examined whether a tariff-quota would be more appropriate and
what the appropriate duration for the application of the measure should be.331  Based on its
examination, the KTC recommended that the appropriate duration of the measure was four years and
that the measure should be in the form of a quantitative restriction in the amount not exceeding the
average of the import levels for the three most recent representative years for which statistics were
available.332
4.669  The first notification by Korea, which referred to the nature of the safeguard measure, set out
the following amounts333:
                                                     
328 OAI Report at 74.
329 Id.
330 Id. at 3-4.
331 Id. at 4-5.
332 Id. at 4.
333 G/SG/N/10/KOR/1 (27 January 1997)WT/DS98/R
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Year 1 Year 2 Year 3 Year 4
15,595 tonnes 16,483.9 tonnes 17,372.8 tonnes 18,261.7 tonnes
Following prior consultations in Geneva on 4 and 5 February 1997, between Korea on the one hand,
and the European Communities, Australia and New Zealand on the other, Korea decided to increase
the level of its quota as an act of good faith intended to provide some level of concessions to its
trading partners .  In its final Notification under Article 12.1(c) of the Agreement on Safeguards334,
Korea set out the following quota amounts:
March 7 1997 -
February 1998March 1998-
February 1999March 1999-
February 2000March 2000-
February 2001
20,521 tonnes 21,691 tonnes 22,927 tonnes 24,234 tonnes
This represents an average increase of over 5,000 tonnes in the level of the quota in each of the fouryears of the safeguard measure, and a total of 21,659 tonnes more imports than originally proposed inaccordance with the provisions of Article 5.
4.670  Korea recalled its answers to the Panel's questions regarding the nature of the safeguard
measure and the level of quota if a quota is chosen, which can be found at paragraphs 4.634 and 4.628
4.671  In Korea's view, provided the level of quota was equivalent to or not less than the average of
the import levels for the three most recent representative years for which statistics were available, theKorean authorities were not required to show that the nature of the measure, or its level, were
“necessary”.
(g) Additional arguments by the European Comm unities made at the second meeting of the
Panel with the parties
4.672  At the second meeting of the panel with the parties, the European Communities  further
advanced their arguments under Article 5.1 as follows:
(i) Both the first and the second sentence of Article 5.1 impose obligations on Members, having
regard to their wording, context and object and purpose
4.673  The European Communities assert that Korea has provided no explanation for its
interpretation that the first sentence of Article 5.1. is non-binding, except to say that the first sentence
does not include “objective criteria that may be used to calculate the level of tariff, tariff quota, or
quota that would ‘remedy’ serious injury or ‘facilitate adjustment."  It is hard to see from where Koreahas drawn this criterion to decide whether the language of the first sentence is binding or not.  In any
event, in the first sentence of Article 5.1, too reference to injury and adjustment is made, and therefore
a threshold is set to determine the level of protection allowed.  Also, several other “‘necessity’
clauses” exist both in GATT and in the other WTO Agreements.  The binding character of those
clauses is not questioned even in the absence of precise or objective or objective criteria which mightbe used to calculate the level of tariffs as Korea maintains.
4.674  The European Communities recalled their arguments set out in paragraphs 4.650- 4.655
above.
                                                     
334 G/SG/N/10/KOR/1/Suppl. 1 (1 April 1997), section 2,WT/DS98/R
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4.675  In the EC view what Korea should have assessed, and did not, is whether the measure chosen
was really necessary.  The only reference to this issue is in the passage of Exhibit Korea-8
(“Determination of a Relief Measure by the Korean Trade Commission”, which is the KTC'sRecommendation of relief measures to the Ministry of Agriculture) quoted by Korea in reply to a
question of the Panel :  [w]hile it was determined that the domestic industry has been suffering from
serious injury caused by increased imports, the injury has not been relieved even by the continuing
efforts of the relevant authorities and the petitioner.  In this regard, it is agreed that the appropriate
relief measures should be taken to resolve the problem”.
4.676  As regards Exhibit Korea-8 in particular, the European Communities would observe the
following.  First, it is, by its nature, an interim, preparatory document, not a final one.  It is not final,
as shown by the fact that the measures were eventually changed after the consultations with other
WTO Members.  Second, it is not a decision, but merely a recommendation to the final decision-
making authority, notably the MAF, to take a given safeguard measure.  Looking at the content of
Exhibit Korea-8, it simply states a conclusion as to the necessity of a measure, certainly does not
show the necessity.  For instance, which efforts were ever undertaken to solve the difficulties in analternative way remains unclear.
(ii) The second sentence of Article 5.1 imposes a specific obligation in respect of quantitative
measures
4.677  The three-year period used by Korea was not the most recent available:  as of February 1997,
all import data for 1996 were published in Korea’s Statistical Yearbook of Foreign Trade (ExhibitEC-20).  Presumably, those data were available to the Korean authorities as internal information even
in advance of publication.  In any event, the European Communities recall that it was precisely in
February 1997 that a new calculation of the quota level was performed, following the bilateral
consultations under Article 12.3 of the Agreement on Safeguards.
4.678  The data used by Korea were less representative because they included a period where the
product at issue was under import restrictions for Balance-of-Payment reasons, which is a temporary
and exceptional measure and is not a normal tariff restriction.  On the other hand, the import data for
the second semester of 1996 were not, as Korea argues, affected by exporters’ attempt to export
massively in advance of the imposition of the measure.  Indeed the import increase from 1995 to 1996
was lower than, for instance, between 1994 and 1995, the data of which Korea had no difficulty toretain as representative.
(iii) The third sentence of Article 5.1 requires that the “most suitable measure” be selected
4.679  The European Communities note that Korea, while referring extensively to the OAI Report,
which in the EC view does not represent Korea’s final position on the measures, reports that its
Korean authorities considered a certain amount of information and certain sources of information(notably information investigated by the OAI, multilateral regulations, opinions of authorities
concerned, measures mentioned in its domestic legislation) when deciding the measure, and that they
concluded in a certain way.  The European Commun ities consider that it is not sufficient for the
authorities to note the arguments and conclude.  They must state reasons.  In particular, it is not
sufficient and legitimate to examine only the measures requested by a petitioner in order to comply
with the requirement to choose the “most suitable m easure” pursuant to Article 5.1, third sentence of
the Agreement on Safeguards.  This represents an undue weakening of that requirement and wouldleave the decision within the hands of the very industry seeking safeguard protection.WT/DS98/R
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(h) Additional arguments by Korea made at the second meeting of the Panel with the
parties
4.680  At the second meeting of the panel with the parties, Korea  further advanced its arguments
under Article 5.1 as follows:
4.681  Korea is of the view that there is a requirement on the investigating authority under
Article 5.1 to investigate whether a quota or some other safeguard measure is the most appropriate
method of offsetting the serious injury caused by the increased imports .  In this case, this obligation
was discharged by the KTC Commissioners.335  As to the level of any quota decided upon, Korea
reiterates that under Article 5.1 where a Member intends to impose a quota at a level equivalent to or
higher than the level of imports during the three most recent representative years for which statistics
are available, then it is not required to justify that level of quota .  However, should a Member seek to
impose a lower level, then, but only then is a just ification required as to why that lower level was
necessary.
4.682  The European Communities suggest that Korea is trying:  “to unduly reduce the scope of its
obligations under the WTO Agreements, and thus the rights arising thereunder to the European
Communities.”  In order to defend its position, Korea has to rebut the EC incorrect assertions .  It is
inherent in the nature of disputes that the assertion of rights by one party affects the obligations of the
other party or parties .  It is simply not helpful for the European Communities to argue that by raising a
defence, Korea is seeking to deny the EC rights.
4.683  Finally, Korea notes the rather curious reasoning used by the European Communities where
they state that:
“That the safeguard measure at issue in this dispute was not “necessary” to remedy
serious injury is flowing from the fact that there was no such injury, and certainly not
serious injury resulting from the imports of SMPP.”
The European Communities appear to be saying no more than that if serious injury is found, then the
safeguard measure was necessary .  As the Korean authorities established serious injury, and set the
level of quota at or above the level of imports in relation to the three most recent representative years
for which statistics were available, this rather curious statement is redundant.
I. CLAIMS UNDER ARTICLE  12 OF THE AGREEMENT ON SAFEGUARD
(a) Claim by the European Communities
4.684  The European Communities  claim that Korea violated its obligations under Article 12 of the
Agreement on Safeguards by failing to comply with the notification requirements and by failing to
provide adequate opportunity for prior consultations .  The following are the EC arguments in support
of that claim:
(i) Violation of Article 12.1-2 of the Agreement on Safeguards- Failure to comply with
notification requirements
4.685  Article 12.1 of the Agreement on Safeguards provides that :
“A Member shall immediately  notify the Committee on Safeguards upon :
                                                     
335 See, Exhibit Korea-8.WT/DS98/R
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(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.” (emphasis added)
Article 12.2 further provides:
“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 onSafeguards with all pertinent information, which shall include  evidence  of serious injury
or threat thereof caused by the increased imports, precise description  of the product
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 proposing to apply … the measure.”(emphasis added)
4.686  The European Communities submit that, in fail ing to provide immediately the Safeguards
Committee with the information required under Article 12.1-2 of the Agreement on Safeguards, Korea
violated its obligations arising thereunder.  It furt her submits that Korea failed to comply with its
obligation laid down in Article 12.3 of the Agreement on Safeguards in respect of consultations.Furthermore, it considers that the insufficient am ount of the information provided in the notifications
was not justified on grounds of confidentiality pursuant to Article 12.11 of the Agreement on
Safeguards.
4.687  In order to demonstrate this claim the European Communities first reviewed the general
meaning and objective of procedural obligations in the Agreement on Safeguards, and then discussedthe specific aspects relating to the violations of notification and consultation requirements.
(a) Objective and meaning of procedural obligations in respect of safeguard measures
4.688  In view of the limitative character of safeguard measures their inclusion in the WTO system is
accompanied by limits to their use, so that the interests of all the parties are protected.  This is
particularly important as regards procedural requirements, like the notification obligations.  Asobserved in the Panel report in Guatemala - Anti-Dumping Investig ation Regarding Portland Cement
from Mexico  in respect of the Agreement on Implementation of Article VI of the General Agreement
on Tariffs and Trade 1994 (AD Agreement) “[a] key function of the notification requirements in the
AD Agreement is to ensure that interested parties, including Members, are able to take whatever steps
they deem appropriate to defend their interests.  Where a required notification is not made in a timelyfashion, the ability of the interested party to take such steps is vitiated”.
336  Thus, the Panel made clear
that failure to comply with such  requirements amounts, in itself, to a violation of a WTO Member’s
obligations under the AD Agreement.  The Panel went on to add that “merely that the AD Agreement
does not require some action following notification does not mean that nothing useful can take place
following a timely notification, and that the expor ting Member has therefore no interest in timely
notification.”337   A fortiori  this applies to a case like the one at stake, where, as will be shown below,
                                                     
336 See, Panel Report in Guatemala - Anti-Dumping Investigation Regarding Portland Cement from
Mexico , 19 June 1998, WT/DS60/R, para. 7.42.
337 Id., at footnote 228.WT/DS98/R
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consultations are mandated by the Agreement following notification and must take place on the basis
of the information notified.
4.689  The European Communities also asserted that the notification requirements under
Article 12.1-2 of the Agreement on Safeguards are clearly autonomous and additional to the
transparency requirements imposed by Articles 3 and 4 of the agreement in respect of the domestic
investigatory procedures.  This is explained by a variety of considerations, including the possibility
for the Members concerned to request consultations on the basis of that information and the generalinterest of all WTO Members, and not only those more directly concerned by the procedure, in
monitoring compliance with the Agreement on Safeguards .  Specifically as regards notifications under
Article 12.1(b) and (c), as made clear from Article 12.3 one specific purpose is to offer the Members
concerned an opportunity for adequate consultations.  Effective exercise of these rights by WTO
Members calls for a minimum guaranteed level of information officially transmitted in one of the
working languages of the WTO.
338  Therefore, compliance with Article 12 requirements must be
reviewed regardless of the conclusions which ma y be drawn in respect of the domestic procedure
documents and measures.
(b) Notifications under Article 12.1(a) and Article 12.1.(b) of the Agreement on Safeguards
4.690  The European Communities consider that Korea failed to fulfil the obligations assumed under
Article 12.1(a) and (b) of the Agreement on Safeguards, both in terms of timeliness and of sufficiency
of its notifications.
4.691  Insofar as timeliness is concerned, the European Communities recall that the need for timely
notifications is particularly stressed by the language of the opening clause of Article 12.1.  In this
respect, the European Communities note that a delay of 14 days (28 May 1996-11 June 1996) between
the publication of the initiation decision and the date appearing on the relevant notification document
cannot in principle be said to comply with the requirement of “immediate” notification “upon”initiation.
339  The same conclusion applies in respect of a delay of 40 days (23 October 1996-2
December 1996) between the publication of the injury finding and the date of the document which
was notified to the Safeguards Committee.340
4.692  The European Communities concede that the expression “immediately upon” may need to be
interpreted also in the light of the type and amount of information to be provided and to the purposes
for which the information may be used.  Nevertheless,  it submits that Korea’s notifications fell short
of the standard laid down in Article 12.1(a) and (b) even making allowance for those considerations .
The amount of information required for those notifications, which relate to interim stages of the
investigatory process, is limited and, in any event, Korea did not even provide that information in full.
The European Communities therefore conclude that Ko rea failed to notify “immediately” information
concerning the initiation of the safeguard procedure and the finding of serious injury.
4.693  As regards the content of Korea’s notifications, the European Communities observe, in
respect of the initiation notification341, that no mention was made either of the conditions under which
imports occurred, or of whether and on which basis serious injury or threat thereof was alleged by
complainants in the domestic investigatory procedure, although, Article 12.1(a) includes an express
reference to injury and the reasons therefor.  The conditions under which the products investigated
                                                     
338 It is clear in fact that the notifications serve, inter alia , the purpose of allowing review within the
Safeguards Committee as expressly provided by Articles 13.1(f) and 13.2 of the Agreement on Safeguards.  Inthis respect it should be recalled that Rule 35 of the Rules of Procedure for the Committee on Safeguards
provides that “English, French and Spanish shall be the working languages” of that Committee.
339 See, WTO Doc. G/SG/N/6/KOR/2, 1 July 1996 (Exhibit EC-1).
340 See, WTO Doc. G/SG/N/8/KOR/1, 6 December 1996 (Exhibit EC-2).
341 See, WTO Doc. G/SG/N/6/KOR/2, 1 July 1996 (Exhibit EC-1).WT/DS98/R
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were imported should have likewise been mentioned, for their review equally constitutes a
requirement for the adoption of a safeguard measure pursuant to Article 2 of the Agreement on
Safeguards.  Yet no mention in this respect is included in the initiation notification.
4.694  The inadequacy of the information provided by Korea is even more compelling relative to the
injury notification.342  The standard of notification in respect of injury findings is laid down in
Article 12.2, which requires that “all pertinent information” must be supplied.  Furthermore, in respect
of the matters which are specifically mentioned as "pertinent information", Article 12.2 determines
the particular type of information that is required.  Thus, as regards “serious injury or threat thereofcaused by increased imports”, not any information, but evidence, must be provided in order to meet
that standard.  In the light of the context of Article 12.2, the “evidence” referred to cannot be but that
mentioned in Article 4.2 of the Agreement on Safeguards, that is, in the first place, the “factors of an
objective and quantifiable nature having a bearing on the situation of” the industry which are listed
therein.
4.695  The European Communities note that no information of any kind, or evidence, was provided
on the causal link between the increased imports and the serious injury.  As to serious injury or threatthereof, the European Communities observe that most of the “factors” listed in Article 4.2 were
neither mentioned, nor disregarded as not “pertinent”.  As to the import trends and conditions, no
addition to the information already provided in the initiation notification was made.  Thus, the issue of
the “conditions” under which the foreign products were imported was still not addressed.
4.696  No justification for the incompleteness of the information submitted was provided in either
notification.  In particular even assuming, arguendo , that the confidential nature of the information
received relative to serious injury or threat thereof and on the conditions under which the investigated
products were imported could have justified a complete withholding of information, quod non , no
such explanation was made in either notification.
4.697  In the light of the foregoing the European Communities consider that Korea violated its
obligations under Article 12.1(a) and (b) of the Agreement on Safeguards.
(c) Notification under Article 12.1(c) of the Agreement on Safeguards
4.698  The European Communities consider that, as in the case of the notifications under
Article 12.(a) and (b) of the Agreement on Safeguards, that made pursuant to Article 12.1(c) was
neither timely nor complete.  However, in order to discuss compliance with Article 12.1(c) thedocument constituting the notification must first be identified.  There appear to be at least three acts
self-qualifying as notification or that could in any event be relevant in order to assess whether
Article 12.1(c) was complied with.
• On 21 January 1997 Korea forwarded a document termed as “notification pursuant to
Article 12.1(c)” that it “proposes to apply a safeguard measure”.
343
• On 31 January Korea notified a "decision to apply a safeguard measure” pursuant to Article 9.1,
footnote 2 of the Agreement on Safeguards.  It is, however, explained in the same document that
Korea is simply “considering relief to a domestic industry … in the form of the imposition of
quantitative restrictions”.344
                                                     
342 See, WTO Doc. G/SG/N/8/KOR/1, 6 December 1996 (Exhibit EC-2).
343 See, WTO Doc. G/SG/N/10/KOR/1, 27 January 1997, p. 1 (Exhibit EC-5).
344 See, WTO Doc. G/SG/N/11/KOR/1, 21 February 1997, p.1 (Exhibit EC-6).WT/DS98/R
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• On 24 March 1997 Korea notified a “supplement” to its 21 January notification.345 In the
meantime, as indicated in this document, a definitive safeguard measure had been published on 7
March, with immediate effect.
4.699  The European Communities note that, irrespective of the title given to the various documents
mentioned above, the level of quantitative restrictions reported in the 24 March 1997 notification is
different from the one reported in the documents previously notified, and is presumably based on
different import statistics.346  Furthermore, according to the 24 March document the measure
described therein had already entered into force on 7 March 1997.  Therefore, that document is likelyto constitute an autonomous and final notification distinguished from the one reported in the previous
documents and is based on partially different import statistics.
4.700  The European Communities consider that inas much as the information included in the
document of 24 March 1997 regarding the date of entry into force of a safeguard measure in the form
of a quantitative restriction is correct, Korea failed to notify it “immediately … upon taking a decision
to apply … a safeguard measure” in accordance with Article 12.1(c) of the Agreement on Safeguards.
4.701  Besides the lapse of time (17 days) between the entry into force of the safeguard measure
(7 March) and the date of the notification to the Safeguards Committee, the required content and the
purpose of this notification warrant the same conclusion.  In fact this constitutes the final document on
the basis of which consultations can take place under Article 12.3 of the Agreement on Safeguards,
and therefore offers the last opportunity for informed bilateral consultations before possibly starting
dispute settlement consultations.  Seen from this perspective, failure to meet the notification standardshas the specific consequence of impairing a Member’s provision of "adequate opportunity for prior
consultations” within the meaning of Article 12.3 of the Agreement on Safeguards.  As regards the
required contents of the notification, the European Communities observe that in view of the length of
the investigatory process and the previous notification requirements, much of the information should
have been available even in English for long time, all the more so if already on 21 January Korea wasable to announce "a decision to apply" a safeguard measure.  This consideration further reinforces the
conclusion that Korea failed to notify in time and thus violated Article 12.1(c) of the Agreement on
Safeguards.
4.702  In the unlikely case that the 24 March document was considered to have been notified in time,
the European Communities consider that the Panel should also find that it did not include “allpertinent information” and the notification was theref ore not complete for purposes of Article 12.1(c).
There is no explanation as to the basis for the calculation of the quota, and in particular, no reference
to the last three representative years or to the necessity to depart from data relating to those years;
that data on employment in a part of the domestic industry (raw milk production) is not provided;
347
that for profits and losses, information for the same part of the domestic industry is also not
provided.348 As with the notifications under Article 12.1(a) and (b), no justification was provided for
withholding the missing information, either on grounds of confidentiality or on other grounds.  In any
event, confidentiality could obviously not have been invoked in respect of such information as the
import data forming the basis for the calculation of the quantitative restrictions.
                                                     
345 See, WTO Doc. G/SG/N/10/KOR/1/Suppl.1, 1 April 1997 (Exhibit EC-10).
346 Both the 21 January and 31 January documents refer to import statistics for 1993-1995 as the basis
for calculating the quota level indicated therein.  As the quota level included in the 24 March notificationcorresponds to that mentioned in the Notification of the Ministry of Trade, Industry and Energy of
7 March 1997 (Exhibit EC-9), the import data relied upon are presumably those mentioned in the 7 March
Notification.
347 See, WTO Doc. G/SG/N/10/KOR/1/Suppl.1, 1 April 1997, p. 10, para. 3.6 (Exhibit EC-10).
348 Id., para. 3.10.a.WT/DS98/R
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4.703  If the notification dated 24 March 1997 was not to be considered the relevant notification
under Article 12.1(c), the European Communities submit, in the alternative, that neither the document
dated 21 January 1997 nor that dated 31 January 1997 were complete.349  Without the need to discuss
them in any greater detail, this is made clear by the fact that Korea was indeed able to provide a
significantly more detailed notification on 24 March 1997.
(ii) Violation of Article 12.3 of the Agreement on Safeguards- Failure to provide adequate
opportunity for prior consultations
4.704  Article 12.3. of the Agreement on Safeguards provides that :
“A Member proposing  to apply … 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 .”
(emphasis added)
Resulting from Korea’s notification dated 24 March 1997, “in order to make its final decision on
safeguard measures, Korea circulated a notification (G/SG/N/10/KOR/1 of 27 January 1997) to
provide an opportunity for consultations with Member countries concerned in accordance with the
Agreement on Safeguards.  Korea then held bilateral consultations with the European Communities,
Australia and New Zealand on 4 and 5 February 1997 in Geneva and also attended a special meeting
of the Safeguards Committee on 21 February 1997”.350  The European Communities submit that
consultations eventually afforded by Korea after their reiterated requests351 failed to meet the
standards laid down in Article 12.3 of the Agreement on Safeguards, and therefore Korea breached its
obligations under that provision.
4.705  The European Communities first note that Article 12.3 expressly refers to a general standard
of “adequacy” of the opportunity to consult, which is then clarified by reference to the subject matterof the consultations and their aim.  The text of Article 12.3 makes clear that the purpose of the
consultations is to foster an agreement between the WTO Members concerned or to ensure the
maintenance of the balance of concessions pursuant to Article 8.1 of the Agreement on Safeguards .
In particular Article 12.3, when specifying that it is for the Member “proposing to apply” to offer to
consult, inter alia , on the “proposed measure”,
352 implies that consultations must take place before the
measure is taken ( i.e., when it is still a "proposal").  This conclusion is reinforced if one has regard to
the subject matter on which consultations must be afforded.  In order for the opportunity to consult to
be adequate pursuant to Article 12.3, consultations must take place on all the information provided
under Article 12.2 of the Agreement on Safeguards.  As already illustrated above, Article 12.2 in turnmentions “all pertinent information”, including the evidence specified therein, as the one to be
supplied in the notifications of injury findings and of the results of the procedure.  Therefore, any
consultations falling short of a review of all pertinent information would obviously not meet the
Article 12.3 standard.  The purpose of Article 12.3 logically requires that such consultations must be
                                                     
