UNITED STATES - RESTRICTIONS ON IMPORTS OF COTTON AND MAN-MADE FIBRE UNDERWEAR
Document: Original: English UNITED STATES - RESTRICTIONS ON IMPORTS OF COTTON AND MAN-MADE FIBRE UNDERWEAR Report of the Panel
Date: 8 November 1996
Document codes: WT/DS24/R
Complainant: Costa Rica
Respondent: U.S.
Third parties: India
Dispute stage: Appellate Body
Agreements cited: Art. 2, 6, 8  Textiles and Clothing

UNITED STATES - RESTRICTIONS ON IMPORTS OF COTTON
AND MAN-MADE FIBRE UNDERWEAR
Report of the Panel
The report of the Panel on is being circulated to all Members, pursuant to the DSU.
The report is being circulated as an unrestricted document from 8 November 1996
pursuant to the Procedures for the Circulation and Derestriction of WTO Documents
(WT/L/160/Rev.1). Members are reminded that in accordance with the DSU only
parties to the dispute may appeal a panel report, an appeal shall be limited to issues
of law covered in the panel report and legal interpretations developed by the panel,
and that there shall be no ex parte communications with the panel or Appellate Body
concerning matters under consideration by the panel or Appellate Body.
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Page
V Main Arguments by the Parties (cont'd)
F. Serious Damage or Actual Threat Thereof 35
- The March 1995 Market Statement 39
- The July 1995 Market Statement 42
- Analysis of March and July Market Statements 43
- The Counting of Re-imports 43
G. Existence of Causal Link 45
- Restraint Agreements with Other Countries 46
- The US Policy in Applying the Safeguard 50
H. Attribution to Individual Exporting Country(ies) 51
- Obligation to Submit Specific and Relevant Information 51
- The Nature of Costa Rica's Exports 52
I. More Favourable Treatment for Re-imports 53
- The United States Fabric Industry 56
J. The Requirement to Hold Consultations 58
K. Effective Date of the Restriction 60
L. Article 2 of the ATC 62
M. A Member Must Endeavour to Accept Recommendations of the TMB 64
N. Nullification or Impairment of Benefits 68
VI Interim Review 69
VII Findings 70
A. Claims of the Parties 70
- Introduction 70
- Main Substantive Claims 71
B. General Interpretative Issues 71
- Standard of Review 72
- Burden of Proof 74
- The Interpretation of the ATC 74
- The Structure of Article 6 of the ATC 76
C. Review of the Findings by the US Investigating Authorities on Serious
Damage Attributable to Costa Rican Imports 77
- The Scope of the Matter 77
- Serious Damage 77
- Overview 78
- Output (US Production) 78
- Market Share (Market Share Loss/Import Penetration) 79
- Employment 79
- Man-Hours 80
- Sales 80
- Profits 80
- Investment 80
- Utilization of Capacity 81
- Prices 81
- Causality 82
- Attribution of Serious Damage to Costa Rica 82
D. Actual Threat of Serious Damage 84
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VII Findings (cont'd)
E. Other Claims 85
- Article 6.6(d) of the ATC 85
- Obligation to Consult 86
- Date of Application of the Restriction 86
- Article 2.4 of the ATC 88
- Article 8 of the ATC 88
VIII Recommendation 89
ANNEX March 1995 Market Statement 90

I INTRODUCTION
1.1 On 22 December 1995, Costa Rica requested consultations with the United States under Article 4
and other relevant provisions of the Understanding on Rules and Procedures Governing the Settlement
of Disputes (DSU), Article XXIII of the General Agreement on Tariffs and Trade 1994 (GATT 1994)
and the corresponding provisions of the Agreement on Textiles and Clothing (ATC) (WT/DS24/1).
Consultations were heldon18 January and1 February 1996, however, nomutuallysatisfactory solution
was reached. On 22 February 1996, Costa Rica requested the establishment of a panel (WT/DS24/2)
which was considered by the DSB at its meeting on 5 March 1996 (WT/DSB/M/12). The Dispute
Settlement Body (DSB) accordingly agreed to establish a panel with standard terms of reference in
accordance with Article 6 of the DSU.
1.2 On 19 April 1996, the DSB was informed that the terms of reference and the composition of
the Panel (WT/DS24/3) were as follows:
Terms of Reference
"To examine, in the light of the relevant provisions of the covered agreements cited by
Costa Rica in document WT/DS24/2, the matter referred to the DSB by Costa Rica in that
document and to make such findings as will assist the DSB in making the recommendations
or in giving the rulings provided for in those agreements".
Composition
Chairman: Mr. Thomas Cottier
Panelists: Mr. Martin Harvey
Mr. Johannes Human
1.3 The Panel heard the parties to the dispute on 24-25 June 1996 and 29 July 1996. The Panel
also met with the parties on 15 October 1996 to review aspects of the interim report, at the request
of the parties. The Panel submitted its complete findings and conclusions to the parties to the dispute
on 25 October 1996.