349 See, WTO Doc. G/SG/N/10/KOR/1, 27 January 1997 (Exhibit EC-5) and WTO Doc.
G/SG/N/11/KOR/1, 21 February 1997 (Exhibit EC-6).
350 See, WTO Doc. G/SG/N/10/KOR/1/Suppl.1, p. 6, para. 7 (Exhibit EC-10). See, also WTO Doc.
G/SG/11 of 18 March 1997, p. 1 (Communication from Korea on the results of consultations under Article 12.3of the Agreement on Safeguards, Exhibit EC-7) and WTO Doc. G/SG/M/8, 10 June 1997, p. 2, para. 10(Minutes of the special meeting of the Safeguards Committee held on 21 February 1997, Exhibit EC-8).
351 See, WTO Doc. G/SG/7, 12 December 1996 and WTO Doc. G/SG/8, 17 December 1996 (Exhibits
EC-3 and EC-4).
352 It is only in the case of provisional safeguard measures that the Agreement on Safeguards
(Article 12.4) makes an exception by allowing consu ltations to take pace after adoption of the measure.WT/DS98/R
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held on the basis of all the information required at a date prior to the application of the measure, so as
to have a possibility to avoid it or ensure that the balance of concessions is preserved.
4.706  The European Communities believe they have already shown above that the documents
notified by Korea, either before or after the date of the consultations, including the one dated 24
March 1997, were far from complete.  Even assuming that the latter document were sufficiently
detailed, the procedural history reported by Korea in its 24 March document omits to underline a
crucial element, namely that consultations took place well before that document was supplied and
when only the extremely limited information included in WTO Documents G/SG/N//6/KOR/2
(initiation notification), G/SG/N/8/KOR/1 (serious injury finding), G/SG/N/10/KOR/1
(Article 12.1(c) notification), and G/SG/N/11/KOR/1 (Article 9, footnote 2 notification) was
available.  It follows that by failing to provid e all pertinent information in its notifications, and
specifically in the ones made under Article 12.1(b) and (c) of the Agreement on Safeguards, in
advance of consultations, Korea prevented WTO Members having a substantial interest as exporters
from engaging in meaningful consultations, thus fai ling to provide them with  an adequate opportunity
in this respect.  As a consequence, it also frustrated the further objective of those consultations,
namely to reach an agreement or to ensure the maintenance of the balance of concessions as foreseen
in Article 8.1 of the Agreement on Safeguards.
4.707  The European Communities further submit that if the document dated 21 January 1997 is
found to be a notification of a “decision to apply a safeguard measure” within the meaning ofArticle 12.1(c) of the Agreement on Safeguards, by affording consultations on 4 February 1997 Korea
frustrated the very purpose of the consultations under Article 12.3, which aim at finding a solution
alternative to the imposition of a safeguard measure or at the least at enabling the Members concerned
to influence the final decision.  Thus, a fortiori  in this case Korea should be found to have failed to
comply with its obligation arising under Article 12.3 of the Agreement on Safeguards.
(b) Response by Korea
4.708  Korea  responds to the EC arguments as follows:
4.709  On 28 May 1996, Korea initiated the safeguards investigation at issue.  On 11 June 1996,
Korea forwarded its notification of the initiation to the Committee on Safeguards under
Article 12.1(a) of the Agreement on Safeguards.
353 Consistent with the guidance issued by the
Committee on Safeguards354,  Korea identified the following in its notice :  (1) the date of initiation of
the investigation (28 May 1996);  (2) the dairy produ cts subject to the investigation, as identified by
their HS numbers, and (3) the reasons for initiating the investigation, including that the investigation
was initiated on the basis of a petition filed under Article 33(1) of the Foreign Trade Act and that the
non-confidential evidence indicated the specified increase in imports .  Notably, the Agreement on
Safeguards does not impose obligations regarding the scope of the reasons that are necessary to justify
the initiation of a safeguards investigation.
4.710  Article 12.2 of the Agreement on Safeguards provides that notifications under Article 12.1(b)
and (c) of the Agreement on Safeguards must include all pertinent information, including «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.»  In the Technical Cooperation Handbook on NotificationRequirements (the «Handbook»), the Committee on Safeguards adopted guidance for Members on
how to comply with these notification requiremen ts, although it did not define, for example, the
                                                     
353 G/SG/N/6/KOR/2 (1 July 1996).
354 Committee on Safeguards, Notification Under Article 12.1(a) of the Agreement on Safeguards on
Initiation of an Investigation and the Reasons for It, G/SG/N/6 (7 February 1995).WT/DS98/R
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amount of evidence that should be provided to comply with Article 12.2.355  According to the
Handbook, a Member should provide:
(a) evidence of serious injury or threat thereof caused by increased imports
(b) information on whether there is an absolute  increase in imports or an increase in
imports relative to domestic production;
(c) precise description of the product involved;
(d) precise description of the proposed measure;
(e) proposed date of introduction of the measure;
(f) expected duration of the measure;
(g) proposed date for review if applicable;
(h) expected timetable for progressive liberalization, if applicable;  and
(i) other information if the measure is being extended.356
4.711  On 2 December 1996, Korea transmitted to the Committee on Safeguards its notification of a
finding of serious injury caused by imports under Article 12.1(b) of the Agreement on Safeguards.357
The notification referred Members to the 23 October 1996 KTC finding, the report of which was
publicly available.  Consistent with the guidance in the Handbook, the notification also
(1) summarized the evidence of serious injury caused by increased imports  (2) provided information
on whether there is an absolute increase in imports or an increase in imports relative to domestic
production, (3) described the products involved, and (4) informed the Committee that no final
decision had been made to impose a safeguard measure and, thus, no information was available on themeasure.
4.712  After receiving two requests for consultations under Article 12.3 of the Agreement on
Safeguards, Korea provided a preliminary notification under Article 12.1(c) on 21 January 1997.
358
Although such preliminary notification was not required under Article 12, Korea considered that forprior consultations to be meaningful under Article 12.3, Members should have more information onthe proposed measure.
359  Thus, Korea’s preliminary notification under Article 12.1(c) included the
information from the 2 December 1996 notification as well as information on the proposed measure.
Given its preliminary nature, Korea expressly reserved the right to provide further relevant
information after the final decision was made.  In addition, the notification provided dates that the
Korean delegation was available for consultations an d stated that the final decision was expected the
week of 24 February 1997, after consultations had been held.
                                                     
355 WT/TC/NOTIF/SG/1 (15 October 1996).
356 Id.
357 G/SG/N/8/KOR/1 (6 December 1996).  This notification was provided to the Committee on
Safeguards on the same day as the KTC issued its recommendations .  See,  Exhibit Korea-11.
358 G/SG/N/10/KOR/1 (27 January 1997).
359 Korea notes that it could have held consultations based solely on the notification under
Article 12.1(b), given that consultations under Article 12.3 must necessarily be held prior to the final decision to
impose a safeguard measure notified under Article 12.1(c).  After the decision to impose the measure is madeand final notification is provided under Article 12.1(c), consultations would not be meaningful because theconsultations could not result in any consideration of Member’s concerns prior to the final decision.WT/DS98/R
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4.713  On 4 and 5 February 1997, Korea held consultations with the European Communities,
Australia, and New Zealand under Article 12.3 of the Agreement on Safeguards.  These consultations
facilitated an exchange of views regarding the measure based on Korea’s earlier notifications and on
the publicly-available OAI Report.
4.714  On 24 March 1997, Korea provided the Committee on Safeguards with its final notification
under Article 12.1(c) of the Agreement on Safeguards.360  Given the concerns raised by the European
Communities and other Members regarding the scope of its earlier notifications, Korea, while notregarding itself as obliged to do so, expanded its discussion in its final notification on virtually every
aspect of its 21 January 1997 notification.
4.715  Korea is of the view that it fully complied with its obligations under Article 12 of the
Agreement on Safeguards.  In fact, Korea took additional steps to ensure that Members were provided
additional information to facilitate meaningful consultations.
(c) Rebuttal arguments made by the European Communities
4.716  The European Communities  made the following arguments in rebuttal:
(i) Violation of Article 12.1-3 of the Agreement on Safeguards - Failure to comply with
notification and consultation requirements
(a) Notification requirements
(1) Contents of the notifications
4.717  In this regard Korea alleges the consistency of its action with the “guidance issued by the
“Committee on Safeguards” on the matter of notifications, notably the “Technical Cooperation
Handbook on Notification Requirements” (“the Handbook”).
361  However, by Korea’s own admission,
this Handbook does not define “the amount of evidence that should be provided to comply with
Article 12.2 of the Agreement”.
4.718  The European Communities do not accept that Korea’s notification is consistent with the
Handbook.  In particular, the European Communiti es note that in Document. G/SG/1 quoted by
Korea, it is mentioned, inter alia , that parties should  “1. Provide evidence of serious injury or threat
thereof caused by increased imports.”362  As just noted, nowhere in the Handbook are the notions of
“evidence”, “serious injury”, “causation” defined.  It is therefore only by referring to Article 12 of the
Agreement on Safeguards, as well as at the other provisions referred to therein, that these notions canbe interpreted.  In perfect consistence with this conclusion is the express disclaimer note at the
opening of Document G/SG/1, reading as follows:  “These formats are without prejudice to the
interpretation of the relevant provisions in the Agreement on Safeguards by the competent bodies.”
363
Interpretation obviously concerns the Agreement on Safeguards and will be conducted in line  with
                                                     
360 See, G/SG/N/10/KOR/1/Suppl.1 (1 April 1997)..
361 See, WTO Docs. WT/TC/NOTIF/SG/1, 15 October 1996 and G/SG/1, 1 July 1996;  Korea’s First
Submission, para 142.
362 See, WTO Doc. G/SG/1, Section II, item1.
363 See, WTO Doc. G/SG/1, p. 1.  The EC would further recall that in EC - Bananas  the Appellate
Body made clear that a document not “endorsed by a formal decision of the CONTRACTING PARTIES”“cannot be considered as an authoritative interpretation” (see EC - Bananas , WT/DS27/AB/R, 9
September 1997, para 200) .  The EC considers that the Appellate Body’s ruling in respect of GATT 1947 would
apply in the present case mutatis mutandis , that is, consistently with Article IX:2 of the Agreement establishing
the World Trade Organization, pursuant to which :  “The Ministerial Conference and the General Council shall
have the exclusive authority to adopt interpretations of this Agreement and of a Multilateral Trade Agreement inAnnex 1.”WT/DS98/R
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the provisions thereof.  The Handbook can therefore be of no guidance in deciding whether the
information submitted to the Committee on Safeguar ds constituted “all pertinent information” within
the meaning of the Article 12.2 of the Agreement on Safeguards.
(2) Timing of the notifications
4.719  The European Communities disagree with Korea’ s statement that Korea’s Notification of 27
January 1997364 was not required under Article 12 of the Agreement on Safeguards if this is meant to
imply that there is no obligation under Article 12.1(c) to notify “all pertinent information” prior to the
application of a safeguard measure, with a view to, inter alia,  holding consultations.  This seems
otherwise to contradict what Korea's statement in its First Written Submission:
“Korea notes that it could have held consultations based solely on the notification under
Article 12.1(b), given that consultations under Article 12.3 must necessarily be held prior
to the final decision to impose a safeguard measure notified under Article 12.1(c).  After
the decision to impose the measure is made and final notification is provided under
Article 12.1(c), consultations would not be meaningful because the consultations could
not result in any consideration of Member’s concerns prior to the final decision.”(emphasis added)
4.720  What Korea has overlooked in this striking admission is that meaningful consultations can
only take place if Members are provided all the necessary information, notably that required by
Article 12.2 of the Agreement on Safeguards.
365  Therefore, the consultation objective contributes to
define the timing of the notification and its content.  Since consultations under Article 12.3 mustcover “the information provided for under paragraph 2”, including on “the proposed measure”,
Korea’s notification under Article 12.1(b) could not have been the exclusive basis for consultations.
366
The European Communities would remind the Panel that Korea’s 1 April Notification, which was themost comprehensive document ever provided by Korea to the Committee on Safeguards under
Article 12.1(c), was forwarded 17 days after the entry into force of the safeguard measure.
(b) Consultations
4.721  The foregoing observations on the content and timing of notifications also confirm the EC
claim that Korea failed to provide “adequate opportu nity for prior consultations” within the meaning
of Article 12.3 of the Agreement on Safeguards.  In fact, in view of the insufficient content and late
submission of Korea’s notifications, consultations, which, by Korea’s own admission, can only bemeaningful if preceding the adoption of the measure, could certainly not be based on “all pertinent
information” in terms of Article 12.2, and could not therefore be “meaningful” in terms of
Article 12.3.  The European Communities therefore conclude that their claim of a violation of
Article 12.3 of the Agreement on Safeguards has not been rebutted by Korea and should be upheld by
the Panel.
                                                     
364 See, WTO Doc. G/SG/N/10/KOR/1, 27 January 1997 (Exhibit EC-5).
365  The EC also points out in this connection that the Notification Handbook does not address the issue
of the timing of notifications, except by repeating that they should be made “immediately” and by regulating therelationship between the one under Article 12.1(b) and the one under Article 12.1(c) of the Agreement onSafeguards.  Therefore, in this respect too Korea, by referring to the Handbook, has certainly not rebutted theEC’s claim of violation of the requirement to “immediately notify”, which is laid down in Article 12.1 in respectof all three notifications mentioned.
366 See, WTO Doc. G/SG/N/8/KOR/1, 6 December 1996 (Exhibit EC-2), para 4, which reads :
“Information on measure.  The Korean Trade commission has not made a decision to apply a safeguard measure
yet.  Therefore, there is no information on such a measure at this time.  The KTC will recommend to the
relevant Minister an appropriate remedial measure within 45 days of the injury determination.”WT/DS98/R
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4.722  At the second meeting of the panel with the parties, the European Communities  further
advanced their arguments under Article 12, by presenting its own version of the sequence of eventsleading up to dispute settlement consultations.
23 October 1996: Finding of serious injury by KTC
2 December 1996: First notification of serious injury under Article 12.1(c) of the Agreement on
Safeguards.
11 December 1996: First request for consultations under Article 12.3 by the European
Communities .
16 December 1996: Reiteration of the first request for consultations, since the European
Communities  received information about a 30-day deadline running from the
date of the recommendation of the imposition of safeguard measures by the
KTC to the competent authorities within the Korean Government.  Hence, the
suggested date for the consultations of 20 December.  It should be noted that
Korea finally agreed to hold consultations 73 days after the finding of seriousinjury was made.
28 January 1997: A set of written questions was sent by the EC Delegation in Geneva to the
Korean Delegation with a view to preparing consultations under Article 12.3
of the Agreement on Safeguards.
367  The European Communities never
received a written reply to those questions.  Furthermore during theconsultations, Korea equally failed to reply satisfactorily and simply promised
to provide further information on specific issues as requested by the European
Communities which, with one exception, it never did.
368
4 February 1997: Article 12.3 consultations.  During the consultations, the Korean Delegation
read out prepared answers to the questions sent by the European Communitieson 28 January. Korea refused to hand over the written answers to the EC
Delegation.
21 February 1997: Special meeting of the Committee on Safeguards.  This meeting was
requested by the European Communities based on Article 13 of the
Agreement on Safeguards which relates to certain particular functions of thatCommittee, including general vigilance with respect to Members’ actions
related to safeguards.
369  As  can be clearly seen from the record of that
meeting, Korea did not provide any further pertinent information  on that
occasion.
24 March 1997: Korea submitted the amended and extended version of the notification under
Article 12.1(c).  In the cover letter370 sent by the Korean Delegation in
Geneva to the EC Delegation, the notification was described as being "also
intended to serve as an overall response to the questions raised by the
European delegation during the bilateral consultations on this matter." Again,
the European Communities note that all pertinent information must be
notified prior to the adoption of a measure ( i.e., in the present case, prior to 7
                                                     
367 See, Exhibit EC-27.
368 See, Exhibit Annex EC 28.
369 See, WTO Doc. G/SG/M/8  10 June 1997, Minutes of the Special Meeting held on
21 February 1997, para 2.
370 See, Exhibit  EC-29.WT/DS98/R
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March 1997) with a view to allowing meaningful consultations, as set forth in
Article 12.1-3.
3 September 1997: The European Communities sent a second set of questions371 to Korea ahead
of the first round of dispute settlement consultations under Article XXII:1 of
GATT on 10 September.  The European Communities never received a
written reply.
19 September 1997: The European Communities sent a letter372 restating questions asked during
the first round of dispute settlement consultations under Article XXII:1 ofGATT and one question posed during the consultations under Article 12.3 of
the Agreement on Safeguards.
16 October 1997: Second round of dispute settlement consultations.  Korea gave its sole written
response to any of the EC questions.  It handed over one page showing a table
contained in the OAI Report concerning the development of production of
other dairy products in response to the question asked on 4 February 1997 and
restated on 19 September 1997, i.e., eight months after the information was
requested for the first time.
4.723  The conduct of the consultations as set out above shows that Korea can not rebut the EC
claim that Korea violated its obligations under Article 12.1-3 of the Agreement on Safeguards in
particular because it did not provide all pertinent information before or during the consultations under
Article 12.3 of the Agreement on Safeguards, which could therefore not be "meaningful" in terms ofArticle 12.3.
4.724  In response to a question by the Panel
373 the European Communities  further clarified their
position on Article 12 notifications:
4.725  Although the absence of a notification is a clearer violation than a deficient notification, the
European Communities consider that the adequacy of a notification must be verified by the Panel inthe same way as any other alleged violation of the WTO Agreements.  A violation of a procedural
obligation can in principle give rise to the same kind of finding as a substantive violation, and that is
what the European Communities are requesting in this case.
4.726  There are however important distinctions to be made between some procedural and
substantive violations when it comes to implementing a Panel report.  The violation of a proceduralobligation which only serves an objective of transparency, will not have the same consequences as the
violation of a procedural obligation which is an indispensable precondition for a measure ( e.g., the
obligation to conduct an investigation or to give adequate opportunity for prior consultations in order
to review all pertinent information in the meaning of Article 12).
4.727  Also in response to a question of the Panel
374 the European Communities  clarified their
position on the issue of the content of the notification:
                                                     
371 See, Exhibit  EC-30.
372 See, Exhibit  EC-31.
373 The Panel recalls that the question was:  "With regard to Article 12.1 and 12.2, do the parties
believe that a distinction should be drawn between a complete or a deficient notification, or between theexistence or the absence of such notification? What should the consequences be of the absence or the
incompleteness of the notification with regard to the safeguard measure itself?"
374 The Panel recalls that the question was: "Is the concept of 'all pertinent information' an objective or
subjective standard?  Please comment on how your answer should affect the Panel's conclusion with regard to
the consequences of such a standard not being met?"WT/DS98/R
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4.728  The European Communities are of the view that “all pertinent information” is an objective
standard because it is defined in Article 12.3 of the Agreement on Safeguards as including “evidenceof serious injury or threat thereof caused by increased imports, precise description of the products
involved and the proposed measure, proposed date of introduction, expected duration and timetable
for progressive liberalization.” The Member proposing to apply safeguard measures may be obliged to
provide further information since this list is not exclusive, but at least the items which are listed are
objective standards and subject to review by the panel. Further guidance for the interpretation of thefirst item of this list, “evidence of serious injury or threat thereof caused by increased imports”, can be
found in Article 4.2(a) and (b) of the Agreement on Safeguards.
4.729  The consequence of a finding of violation is not a matter for the Panel, as the panel in the
Guatemala case correctly concluded.
375
4.730  The Panel also requested376 the European Communities  to clarify their position on the
documents that Korea provided the Panel at the seco nd meeting of the Panel with the parties regarding
the consultations held with Korea.377  The EC answer was as follows:
4.731  The European Communities consider that the fact that the parties have provided details of the
consultations under Article 12.3 to the panel means that the panel should take them into account in
adjudicating this dispute and in its report in pa rticular in reviewing whether Korea complied with
Article 12.3.
(d) Rebuttal arguments made by Korea
4.732  Korea  makes the following rebuttal arguments:
4.733  Korea reiterated its view that Korea’s notifications were:
(a) timely;
(b) adequate, in that they contained “all pertinent information”;  and
(c) permitted the parties to reach an agreement.
(i) The Timeliness of Notifications and Consultations
4.734  The notifications were timely in that they:  Were provided to the Committee on Safeguards as
soon as practically possible after the conclusion of the procedural step that triggered such notification;
and permitted third parties sufficient time to prepare for and engage in meaningful prior consultations.
4.735  Korea notes that as to timeliness:
(a) On  11 June 1996, Korea notified the WTO Committee on Safeguards under
Article 12.1(a) of the Agreement on Safeguards regarding the KTC’s initiation of a
safeguards investigation and the reasons supporting initiation;
(b) The notification identified the date that the investigation was initiated (28 May 1996),
the products subject to investigation (dairy products under the specified HS
                                                     
375 See, Panel Report in Guatemala – Anti-Dumping Investigation Regarding Portland Cement from
Mexico , 19 June 1998, WT/DS60/R, para 8.3.
376 The panel recalls that the question was:  "What judicial notice should the Panel now take of the
consultations?"
377 See paragraph 4.751.WT/DS98/R
Page 150
headings), and the reasons for the initiation (a petition filed under Article 33(1) of the
Foreign Trade Act providing evidence of increased imports);
(c) Following 26 days’ public notice of the KTC hearing, and after having had the OAI’s
Interim Report for 8 days, representatives of EC Member States attended the KTC’s
Public Hearing held on 20 August 1996 and made substantive comments;
(d) Representatives of the European Communities then had almost 2 months to make
comments to the OAI concerning the material contained in the OAI’s Interim Report
and matters raised at the public hearing;
(e) Dr. Beseler of DG1 of the European Commi ssion then had an exchange of letters with
the KTC, in which Director-General Kim again summar ized the reason for the
initiation of the KTC investigation and noted the steps taken by certain EC Member
States to protect their commercial interests, inter alia,  by attending the KTC hearing
and obtaining copies of the OAI’s Interim Report;378
(f) The KTC, after a full deliberation of the final  OAI Report, made a determination of
serious injury on 23 October 1996, a summary of which was published in Kwanbo  on
11 November 1996 .  It should be noted, inter alia , that the final three paragraphs of
the OAI Report note Korea’s international obligations and the necessity of both
notification and prior consultation under the Agreement on Safeguards;
(g) The European Communities raised the issue of the OAI’s investigation at a regular
meeting of the Committee on Safeguards on 25 October 1996 .  The comments made
by the European Communities indicated that they were very well informed about the
nature of the investigation underway, and they asked for further particulars regarding
the conclusion of the OAI’s investigation 2 days earlier .  The Korean delegate:
“indicated that his delegation was not in a position to furnish additional
information at the meeting.  He asked any interested Members to addresstheir questions to the Korean delegation in writing, and indicated that his
delegation would do its best to provide the additional information requested,
so long as such information was not confidential.”
379
(h) On 2 December 1996, Korea transmitted to the Committee on Safeguards its
notification of a finding of serious injury caused by imports under Article 12.1(b) ofthe Agreement on Safeguards.
380  The notification referred Members to the
23 October 1996 OAI Report which was publicly available.  The notification under
Article 12.1(b):
(i) summarized the evidence of serious injury caused by increased imports;381
(ii) provided information on whether there is an absolute increase in imports or an
increase in imports relative to domestic production;
                                                     
378 See, Exhibits Korea-15 and 16.
379 See, G/SG/M/7  (19 March 1997) at paragraph 24.
380 G/SG/N/8/KOR/1 (6 December 1996) .  This notification was provided to the Committee on
Safeguards on the same day as the KTC issued its recommendations.  See, Exhibit Korea-11.
381The non-confidential evidence that Korea deemed pe rtinent for purposes of the notification included
evidence on (1) the increase of imports, share of domestic industry in consumption, and stock, (2) the sale price
of imported goods and domestic goods, and manufacturing costs of domestic goods, and (3) the reduction of thenumber of dairy farming households and loss incurred by Livestock Cooperatives.  Given that the KTC’s Reportwas publicly available, Korea did not deem it necessary to delay its notification in order to translate the report.WT/DS98/R
Page 151
(iii) described the products involved;  and
(iv) stated that no final decision had been made to impose a safeguard measure and,
thus, no information was available on the measure.
(i) Korea’s first notification under Article 12.1(c)382 was made in a preliminary form to
provide interested third parties with information about Korea’s proposal to apply a
safeguard measure; It should be noted that the obligation to file a notification under
Article 12.1(c) arises upon “taking a decision to apply or extend a safeguardmeasure” which, as noted at paragraph 7 of that notification, was due to be taken not
earlier than “the week beginning 24 February 1997.”  However, as noted above,
Korea took the view that in order to provide for meaningful prior consultations under
Article 12.3, it should circulate information “before it makes a final decision on the
measure by the week beginning 24 February 1997”;
383  This preliminary notification
was made 17 days prior to the actual consultations and 47 days prior to the actual
imposition of what is intended to be an emergency measure.
(j) It is noteworthy that the European Communities in their second request for
consultations384 wished to provide only 4 days notice, which would not, in Korea’s
view, have provided sufficient opportunity to prepare for meaningful consultations.
Further, the European Communities were able to provide Korea with 11 pages of
detailed questions within 7 days of Korea’s preliminary Article 12.1(c) notification .
These are remarkably detailed questions and are obviously based on a close reading
of the OAI Report. Korea answered within 6 days and before the consultations;
during the course of the consultations on 4 and 5 February, the European
Communities produced an English translation of the OAI Report, which it provided to
the Korean delegation;
(k) The European Communities had the opportunity to request, attend and address a
Special Meeting of the Committee on Safeguards after its consultations but still prior
to the imposition of the measure .  It is clear from that meeting that all parties
concerned had full access to all relevant information and that the matter was fully
aired.
(l) It is worthy of note that the Committee has the power to “request such additional
information as they may consider necessary from the Member proposing to apply or
extend the measure” (Article 12.2) and “to find, upon request of an affected Member,
whether or not the procedural requirements of this Agreement have been complied
with in connection with a safeguard measure, and report its findings to the Councilfor Trade in Goods” (Article 13.1(b)) .  The Committee did neither;  and
(m) Korea provided the Committee on Safeguards with an amended and extended version
of the notification under Article 12.1(c)
385 that fully set out all aspects of the
safeguard measure imposed.
(n) The earlier 21 January notification was amended inter alia  to take into account the
fact that, following on from consultations and as a demonstration of good faith, Korea
reconsidered the base years for the establishment of the quota, thus increasing itsamount by approximately 5,000 tonnes.
                                                     
382 See, G/SG/N/10/KOR/1 (27 January 1997).
383 Id.
384 See, G/SG/8 (17 December 1996).
385 See, G/SG/N/10/KOR/1/Suppl.1 (1April 1997).WT/DS98/R
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(ii) The Adequacy of Notification and Consultations
4.736  Korea’s notifications were adequate in that they:
(a) provided  “all pertinent information” required by Article 12.2, i.e:
- evidence of serious injury or threat thereof caused by increased imports;
- a precise description of the product involved;
- the proposed measure;
- the proposed date of introduction;
- the expected duration;
- a timetable for progressive liberalization;  and
(b) adhered to the format   approved by the Committee on Safeguards386;  and
(c) permitted the European Commission to reach a settlement of the dispute, albeit one
that was not accepted by the EC Member States.
4.737  Regarding the adequacy of information provided,  Korea suggests that notifications under
Article 12 serve a different function from the publica tion of information relatin g to the investigation
by the Korean authority under Articles 3.1 and 4.2(c) of the Agreement on Safeguards, which staterespectively:
“The competent authorities shall publish a report setting forth their findings and
reasoned conclusions reached on all pertinent issues of fact and law.”
“The competent authorities shall publish promptly, in accordance with the
provisions of Article 3, a detailed analysis of the case under investigation as wellas a demonstration of the relevance of the factors examined.”
Notification is intended to provide the Committee on Safeguards with information which is to be
disseminated to Members to facilitate meaningful prior consultations under Article 12.3 and, where
appropriate, consultations under Article XXII GATT. This function is implied both by the structure of
Article 12, which includes both notification and consultation, and by the final sentence of Article 12.2
which provides that “The Council for Trade in Goods or the Committee on Safeguards may request
such additional information as they may consider necessary from the Member proposing to apply or
extend the measure.” Clearly, if the purpose of Article 12 were to replicate the exacting standards of
Article 3 and 4.2(c), the final sentence of Article 12.2 would be redundant;
4.738  However, Korea does not view the notification procedure as a replacement for a third party
Member’s responsibility to be vig ilant in international trade matters .  Once a third party Member has
been notified of the simple fact of the initiation of an investigation (and, where applicable, each of the
subsequent stages), it must bear some responsibility for monitoring developments and for protecting
its international law rights.
                                                     
386 See, G/SG/M/1, 24 May 1995 paragraphs 35 and 36, which endorsed the suggested formats set out
in the Note from the Chairman contained in G/SG/W/1 (23 February 1995).  On 15 October 1996, the WTOSecretariat provided Members with the Technical Cooperation Handbook on Notification Requirements,WT/TC/NOTIF/SG1.WT/DS98/R
Page 153
4.739  Indeed, Korea notes that the European Communities were extremely vigilant in this respect in
that:
(a) they attended the OAI public hearing on 20 August 1996;
(b) they wrote to Dr. Kim of the KTC on 23 September 1996387 and received a reply from
Director-General Kim on 11 October 1996.388  D-G Kim summarized the reason for
the initiation of the KTC investigation and noted the steps taken by certain EC
Member States to protect their commercial interests by, inter alia,  attending the KTC
hearing and obtaining copies of the OAI’s Interim Report;
(c) it raised issues concerning the nature of the KTC investigation at the regular meeting
of the Committee on Safeguards on 25 October 1996;
(d) it requested prior consultations with Korea on 11 and 16 December 1996;
(e) on 28 January 1997, it provided Korea with 11 pages of questions concerning various
aspects of Korea’s investigation and the proposed safeguard measure;
(f) on 3 February 1997, it received full responses to all questions posed to Korea;
(g) it undertook prior consultations with Korea on 4 and 5 February 1997 in Geneva
where it provided Korea with an English translation of the final OAI Report;  and
(h) it addressed a Special Meeting of the Committee on Safeguards on 21 February 1997
at which no further action was taken;
4.740  Korea is of the view that “all pertinent information” can only reasonably be interpreted as
meaning all information required by Article 12.2 available at the time of the specific notification, that
is, “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”.  "All pertinent information" does not and cannot, as the
European Communities imply, mean all information and analysis produced during the investigationby the Korean authorities .  In any thorough investigation, this information and analysis will run to
thousands of pages and will be summarized and reported during the course of the national
proceedings, as required by Article 3.1 of the Agreement on Safeguards, which again Korea notes the
European Communities have conspicuously failed to use as a basis for any claims.
4.741  The requirement to provide “evidence of serious injury or threat thereof caused by increased
imports” does not imply that the notifying party has to:  provide further analysis, whether detailed or
otherwise, of any evidence provided;  or provide any separate analysis of causation
389;
4.742  In Korea's view, the Committee on Safeguards and the WTO Secretariat acknowledge that
certain legal systems may draw a distinction between “making a finding” (triggering a notification
under Article 12.1(b)) and “taking a decision” (triggering a notification under Article 12.1(c)).390
Thus, in making a notification under both of these provisions, some information may not be available .
                                                     
387 See, Exhibit Korea-15.
388 See, Exhibit Korea-16
389 See, G/SG/W/1 (23 February 1995) where, at Section VI, the obligation to “provide evidence of
serious injury or threat thereof caused by increased im ports” is distinguished from the obligation to “provide
information on whether there is an absolute increase in imports relative to domestic production.” If evidence of
causation is a separate requirement, it would have been separated out as are serious injury and increase inimports.
390 Id.WT/DS98/R
Page 154
In the case of Korea, it made a good faith attempt to provide relevant information that would assist
prior consultations.
4.743  Finally, Korea notes that the notifications and prior consultations permitted the parties to
reach a settlement391.  The European Communities in their Oral Statement argue that no binding
settlement was reached between the parties .  However, the European Communities cannot deny that
an exchange of proposals leading to a settlement was made .  If the notifications and prior
consultations were inadequate as the European Communities suggest, no such proposal could have
been made at all.
(iii) Conclusion
4.744  Korea takes its obligations under Articles 3.3 and 3.7 of the Understanding on Dispute
Settlement to reach a “mutually acceptable” solution very seriously .  It reiterates that it acted in good
faith during all consultations and is pleased that the European Communities acknowledged this in
their comments at the Oral Hearing .  Korea also reiterates that it unilaterally increased the amount of
its quota as part of its attempt to settle this dispute.  However, Korea objects to the EC argument that
Korea’s notification and consultations were inadequate when the real blame lies in the sectionalinterests of its Member States.
4.745  At the second meeting of the panel with the parties, Korea  further advanced its defence on
the EC claims under Article 12 as follows:
4.746  Notification and consultations are intended to provide the Committee on Safeguards with
information that is to be disseminated to Members to facilitate meaningful prior consultations under
Article 12.3, and where appropriate, consultations under Article XXII GATT 1994.  Korea does not
view its obligations under Article 12 as a complete replacement for the duty of its trading partners,
including the European Communities, to be vigila nt in international commercial matters, and to
monitor the activities of its trading partners.  Korea notes that the European Communities and certain
other WTO Members were involved in every stage of the Korean investigation leading to theimposition of the safeguard measure.  This involvement demonstrates both adequacy of published and
publicly available information, and openness of the investigation procedure.
4.747  The European Communities addressed a regular
392 and special meeting393 of the Committee
on Safeguards.  While such meetings are not a replacement for the dispute settlement procedure, it is
clear that although the European Communities had a full and fair opportunity to air their grievances,the Chairman of the Committee took note of the statements made, but made no recommendations and
requested no further action.
4.748  Korea undertook extensive consultations with the European Communities, New Zealand and
Australia prior to imposition of the safeguard measure.  This process included answering very detailed
questions on Korea’s investigation and on the process which would eventually lead to the impositionof the safeguard measure.
4.749  Each notification provided all the information available at the time of submission, and is
consistent with the pro forma  drafted by a Working Group of the Committee, agreed by the
Committee on Safeguards in May 1995, and provided to all Members in a Handbook prepared by the
Secretariat.  Korea cannot accept the EC argument that “the Handbook can therefore be of no
guidance in deciding whether the information submitted to the Committee on Safeguards constituted
‘all pertinent information.’”  If the European Co mmunities felt that the formats were inadequate, and
                                                     
391 See Korea's arguments in paragraph 4.6 above.
392 See meeting of 25 October 1996, G/SG/M/7 (19 March 1997).
393 See meeting of 21 February 1997, G/S/M/8 (19 June 1997).WT/DS98/R
Page 155
could not provide guidance to Members, it should have made these points at the time of their adoption
by the Committee on Safeguards rather than seeking to raise such objections when it suits itsarguments.
4.750  Korea cannot accept as the European Communities appear to imply that “all pertinent
information” means all information and analysis produced during the investigation by competent
authorities.  This information and analysis is to be found within the documents produced in
accordance with Articles 3 and 4.2(c), which the European Communities have chosen not tochallenge.
4.751  The EC argument that no binding settlement of this case was reached wholly misses the point
of Korea’s comments: clearly, the notification and prior consultations were sufficiently adequate to
permit settlement .  The fact that this could not be finalized by the European Communities, as a result
of their internal procedures, is irrelevant .  If the notifications and prior consultations were inadequate,
as the European Communities suggest, no proposal to its Member States would or could have been
made at all;  Korea, mindful of the confidential nature of these consultations, had not provided thePanel with proces verbal  containing the terms of settlement and all correspondence between the
European Communities and Korea on this matter .  Given the EC challenge to Korea to prove that a
settlement was almost concluded, Korea provided the Panel with the following documents:
394
- the various versions of the exchanged  proces verbal  including the final
settlement;  and
- the relevant correspondence accompanying these documents.
4.752  As the third sentence of Article 3.7 of the DSU unequivocally states “a solution mutually
acceptable to the parties to the dispute and consistent with the covered agreements is clearly to be
preferred.” It was pursuant to this Article of the DSU that Korea entered into settlement negotiations
with the European Communities with a view to  working out a mutually satisfactory solution .  It was
the European Communities, and not Korea, that breached the outcome of these good faith negotiations
by failing to confirm this settlement with its Member States.
4.753  In response to a question of the Panel395 Korea  further clarified its position on Article 12
notifications:
4.754  Korea is very clear that the complete absence of a notification must be distinguished from a
notification .  Further, there is a distinction between a complete and incomplete notification.  In
Korea’s view, the incompleteness of the notification cannot affect the validity of the underlying
safeguard measure.
4.755  The European Communities suggested that a procedural violation, however insignificant or
immaterial, could  call in question the very existence of the safeguard measure .  Further, Korea also
understood the European Communities to be implying that a procedural violation of Article 12 could
in some way also amount to a substantive violation.
4.756  Korea's view is that a procedural violation of Article 12 cannot be a substantive violation.
                                                     
394 See, Korea Exhibit 18
395 The Panel recalls that the question was:  "With regard to Article 12.1 and 12.2, do the parties
believe that a distinction should be drawn between a complete or a deficient notification, or between theexistence or the absence of such notification? What should the consequences be of the absence or the
incompleteness of the notification with regard to the safeguard measure itself?"WT/DS98/R
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4.757  Korea further notes that whether or not the safeguard had been implemented did not appear to
alter the issue of whether or how a deficient notification could be remedied .  Korea stated that should
a Member be held by a panel to violate Article 12, then as is set out in Article 19.1 of the DSU, and asis normally the case, the Member in breach should be requested to bring its measures into conformity
with the agreement under consideration .  In a case such as this, the question has to be asked as to
exactly how a Member could bring its notification into conformity .  If the Member has imposed its
safeguard measure, then entry into further (meaningful) consultations would not be pointless, but
could facilitate a revision in that safeguard measure (for example an increase in quota, or decrease in atariff) .  If the safeguard measure was otherwise wholly in conformity with the Agreement on
Safeguards, it would then be inappropriate for a Panel to suggest that a Member should be required to
withdraw that safeguard.
4.758  Also in response to a question by the Panel
396 Korea  clarified its position on the issue of the
content of the notification:
4.759  Korea is of the view that “all pertinent information” should be and is based on an objective
standard, that of the format .  These replicate the structure and content of Article 12.2.
4.760  However, the European Communities appear to want a decision regarding the issue of what is
the precise content  of the term “all pertinent information” .  Korea suggests that the precise nature of
“all pertinent information” will vary from case to case.
4.761  The Panel also requested397 Korea  to clarify its position on the documents that it had provided
the Panel regarding the consultations held with the European Communities.  Korea's answer was asfollows:
4.762  Korea is of the view that the evidential value of any fact supplied by the parties ultimately has
to be assessed by the Panel, and possibly the Appellate Body .  This is a fortiori  the case where the
parties appear to dispute those facts.  Korea only notes that the documentation it has supplied
concerning the consultations was merely provided to establish that these consultations were adequateenough to permit the European Communities and Korea to agree on the terms of settlement, albeit not
legally binding.
V. THIRD PARTY ARGUMENTS
A. U
NITED STATES
5.1 The United States  made the following arguments as third party:
(a) Standard of Review
5.2 The United States agrees with Korea’s assertions concerning the standard of review
applicable in safeguard cases .  The United States recalls the panel’s determination in US - Underwear,
as cited by Korea, wherein the panel concluded that its function was not to engage in a de novo
review, but rather to examine the consistency of a Member’s actions with its internationalobligations.
398   The US - Underwear  panel decided to make an objective assessment of the written
decision of the US authorities embodying their determination and findings;  this objective assessment
                                                     
396 The Panel recalls that the question was:  " Is the concept of "all pertinent information" an objective
or subjective standard?  Please comment on how your answer  should affect the Panel's conclusion with regard to
the consequences of such a standard not being met?"
397 The panel recalls that the question was:  "What judicial notice should the Panel now take of the
consultations?"
398WT/DS24/R (8 November 1996) ¶ 7.12-7.13WT/DS98/R
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entailed an examination of whether those authorit ies had examined all relevant facts before them,
whether adequate explanation had been provided of how the facts as a whole supported thedetermination made, and, consequently , whether the determination made was consistent with the
international obligations of the United States.
399  Similarly, the panel on US - Shirts and Blouses
followed this standard of review in its assessment of another textile safeguard action by the United
States .  The panel made a close examination of the written decision of the US authorities;  it
commented on factors addressed in the written decision, and dealt as well with the decision’s failureto address certain factors, and with the issue of causation.  Finally, the panel made an overall
assessment of the US determination.  However, at no time did the US - Shirts and Blouses  panel
engage in a de novo  review.  The findings of these two panels concerning the issue of standard of
review were adopted by the DSB without any modification by the Appellate Body.
5.3 The standard articulated above is also the appropriate standard of review for disputes
involving the application of the Agreement on Safe guards in the context of safeguard determinations
made by national authorities.  National authorities are in the best position to evaluate the facts anddetermine the applicable weight to be accorded to various factors.  As the Appellate Body properly
noted in European Communities -- Measures Concerning Meat and Meat Products ("Hormones") ,
panels “are poorly suited to engage in such review.”
400  The appellate body further noted in Hormones
that the role of a panel is to make an objective assess ment of the matter in dispute, both as to the facts
and the law, as mandated by Article 11 of the DSU.401  The United States submits that a panel would
be assured of arriving at an “objective assessment” of the matter in dispute if it applied a standard of
review, consistent with US - Underwear  and US - Shirts and Blouses , that considers whether (a) the
domestic authority has examined all relevant facts before it;  (b) adequate explanation has been
provided of how the facts as a whole supported the determination made;  and (c) consequently ,
whether the determination made is consistent with the international obligations of the Member.
(b) The Agreement on Safeguards has Subsumed the Applicable Provisi ons of Article XIX
of GATT
5.4 The United States disagrees with the EC assertion that a Member may only impose a
safeguard measure if, inter alia , the increase in imports results “from both unforeseen developments
and compliance with GATT obligations, includin g tariff liberalization according to a party’s
schedules of concessions.” Article XIX:1(a) of the GATT must now be read in accordance with the
rights and obligations set out in the Agreement on Safeguards, as required by Article 11.1(a) of that
Agreement.  The Agreement on Safeguards has defined, clarified, and in some cases modified, the
package of rights and obligations of a potential user of safeguard measures, and Article 2 of the
Agreement on Safeguards makes clear that a demonstration of “unforeseen developments” and acausal nexus to GATT obligations are no longer prerequisites to the application of a safeguard
measure.
5.5 The Agreement on Safeguards clarifies and expands on the provisions of Article XIX, and
establishes procedures for the application of safeguards measures.  Thus, the preamble to the
Agreement on Safeguards “recogniz[es] the need to clarify  and reinforce the disciplines of GATT, and
specifically those of its Article XIX”, while Article 1 “establishes the rules for the application of the
safeguard measures . . . provided for in Article XIX of GATT.”  The two agreements must be read  in
tandem  and, together, they create a new package of rights and obligations which are distinct from the
rights and obligations contained in the original GATT provision.  The United States recalls that the
Appellate Body arrived at a similar determination in Desiccated Coconut, wherein the Appellate
Body, quoting the panel, asserted:
                                                     