II FACTUAL ASPECTS
Outward Processing Regime: "807 Trade" and "Guaranteed Access Levels"
2.1 In the course of the last six years, there has been a significant change in the US cotton and
man-made fibre underwear manufacturing industry which has significantly switched from producing
and assembling underwear domestically to producing components in the United States for assembly
in other countries and subsequent return to the same enterprises in the United States for marketing.
This pattern of co-production has enabled the companies in this industry to maintain their share of
the US market by making use of the labour force available outside the country while at the same time
controlling the source of raw materials, the production timetable, the types and amounts of underwear
to be produced and the marketing of the final product. Moreover, these co-production operations were
consistent with the policies of the United States, which was encouraging investment and production
in Mexico and the Caribbean Basin.

2.2 Item 9802.00.80 of the Harmonized Tariff Schedule of the United States (HTSUS)1 provides
for re-importation into the US of goods that have been assembled abroad from US-made components;
it provides the basis for a type of outward processing regime which enables US manufacturers of
relatively labour-intensive products to export US parts for assembly abroad and return of the assembled
products to the United States with partial exemption from US duties. This programme is not limited
to apparel, although it is widely used in apparel trade because of the high labour content and the
substantial US duties on apparel imports. To qualify for partial duty exemption under item 9802.00.80,
articles must be assembled abroad in whole or in part of fabricated components, the product of the
United States, which has been exported in condition ready for assembly without further fabrication;
has not lost its physical identity in such articles by change in form, shape or otherwise; and has not
been advanced in value or improved in condition abroad except by being assembled and except by
operations incidental to the assembly process such as cleaning, lubricating and painting.
2.3 The exported articles used in the imported goods must be "fabricated US components," i.e.,
manufactured articles ready for assembly in their exported condition, except for operations incidental
to the assembly process. Integrated circuits, compressors, zippers, buttons and precut or preformed
sections of a garment are examples of fabricated components in this sense. To be considered "US
components," the exported articles do not necessarily need to be fabricated from materials or components
wholly made in the United States. If a foreign product undergoes processing in the United States
sufficient to confer US origin for customs purposes, then the resulting processed goods may be exported,
assembled abroad and re-imported and still qualify for partial duty exemption under item 9802.00.80.
Thus, in an 807 operation, the cloth can come from any country in the world: what is important is
to have it cut in the United States. There is no obligation to re-import the articles assembled abroad
into the United States; producers of underwear assembled from US components could sell the underwear
to any market in the world.
2.4 An article imported under item 9802.00.80 is treated as a foreign article for customs purposes
and recorded as a foreign article in US import statistics. Chapter 98, Subchapter II, Note 2 of the
HTSUS, provides that any product of the US which is returned after having been advanced in value
or improved in condition abroad, or assembled abroad, shall be a "foreign article" for the purposes
of the Tariff Act of 1930, as amended. It is not legally of US origin even if the pieces of a garment
re-imported are cut in the United States. This rule has been provided as an explicit exception to the
US rule of origin for textiles and apparel, in force up to 30 June 1996, which normally deems such
products to originate from the place where garment pieces are cut. This exception remains even in
the revised rules of origin for textiles which took effect on 1 July 1996. HTSUS Note 2 also provided
that textile or apparel articles are to be treated as foreign articles even if they are assembled or processed
in whole of fabricated components that are a product of the United States or are processed in whole
of ingredients (other than water) that are a product of the United States, in beneficiary countries of
the Caribbean Basin Initiative.
2.5 An article imported under item 9802.00.80 is dutiable under the rate otherwise applicable to
the assembled product, but the dutiable value is reduced by deducting the cost or value of the exported
fabricated components from the value of the imported assembled product. For instance, the underwear
re-imports in the present case are subject to customs duties at the rate applicable to underwear, but
their customs value is reduced by deducting the cost or value of the exported garment sections, elastic,
zippers, buttons, thread, etc. used in assembling the underwear in Costa Rica. The duty reduction
(which is not regulated by the ATC) is a key factor in making the offshore assembly operations in
Costa Rica economically viable. The "807" programme is not mandated by tax, social or industrial
requirements. However, the underlying intent encompasses a variety of broader social and economic
objectives, such as aiding structural adjustment, assisting the economic development of foreign countries,
1This provision is frequently referred to as "807 trade" as it was covered by that chapter in the former US tariff
schedules.