399 See, US - Underwear  at 7.13.
400 WT/DS26/AB/R (16 January 1998), 117.
401 Hormones  at 118.WT/DS98/R
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Article VI of GATT and the SCM Agreement represent a new and different package of
rights and obligations, as among WTO Members, regarding the use of countervailing
duties. . . . The SCM Agreements do not merely impose additional substantive and
procedural obligations on a potential user of countervailing measures.  Rather, the SCM
Agreements and Article VI together define, clarify and in some cases modify the wholepackage of rights and obligations of a potential user of countervailing measures.
402
5.6 In addition, the negotiators of the Agreement on Safeguards were specific in their intent to
subsume Article XIX under the new regime established by the Agreement on Safeguards.  Thus,Article 11.1(a) of the Agreement on Safeguards establishes the relationship between GATT
Article XIX and the Agreement as follows:
A Member shall not take or seek any emergency action on imports of particular products
as set forth in Article XIX of GATT unless such action conforms with the provisions of
that Article applied in accordance with this Agreement.
The phrase “applied in accordance with this Agreement” is significant in that it demonstrates the
intent of the negotiators to subsume Article XIX under the new rights and obligations created by theAgreement on Safeguards.  This intention is made even more apparent when the language in
Article 11.1(a) is contrasted, for example, with language in the Agreement on Subsidies and
Countervailing Measures  (“SCM Agreement”) where there is not a similar intent to subsume
Article VI of GATT under the SCM Agreement.  Thus, Article 10 of the SCM Agreement provides:
Members shall take all necessary steps to ensure that the imposition of a countervailing
duty on any product of the territory of any Member imported into the territory of another
Member is in accordance with the provisions of Article VI of GATT and the terms of this
Agreement.  (Emphasis added).
5.7 The explicit terms of the Agreement on Safeguards make clear that Article XIX does not
maintain an existence separate and apart from the Agreement;  rather,  those provisions of Article XIX
that remain in force  are incorporated into the Agreement on Safeguards.   Moreover, the Agreement on
Safeguards does not merely establish a procedural framework for the application of GATT
Article XIX.  Instead, the Agreement subsumes Article XIX under its umbrella and thereby creates a
new package of rights and obligations that defines, clarifies and, in some cases, modifies the rights
and obligations articulated in Article XIX.  In this instance, the Agreement on Safeguards modifiesthe package of rights to ensure that a Member may impose a safeguard action without regard to the
question of whether the increase in imports (or threat thereof) was “as a result of unforeseen
developments and of the effect of the obligations incurred by a contracting party under this
Agreement, including tariff concessions . . .” as originally articulated in Article XIX.
403  Under this
new regime, Article 2 establishes the threshold conditions a Member must satisfy before a safeguardmeasure properly can be imposed.  This interpretation is further borne out by the fact that the
negotiators of the Agreement on Safeguards conspicuously reiterated in Article 2 every sentence of
Article XIX:1(a) except  the language regarding “unforeseen developments” and GATT obligations.
                                                     
402 WT/DS22AB/R (21 February 1997), at p.16 (emphasis in original).
403 Indeed, such a modification was necessary in order to reflect actual practice.  It is simply not
credible to suggest that a trade Minister would negotiate a particular concession if it could be foreseen that such
a concession would result in increased imports that, in turn, would seriously injure an industry in the country
granting the concession.  A Minister who engaged in such conduct would, quite properly, be relieved of his orher post.  Thus, the use of the term “unforeseen developments” is surplusage because circumstances whereincreased imports cause or threaten serious injury are, almost by definition, “unforeseen”.WT/DS98/R
Page 159
5.8 Accordingly, the United States respectfully submits the EC assertion that the safeguard
measure imposed by Korea violates the “unforeseen developments” provision of Article XIX:1(a) ofGATT is erroneous because Article 2 of the Agreement on Safeguards contains no such requirement.
(c) Safeguard Measures Must Be Imposed in Accordance with the Requirements of
Article 4 of the Agreement on Safeguards
5.9 The United States agrees with the European Communities that a Member, in making its injury
determination, must examine all of the relevant factors bearing on the condition of the industry as awhole, as required by Article 4 of the Agreement on Safeguards.  To the extent that Korea examined
relevant factors only with respect to the condition of a portion of an industry without relating that
examination to the condition of the industry as a whole, Korea’s determination is deficient.
Article 4.2(a) states that the Korean authorities in the Member “shall evaluate all relevant factors of an
objective and quantifiable nature having a bearing on the situation of that industry, in particular . . . ”
(a list of factors follows).  This requirement, read in conjunction with the definition of domestic
industry in Article 4.1(c)  -- “the producers as a whole . . . or those whose collective output . . .
constitutes a major proportion of the total domestic production” -- indicates that the evaluation should
be in terms of the whole industry, and not just one or another part of it.  While injury to an industry
can be analysed in terms of a portion of an industry , the implication is that information relating to a
portion of the industry must be shown as relating to the condition of the industry as a whole.  Thus, to
the extent that Korea failed to examine all the relevant factors set out in Article 4.2(a), itsinvestigation is deficient.
5.10 Similarly, the European Communities enumerate a number of factors that Korea allegedly
failed to evaluate in arriving at its affirmative injury determination .  In response to this claim, Korea
furnished a number of tables and other information.  It is unclear from Korea’s submission, however,
whether this information was before the KTC and considered by the KTC when it made itsdetermination, or whether this information was compiled after the fact to support the KTC’s
determination.  There are no citations to the record of the KTC investigation or to the KTC’s report
demonstrating that such information was evaluated by the KTC.  While a decision on the merits of the
evidence submitted must be left to the discretion of the domestic competent authority, Article 4.2(a)
clearly requires that the competent authority  evaluate all such relevant evidence.  If the KTC did
indeed fail to evaluate relevant evidence, such an act would violate the explicit terms of Article 4:2(a).
(d) The Agreement on Safeguards Does Not Establish a Numerical Market Penetration
Threshold
5.11 Both Korea and the European Communities erroneously suggest that there is an implicit but
undefined numerical threshold in Article 4.2(a) relating to market share for determining whetherincreased imports are causing or threatening serious injury.  The European Communities indicate that
the 5.7 per cent decline in domestic market share of Korean raw milk and milk powder producers is
too small to be a cause for concern, while Korea counters that the 5.7 per cent decline indicates
serious injury to the domestic industry .  In support of its position, Korea cites to the March 1998
affirmative injury determination of the US International Trade Commission (USITC) in Wheat
Gluten , in which the USITC found that imports increased their share of the US market by 8.8 per cent
during the period of investigation.
5.12 The United States submits that Article 4.2(a) contains no numerical test or threshold
requirement for market penetration, explicit or implied.  Instead, Article 4.2(a) requires that the
competent authority evaluate “all relevant factors,” of which the percentage share of the domestic
market is only one.  If the percentage share change were taken as the sole benchmark, it would be
contrary to the requirement that the competent authorities evaluate all relevant factors.  Asdemonstrated by the USITC determination in Wheat Gluten , at the pages in the USITC report cited by
Korea, the increase in market share held by imports was only one of several factors that the USITCWT/DS98/R
Page 160
considered in determining that increased imports we re a substantial cause of serious injury in that
particular case.
5.13 Furthermore, no single number could logically serve as a benchmark for evaluating the
significance of market penetration.  The importance of any given change in market share will vary
from case to case.  Whether a change of 5.7 per cent is significant or insignificant will depend in large
part on the nature of the product and the nature of competition in the market.
(e) The Agreement on Safeguards Does Not Require Adjustment Plans
5.14 The United States disagrees with the EC assertion that Korea violated Article 5.1, inter alia ,
because it “did not submit any information as to adjustment plans to restore the industry’s
competitiveness.  .  .” and that “by omitting to  give any consideration to adjustment plans, a fortiori
Korea has failed to examine how its safeguard measure could be necessary or even helpful to their
implementation.” The Agreement on Safeguards does not require that an industry submit an
adjustment plan, thus, the Panel cannot read such a requirement into the Agreement.  Article 5.1
provides solely that “[a] Member shall apply safeguard measures only to the extent necessary to
prevent or remedy serious injury and to facilitate adjustment. . . .”  Although submission andconsideration of an adjustment plan may be desirabl e as a means of substantiating that a Member has
satisfied the objective of Article 5.1, there is no specific requirement  in the Article that either refers to
adjustment plans or requires that a member consider such plans.
VI. INTERIM REVIEW
6.1 On 17 March 1999, The European Communities and Korea requested the Panel to review, in
accordance with Article 15.2 of the DSU, certain aspects of the interim report that had been
transmitted to the parties on 3 March 1999.  The European Communities requested the Panel to hold
an additional meeting.  This additional meeting of the Panel with the parties took place on
22 March 1999.
6.2 We have reviewed the arguments and suggestions presented by the parties, and finalized our
report, taking into account those comments by the parties which we considered justified.  In doing so
we have ensured that no new arguments were introduced at this stage of the panel process.  In this
context we have made slight modifications to certain paragraphs, including those made to paragraphs
4.325, 4.416 to 4.419, 4.449 and 4.452 of the descriptive part and paragraphs 7.16, 7.18, 7.23, 7.24,
7.30, 7.31, 7.46, 7.49, 7.55, 7.70, 7.72, 7.73, 7.75, 7.77, 7.78, 7.79, 7.86, 7.87, 7.96 and 7.116 of thefindings.  In addition, we have made other minor modifications including linguistic and typographical
corrections.
VII. FINDINGS
A. P
ROCEDURAL MATTERS
7.1 In the present section, we address two procedural objections raised by Korea in its first
submission.  We also recall an oral ruling made at the end of the first substantive meeting of the Panel
with the parties regarding Korea's request to file the English version of its OAI Report, at a date
following the first substantive meeting of the Panel.  Finally, we address Korea's challenge of the
scope of this dispute, namely the consequences of the absence of any claim by the European
Communities under Article 3 of the Agreement on Safeguards.
1. Insufficiency of the EC Request for Establishment of the Panel
7.2 Korea requests the Panel to reject the European  Communities' complaint in its entirety on the
basis of the insufficiency of its request for establishment of a panel, in violation of Article 6.2 of theWT/DS98/R
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Understanding on the Rules and Procedures Governin g the Settlement of Disputes ("DSU").  Korea
argues that the EC panel request is in violation of Article 6.2 of the DSU as it simply lists four articles
of the Agreement on Safeguards, which, it argues, is insufficient "especially in a request relating to
the determination of a domestic authority…".  For Korea the panel request must contain a detailed
statement of the matter in dispute and the legal basis of the European Communities' claims, in order to
permit the defendant to conduct an effective defense and the third parties to assess whether or not to
intervene.  Korea requests this Panel to refrai n from following the interpretation given by the
Appellate Body in the EC  - Bananas404case, where it was stated that it was sufficient under Article
6.2 of the DSU for a panel request to list the articles of the relevant agreements.
7.3 On this issue the European Communities refers the Panel to the conclusions of the Appellate
Body in EC -Bananas :
"[we] accept the Panel’s view that it was sufficient for the Complaining Parties to list the
provisions of the specific agreements alleged to have been violated  without setting out
detailed arguments as to which specific aspects of the measures at issue relate to whichspecific provisions of those agreements”. 
405 (emphasis added)
7.4 Article 6.2 of the DSU reads as follows:
"The request for the establishment of a panel shall be made in writing.  It shall
indicate whether consultations were held, identify the specific measures at issue and
provide a brief summary of the legal basis of the complaint sufficient to present theproblem clearly".
7.5 We consider that a request for establishment of a panel is sufficiently detailed if it contains a
description of the measures at issue and the claims, i.e. the violations alleged.
406
7.6 We note that the EC request for establishment of a panel contains the following references:
"The contested safeguard measure was imposed in the form of an import quota on
imports of certain dairy products (Korean CN codes 0404.90.0000, 0404.10.2190,
0404.10.2900 and 1901.90.2000) effective as of 7 March 1997 and made public through
notification in the revision of "Separated Notice of Export-Import" and in "Detailed
Principle of Import Licence on Imitation Milk Powder". …
"Therefore, the EC requests that the panel consider and find that this measure is in breach
of Korea's obligations under the provisions of the Agreement on Safeguards, in particular
of Articles 2, 4, 5 and 12 of the said Agreem ent and in violation of Article XIX of GATT
1994."
7.7 We consider, therefore, that the EC request for establishment of a panel is sufficiently detailed
as it contains a description of the measures at issue and the claims, i.e. the violations alleged.
                                                     
404 European Communities – Regime for the Importation, Sale and Distribution of Bananas ("EC-
Bananas") , adopted on 25 September 1997, WT/DS27/AB/R.
405 EC - Bananas , Appellate Body Report, para. 141.
406 See for instance, the Appellate Body statement in EC -  Bananas , Appellate Body Report, para. 141.
In the recent Report on  Guatemala – Antidumping Investigation Regarding Portland Cement from Mexico
(adopted on 25 November 1998, WT/DS60/AB/R) ( "Guatemala – Cement" ) the Appellate Body reiterated that
these were the two requirements prescribed by Article 6.2 of the DSU. We see no reason to depart from thisposition.WT/DS98/R
Page 162
2. Lack of Economic Interest
7.8 Korea also claims that the European Communities admits having little or no commercial
interest in bringing this matter before the Panel.  For Korea this admission, coupled with the failure to
settle the dispute during the consultations, suggests that the current proceeding is merely an attempt
by the European Communities to use the DSU to establish a precedent on safeguards by way of an
advisory opinion from the Panel. Korea argues that this goes against the spirit of the DSU which
provides that formal dispute settlement should be reserved for disputes where Members consider, in
good faith, that their interests are being impaired, and that Article 3.7 of the DSU specifically instructsMembers to exercise restraint in bringing dispute settlement cases and articulates a preference for
mutually agreed solutions over resort to formal dispute settlement.
7.9 The European Communities responds that in the EC - Bananas case, the Appellate Body, in
reply to a similar objection by the European Communities, held that:
“a Member has broad discretion in deciding whether to bring a case against another
Member under the DSU.  The language of Article XXIII:1 of the GATT 1994 and of
Article 3.7 of the DSU suggests, furthermore, that a Member is expected to be largelyself-regulating in deciding whether any such action would be ‘fruitful’.” 
407
7.10 Korea also alleges that after intensive consultations the parties appeared to have settled their
dispute.  For Korea, the fact that the European  Communities later withdrew its acceptance of the
settlement proposed by Korea is evidence of lack of good faith on the part of the European
Communities.
7.11 As to the alleged acceptance of a settlement offered by Korea, the European Communities
responds that there never was any formal proposal or acceptance of a mutually agreed settlement.  For
the European Communities, each side negotiated in good faith in an effort to reach a mutually
satisfactory solution in this case, but that solution did not materialise.  The European Communities
concludes by stating that if Korea wants to challenge the European Communities’ good faith innegotiations and in bringing this dispute, it must bear the burden of proving its allegations.
7.12 First, we note that Korea is not clear as to what it wants the Panel to do in response to its
argument.  Korea does not request the rejection of the complaint for lack of economic interest on the
part of the European Communities or for lack of good faith on the part of the European Communities
during the negotiations.  However, assuming that Korea's position is that there is a requirement for theEuropean Communities to have some economic interest and that the European Communities has
failed to meet it, the Panel would have to decide what action is appropriate.  We consider therefore
that we should rule on this issue.
7.13 Regarding Korea's reference to the lack of economic interest of the European Communities,
we consider that under the DSU there is  no requirement that parties must have an economic interest.In EC - Bananas , the Appellate Body stated that the need for a "legal interest" could not be implied in
the DSU or in any other provisions of the WTO Agreement and that Members were expected to be
largely self-regulating in deciding whether any DSU procedure would be "fruitful".  We cannot read
in the DSU any requirement for an "economic interest".  We also note the provisions of Article 3.8 of
the DSU, pursuant to which nullification and impairment is presumed once violation is established.
7.14 Even assuming that there is some requirement for economic interest, we consider that the
European Communities, as an exporter of milk products  to Korea, had sufficient interest to initiate
and proceed with these dispute settlement proceedings.
                                                     
407 See EC - Bananas , Appellate Body Report, para. 135.WT/DS98/R
Page 163
7.15 Concerning Korea's reference to the unsuccessful settlement negotiations, we can only note
that the European Communities considers that the offers by Korea were not acceptable to it, and bothparties admit that no formal settlement of the present dispute was ever reached and approved by the
relevant national authorities.  The DSU favours the conclusion of mutually acceptable solutions.  We
note that, for the present dispute, no mutually agreed solution was notified to the DSB.  We can only
recall that when a WTO Member considers that its rights have been nullified by the actions of another
Member it is entitled
408 (under Article 14 of the Safeguards Agreement and Articles XXII and XXIII
of GATT 1994) to initiate the dispute settlement procedures envisaged in the DSU.
3. Submission of the OAI Report
7.16 In its first submission Korea refers to a report of the Korean Trade Commission (OAI
Report)409 of which it submitted only a version in the Korean language.  At the outset of the first
substantive meeting of the Panel with the parties, the Panel stated that it was disappointed that Korea
had filed only a Korean language version of the OAI Report.  Although the Panel understood the
difficulties involved with the translation of the in vestigation report, the Panel suggested to Korea that
should it wish to refer to the OAI Report in support of its allegations, Korea should file a version of
the report in one of the official languages of the WTO. Korea raised doubts as to whether the OAI
report was relevant since in Korea's view the EC limited its complaints to the quality and depth of
Korea's notification under Article 12. The Panel was not addressing the issue whether it was for Korea
to submit such OAI Report but simply that any submission of evidence had to be done in one of theofficial languages of the WTO.
7.17 At the end of the first meeting of the Panel, Korea informed the Panel that it would need an
additional period beyond what was scheduled for answers and rebuttals to submit an English version
of the OAI Report.
410
7.18 The Panel informed Korea that if it intended to submit any piece of evidence, including the
OAI Report, it should do so by 20 November 1998, that is, the deadline given to the parties to answer
the questions posed to them during the first substant ive meeting of the Panel.  In this way parties
would be able to submit full and useful rebuttals before the second meeting of the Panel. On 20
November 1998, Korea submitted, together with its answers to the questions submitted to it, an
English version of the OAI Report, as Exhibit Korea-6.
7.19 We based our ruling on paragraph 5 of the Additional Rules of Procedure, adopted by the
Panel pursuant to Article 12.1 of the DSU, which provides that:
                                                     
408 See Appellate Body Report on United States – Measures Affecting Imports of Woven Wool Shirts
and Blouses from India , adopted on 23 May 1997, WT/DS33/AB/R ( "US – Shirts and Blouses" ), at page 13.
409 In its 2 December 1996 notification, G/SG/N/8/KOR/1, circulated on 6 December 1996 Korea stated
that the term “OAI Report” is equivalent to the “KTC Report”.  Therefore, in our findings we shall refer to thereport of the KTC's investigation as the "OAI Report".
410 In response, the European Communities complained that it appeared to it that Korea had had ex
parte  communications with the Panel during which, according to the European Communities, the Panel had
authorized Korea to submit an English version of the OAI Report after the rebuttals.  The Panel immediately
informed the parties that no members of the Panel (nor  any one from the Secretariat) had communicated with
Korea on this issue.  The only reference to the filing of the OAI Report was contained in the transmission letter
that Korea sent to the Panel with its first submission and which was copied to the parties.  The latter part of this
letter reads as follows:  "Given the time constraint, Ko rea was unable to produce an official English version of
the investigation report of the Korea Trade Commission.  Only the original version (Korean version) is attachedherewith.  Korea will submit the English version as expeditiously as possible."  Clearly there had been no ex-
parte  communication.WT/DS98/R
Page 164
"5. Parties shall submit all factual eviden ce to the Panel no later than during the
first substantive meeting, except with respect to evidence necessary for purposes of
rebuttals submissions or answers to questions. … "
7.20 We also consider that this is in line with the two stage approach advocated by the Appellate
Body in Ar gentina – Measures Affecting Imports of Footwear, Textiles, Apparel and Other Items.411
4. The absence of a claim by the European Communities under Article 3 of the Agreement
on Safeguards
7.21  In its second submission, Korea argues that because the European Communities did not raise
any claim under Article 3 or Article 4.2(c), the European Communities must be deemed to accept that
the “competent authorities” in Korea have published: “a report setting forth their findings and
reasoned conclusions reached on all pertinent issues of fact and law” (Article 3.1, final sentence).  For
Korea, since the European Communities has failed to invoke Article 3 of the Agreement on
Safeguards, and has failed to raise claims under Article 4.2(c) of that Agreement, the European
Communities is, therefore, only challenging the quality and depth of Korea’s notifications under
Article 12 of the Agreement on Safeguards.  The European Communities agrees with Korea that it isnot bringing a complaint under Article 3 of the Agreement on Safeguards, nor is it relying upon
Article 4.2(c) thereof.  For the European Communities this does not affect its right to challenge the
substance of the OAI Report.
7.22 We agree with the European Communities that the absence of a claim under Article 3 of the
Agreement on Safeguards means at most that the European Communities agrees that the report isWTO compatible for the purpose of Article 3.1 of the Agreement on Safeguards.  The European
Communities has the right to raise more specific claims under Article 4 of the Agreement on
Safeguards and has done so.  We consider that if a Member wants to challenge the WTO
compatibility of the manner in which an "injury" determination was performed, or the choice of an
appropriate measure to be imposed, this Member does not have to challenge the publication of thefinal report as such.
B. B
URDEN OF PROOF
7.23 Korea alleges that the burden of proof is on the European Communities and adds that this
burden "does not shift between the parties during the dispute".  The European Communities does not
submit any argument on the burden of proof.
7.24 In the context of the present dispute, which is concerned with the assessment of the WTO
compatibility of a safeguard measure imposed by a national authority, we consider that it is for theEuropean Communities to submit a prima facie  case of violation of the Agreement on Safeguards,
namely, to demonstrate that the Korean safeguard measures are not justified by reference to Articles
2, 4, 5 and 12 of the Agreement on Safeguards.
412  We recall in this regard the statement of the
Appellate Body in EC - Hormones413 that "… 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".  It is therefore for Korea to provide an"effective refutation" of the European Communities' case.  In the present case, it is for Korea to
                                                     
411 See Appellate Body Report in Argentina – Measures Affecting Imports of Footwear, Textiles,
Apparel and Other Items , WT/DS57/AB/R, adopted on 22 April 1998, para. 79 ( "Argentina – Measures
Affecting Apparel" ).
412 See Appellate Body Report in Australia - Measures Affecting Importation of Salmon,  adopted on
6 November 1998, WT/DS18/AB/R, ( "Australia – Salmon" ), paras. 257-261.
413 Appellate Body Report on European Communities – Measures Concerning Meat and Meat
Products ("EC – Hormones" ), adopted on 13 February 1998, WT/DS26 and 48/AB/R, para. 104.WT/DS98/R
Page 165
effectively refute the European Communities' evidence and arguments, by submitting its own
evidence and arguments in support of its assertions that, at the time of its determination, Korea didrespect the requirements of the Agreement on Safeguards.
414   As a matter of law the burden of proof
rests with the European Communities, as complainant, and does not shift during the panel process.  As
a matter of process before the Panel, the European Communities will submit its arguments and
evidence and Korea will respond to rebut the EC claims.  At 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 reachconclusions as to whether the EC claims are well-founded.
7.25 In the present case, after considering the extensive submissions of both parties, we must
weigh the evidence submitted by each of them and assess the value of their legal arguments in view of
the provisions of the Agreement on Safeguards to determine whether the European Communities'
claims are well-founded.
C. S
TANDARD OF REVIEW
7.26 We note there are no specific provisions on standard of review in the Agreement on
Safeguards.  We consider, therefore, in line with the prescription of the Appellate Body in the EC -
Hormones  dispute, that in the absence of a specific standard of review for the relevant WTO
multilateral trade agreement, the provisions of Article 11 of the DSU are applicable415.
7.27 Article 11 of the DSU provides 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…".
7.28 Korea asks the Panel not to enter into a de novo  review of its national authorities'
determination to impose a safeguard  measure.  For Korea, the standard of review of Article 11
implies that the function of the Panel is to assess whether Korea (i) examined the relevant facts before
it at the time of the investigation; and (ii) provided  an adequate explanation of how the facts before it
as a whole supported the determination made.  Korea adds that a certain deference or latitude should
be left to the national authorities.
7.29 The European Communities agrees that the standard is that established in Article 11 of the
DSU and that the Panel should not perform a de novo  assessment.  In this context, the European
Communities claims that it is not contesting the basic economic data produced by Korea but only theircompleteness and the conclusions drawn from them. The European Communities submits that the
“objective assessment of the facts” referred to in Article 11 DSU cannot be satisfied by verifying what
conclusions the investigating authority came to but must also include "how" it came to those
conclusions, that is to say the national authority must provide a reasoned opinion explaining how such
factors and arguments have led to its findings.
7.30 We consider that for the Panel 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.This conclusion is supported, in our view, by previous panel reports that have dealt with this issue
416.
                                                     
414 We note that this was the conclusion reached by the Panel in US – Shirts and Blouses  (adopted on
27 May 1997, WT/DS33/R) para. 6.8: "… it was for India to submit a prima facie case of violation of the ATC,namely, that the restriction imposed by the United States did not respect the provisions of Articles 2.4 and 6 ofthe ATC.  It was then for the United States to convince the Panel that, at the time of its determination, it hadrespected the requirements of Article 6 of the ATC."  This was confirmed by the Appellate Body.
415 EC – Hormones , Appellate Body Report, para. 116.
416 We recall that in United States - Restrictions on Imports of Cotton and Man-made Fibre Underwear
("US – Underwear") , (adopted on 25 February 1997, WT/24/R), paras. 7.53-54, a case dealing with a safeguard
action under the ATC, the panel reached the conclusions that the standard of review was that established inArticle 11 of the DSU and commented on the implications of such standard of review for safeguard measures.WT/DS98/R
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However, we do not see our review as a substitute for the proceedings conducted by national
investigating authorities.  Rather, we consider th at the Panel's function is to assess objectively the
review conducted by the national investigating authority, in this case the KTC.  For us, an objectiveassessment entails an examination of whether the KTC had examined all facts in its possession or
which it should have obtained in accordance with Article 4.2 of the Agreement on Safeguards
(including facts which might detract from an affi rmative 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, whetherthe determination made was consistent with the international obligations of Korea.  Finally, we
consider 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
had collected.  In this case, this evidence is found mainly in the Report by the Office of
Administrative Investigation ("OAI Report") and the subsequent determinations by the relevant
Korean authorities
417.  We note that the European Communities has initially relied on the notifications
to the Committee on Safeguards to establish its claims.  We are of the view that such notifications arenot necessarily complete evidence of what the Korean national authorities actually did.  Rather, the
full reflection of the Korean investigation can only be found in the investigation report or the finaldetermination by the Minister
418, and not (as argued by the European Communities at the first meeting
of the Panel) in the notifications to the Committee on Safeguards. In its rebuttals and at the second
meeting of the Panel with the parties, the European Communities, in support of its allegations, madereference to the OAI Report as well.
7.31 We consider, further, that Members are required, in their recommendations or determinations
on the application of a safeguard measure, to explain how they considered the facts in their possession
or which they should have obtained in accordance with Article 4.2 of the Agreement on Safeguardsand why they concluded, at the time of the decision, that the measure to be applied was necessary to
remedy the serious injury and facilitate the adjustment of the industry.  This is not to say that the
Panel interprets the Agreement on Safeguards as imposing on the importing Member any specificmethod either for collecting data or for considering and weighing all the relevant economic factorsupon which the importing Member will decide whether there is need for a safeguard restraint.
419
Korea remains free to choose an appropriate method of assessing whether the state of its domestic
industry was caused by imports of SMPP, or by other factors, but it must be in a position to
demonstrate that it did address the relevant issues.  We also consider that this standard of review is in
line with GATT/WTO practice .
D. GENERAL PRINCIPLES OF INTERPRETATION
7.32 In its examination of the Agreement on Safeguards , the Panel is bound by the principles of
interpretation of public international law (Article 3.2 of the DSU) which include Articles 31 and 32 of
the Vienna Convention on the Law of Treaties.  As provided in these articles and as applied by panels
and the Appellate Body, we shall interpret the provisions of the Agreement on Safeguards  on the basis
of the ordinary meaning of the terms of its provisions  in their context, in the light of the object and
purpose of the Agreement on Safeguards , the GATT 1994 and the WTO Agreement.  We note also
                                                                                                                                                                    
See also the Panel Report in Brazil – Countervailing Duty Proceeding C oncerning Imports of Milk Powder from
the European Community , adopted on 28 April 1994, SCM/179:  "It was incumbent upon the investigating
authorities to provide a reasoned opinion explaining how such facts and arguments had led to their finding.",para. 286.
417 Evidence of what the Korean authorities did can also be found in the present case in: The
Determination to Initiate an Investigation (17 May 1996, Exhibit Korea-3 and Exhibit Korea-4), Public Notice
of Decision on Injury by the KTC (11 November 1996, Exhibit Korea-7), Public Notice of Implementation of
Relief Measure by the Ministry of Commerce, Industry and Energy (7 March 1997, Exhibit Korea-9).
418 See Section IV.B.2(b), supra .
419 We note that a similar conclusion was reached by the Panel in US – Shirts and Blouses , para. 7.52.WT/DS98/R
Page 167
Article XVI:1 of the WTO Agreement which provides that "… the WTO shall be guided by the
decisions, procedures and customary practices  followed by CONTRACTING PARTIES to GATT
1947 and the bodies established in the framework of GATT 1947".
E. CLAIMS UNDER ARTICLE XIX OF GATT
7.33 The European Communities initially makes two claims under Article XIX of GATT 1994.  In
its first submission it claims that Korea failed to examine whether the import trends of the products
under investigation were the result of "unforeseen developments" as provided for in Article XIX:1(a).Korea responds that the text of the Agreement on Safeguards supports the interpretation that the
provisions therein established are now the sole articulation of the rules that must be followed in the
application of a safeguard measure. In its first submission the European Communities also argues that
Korea failed to comply with its obligations under Article XIX:1(a) of GATT and Article 2 of the
Agreement on Safeguards, to address whether the "conditions" under which importation of the
products being investigated were of such a nature as to cause serious injury to the domestic industry
producing like or directly competitive products.  In its second submission, the European Communitiesargues that failing to examine under which conditions these increased imports occurred and in
particular the prices at which the products were imported is a violation of the provisions of Article 2.1
of the Agreement on Safeguards  (and the European Communities made no further reference to
Article XIX:1(a) of GATT).  Therefore, we sh all examine the European Communities' claim that
Korea failed to examine under which conditions th ese importations occurred only in relation to its
claims under Article 2 of the Agreement on Safeguards .
7.34 The claim of the European Communities regarding "unforeseen developments" under
Article XIX of GATT, the wording of which is not repeated in the Agreement on Safeguards,
necessitates that we examine the relationship between the provisions of Article XIX of GATT and
those of the Agreement on Safeguards.
7.35 The parties debated at length whether there is a conflict between the provisions of
Article XIX of GATT and those of the Agreement on Safeguards and how the Panel should interpretthe relationship between the terms of Article XIX:1 of GATT and the different terms used in
Article 2.1 of the Agreement on Safeguards.
420
7.36 Essentially, Korea argues that there is such a conflict, which should be resolved in favour of
the exclusive application of the Agreement on Safeguards.  The European Communities submits that
all WTO obligations are generally cumulative.  For the European Communities, the provisions ofArticle XIX of GATT, which are still fully applicable because there is no conflict between the
provisions of the first paragraph of Article XIX and Article 2.1 of the Agreement on Safeguards,
impose in addition to those of the Agreement on Safeguards, a condition that the increase of imports
must be "the result of unforeseen developments".
7.37 We recall that the terms of a treaty must be interpreted with reference to their ordinary
meaning taken in their context and in light of the object and purpose of the agreements examined.  We
also recall the principle of "effective interpretation" whereby all terms must be given their fullmeaning and must be interpreted with each other to avoid inconsistencies or "inutility"
421.
                                                     
420 We refer to the European Communities' arguments  and Korea's arguments in Section IV.C of this
Panel Report.
421 The principle of effective interpretation or "l'effet utile" or in latin ut res magis valeat quam pereat
reflects the general rule of interpretation which requires that a treaty be interpreted to give meaning and effect to
all the terms of the treaty.  For instance one provision should not be given an interpretation that will result innullifying the effect of another provision of the same treaty.  For a discussion of this principle, see Yearbook of
the International Law Commission, 1966, Vol II A/CN.4/SER.A/1966/Add.1 page 219 and following.  See alsoWT/DS98/R
Page 168
7.38 It is now well established that the WTO Agreement is a "Single Undertaking" and therefore
all WTO obligations are generally cumulative and Members must comply with all of them
simultaneously unless there is a formal "conflict" between them.422  In the absence of conflict, there
remain, however, difficult issues of interpretation for the reader to reconcile various provisions of a
treaty as extensive as the WTO Agreement.423
7.39 We consider that the terms and prescriptions of Article XIX:1 of GATT are still generally
applicable, as we are of the view that there is no conflict between the provisions of the Article XIX:1
of GATT and those of Article 2.1 of the Agreemen t on Safeguards.  Our conclusion is based on our
interpretation of the ordinary meaning of the terms of  Article XIX:1 of GATT.
7.40 The first paragraph of Article XIX of GATT reads as follows:
Emergency Action on Imports of Particular Products
"1. ( a) 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 into the territory of that Member in such
increased quantities and under such conditions as to cause or threaten serious injury todomestic producers in that territory of like or directly competitive products, the Member
shall be free, in respect of such product, and to the extent and for such time as may be
necessary to prevent or remedy such injury, to suspend the obligation in whole or in part
or to withdraw or modify the concession."
Article 2.1 of the Agreement on Safeguards provides 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 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.”
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 of increased imports causing serious injury to the
                                                                                                                                                                    
E.g., Corfu Channel  Case (1949) I.C.J. Reports, p.24 (International Court of Justice);  Territorial Dispute Case
(Libyan Arab Jamahiriya v. Chad)  (1994) I.C.J. Reports, p. 23 (International Court of Justice);  Oppenheim's
International Law (9th ed., Jennings and Watts eds., 1992), Volume 1, 1280-1281;  P. Dallier and A. Pellet, Droit
International Public, 5è ed. (1994) para. 17.2);  D. Carreau, Droit International , (1994) para. 369.  See for instance
the statement of the Appellate Body in  United States – Standards for Reformulated and Conventional Gasoline ,
adopted on 20 May 1996, WT/DS2/AB/R :"An interpreter is not free to adopt a reading that would result inreducing whole clauses or paragraphs of a treaty to redundancy or inutility"; also the Appellate Body Report onJapan – Taxes, page 12; Appellate Body Report on  US - Underwear , adopted on 25 February 1997,
WT/DS24/AB/R, page 16.
422 The principle of interpretation against conflict has been confirmed by the Appellate Body in Canada
– Certain Measures Concerning Periodicals , adopted on 30 July 1997, WT/DS31/AB/R, (" Canada
Periodicals "), page 19; in EC -Bananas , paras 219-222; in Guatemala – Cement , para.65; and by the panel in
Indonesia – Certain Measures Affecting the Automobile Industry , adopted 23 July 1998, WT/DS54, 55, 59 and
64/R (not appealed) (" Indonesia – Autos "), para. 14.28.  For a definition of conflict, see for instance the
Appellate Body statement in Guatemala – Cement , para. 65 or the Panel Report on Indonesia – Autos , para.
14.28.
423 See for instance the Panel and Appellate Body Reports in Brazil – Measures Affecting Desiccated
Coconut, adopted on 20 March 1997, WT/DS22/R and WT/DS22/AB/R, (" Brazil – Desiccated Coconut ") where
it was concluded that although there is no strict conflict between them the provisions of Article VI of GATTmust be reconciled with those of Article 32.3 and 32.4 of the SCM Agreement.WT/DS98/R
Page 169
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 ofthat 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" to deviate
temporarily from Articles II and XI of GATT.
7.42 We consider that the prior section of the senten ce, "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 add conditions for any measur e to be applied pursuant to Article XIX but rather
serves as an explanation of why an Article XIX meas ure may be needed, taking into account the fact that
at the time (1947) the CONTRACTING PARTIES had just agreed (for 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 party under this Agreement" leads us to conclude that
this proposition only describes generally the situa tions 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).  In other
words, this sentence could read
"If, notwithstanding this new set of rules that we have just agreed upon… which imply
that a contracting party cannot use quotas (XI) or breach its bindings (II) , one
contracting party is faced with increased imports that are causing serious injury, thatcontracting party shall be free to suspend the obligation in whole or in part (XI) or to
withdraw or modify the concession (II)."
7.44 The reference to "unforeseen developments" was probably considered necessary as
negotiators had just ended a negotiating exercise which was based on expectations of trade increases
(therefore foreseen developments) and where some quantitative restrictions were grand-fathered.  Wethink that this reference to "unforeseen circumstance s " must be interpreted within its context, namely
in view of the rest of this proposition which provides that "… the effect of the obligations incurred by a
contracting party under this Agreement ".  These latter terms can only refer to the binding nature of the
GATT prohibitions against breach of tariff concessions and the prohibition against quotas, as it would
not be logical to conclude that a Trade Minister would have negotiated a particular concession if itcould have been foreseen that such a concession would result in increased imports, that, in turn, would
seriously injure an industry in the country granting the concession.
7.45 In other words, the proposition "as a result of unforeseen developments and of the effect of the
obligations incurred by a contracting party under th is Agreement" does not address the conditions for
Article XIX measures to be applied but rather e xplains why a provision such as Article XIX may be
needed.  For us, the object of this section of the first sentence of paragraph 1 of Article XIX cannot be
anything else but a statement (of what we would now consider to be obvious) that because of the
binding nature of the GATT obligations and concessions, tariffs and other obligations negotiated on
the basis of trade expectations may need to be changed temporarily in light of actual unforeseen
developments.  Thus, the phrase "unforeseen circumstances" does not specify anything additional as
to the conditions under which measures pursuant to Article XIX may be applied.
7.46 This interpretation is compatible with the object and purpose of GATT which was to ensure
some certainty and predictability in tariff bindings and other GATT obligations. Our interpretation ofWT/DS98/R
Page 170
these provisions of Article XIX:1 of GATT is confirmed by the practice of the contracting parties424
over some 48 years and the adoption of the new Agreement on Safeguards.425
7.47 The adoption of the Agreement on Safeguards without this phrase "as a result of unforeseen
developments and of the effect of the obligations incurred by a contracting party under this Agreement "
is logical.  It was not necessary to refer to this context which had by then evolved.  Members had
since understood the GATT system of binding obligations.  In support of this interpretation, we recall
that in Brazil – Dessicated Coconut  the Appellate Body made clear that some of the Annex 1A
agreements represent an elaboration or evolution of the provisions of GATT 1994.  Because Members
had understood that this reference to "unforeseen developments" did not add to the rest of the
paragraph (but rather described its context), there wa s no need to insert it explicitly in the Agreement
on Safeguards.
7.48 Consequently, we reject the specific claim of the European Communities that Korea was
wrong in failing to examine whether the import trends of the products under investigation were the
result of "unforeseen developments" contrary to Article XIX:1(a), as we consider that Article XIX of
GATT does not contain such a requirement.
F. VIOLATION OF ARTICLE 2.1 OF THE AGREEMENT ON SAFEGUARDS - FAILURE TO ANALYZE
"UNDER SUCH CONDITIONS "
7.49 In its first submission, the European Communities argues that Korea violated Article 2.1 of
the Agreement on Safeguards and Article XIX:1 of GATT because Korea failed to examine under
which conditions the imports occurred and in particular Korea failed to consider the prices at whichthe product was imported.  In its second submission, the European Communities limits that specific
argument (failure to examine under which conditions the imports occurred) to its claim of violation of
Article 2.1 of the Agreement on Safeguards only.  Korea responds that there is no requirement to
examine the prices of the imports with reference to those of the like or directly competitive products
as such.  Korea adds that it did consider, in its overall determination under Article 2 of the Agreementon Safeguards, whether the SMPP were imported into Korea in such increased quantities and under
such conditions as to cause serious injury to the domestic industry that produces like or directly
competitive products to SMPP.  We shall examine this EC argument only with reference to its claim
under Article 2 of the Agreement on Safeguards .
7.50  Article 2 of the Agreement on Safeguards  reads:
“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 importedinto 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).
7.51 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
                                                     
424 Article XVI:1 of the Marrakesh Agreement Establishing the WTO.
425 In 1951, the Working Party on "Withdrawal by the United Stat es of a Tariff Concession under
Article XIX ", (except for the United States), agreed that unf oreseen developments referred to events occurring
after the negotiation of the relevant tariffs and, although the Working Party considered that this phrase contained
a criterion to be respected, it rendered satisfaction of this  criterion automatic, since it would not be reasonable to
expect a contracting party to foresee that imports would cau se serious injury to its domestic industry.   Working
Party on Withdrawal by the United States of a Tariff Concession under Ar ticle XIX of the General Agreement
("Fur Felt Hat "), GATT/CP.6/SR 19 (adopted 22.10.51).WT/DS98/R
Page 171
explicit requirement in Article 2426, 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 theimporting country.
7.52 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.  We are of the view that the phrase "and under such conditions" qualifies and
relates both to the circumstances under which the products under investigation are imported and to thecircumstances of the market into which products are imported, both of which must be addressed by
the importing country when performing its assessment as to whether the increased imports are causing
serious injury to the domestic industry producing th e like or directly competitive products.  In this
sense, we consider that the phrase "under such conditions" refers more generally to the obligation
imposed on the importing country to perform an adequate assessment of the impact of the increased
imports at issue and the specific market under investigation.
7.53 The European Communities raised various other arguments in support of its claims that Korea
violated Article 4, and consequently Article 2, of the Agreement on Safeguards , namely that Korea did
not adequately demonstrate the existence of serious injury and a causal link with the increased
imports.
427  We shall address the EC argument that Korea did not perform an adequate assessment of
whether the products under investigation were being imported into its territory in such increased
quantities and under such conditions as to cause serious injury to the domestic industry when we
examine the European Communities' more specific claims of inadequate serious injury and causation
assessments made pursuant to Article 4.1 and 4.2 of the Agreement on Safeguards .  We note that a
violation of Article 4.2 or 4.3 would constitute a violation of Article 2 of the Agreement on
Safeguards.
G. CLAIMS UNDER ARTICLE 4.2 OF THE AGREEMENT ON SAFEGUARDS
1. Korea's examination of serious injury to the domestic industry
7.54 The European Communities claims that in its evaluation of serious injury to the domestic
industry Korea failed to examine correctly all relevant factors of an objective and quantifiable nature
having a bearing on the situation of the domestic industry.  We note that the parties are in agreement
that the appropriate definition of the domestic industry in this case comprises the producers of both
raw milk and milk powder, as these two products are directly competitive with SMPP when used as
input for the manufacturing of downstream dairy products such as flavoured milk, fermented milk andice cream. Thus, the parties' disagreement regards the correct examination of the relevant factors of an
objective and quantifiable nature having a bearing on the situation of this industry.  We also note that
the complex definition of the domestic industry as including producers of both a raw material and one
of its downstream products has repercussions for how the serious injury assessment on the whole
domestic industry as defined has to be performed.
7.55 In conducting our review of Korea's serious injury determination we are mindful of the
obligations contained in Article 4.2 of the Agreement on Safeguards.  This provision mandates thatcompetent authorities when performing a serious injury investigation:
"…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
                                                     
426 Contrary to the explicit references to prices in Article 3 of the Agreement on Implementation of
Article VI of GATT 1994 ("AD Agreement") and Article 15 of the Agreement on Subsidies and Countervailing
Measures ("SCM Agreement").
427 In its request for a panel the European Communities claimed that the Korean determinations
violated Articles 2, 4, 5 and 12 of the Agreement on Safeguards.WT/DS98/R
Page 172
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."
This provision sets out the general principle regard ing the economic factors which need to be considered
in a serious injury investigation, and provides a list of factors that are a priori  considered to be
especially relevant and informative of the situation of the domestic industry.  The use of the wording "in
particular" makes it clear to us that, among "all releva nt factors" that the investigating authorities "shall
evaluate", the consideration of the factors listed is  always relevant and therefore required, even though
the authority may later dismiss some of them as not having a bearing on the situation of that industry.
Under the applicable standard of review, our function is to assess whether Korea (i) examined all
relevant facts in its possession or which it should ha ve obtained in accordance with Article 4.2 of the
Agreement on Safeguards at the time of the investigation; and (ii) provided an adequate explanation
of how those facts as a whole supported the determination made. Thus, we shall examine whether at
the time of the determination all factors listed in Article 4.2 were appropriately considered; whether
the Korean authorities explained how each factor considered supports (or detracts from) a finding ofserious injury; and whether valid reasons have been put forward for dismissing a considered factor as
not being relevant to the serious in jury determination in this case.
7.56 We note that previous panel decisions have applied similar tests in reviewing determinations
by investigating authorities on the existence of serious damage in the context of a transitional
safeguard under the Agreement on Textiles and Clothing, and of material injury under the TokyoRound Agreement on the Implementation of Article VI (the Anti-Dumping Code). In United States –
Shirts and Blouses, the panel stated that:
"The wording of the first sentence of Article 6.3 of the ATC imposes on the importing
Member the obligation to examine, at the time of its determination, at least all of the
factors listed in that paragraph.  The importing Member may decide -- in its assessmentof whether or not serious damage or actual threat thereof has been caused to the domestic
industry -- that some of these factors carry more or less weight.  At a minimum, the
importing Member must be able to demonstrate that it has considered the relevance or
otherwise of each of the factors listed in Article 6.3 of the ATC.
428"
7.57 Even more to the point the panel in United States – Salmon , set out the following test when
reviewing a material injury determination:
"[A] review of whether a determination of material injury was in conformity with this
requirement necessitated an examination of whether the investigating authorities had
examined all relevant facts before them (including facts which might detract from an
affirmative determination) and whether a reasonable explanation had been provided ofhow the facts as a whole supported the determination made by the investigating
authorities."
429
While the concepts of serious damage and material injury are not entirely analogous to therequirement of serious injury in the Agreement on Safeguards, we believe that the general
considerations expressed by both panels on issues similar to those before us offer useful guidance as
to how a panel should evaluate fulfilment of the serious injury requirement.
7.58 In our evaluation of Korea's serious injury determination there are three issues that we find
particularly troublesome.  First, we find that there is a lack of consideration in the OAI Report of
                                                     