maintaining the competitiveness of US industry, lowering prices for consumers, and reducing the tax
burden on US companies.
Guaranteed Access Levels
2.6 Guaranteed Access Levels, or GALs, are provided for textile re-imports under the US Special
Access Programme, a programme designed to develop and expand manufacturing in the Caribbean
Basin, Andean Trade Preference countries and Mexico (under the North American Free Trade Agreement
(NAFTA)) by allowing guaranteed access to the US market for re-imports of apparel made with fabric
formed and cut in the United States. The United States employs this programme as a form of "more
favourable treatment" for certain re-imports - those using US formed and cut fabric - as provided for
in Article 6.6(d) of the ATC. Under this programme, guaranteed quota access ("GALs") for particular
apparel products are specified by agreement with the relevant exporting country. Garment pieces cut
in the United States from US-formed fabric (e.g. woven or knitted in the United States) are exported
to that country, where they are assembled; the apparel assembled from them is guaranteed access to
the United States at the negotiated level, and is entered under HTSUS subparagraph 9802.00.8015,
which corresponds to the former Item 807A in the pre-HTSUS tariff nomenclature. Entries must be
accompanied by an ITA 370-P form, which certifies the facts necessary for eligibility of the goods
under this subparagraph. The Special Access Programme only affects access to the US market for
textiles and apparel articles, and does not affect the effective duty rate for imports.
Specific Limits
2.7 A specific limit (SL) refers to the level of restraint (quota) on the exports or imports of the
product in question during a set period of time. The ATC provision setting out the method for calculating
the applicable restraint level is found in Article 6.8.
Chronology of Events
2.8 In early 1995 the United States Committee for the Implementation of Textiles Agreements (CITA)
reviewed data on total imports of cotton and man-made fibre underwear (category 352/652) and examined
the state of the domestic industry producing such goods. Based on the factors examined, the CITA
determined that there was a situation of serious damage or actual threat thereof to the US underwear
industry. The United States attributed the serious damage or actual threat thereof, to imports from
seven countries, Colombia, Costa Rica, Dominican Republic, El Salvador, Honduras, Thailand and
Turkey. (See Section V.A.)
2.9 Based on its findings, the United States requested consultations on 27 March 1995 with,
inter alia, Costa Rica on trade in cotton and man-made fibre underwear (US textile category 352/652),
with a view to initiating the transitional safeguard procedure for establishing a quantitative restriction
on that product in accordance with Article 6 of the ATC and provided a statement of serious damage
setting out the factual information in the matter (Annex). The United States proposed a level of restraint
for underwear imports from Costa Rica pursuant to Article 6.8 of the ATC. On 21 April 1995, the
United States published the contents of the request for consultations, including the restraint level and
period, in the Federal Register.
2.10 Consultations were held on 1-2 June 1995 at which the United States proposed a two-part measure
comprising a specific limit (SL) of 1.25 million dozen and a guaranteed access level (GAL) of
20 million dozen. Costa Rica did not consider that the United States had substantiated its case under
the provisions of the ATC and the consultations did not result in a mutually acceptable solution.