428 US – Shirts and Blouses, para. 7.26.
429 United States – Imposition of  Anti-Dumping Duties on Imports of Fresh and Chilled Atlantic
Salmon from Norway, adopted 27 April 1994, ADP/87, para. 492 ("US – Salmon" ).WT/DS98/R
Page 173
some of the factors listed in Article 4.2.  This is the case for instance for capacity utilization and
productivity.  In both cases Korea offers explanations in its submissions to the Panel of why itconsidered these factors not to bear on the situation of the domestic industry.  While these
explanations seem plausible, there is nothing in the OAI Report which would indicate to the Panel that
these factors were taken into consideration in the serious injury finding of the Korean authorities.
Second, as we noted above, the definition of the domestic industry in this case as comprising two
different segments of the dairy products market has consequences for the evaluation of the situation ofthe industry.  In assessing the serious injury to the whole domestic industry, we find that it is
acceptable to analyze distinct market segments but, as stated above, all factors listed in Article 4.2
must be addressed.  In considering each of the factors listed in Article 4.2, and any others found to be
relevant by the authority, the investigating authorit y has two options: for each factor, the investigating
authority can consider it either for all segments, or if it decides to examine it for only one or some
segment(s), it must provide an explanation of how the segment(s) chosen is (are) objectively
representative of the whole industry.  A lack of consideration of all segments, without anyexplanation, is a flaw that we find present in Korea's analysis of the domestic industries' profits and
losses, prices, debt to equity ratio, capital depletion and production cost.  How Korea relates
developments in one segment to its determination regarding the industry as a whole is for Korea to
decide in the first instance.  Our point here is that an analysis of only a segment of the domestic
industry, without any explanation of its signifi cance for the whole industry, will not satisfy the
requirements of the Agreement on Safeguards.  Third, we find that for certain factors considered by
Korea it has failed to provide sufficient reasoning on some of the choices made in the analysis of such
factors which may have affected the result of the consideration.  Also, there is a lack of reasoning in
some cases on how the factor considered supports (or detracts from) a finding of serious injury.  This
lack of explanation or reasoning is perceived in Korea's consideration of market share, production,profits and losses, employment and inventory.
7.59 Having laid out our overall concerns with Korea's compliance with its obligations under
Article 4.2, we turn to the specifics of Korea's consideration of each of the factors listed in Article 4.2,
as well as additional factors Korea considered in determining the existence of injury to the domestic
industry.  Since our task is to make an objective assessment of the factual considerations andreasoning of the Korean authorities in arriving at a finding of serious injury at the time of the
determination, our analysis of Korea's compliance with the provisions in Article 4.2 will be on the
basis of the OAI Report.  We would also like to make it clear that even if we examine each one of the
factors listed in Article 4.2 and others used by Kor ea, it is not our task to question the weight accorded
to each factor for purposes of the final determination of serious injury.  In this regard we concur withwhat the panel in US – Shirts and Blouses  stated in examining the imposition of a safeguard measure
under the ATC:
"This is not to say that the Panel interprets the ATC as imposing on the importing
Member any specific method either for collecting data or for considering and weighing
all the relevant economic factors upon which the importing Member will decide whether
there is need for a safeguard restraint.  The relative importance of particular factors
including those listed in Article 6.3 of the ATC is for each Member to assess in the lightof the circumstances of each case."
430
(a) Increased imports
7.60 The European Communities argues that Korea excluded certain products (mixed products)431
from the scope of application of the measure which were nevertheless included in the calculation of
the increase in imports.  Korea pointed out that the import volume of these products, found on page 7
                                                     
430 US – Shirts and Blouses , para. 7.52.
431 The excluded products are: milk mineral (calcium ), concentrated product, Chilean special products
and raw material for the production of Nestlé's Cerelac.WT/DS98/R
Page 174
of the OAI Report,432 shows that the excluded mixed products accounted for just 0.7, 0.8, 1,5 and 1,3
per cent of SMPP imports for the years 1993, 1994, 1995, and the first semester of 1996 respectively.
After examining the figures pointed out by Korea, we consider that the excluded mixed productimports are a very minor portion of the SMPP imports.  Thus, there is no basis for finding that Korea's
decision not to exclude those products from the import increase calculation is inadequate for the
purpose of Article 4.2 of the Agreement on Safeguards.
7.61 Based on the relevant sections in the OAI Report, we find that the Korean authorities'
consideration of increased imports was adequate for the purposes of Article 4.2.  Korea's assessmentof the increased imports can be found from pages 32 through 35 of the OAI Report, where the
progression of SMPP imports for the period under investigation both in absolute terms and relative to
domestic production is detailed.
(b) Market share captured by imports
7.62 Korea's consideration of this factor can be found on page 35 of the OAI Report, where it
states: "The market share of SMPP against the total demand was 1.6 per cent in 1993, 7.0 per cent in
1994, 12.2 per cent in 1995, and 14.1 per cent in Jan.-June in 1996, showing an upward trend."  On itsface this consideration of the total dairy market share captured by the increased imports of SMPP
would seem to be correct and in compliance with the provisions of Article 4.2.  However, we note that
on page 16 of the OAI Report Korea defines the total market of basic materials for the production of
dairy products in Korea as being composed of: raw milk produced by domestic dairy farms; milk
powder produced from raw milk by processing co mpanies, imported milk powder, imported basic
materials for cheese, and other imports including SMPP.  In a footnote on page 16 of the OAI Report
the investigating authorities state:
"Considering the characteristics of the analysis, data on cheese import was excluded but
import of cheese, which has direct influence on consumption of domestic raw milk, also
has largely been increasing since import liberalization in 1995.  Including the cheeseimport volume, the total demand comes to 2,027,713 tons in 1993, 2,249,958 tons in
1994, 2,414,525 tons in 1995, and 1,222,804 tons in Jan.-June 1996, showing the
increase rates of 11.0 per cent in 1994, 7.3 per cent in 1995 and -1.4 per cent in Jan.-June
1996."
7.63 The Panel can only assume that this footnote actually refers to an exclusion of data on
imported basic materials for cheese, since it would be these kinds of imports which would have a
direct influence on consumption of raw milk.  Also, the text that is being expanded upon in the
footnote does not mention cheese as a finished product but imported basic materials for cheese.  We
find that this exclusion has not been sufficiently explained by Korea, even though it admits in the
footnote quoted above, that these imports are part of the total market of basic materials for dairyproducts, that they affect consumption of raw milk and that they have increased significantly during
the period of investigation.  Such exclusion is not inconsequential as it may result in a decrease of the
relevant market size, and a corresponding overesti mation of the share of the market being captured by
SMPP imports. We would like to make it clear that our view is not that this exclusion of imported
basic materials for cheese from the total volume of the dairy market was necessarily incorrect.
Rather, since Korea did not provide any reasoning as to why it chose to exclude this portion of the
relevant market, we find that Korea's analysis of the market share captured by imports of SMPP wasnot adequately performed for the purpose of Article 4.2.
                                                     
432 See para. 4.370, supra .WT/DS98/R
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(c) Sales
7.64 The Korean authorities' consideration of ch anges in the level of sales for the domestic
industry was performed separately for raw milk and milk powder and can be found respectively at
pages 38 and 45 of the OAI Report.  Regarding raw milk consumption for the period of investigation
the report states:
"The amount of domestic raw milk consumed was 1,844,463 tons in 1993,
1,947,128 tons in 1994, 1,947,965 tons in 1995, and 984,934 tons in the January-Juneperiod of 1996. The consumption increase rate was 5.6 per cent for 1994, 0.0 per cent for
1995, and -2.0 per cent for the January-June period of 1996."
433
7.65 Regarding milk powder consumption the Korean authorities found:
"The amount of domestic milk powder consumed was 12,191 tons for 1993, 12,468 tons
for 1994, 10,690 tons for 1995 and 2,741 tons for the January-April period of 1996.  In
terms of increase rate, it was 2.3 per cent in 1994, -14.3 per cent in 1995 and -40.9 per
cent in the January-April period of 1996."434
7.66 We note that in the case of domestic raw milk and milk powder sales in Korea there is a
decline in consumption.  This decline could support the Korean authorities' finding of serious injury to
the domestic industry.  Thus, we find that this factor was adequately considered for the purpose of
Article 4.2.
(d) Production
7.67 This factor was considered in the OAI Report for both the raw milk and the milk powder
segments of the industry respectively at pages 38 and 45 of the OAI Report, where it is stated:
"The production amount of domestic raw milk was 1,857,873 tons in 1993,
1,917,398 tons in 1994, 1,998,445 tons in 1995, and 1,069,224 tons in the January-to-
June period of 1996.  The increase rate was 3.2 per cent for 1994, 4.2 per cent for 1995,and 4.4 per cent for the January-June period of 1996."
435
"The amount of domestic milk powder produced was 13,512 tons for 1993, 9,495 tonsfor 1994, 15,719 tons for 1995, and 10,401 tons for the January-April period of 1996.  In
terms of the production increase rate, it was -29.7 per cent in 1994, 65.6 per cent in 1995
and 52.6 per cent in the January- to-April period of 1996."
436
Korea later explains that it does not consider this factor to be relevant as "it was not an appropriate
measure for determining the state of the domestic industry".437  However, this explanatory statement is
made in the first submission of Korea to the Pane l.  We fail to find any analysis by the Korean
authorities at the time of the investigation, as to  how these figures on production are relevant (or not)
to a finding of serious injury to the domestic production.  Lacking this explanation it is not possiblefor us to discern whether the Korean authorities' dismissal of this factor as an indicator of serious
injury to the domestic industry was appropriate.  Thus, we find that this factor was not adequately
considered for the purpose of Article 4.2.
                                                     
433 OAI Report, page 38.
434 Id. at 45.
435 Id. at 38.
436 Id. at 45.
437 See para. 4.364, supra .WT/DS98/R
Page 176
(e) Productivity
7.68 As described above the first task of the Panel is to examine whether all factors listed in
Article 4.2 have been appropriately considered.  We find that there is no mention of this factor in theOAI Report.  While Korea in its submissions argues that "changes in productivity were not
appropriate indicators of serious injury" and gives reasoning for this conclusion, this reasoning is not
found in the OAI Report.  There is no indication that Korea considered the productivity of the
domestic industry when making a finding of serious in jury.  Thus, we find that this factor was not
adequately considered  for the purpose of Article 4.2.
(f) Capacity utilization
7.69 Just as in the case of productivity we fail to find any discussion in the OAI Report of the
changes in capacity utilization of the domestic indu stry. Although this factor is mentioned in the
Interim Draft Investigation Report
438 it is not brought forward in the final OAI Report on which Korea
based the adoption of its safeguard measure. Thus, we find this factor was not adequately considered
for the purpose of Article 4.2.
(g) Profits and losses
7.70 The Korean authorities' consideration of this factor appears at page 41 of the OAI Report for
the raw milk segment of the industry and page 49 for the milk powder segment of the industry.
Regarding the raw milk segment the Korean authorities found that various livestock cooperatives had
declining profits during the period, to the point where by the first semester of 1996 they were
reporting losses of 17,546 million Won.  Korea explained in the OAI Report that this analysis wascarried out on the livestock cooperatives with the following reasoning: "since the livestock
cooperatives, which are comprised of dairy households producing raw milk, distribute their profits to
their members, the livestock cooperatives' profits and losses are directly linked to the raw milk
producers' income."
439
7.71 First, we note that the livestock cooperatives' business is not only the collection, distribution
and sale of raw milk but also the processing of this raw milk into downstream dairy products for
subsequent sale.  Thus, the profits or losses of the livestock cooperatives do not reflect exclusively
their activities in the raw milk sector but also other activities.
7.72 Second, the raw milk producers' profits or losses do not derive only from their investment in
the livestock cooperatives, but also from the sale of raw milk to the livestock cooperatives.  In its firstsubmission
440 Korea presents data on the profit margins for raw milk producers based on the
difference between the reference sale prices and the production cost of raw milk.  However, as
admitted by Korea, 441 this analysis was not performed at the time of the investigation.
7.73 Third, we also gather from Korea's description of its analysis that it examined only some of
the livestock cooperatives. However, there is no explanation of why this was done.  Lacking any suchexplanation it is not possible for us to assess whether the selection of the livestock cooperatives
rendered an objective picture of the situation of the whole domestic industry.
                                                     
438An extract of this draft report was submitted as Exhibit Korea-5.
439 OAI Report, page 41
440 See para. 4.343, supra .
441 In its request for interim review, Korea submits that it "has never made any attempt to argue that [an
analysis of the profits and losses of the raw milk producers] was conducted during the investigation".WT/DS98/R
Page 177
7.74 Taken together the flaws in Korea's consideration of profits and losses in the raw milk
segment of the industry outlined above lead us to find that this factor was not adequately consideredfor the purpose of Article 4.2.
7.75 Regarding the milk powder sector of the industry, we again find flaws in Korea's
consideration of profits and losses.  In examining the profits and losses of the milk powder sector the
Korean authorities examined only two livestock cooperatives and four milk processing companies.
Again, there is no explanation of why the an examination of only these companies would constitute anobjective and representative picture of the situation of the whole domestic industry.  Footnote 15 of
the OAI Report contains a reference to the proportion of annual production by the chosen
cooperatives and companies where the data have been deleted.  Without any such explanation Korea
has not demonstrated that it had considered the objectivity and representativeness of the sample.
Thus, we find that for the purpose of Article 4.2 Korea has not adequately considered the profits and
losses of the whole domestic industry.
(h) Employment
7.76 The analysis of changes in the levels of employment for the domestic industry was also
performed by the Korean authorities first for the raw milk producers and then for the milk powder
producers.  Regarding the analysis of the employment in the raw milk sector, the Korean authorities
chose to analyse whether there was a decrease in the number of dairy households.  The reasons for
this choice were explained to the Panel as follows:
"Korean dairy farms are on the whole small scale family businesses, and represent one
part of the economic activity of some members of that family .  It is not possible to
determine how much time each person spends working on that business, and what
proportion of that time is devoted to dairy production … and so the Korean authorities
used changes in the number of dairy households as a surrogate"
442
This explanation was made in the oral statement at the second meeting of the Panel with the parties,
and not in the OAI Report.  We commend Korea for devising a surrogate methodology to measure the
employment in the raw milk industry and not simply dismissing this factor as irrelevant or not
quantifiable.  Nevertheless, this deviation from normal practice should have been explained at the
time of the decision in the OAI Report.  Lacking this explanation in the OAI Report we find that thisfactor was not adequately considered for the purpose of Article 4.2.
7.77 Regarding the analysis of employment for the milk powder producers, the Korean authorities,
explained in the OAI Report, that:
"As the milk powder production became automated, the number of workers employed in
milk powder production decreased over the years. Currently, very few people are fullyemployed for the exclusive purpose of engaging in milk powder production. Workers
producing other dairy products are used temporarily, when needs arise, to engage in milk
powder production. Accordingly, employment and wage are insignificant factors in
operating milk powder business"
443
In the light of this explanation in the OAI Report, we find that, for the purpose of Article 4.2, Koreahas adequately considered this factor for milk powder production.
                                                     
442 See para.4.513, supra .
443 OAI Report, page 48WT/DS98/R
Page 178
(i) Inventory
7.78 Regarding this factor, Korea considered inventories of domestic milk powder only, since raw
milk is not susceptible of stockage.444 There are two references to the inventory levels throughout the
OAI Report (pages 38-39, and 46).  We note that the figures at pages 38-39 are slightly different from
those at page 46.  Nevertheless, they both show an accumulation of stock for the period under
investigation.445  We find, however, that there is no reasoning as to why such levels of inventory are
indicative of serious injury or why they are negative for the domestic dairy industry.  Again this
explanation is made in the second submission of Korea, where it is stated:
"Increase of milk powder inventory is clear evidence of serious injury in this case not
only to the milk powder industry, but also to the entire domestic industry .  As explained
above, raw milk that is not consumed has to be converted into, inter alia,  milk powder .
Conversion only increases supply and inventory of milk powder .  Therefore, increased
milk powder inventory not only indicates oversupply of milk powder but also
demonstrates displacement of domestic raw milk by cheap imported SMPP, thus
signifying serious injury to the entire domestic industry.446
The increased inventory incurred a significant amount of costs.  Even if depreciation is
disregarded, the cost of inventory amounted to 17.3 billion Won (approximately US
$21.6 million) during the investigation period .  The inventory costs during the first six
months of 1996 alone were 5.8 billion W on (approximately US $7.3 million), and the
domestic producers were compelled to incur the full inventory cost…447"
Thus, it is clear from the statement made in Korea's second submission that the level of inventories of
milk powder found by the Korean authorities has ne gative consequences for the milk powder sector of
the industry and could indicate that the domestic industry is injured.  However, this reasoning
provided in Korea's second submission is not discernible in the OAI Report, and it is only after it has
been explained in the second submission that the precariousness of the situation of the domesticindustry regarding this factor becomes evident. Thus, we find that this factor was not adequately
considered for the purpose of Article 4.2.
(j) Price
7.79 This factor is not explicitly mentioned in the list of factors included in Article 4.2, however,
Korea considered it in its investigation.  The Korean  authorities examined prices for milk powder and
found that they were lower in the first half of 1996 than they were in 1993 at the beginning of the
period of investigation.
448  We note that milk powder prices had risen to a high level as recently as
1995.  Taking into account the entire OAI Report, we consider that Korea has established that lower
prices for milk powder are indicative of serious injury for the milk powder industry449.  However,
while there is an analysis of prices for the milk powder industry, we note that there is no explanationof the relationship between the price levels for milk powder and the serious injury alleged to be
suffered by the whole domestic industry.
7.80 Indeed, Korea did not examine prices of raw milk  in its investigation.  In this regard Korea
stated in its submissions that "there is no reliable way of arriving at an accurate or appropriate
                                                     
444 OAI Report, page 38
445 See para. 4.323, supra .
446 See para.4.460, supra .
447 See para.4.462, supra .
448 OAI Report, page 47.
449 This reasoning can be found in the causation section of the OAI Report at page 62.WT/DS98/R
Page 179
transaction price for raw milk in Korea"450 and "that any impact of declining domestic milk powder
prices adversely affected the entire domestic industry, since raw milk producers own the livestockcooperatives."
451
7.81 We are of the view that conclusions about the prices of milk powder only, do not constitute a
consideration of prices to the whole domestic industry which was defined as producers of raw milk
and milk powder.  The fact that it is the produ cers of raw milk who own the cooperatives does not
exempt the Korean authorities from examining the particular conditions of the raw milk producers asthis is a different segment of the industry from milk powder production.  For this reason we find that
Korea's consideration of the prices was incomplete as it only took into account one segment of the
domestic industry.  Thus, we find that this factor was not adequately considered for the purpose of
Article 4.2.
7.82 Moreover, we note that even if actual transaction prices for raw milk in Korea were
unavailable or it was not feasible to collect them given the large number of producers, there were
several other avenues available to the Korean authorities that would have allowed them to calculate orconstruct an approximation of raw milk prices.
452  Such indicators, even if not one hundred per cent
accurate could have enabled the Korean authorities to identify the existence of trends, either positive
or negative, in the prices for raw milk.  The choice of methodology to determine prices rests with the
investigating authorities, but given that there were various options available in this case we find that
the Korean authorities should have made an effort to determine the prices for raw milk, instead ofdismissing this factor as not being quantifiable.
(k) Debt to equity ratio and capital depletion
7.83 These are two additional economic indicators that  do not appear in the illustrative list of
Article 4.2, which were considered by the Korean authorities. These factors were evaluated
exclusively with regard to the livestock cooperatives. The results, presented at pages 43 and 44 of theOAI Report, only give information on a portion of the livestock cooperatives.  It is impossible for us
to assess if the data presented reflect the position of the whole domestic industry.  Thus, we fail to see
in the OAI Report any explanation as to why these two factors reflect serious injury, especially
serious injury to the whole Korean domestic industry producing raw milk and milk powder. Thus, we
find that this factor was not adequately considered for the purpose of Article 4.2.
(l) Production cost
7.84 The Korean authorities only examined the production cost of livestock cooperatives in the
production of milk powder.  In this  examination the Korean authorities found:
"The manufacturing cost increased from 5,158 won/kg in 1993 to 5,426 won/kg in 1994,
5,860 won/kg in 1995 and 6,178 won/kg in the January-April period of 1996.
The difference between the sales price and the manufacturing cost was 196 won in 1993.
However, it recorded -132 won in 1994 and th e negative margin grew larger to -472 won
in 1995 and further to -1,184 won in the January-to-April period of 1996."
453
                                                     
450 See para.4.504, supra .
451 See para.4.449, supra .
452 For example, Korea could have performed: (1) an analysis based on sampling of the raw milk
producers, a methodology which was used by Korea elsewhere in its analysis; (2) a construction of the prices for
raw milk based on the cost of production of raw milk producers, for which data appear to be on the record; on
(3) a construction of the prices by making adjustments to the cost of raw materials reported by the milk powderproducers.
453 OAI Report, page 53.WT/DS98/R
Page 180
The Korean authorities concluded that there was a widening negative gap between the cost of
manufacturing milk powder and its sale price.  These sales below cost would indicate that livestock
cooperatives were going through a difficult period.  However, as this factor was only evaluated for aportion of the domestic industry (livestock cooperatives producing milk powder) it is not possible for
us to assess the situation with regard to the whole domestic industry.  We do not consider this factor
to provide adequate support for the conclusion that there is serious injury to the domestic industry as
defined by the Korean authorities. Thus, we find that this factor was not adequately considered for the
purpose of Article 4.2.
(m) Conclusion
7.85 For the reasons described above, we find that Korea's determination of serious injury to the
domestic production of raw milk and milk powder does not meet the requirements of Article 4.2 of
the Agreement on Safeguards.
7.86 Article 2.1 permits the application of a safeguard measure only if, inter alia , there has been a
determination of serious injury pursuant to Articl e 4.2.  Since we find that Korea's determination of
serious injury does not meet the requirements of Article 4.2, the application of the safeguard measureat issue would necessarily also violate Article 2.1of the Agreement on Safeguards.  We note that in its
request for establishment of a panel, the European Communities claims generally that Korea violated
Articles 2.1, 4.2(a), 4.2(b), 5.1 and 12.1 to 12.3 of th e Agreement on Safeguards.  However, in its
submissions, the European Communities did not argue specifically, nor did it submit any evidence, in
support of its claim under Article 2.1, other than those relating to "under such conditions" (asdiscussed in Section F supra .
454  Therefore, we do not reach any conclusion on the issue of whether
Korea's determination of serious injury violates the provisions of Article 2.1 of the Agreement on
Safeguards.
2. Korea's examination of the causal link between increased imports and serious injury
7.87 We have already determined above that Korea's injury determination did not meet the
requirements of Article 4.2 of the Agreement on Safeguards .  We concluded that Korea did not
address all injury factors listed in Article 4.2 of the Agreement on Safeguards.  In addition, we
concluded that when addressing factors listed in  Article 4.2 of the Agreement on Safeguards, the OAI
Report did not contain any reasoning, analysis or evidence in support of its findings and sometimes it
limited its analysis to only one segment of the relevant domestic industry.  Having reached these
conclusions with regard to Korea's assessment of the injury factors, it is not necessary for us to reach
any findings on whether Korea demonstrated that increased imports "caused" serious injury to the
domestic industry producing like or directly competitive products.  However, keeping in mind the
conclusions of the Appellate Body in Australia – Salmon455, we would like to offer some general
comments relevant to an analysis of a causal link between increased imports and injury, in the context
of the Korean investigation.
7.88 We recall the provisions of Articles 2 and 4.2 of the Agreement on Safeguards :
"2.1 A Member may apply a safeguard measure to a product only if that Mem ber
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…
                                                     
454 See the Appellate Body report on Japan – Measures Affecting Agricultural Products
(WT/DS/76/AB/R), paras. 118 to 131.
455 Australia – Salmon , para. 223.WT/DS98/R
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4.2. (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 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  andlosses, 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 .  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)
7.89 In performing its causal link assessment, it is our view that the national authority needs to
analyze and determine whether developments in the industry, considered by the national authority to
demonstrate serious injury, have been caused by the increased imports.  In its causation assessment,
the national authority is obliged to evaluate all relevant factors of an objective and quantifiable nature
having a bearing on the situation of that industry.  In addition, if the national authority has identifiedfactors other than increased imports which have caused injury to the domestic industry, it shall ensure
that any injury caused by such factors is not considered to have been caused by the increased imports.
7.90 To establish a causal link, Korea has to demonstrate that the injury to its domestic industry
results from increased imports.  In other words, Korea has to demonstrate that the imports of SMPP
cause injury to the domestic industry producing milk powder and raw milk.  In addition, havinganalyzed the situation of the domestic industry, the Ko rean authority has the obligation not to attribute to
the increased imports any injury caused by other factors.
7.91 For instance, the KTC needs to explain how the developments with respect to factors
considered by the KTC to demonstrate serious injury, were caused by the imports of SMPP.  This is to
say that the KTC, in its analysis of the increased market share of SMPP for example, should havetried to explain how the imports of SMPP effectively displaced the domestic production of like or
directly competitive products.
7.92 To take one example using only one factor for only one year we note that the OAI Report
456
states that the most important increase of impor t of SMPP occurred from 1993 to 1994 (384 per cent).
However, we know that during the first year under investigation (1994), domestic demand for rawmilk and milk powder increased significantly.  The OAI Report
457 indicates: "… the large increase of
dairy production in 1994 resulted from the drastically increased demand for market milk and
fermented milk due to the quite warm winter".  The Korean authorities found458 that from 1993 to
1994, total demand of raw milk increased by 9.6 per cent while domestic production only increased
by 3.2 per cent.  We consider, therefore, that in 1994, to meet the increased demand in raw milk it was
necessary to increase imports of raw milk substitutes.  The reasons for this are: first, raw milk supply
(in the short term) is very rigid, as it depends upon the number of milk cows (head) which cannot beincreased rapidly and; second, the import tariff on milk powder had been increased to a very high
level (220 per cent) which constrained imports of milk powder.  This situation therefore implied that
the only way for Korea to respond to the increased demand was to import more of the low-tariff
SMPP (39 to 40 per cent).   In other words, in 1994 domestic demand for raw milk in Korea was
                                                     
456 OAI Report, page 32.
457 OAI Report, page 14.
458 OAI Report, page 39.WT/DS98/R
Page 182
larger than domestic production of raw milk.  This had the effect of decreasing the production of milk
powder (which is made from raw milk)459 and decreasing milk powder inventories460.  It seems clear
to us, that at least for 1994, the imports of SMPP cannot have caused injury to the domestic industryproducing like or directly competitive products in Korea.  On the contrary the increasing imports of
SMPP were the result of the increasing needs for raw milk and milk powder substitutes by the Korean
industry faced with the incapacity of the domestic production to fulfill the increasing demand for such
products. In the OAI Report there is no analysis of the interaction of these various elements.
However, any adequate causation assessment ha d to be performed for the overall injury
determination.
7.93 As to other factors that may have caused injury to the domestic industry producing like or
directly competitive products, we know, from the OAI Report, that domestic demand for raw milk
was affected by other factors.  For example, it is said in the footnote to page 16 of the OAI Report:
"Considering …, data on cheese import was excluded but imports of cheese, which has direct
influence on consumption of domestic raw milk,  also has largely been increasing since import
liberalization in 1995…".  As we mentioned before (see paragraphs 7.62 and 7.63 supra ), this
footnote must refer to an exclusion of data on imported basic material for cheese, as the text that is
expanded upon does not mention cheese as a finished product but rather imported basic materials for
cheese.  In other words, it would be these imports of basic materials for cheese that would have a
direct influence on consumption (demand) for raw milk.
7.94 Korea recognizes that the domestic production of cheese has decreased.
461  This decrease of
cheese production directly affected the consumption of and demand for raw milk.  However, the OAI
Report does not contain any evaluation or analysis of the impact of this factor (i.e. increased imports
of cheese or increased imports of basic material for cheese, and their impact on the reduced demand
for cheese and consequently the reduced demand for domestic raw milk in making cheese).
7.95 The same line of reasoning holds for the other dairy products that use raw milk or milk
powder as inputs which, according to Korea, also decreased.  Therefore, the demand for raw milk and
milk powder should have decreased as well.  On page 14 of the OAI Report, the KTC notes that the
domestic production of white milk, condensed milk, cheese and lactic-acid-producing beverages went
down during the period of investigation.  We know from Korea's domestic regulation462 that SMPP
cannot substitute for raw milk in the production of white milk, condensed milk, cheese, and lactic-acid-producing beverages.  If the domestic producti on of these products went down as well, factors
other than imports of SMPP must have caused the reduction of domestic production of these products
which, in turn also must have had an impact on the reduced consumption of raw milk and milk
powder. In compliance with the provisions of Article 4.2 of the Agreement on Safeguards , the causal
link between increased imports of SMPP and the factors it found to demonstrate injury must also be
assessed by the national authority.
7.96 This should not be construed to mean that the Panel interprets the Agreement on Safeguards
as imposing on the importing Member any appropriate method either for collecting data or forconsidering and weighing all the relevant economic factors upon which the importing Member willdecide whether there is need for a safeguard restraint.  The relative importance of particular factorsincluding those listed in Article 4 of the Agreement on Safeguards is for each Member to assess in thelight of the circumstances of each case.  Korea remains free to determine an appropriate method of
assessing whether the state of its domestic industry was caused by imports of SMPP and how this
analysis was performed. Korea also remains free to choose the method of assessing whether anyserious injury to its domestic industry was caused by such other factors.
                                                     
459 OAI Report, pages 58-60.
460 OAI Report, page 17.
461 See the negative data in the OAI Report, page 14.
462 See Food Industry Handbook, referred to in the OAI Report, page 26.WT/DS98/R
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H. CLAIMS UNDER ARTICLE 5.1 OF THE AGREEMENT ON SAFEGUARDS
7.97 The European Communities argues that when a WTO Member takes a safeguard measure, it
needs to prove that such measure was necessary and therefore should justify its "adequacy" in
remedying injury and facilitating adjustment.  The European Communities claims that (i) by omitting
to give any consideration to adjustment plans, Korea violated Article 5.1, first sentence; (ii) by failing
to consider whether types of measure other than a quota would be the most suitable to remedy serious
injury or facilitate adjustment, Korea violated Article 5.1, first sentence; and (iii) by failing to showthat the level of the quota itself was necessary to remedy serious injury or facilitate adjustment
remedy, Korea violated its obligations under Article 5.1, first and second sentences.  The European
Communities also claims that by not choosing the appropriate three representative years (which
should start as of the date of the imposition of the measure), without submitting a "clear justification
that a different level was necessary to prevent or remedy the serious injury", Korea violated the
provision of Article 5.1, second sentence.
7.98 Korea responds that since Article 5.1 states that "Members should choose measures most
suitable for the achievement of these objectives," it complied with this provision, as it considered that
the quotas at these levels for that period of 4 years, were the most suitable for remedying the serious
injury and facilitating adjustment to the domestic in dustry in Korea.  For Korea, there is no obligation
to demonstrate that the type of measure is the most suitable measure to achieve these objectives.
Korea adds that the Korean competent authorities did examine whether other types of measures,including tariff-quota, would be more appropriate.   For Korea, there is no obligation to demonstrate
that the level of such tariff is necessary or appropriate to achieve these objectives.  In its view, the
wording of the second sentence of Article 5.1 makes it clear that Members must only justify the level
of quotas if it is different ( i.e., lower) than the average imports during the three most recent
representative years.   It based its quota level on the average of imports for the three years fromJuly 1993 to June 1996, as it initiated its safeguards investigation in May 1996. The requirement for
consideration of three "representative" years was intended to prevent foreign exporters from
manipulating quota levels by flooding the market with imports just prior to the decision to impose a
safeguard measure.  Therefore, Korea considered that the second half of 1996 was not
"representative", and it excluded imports from this period in calculating the quota level.  Since itchose the appropriate three representative years, Korea argues that it did not have to provide any
justification.
7.99 We are of the view that Article 5 of the Agreement on Safeguards establishes certain rules on
the application of safeguard measures.  In the view of the Panel these rules on the application of a
measure come into play only after a decision has been taken to adopt a safeguard measure.  The firstsentence of Article 5.1 reads:  "A Member shall apply safeguard measures only to the extent
necessary to prevent or remedy serious injury and to facilitate adjustment." We believe that this
provision 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 Agreement on Safeguards, which pr ovides that "[a] Member may apply a safeguard
measure" (emphasis added) after that Member has made the injury and causation determination
refered to in that article.  The use of the verb "may" indicates that the decision whether to apply ameasure or not, after the above-mentioned conditions have been evidenced, rests with the Member
conducting the investigation.  We find that in the context of the discretion authorized by Article 2.1
we cannot conclude that Article 5.1 requires a Member to further justify the necessity of applying a
safeguard measure.  In consequence the decision by a Member to adopt a safeguard measure once all
the required conditions have been determined to exist can not be challenged by another Member underArticle 5.1.
7.100  The fact that the Panel finds that, after full co mpliance with the provisions of Articles 2 and 4
of the Agreement on Safeguards, there is no obligation under Article 5.1 to justify the decision to
adopt a safeguard measure does not mean, however, that the first sentence of Article 5.1 only "states aWT/DS98/R
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basic principle"463 or "does not impose a general obligation".464  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 offacilitating 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  preventing or remedying the serious injury and
facilitating adjustment.
7.101  In our view a measure is defined by the foll owing 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
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 theirentirety.
7.102  In the present case the European Communities argues that Korea has not fulfilled its
obligations under Article 5.1 with respect to the justification of type and level of the measure at issue.
In considering whether Korea has complied with its obligations under Article 5.1, we apply the
standard of review set out in paragraphs 1.25 to 1.30.  Thus, we need to consider whether the Koreanauthorities examined all relevant facts before them , whether adequate explanation was provided of how
the facts as a whole supported the determination made, and, consequently, whether the determination
made was consistent with the international obligations  of Korea. In other words, Members are required,
in their recommendations or determinations on the application of a safeguard measure, to explain how
they considered the facts before them and why they concluded, at the time of the decision, that themeasure to be applied was necessary to remedy the serious injury and facilitate the adjustment of the
industry.  Our task is not to determine for ourselves whether the measure applied by Korea is at a level
that is no more restrictive than necessary to remedy th e serious injury and facilitate adjustment.  Rather,
we must evaluate whether in deciding on the type and level of the measure to be applied, the Korean
authorities considered relevant information and expl ained their decision that the measure chosen was no
more restrictive than necessary to prevent or remedy  serious injury to the Korean dairy industry and to
facilitate the industry's adjustment.
7.103  In examining Korea's compliance with Article 5.1 we consider the Determination of Relief
Measure, by the Korean Trade Commission dated 2 December 1996
465 to be most relevant, as this
document describes the measure adopted by the Korean authorities.466  It is this document which
should, in our view, reflect the Korean authorities' considerations underlying the measure adopted.
7.104  Looking at the Determination of Relief Measure, we find a bare description of the elements of
the measure.  We note the absence of any discussion or analysis indicating the considerations
underlying the choice of the measure adopted and any explanation as to why the Korean authorities
concluded that the measure adopted was necessary to remedy the serious injury and facilitate
adjustment.  There is no reference to the measure, in any of the other determinations before or after
the Determination of Relief Measure.
                                                     
463 See para. 4.629, supra .
464 See para. 4.628, supra .
465 Exhibit Korea-8.
466 We recognize that there was a later decision to ad just the level of the measure.  However, as this
affected only one of the defining elements of the measure, we nonetheless focus on the 2 December 1996Determination.WT/DS98/R
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7.105  It appears from the evidence presented by Korea that the Korean authorities were aware of,
and may even have considered, measures other than the quantitative restriction adopted.467 However,
these potential measures are merely described in the determination.  In our view mere description of
the alternative measures considered is insufficient.  There must be some discernible reasoning as to
why the measure recommended or adopted is preferable to the others, specifically with respect to
achieving the objectives of remedying the serious injury and facilitating adjustment.
7.106  Korea's Determination of Relief Measure lists different factors that appear to have been
considered in deciding on the adoption of the measure to be applied.  However, this is again merely
descriptive, as is evident from the following paragraph:
"[b]efore recommending the relief measures, the KTC commissioners agreed that close
considerations should be made beforehand for each relief measure on its impacts on the
domestic dairy industry, national economy, and bilateral/multilateral trade.  In this
regard, the KTC examined the information investigated by the OAI, the relevant articles
of the multilateral regulations, the opinions of authorities concerned, and the reliefmeasures stipulated in the Foreign Trade Act and the Enforcement Decree of the Act.
Based on all these examinations, the KTC reviewed the petitioner’s request for relief
measures."
468
We do not see any explanation as to whether or how each of these factors shaped the Koreanauthorities' recommendation on the type, level and duration of the applied measure.
7.107  Indeed the Determination of Relief Measure simply continues:
"The KTC decided to recommend to the Minister of Agriculture and Forestry (MAF) that
he permit the following in connection with the import restrictions on the products under
investigation[:]
The import restriction on the products under investigation should be implemented for 4
years.
The restricted volume should amount to 15,595 tons (average import volume during the
year of 1993 – 1995) in the first year of the total 4 years of relief measures period. From
the second year, the yearly 5.7 per cent increase rate (average increase rate of total
domestic demand during 1993 – 1995) over the preceeding year's restricted volumeshould be applied."
This recommendation does not contain any consideration or explanation of why the Korean
authorities concluded that the recommended measure was necessary to prevent or remedy serious
injury and facilitate the adjustment of the domestic industry.
7.108  We wish to make it clear that we do not interpret Article 5.1 as requiring the consideration of
an adjustment plan by the authorities, as the European Communities asserts.
469  The Panel finds no
specific requirement that an adjustment plan as such must be requested and considered in the text of
the Agreement on Safeguards.  Although there are references to industry adjustment in two of its
provisions,470 nothing in the text of the Agreement on Safeguards suggests that consideration of a
                                                     
467 Other measures that may have been considered include those measures which were proposed by the
petitioner ( see, Exhibit Korea-8 at pg. 3) and the application of a tariff quota as recommended by Commissioner
Jeong Mun-Su in his minority opinion ( id. at pg. 4).
468 Id. at pg. 3.
469 See para. 4.611, supra .
470 Articles 5 and 7 of the Agreement on Safeguards.WT/DS98/R
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specific adjustment plan is required before a measure can be adopted.  Rather, we believe that the
question of adjustment, along with the question of pr eventing or remedying serious injury, must be a
part of the authorities' reasoned explanation of the measure it has chosen to apply.  Nonetheless, wenote that examination of an adjustment plan, within the context of the application of a safeguard
measure, would be strong evidence that the authorities considered whether the measure was
commensurate with the objective of preventing or remedying serious injury and facilitating
adjustment.
7.109  In response to a question by the Panel,
471 Korea states that Article 5 "does not impose a
general obligation on Members to demonstrate that the specific level of quota that they decided to
impose as a safeguard measure is necessary to prevent or remedy serious injury and to facilitate
adjustment".  In our interpretation, Article 5.1 does not require a Member to demonstrate ex posteriori
to the Panel that the measure adopted is effectively the most appropriate one.  We consider rather, as
we mentioned before, that Members are required, in their recommendations or determinations on the
application of a safeguard measure, to explain how they considered the facts before them and why
they concluded, at the time of the decision, that the measure to be applied was necessary to remedythe serious injury and facilitate the adjustment of the industry.  It is such reasoning and explanation
concerning the measure adopted, essential to evaluate Korea's compliance with Article 5.1, which we
cannot discern in Korea's determination to apply a safeguard measure in the present case.
7.110  Korea argues that "provided the level of quota was equivalent to or not less than the average
of the import levels for the three most recent representative years for which statistics were available,the Korean authorities were not required to show that  the nature of the measure, or its level, were [ sic]
'necessary'".
472  However, as explained above, we consider that the first sentence of Article 5.1 applies
to all elements of a safeguard measure, including the level of any quota.  In consequence, even
assuming Korea based its quota level on the average imports levels for the last three representative
years, this would not suffice to meet the requirements of Article 5.1, as the scope of that Article isgreater than just the level of the applied quota.  We conclude therefore that Korea's determination of
the measure did not meet the requirements of Article 5 of the Agreement on Safeguards .
7.111  The European Communities also claims that Korea violates Article 5.1 because it applied a
quota whose level was lower than the average of imports in the last representative three-year period
preceeding the application of the measure for which statistics were available.  Since we have already
found that Korea's application of a measure was not consistent with the provisions of the first sentenceof Article 5.1 which we consider to be generally applicable, also when a quantitative restriction based
on the average import levels for the last three representative years is used, we do not address the
question of whether the quota level was calculated consistently with the second sentence of
Article 5.1.
I. C
LAIMS UNDER ARTICLE 12
1. Incomplete and Untimely Notifications
(a) Arguments of the parties
7.112  The European Communities claims that Korea failed  to notify its measure in a timely fashion
and with sufficient detail contrary to Article 12.1 and 12.2 of the Safeguards Agreement.  The
European Communities argues that in view of the limitative character of safeguard measures, their
inclusion in the WTO system is accompanied by limits to their use, so that the interests of all the
parties may be protected.  As regards notifications under Article 12.1(b) and (c), one specific purposeis to offer the Members concerned an opportunity for adequate consultations.  Effective exercise of
                                                     
471 See para. 4.628, supra .
472 See para. 4.671, supra .WT/DS98/R
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these rights by WTO Members calls for a minimum guaranteed level of information officially
transmitted in one of the working languages of the WTO.
7.113  Korea responds that its notifications are consistent with the guidance issued by the Committee
on Safeguards and with the Technical Cooperation Handbook on Notification Requirements.  For
Korea, its notifications provided the European Communities with all pertinent information.  In its
view, the purpose of the notification pursuant to Article 12 is to provide the Committee on Safeguards
with information which is to be disseminated to Members to facilitate meaningful prior consultationsunder Article 12.3 and, where appropriate, consultations under Article XXII of GATT 1994. This
function is implied both by the structure of Article 12, which includes both notification and
consultation, and by the final sentence of Article 12.2 which provides that “The Council for Trade in
Goods or the Committee on Safeguards may request such additional information as they may consider
necessary from the Member proposing to apply or extend the measure.” For Korea, if the purpose of
Article 12 were to replicate the exacting standards of Article 3 and 4.2(c), the final sentence of
Article 12.2 would be redundant.
(b) The notifications under examination
7.114  We asked Korea to clarify for us the sequence of its WTO notifications.  In light of its
response, we understand that the following notifications were made:
(a) 11 June 1996, G/SG/N/6/KOR/2, circulated on 1 July 1996.  Notification of the
KTC's decision to initiate an investigation on 17 May 1996.  (Circulated as anArticle 12.1(a) notification, of the initiation of an investigatory process relating to
serious injury or threat thereof and the reasons for it). (See Exhibit EC-1).
(b) 2 December 1996, G/SG/N/8/KOR/1, circulated on 6 December 1996.  Notification
of the completion of the report by the Office of Administration and Investigation
(OAI) that provided the basis for the KTC's determination of injury (on23 October 1996).  This notification stated: "The Korean Trade Commission has not
made a decision to apply a safeguard measure yet. Therefore, there is no information
on such a measure at this time.  The KTC will recommend to the relevant Minister an
appropriate remedial measure within 45 days of the injury determination."  This
document was circulated as an Article 12.1(b) notification of a finding of seriousinjury or threat thereof caused by increased imports.  (See Exhibit EC-2)
In this case, the KTC decided on the relief measure, namely the quota, on
2 December 1996, and recommended it on 6 December 1996 to the Minister for
Agriculture and Forestry for his consideration.
473 Korea stated that the KTC’s
recommendation on relief measures is not made public because it is only arecommendation that has no legal effect and that is subject to change by the relevant
Minister.
(c) 21 January 1997, G/SG/N/10/KOR/1, circulated on 27 January 1997, as an
Article 12.1(c) notification of a decision to apply or extend a safeguard measure.  In
the notification Korea invited interested Members for consultations during the week
of 3 February 1997, "before it makes a final decision on the measure by the week
beginning 24 February 1997." (See Exhibit EC-5)
(d) 31 January 1997, G/SG/N/11/KOR/1 circulated on 21 February 1997. Notification of
non-application of the proposed safeguard measure to developing countries.
(Footnote 2 of Article 9 of the Agreement on Safeguards). (See Exhibit EC-6)
                                                     
473 See para. 4.113, supra .WT/DS98/R
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(e) 24 March 1997, G/SG/N/10/KOR/1/Suppl.1, circulated on 1 April 1997 as a
supplemental notification under Article 12.1(c).  Notification of the Minister of
Agriculture and Forestry's decision of 1 March 1997 to impose a measure.  Thisnotification contained an attachment with further detailed information following the
6 February 1997 consultations and the special Committee on Safeguards meeting.
(See Exhibit EC-10)
(c) Analysis of Article 12 of the Agreement on Safeguards
7.115  We shall proceed in the following way:  First, we will examine the provisions of Article 12
generally in order to determine which WTO Members' actions or measures ought to be notified, the
content of these notifications and their timing; Second, we shall examine each of Korea's notifications
and assess their compatibility with the requirements of Article 12 of the Agreement on Safeguards.
(i) What actions must be notified
7.116  It is clear that the provisions of Article 12 of the Agreement on Safeguards prevail over the
Guidance issued by the Committee on Safeguards
474 (which contains a disclaimer to that effect) and
the Technical Cooperation Handbook on Notification Requirements (prepared by the Secretariat butwhich explicitly states that it "does not constitute a legal interpretation of the notification obligations
under the respective agreement(s)"). At issue in this case are the notifications required under
Articles 12.1(a), (b) and (c).
7.117  The wording of Article 12 provides that a number of types of actions must be notified to the
WTO Committee on Safeguards by Members proposing to use the provisions of the Agreement onSafeguards.   Article 12.1 refers to three such actions, by inference Article 12.2-3 refers to a fourth
item and Article 12.6 to a fifth item.
7.118  Article 12.1 requires notification to the Committee on Safeguards of (a) the initiation of an
"investigatory process relating to serious injury or threat thereof and the reasons for it"; (b) any
"findings of serious injury or threat thereof caused by increased imports"; and (c) any "decision toapply or extend a safeguard measure".
7.119  Articles 12.2 and 12.3 set forth the required content of such notifications, and provide as well
certain guidance as to the sequence of events to be followed in the notifications and related
consultations.  These Articles read as follows:
"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."
7.120  Although not explicitly listed in Article 12.1, the wording of Article 12.2 and 12.3 make it
clear that any proposed measure must also be notified to the Committee on Safeguards.  Article 12.2
                                                     
474 See document G/SG/1.WT/DS98/R
Page 189
provides that the notifications under Article 12.1(b) and 12.1(c) must contain information as to the
basis for the serious injury finding, as well as information as to the “proposed” measure to be applied.Article 12.3 requires that the notifying Member provide an adequate opportunity for “prior
consultations” with interested Members, that is, consultations prior to the actual application of the
measure.  Article 12.3 further requires that among the information to be discussed in the consultations
is the information already notified under Article 12.1(b) and 12.1(c), i.e., the basis for the serious
injury finding, and the details of the measure that the notifying Member proposes to apply.  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 it must 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.  Therefore, we reject Korea's argument that it
was not obliged to notify its proposed measure, but we note that Korea did do so.
7.121  Finally, pursuant to Article 12.6, a provisional measure shall also be notified to the
Committee on Safeguards.
(ii) The content of such notifications
(1) 12.1(a)
7.122  Regarding the "content" of notifications under Article 12.1, we note that with regard to the
notification of the initiation of an investigation, the terms of Article 12.1(a) only refer to the
obligation to notify "initiating an investigatory process relating to serious injury or threat thereof and the
reasons for it".
7.123  We also note that the notification under Article 12.1(a) does not have to take place before the
investigation is initiated, but rather immediately upon its initiation.  In this context, we recall that
there is no individual country notification (as there exists for instance for antidumping actions) under
the Agreement on Safeguards, presumably because in principle the safeguard measure is to be applied
on an MFN basis.  The purpose of the notification und er paragraph 1(a) of Article 12 is to inform all
WTO Members of the initiation of an investigation so that Members having a substantial interest may
exercise their rights to participate in the invest igation (provided for under Article 3.1) in the first
instance and possibly to request consultations under Article 12.3.
(2) 12.1(b) and (c)
7.124  For the notifications envisaged under paragraphs 1(b) and (c) of Article 12, i.e. the finding of
serious injury caused by imports, the proposed measure and the decision to apply a measure, we note
that the terms of Article 12.2 provide for a standard expressed in terms of an overall and a specificrequirement as to the content of these notifications.  First, there is a reference to "all pertinent
information" (the overall criterion) and then there is a list of factors (the specific criteria) presumed to
be pertinent information for which information must be provided.
"12.2 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." (emphasis added)
Article 12.2 refers thereby to six more specific items which must be covered by such notifications.
Thus it is necessary to notify: (1) evidence of serious injury or threat thereof that was caused byWT/DS98/R
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increased imports, (2) the precise description of the product involved, (3) the proposed measure, (4)
the proposed date of introduction, (5) the expected duration and (6) the timetable for progressive
liberalization.
7.125  In our examination of the context of the expression "all pertinent information" in Article 12.2,
we note that the same word "pertinent" is also used in Article 3, with reference to the domestic
publication of the overall report.  But Article 12 refers to "all pertinent information", while Article 3
refers to "all pertinent issues of fact and law".  Th e term "information" differs from "issues of fact and
law", the former being more general. Based on the ordinary meaning of the terms and their context, adistinction may be made between the less stringent requirement of "all pertinent information" for the
purpose of the WTO notification (Article 12), and "all pertinent issues of fact and law" for the purpose
of the final report (Article 3) which must be published domestically. "Information" (Article 12) on a
matter is certainly less comprehensive than a "report setting forth …  reasoned conclusions"
(Article 3) on the same matter.
7.126  The term "pertinent information" ought to be interpreted taking into account the context of
Article 12 and the object and purpose of the Agreement on Safeguards and its notificationrequirements.  We think that the notification serves essentially a transparency and information
purpose.  In ensuring transparency
475, 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 the circumstances of the case and the
conclusions of the investigation together with the importing country's particular intentions.  Thisallows 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.
476
7.127  We understand the European Communities to argue that, although in a summary form,
Members should notify to the WTO (pursuant to Article 12 of the Agreement on Safeguards )
everything they are required to publish domestically pursuant to Articles 3 and 4 of the Agreement on
Safeguards.  We consider that the standards of what must be published domestically and what ought
to be notified to the WTO are different.  If Members, when they negotiated the Agreement on
Safeguards , intended that what was to be published domestically also had to be notified to the WTO,
they could have made such a requirement clear by simply referring in Article 12 to the publication
requirements mentioned in Articles 3 and 4.  However, the ordinary meaning of the word
"information" implies that the other Members must gain knowledge of the actions undertaken by the
notifying Member.  In this sense, the amount of information notified must be sufficient to be useful to
Members with a substantial interest in the proposed safeguard measure.  We note that while not
required by the Agreement on Safeguards , and not included as an element of information in the agreed
notification formats adopted by the Committee, it may be desirable for the notification to include a
reference to the published report on the case referred to in Articles 3.1 and 4.2.  Such reference would,however, not replace the requirements of Article 12.  We note finally that the Committee has the
power to
“request such additional information as they may consider necessary from the
Member proposing to apply or extend the measure”.
477
                                                     
475 We recall the need for transparency of Members' actions as emphasized in the Marrakesh Decision
on Notification Procedures.
476 Article 12.3 explicitly provides that among the topics to be discussed are the objective of Article
8.1, i.e. endeavouring to maintain a substantially equivalent level of concession and other obligations to thatexisting under GATT.
477 Article 12.2 of the Agreement on Safeguards.WT/DS98/R
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(iii) The timing of such notifications
7.128  Article 12.1 provides that "A Member shall immediately notify the Committee on Safeguard
upon …" (emphasis added).  The ordinary meaning of the term "immediately"478 introduces a certain
notion of urgency.  As discussed above, we believe that the text of Article 12.1, 12.2 and 12.3 makes
clear that the notifications on the finding of serious injury and on the proposed measure shall in all
cases precede the consultations referred to in Article 12.3.   We note finally that no specific number of
days is mentioned in Article 12.  For us this implies that there is a need under the agreement tobalance 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 a WTO working language, may encounter further delay in preparing their
notifications.
7.129  We shall now proceed to examine the European Communities' claims with regard to the
notifications made by Korea, and determine whether such notifications respect the requirements ofArticle 12 as to their content and timing.
(d) Examination of the specific notifications by Korea
(i) Notification pursuant to Article 12.1(a): The initiation of the investigation - 1 July 1996,
G/SG/N/6/KOR/2
7.130  Korea's notification states the date of the initia tion of the investigation, the products covered and
then refers to two reasons for the initiation of th e investigation: a petition was filed and the level of
imports had increased.  There is no explicit reference to any serious injury to the domestic industry, but
Korea does refer to an initiation pursuant to Article 12.1(a) of the Agreement on Safeguards.
7.131  We disagree with the European Communities that such notification should necessarily include
a discussion of all of the legal requirements for a safeguard action to be taken such as a discussion of
the conditions of the markets, etc.  We note that initiation is the beginning of the process, and the
Agreement on Safeguards does not establish specific standards for the decision to initiate, as do
Article 5 of the Agreement on the Implementation of Article VI of GATT 1994 and Article 11 of the
Agreement on Subsidies and Countervailing Measures.  Thus, to require a discussion in the
notification of initiation of evidence regarding the elements that must be found to exist to impose ameasure at the end of the investigation would impose a requirement at the initiation stage that is not
required by the Agreement on Safeguards itself.  We note in the first instance that whatever the
relationship between the requirements of Article 12.2 regarding the contents of notifications and the
contents of the investigation reports published pursuant to Articles 3.1 and 4.2, this question is not
relevant to Article 12.1(a) notifications, as Article 12.2 specifically and exclusively addresses“notifications referred to in paragraphs [12.]1(b) and [12.]1(c)”.
7.132  The format agreed by the Committee for notifications under Article 12.1(a) is not legally
binding, although helpful.  The guidance in the form at is general as to the kind of information to be
provided, referring simply to examples of information on the reasons for initiation, and saying nothing
about the level of detail of that information.
7.133  Although Korea's notification could usefully have included a reference to allegations of
serious injury and a cross-reference to any domestic publication(s) in Korea, we think that thisnotification was sufficient to inform WTO Members adequately of Korea’s initiation of an
                                                     
478 The New Webster Encyclopedic Dictionary defines immediately as "without delay, straightaway";
the New Shorter Oxford Dictionary defines it as "without delay, at once, instantly".WT/DS98/R
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investigation concerning a particular product, so that Members having an interest in the product could
avail themselves of their right to participate in the domestic investigation process.
7.134  As to the timing of this notification, we note a delay of 14 days (28 May 1996 to
11 June 1996) between the publication of the initiation decision and its notification to the WTO.479
We recall that Members are required to notify the initiation of any investigation “immediately”,although no specific time-period is identified.  We note, moreover, that the content of the
Article 12.1(a) notification is minimal.  Recalling again the reasons for the requirement of a
notification without delay, we believe that any delay in Article 12.1(a) notifications can beproblematic.  We therefore disagree with Korea that it satisfied the requirement for an immediate
notification because it did so "as soon as practically possible".  There is no basis in the wording of
Article 12.1 to interpret the term "immediately" to mean "as soon as practically possible".  In light of
all of the foregoing considerations, we find that the 14-day period between Korea’s initiation of the
investigation and its presentation of the notification related thereto, does not respect the requirements
for “immediate” notification and is in violation of Article 12.1 of the Agreement on Safeguards.
(ii) Notification Pursuant to Article 12.1(b) and 12.2 : Determination of serious injury caused by
increased imports - 2 De cember 1996, G/SG/N/8/KOR/1
7.135  Korea's notification of the finding of serious injury caused by increased imports stated that
imports had grown, that the domestic industry's share of domestic consumption had decreased and
domestic stocks had increased.  There is no explicit reference to any analysis of the level of sales,
production, productivity, and employment as such, nor is there any reference to any causationelement. We note that there is no cross-reference to the domestic publication of this finding of serious
injury where the reader would find further information.
7.136  We consider, however, that this notification contains sufficient information on what Korea
considered to be evidence of injury caused by increased imports as well as on the other listed items in
Article 12.2.  We note that there is no explicit requirement to explain how such injury has been causedby increased imports.  Rather the requirement is to notify "evidence of injury caused".  We note that
the last sentence of Article 12.2 allows for the possibility to request additional information.  We find
that Korea's notification would permit the effective exercise of the right of other Members to request
consultations.  Consequently, we consider that the content of that Korean notification made pursuant
to Article 12.1(b) meets the requirements of Article 12.2 of the Agreement on Safeguards.
7.137  As to the timing of such notification, we note that, although it was made two months prior to
the consultations, a delay of 40 days (23 October 1996 to 2 December 1996) between the domestic
publication of the injury finding and the date of that notification to the Committee on Safeguards took
place. We find that this delay does not satisfy the requirements for an immediate notification and
therefore is in violation of Article 12.1 of the Agreement on Safeguards.
(iii) Notification Pursuant to Article 12.1(c) and 12.2 : Proposed measure – 21 January 1977,
G/SG/N/10/KOR/1
7.138  As we mentioned before, we are of the view that Members are obliged under Article 12.1(c)
to notify any decision with regard to the proposed imposition of a safeguard measure.  Korea did so
on 21 January 1997.
7.139  Considering that an important purpose of the not ifications of the serious injury determination
and the proposed measure is to provide other Members with an effective possibility to requestconsultations, we examine only the notifications of 2 December 1996 and 21 January 1997 which are
                                                     
479 We note, however, a period of 34 days between the domestic publication of the initiation decision,
28 May 1996, and the date of the circulation of the said notification to all WTO Members, i.e. 1 July 1996.WT/DS98/R
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the only notifications which were circulated before the consultations of 6 February 1997.  The
notification of 2 December 1996 is discussed above. We consider that this notification containssufficient information on what Korea considered to be evidence of injury caused by increased imports
as well as on the other listed items in Article 12.2.  We note that there is no explicit requirement to
explain how such injury had been caused.  Rather one of the listed factors is "evidence of injury
caused by increased imports".  We note again that the last sentence of Article 12.2 allows for the
possibility to request additional information. Consequently, we consider that the content of thatKorean notification of its proposed measure, made pursuant to Article 12.1(c), meets the requirements
of Article 12.2 of the Agreement on Safeguards as it contains sufficient information on the proposed
measure, e.g. its nature, scope and duration, to provide Members with a substantial interests with
adequate information to request consultations.
7.140  As to its timing, we note that this notification took place more than 6 weeks after the decision
on the proposed measure was taken (6 December 1996 to 21 January 1997).  For us, this is not an
"immediate" notification.  We consider that this delay does not meet the requirements for an"immediate" notification and therefore is in violation of Article 12.1 of the Agreement on Safeguards.
(iv) Notification Pursuant to Article 12.1(c) : The taking of the safeguard measure –
24 March 1997, G/SG/N/10/KOR/1. Suppl.
7.141  Following the consultations with interested Members and the special meeting of the
Committee on Safeguards, Korea notified a revised description of its investigation process and themeasure it had by then imposed.  This notification is, in the present case, the more complete one.
7.142  We consider that provision of additional notifications following consultations may be helpful
in furthering multilateral transparency, that it may be evidence of adequate consultations and may also
constitute a rectification of prior, incomplete notifications.
480  In this context, we recall that one of the
purposes of consultations is to review the Article 12.1(b) and (c) notifications, logically implying thatsuch consultations may lead to revision and rec tification of those notifications.  The wording of
Article 12.2 and 12.3 seems to confirm this possibility.
7.143  In our view notifications can always be revised.  However, we cannot accept Korea's
argument that the fact that the European Communities and Korea almost "settled" this case is
evidence that the notification was sufficient.  Parties may settle a case on the basis of additionalinformation provided during the consultation and not contained in the prior notification.
7.144  As far as it covers Korea's final decision to take a safeguard measure
481, we find that the
content of the Korean notification of 24 March 1997 meets the requirements of Article 12.1(c) and
12.2 of the Agreement on Safeguards.
7.145  As to the timing of this notification (as far as it covers Korea's final decision to take a
safeguard measure), we note that Korea notified on 24 March 1997 that on 1 March 1997 a final
decision had been taken to impose a quota as a safeguard measure.  We fail to see how this can be
viewed as an immediate notification.  As far as it covers Korea's final decision to take a safeguard
                                                     
480 In our view, in the event that a Member considers that it has to revise or to correct its notification,
that Member may, but is not obligated to, offer further consultations on this revised notification before anydefinitive measure is imposed, in an attempt to prevent any eventual dispute settlement proceedings based on analleged violation of Article 12.
481 This 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 thisnotification took place after the consultations, and therefore cannot remedy the flaws in the previousnotification.WT/DS98/R
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measure, we find that the timing of the Korean notification of 24 March 1997 does not meet the
requirements of Article 12.1 of the Agreement on Safeguards.
2. Claim of inadequate consultations
7.146  The European Communities first claim that since Korea's notifications, which serve as the
basis for the consultations, were incomplete and untimely, the consultations were therefore
inadequate.  For the European Communities, in order for the opportunity to consult to be adequate
pursuant to Article 12.3, consultations must take place on all the pertinent information to be provided
under Article 12.2 in advance of the consultations, including the evidence to be supplied in the
notifications of injury findings and of the results of the investigation.
7.147  The European Communities further argue that Article 12.3, when specifying that it is for the
Member “proposing to apply a safeguard measure ” to offer to consult, inter alia , on the “proposed
measure”, implies that consultations must take place before the measure is applied (i.e. when it is still
a "proposal").  We agree with the European Communities on this issue.  Notification of the proposedmeasure must take place before the consultations.
7.148  In the present case, a special meeting of the Committee on Safeguards took place on
21 February 1997 and Korea held bilateral consultations with the European Communities, Australia
and New Zealand on 4 and 5 February 1997 in Geneva.  By failing to provide all pertinent
information in its notifications in advance of consultations (and specifically those notifications made
pursuant to Article 12.1(b) and (c)), the European  Communities argues that  Korea prevented WTO
Members having a substantial interest as exporters from engaging in meaningful consultations, thusfailing to provide them with an adequate opportunity in this respect.  As a consequence, it also
frustrated the further objective of those consultations, namely to reach an agreement or to ensure the
maintenance of the balance of concessions as foreseen in Article 8.1 of the Agreement on Safeguards.
7.149  Korea responds that after receiving two requests for consultations under Article 12.3 of the
Agreement on Safeguards, it provided (although, according to Korea, this was not required) apreliminary notification of the proposed measure, under Article 12.1(c) on 21 January 1997.   We
have already mentioned that we consider that Me mbers are under an obligation to notify any proposed
measures and must also invite any interested party to consult on this issue.  Korea adds that
consultations were certainly fruitful as they almost resulted in a mutually agreed solution. The
European Communities responds that the case was never settled but that in any case the information
and responses submitted by Korea never provided it with all pertinent information.
7.150  We have found above that the content of Korea's notifications was in conformity with the
provisions of Article 12.  Moreover, we consider that consultations may be adequate even in
circumstances where prior notifications of a finding of serious injury or of any proposed measure are
incomplete.  In fact one of the purposes of the consultations is to review the content of suchnotifications (and thereby augment it if necessary).  During consultations parties usually exchange
further information, exchange questions and answers and proceed to a thorough discussion of the
national authority's determinations.
7.151  The parties have explicitly requested us to assess the compatibility of their consultations with
the requirements of the Agreement on Safeguards, based on the chronology of events that they
submitted to us.
482  We note that no formal mutually agreed solution was reached by the parties in this
dispute, but we do not consider that the only criterion for assessing the adequacy of consultations iswhether parties through such consultations settle their dispute.  Many formal dispute settlement
proceeding take place following consultations which are WTO compatible and which do not lead to a
mutually agreed settlement of the dispute.
                                                     
482 See paras.4.730 and 4.762 supra .WT/DS98/R
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7.152  In the present case we note that parties exchanged questions and answers.  The European
Communities claims that it has always been unsatisfied with the Korean's answers and notifications(together with Korea's determination).  This may be the case and would explain why it decided to
pursue dispute settlement proceedings, but it does not prove that Korea did not consult in good faith
for the purpose of informing interested Members of its investigation, its conclusion and its proposed
actions.  We note also that Korea did impose a measure at a level and for a duration different, and less
restrictive, than initially proposed.  Consultations we re certainly fruitful in this respect, albeit not
sufficient to satisfy the European Communities.
7.153  We reject therefore the EC claim that Korea failed to provide adequate opportunity to consult.
Moreover, it seems to us that such consultations have led to an important revision of the initial
notification and that parties, at some point, entered into very serious negotiations and considered
serious elements of a mutually agreed solution.  The fact that this proposed settlement was not
formalized through the acceptance by the relevant internal authorities of the European Communities is
immaterial.  What is relevant for the purpose of this EC claim, is the fact that the parties to theseconsultations were able to negotiate quite effectively, which, in our view, demonstrates that the
consultations were adequate.  For us, this is the purpose of any consultation process and the scope of
the obligation contained in Article 12.3 of the Agreement on Safeguards, i.e. to favour efforts by the
parties to reach a mutually agreed solution of their disagreement.   In our view Korea has very well
respected its obligation during the consultation process in this case.  We therefore reject this EC claimmade pursuant to Article 12.3 of the Agreement on Safeguards.
VIII.  CONCLUSIONS AND RECOMMENDATIONS
8.1 In the light of the findings above, we conclude that the definitive safeguard measure was
imposed inconsistently with the provisions of the Agreement on Safeguards in that
(a) Korea's serious injury determination is not consistent with the provisions of
Articles 4.2(a) of the Agreement on Safeguards;
(b) Korea's determination of the appropriate safeguard measure is not consistent with the
provisions of Article 5 of the Agreement on Safeguards;
(c) Korea's notifications to the Committee on Safeguards (G/SG/N/6/KOR/2,
G/SG/N/8/KOR/1, G/SG/N/10/KOR/1, G/SG/N/10/KOR/1. Suppl) were not timelyand therefore are not consistent with the provisions of Article 12.1 of the Agreement
on Safeguards.
8.2 In the light of the findings above, we reject
(a) the European Communities' claim that Korea violated the provisions of Article XIX:1
of GATT by failing to examine the "unforeseen developments";
(b) the European Communities' claim that Korea violated the provisions of Article 2.1 of
the Agreement on Safeguards by failing to examine, as a separate and additional
requirement,  the "conditions" under which increased imports caused serious injury to
the relevant domestic industry.
(c) the European Communities' claims that the content of Korea's notifications to the
Committee on Safeguards (G/SG/N/6/KOR/2, G/SG/N/8/KOR/1, G/SG/N/10/KOR/1,
G/SG/N/10/KOR/1. Suppl) did not meet the requirements of Article 12.1, 12.2 and
12.3 of the Agreement on Safeguards.WT/DS98/R
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(d) the European Communities' claim that Korea violated the provisions of Article 12.3
of the Agreement on Safeguards in refusing to offer appropriate consultations to the
European Communities.
8.3 Under Article 3.8 of the DSU, in cases where ther e is 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.  Accord ingly, we conclude that to the extent that Korea
has acted inconsistently with the provisions of the Agreement on Safeguards, as described in
paragraph 8.1 supra , it has nullified or impaired the benefits accruing to the European Communities
under that agreement.
8.4 The Panel recommends  that the Dispute Settlement Body request Korea to bring its measures
into conformity with its obligations under the WTO Agreement.
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