2.11 On 22 June 1995, the United States made a new proposal for the establishment of a quantitative
restriction at a level of 1.325 million dozen specific level (SL) with annual growth of 6 per cent and
20 million dozen GAL for 1996.
2.12 Because no mutual agreement had been reached between the United States and Costa Rica by
the end of 30 days after the 60-day consultation period provided for in Article 6.7 of the ATC, the
United States implemented a restraint on imports from Costa Rica effective 23 June 1995 for a 12-month
quota period starting 27 March 1995 and referred the matter to the Textiles Monitoring Body (TMB),
pursuant to Article 6.10 of the ATC.
2.13 On 10 July 1995, the United States sent Costa Rica a further proposal for a specific limit for 1996
of 3 million dozen with 6 per cent annual growth and a guaranteed access level of 30 million dozen.
This proposal included a provision to reduce the specific limit to 1.5 million dozen in the event the
US Congress passed a law providing for quota-free treatment for goods from the Caribbean Basin that
prescribed certain rules of origin (the "ratchet-down" clause). Costa Rica continued to question the
basis for the request for a restriction and did not respond to this proposal.
2.14 On 12 July 1995 the US made a proposal to Costa Rica with the same levels as on 10 July
but which did not specify the reduction in the specific limit in the event of the above-mentioned law
being passed and subjected reduction in SL to subsequent negotiations.
Review by the TMB
2.15 The TMB reviewed this case, and others, in accordance with Article 6.10 of the ATC and
heard presentations from the United States, Costa Rica, Honduras, Thailand and Turkey from
13-21 July 1995. During the proceedings, the United States provided updated data and other relevant
information (July 1995Market Statement, see paragraphs 5.135-5.138). These data were usedtoupdate
the data presented in March so that all of the data would be consistent with the reference period of
the call, the year ending in December 1994. The United States also supplied the TMB with additional
information requested by Members subject to the call and by the TMB members concerning the industry,
re-imports and exports.
2.16 During its review of this safeguard action by the United States against imports of
category 352/652 from inter alia Costa Rica, the TMB found that serious damage had not been
demonstrated. The TMB could not, however, reach consensus on the existence of actual threat of serious
damage. The TMB recommended that further consultations be held between the United States and
Costa Rica,
"with a view to arriving at a mutual understanding, bearing in mind the above, and with due
consideration to the particular features of this case, as well as equity considerations"
(G/TMB/R/2).
2.17 A new round of consultations was held on 16-17 August 1995 at which a number of issues
were raised by Costa Rica with respect to the justification of US actions. The consultations did not
produce an agreement and both parties reported the situation to the TMB.
2.18 At its meeting on 16-20 October 1995, the TMB received reports from Costa Rica and the
United States on the bilateral consultations they had had following the TMB recommendation. It took
note of the reports and of the fact that the two parties had not reached a mutual understanding during
the consultations. The TMB's discussions confirmed the Body's previous findings in this matter; there
being no further requests by the parties involved, the TMB considered its review of the matter completed
(G/TMB/R/5).

Further Consultations
2.19 On 22 November 1995, a further consultation was held at which the United States made a new
restraint proposal for a specific limit of 7 million dozen (sub-limit of 4 million dozen for knit products)
and a GAL of 40 million dozen for the period 1 April 1996 to 31 March 1997 and also including the
previously mentioned "ratchet-down" clause and 6 per cent growth. Costa Rica submitted a proposal
for a specific limit of 21 million dozen for 1996 followed by a second proposal fixing SL and GAL
access for the period corresponding to 1996-1997 at 15.4 and 40 million dozen respectively. These
were not accepted by the United States. Thereafter, Costa Rica requested consultations under Article 4
of the DSU.
2.20 The restriction, augmented by the application of a growth rate of 6 per cent was renewed for
a second 12-month period on 27 March 1996.

Action Under the Dispute Settlement Understanding
2.21 On 22 December 1995, Costa Rica requested the US Government to hold consultations under
Article 4 of the ATC and the other relevant provisions of the DSU, Article XXIII of GATT 1994 and
the corresponding provisions of the ATC. The two countries met on two occasions, on 18 January
and 1 February 1996.
2.22 At the first of these meetings, Costa Rica raised a number of questions, which it subsequently
submitted in writing, requesting the earliest possible written reply. Moreover, reiterating its view that
the call for consultations was not justified under the ATC, Costa Rica again requested that it be
withdrawn. On 18 January 1996, Costa Rica proposed establishing, instead of a restriction, a mechanism
for monitoring the composition and patterns of trade between the two countries in the category in
question. However, this suggestion was not accepted by the United States.
2.23 At a meeting held on 1 February 1996 the United States made a new proposal to Costa Rica
offering access for 57 million dozen during the period 27 March 1995 to 30 September 1996. In
addition, access for the 18-month period from 1 October 1996 to 26 March 1998 would be fixed at
12 million dozen SL, with a sub-limit of 6.8 million dozen for knitwear, and 30 million GAL. This
restraint proposal included a "ratchet-down" clause, in accordance with which SL access would be
reduced to 1.5 and 1.6 million dozen for each of the periods covered by the restriction. Once again,
Costa Rica rejected this proposal as inconsistent with the corresponding provisions of the ATC.
2.24 The period of 60 days for consultations provided for in the DSU ended without any satisfactory
agreement having been reached between the parties, and the United States continued to maintain its
unilateral restrictions on the products in question. Consequently, on 5 March 1996, Costa Rica made
a request to the DSB, which was granted, for the establishment of a Panel.

III FINDINGS REQUESTED
3.1 Costa Rica requested the Panel to find specifically, inter alia, on the following aspects:
1. That as a result of having imposed a new restriction on the trade in cotton and man-made
fibre underwear in violation of the provisions of the ATC, the United States was in
breach of Article 2 of that Agreement;

2. That the increase in "807 trade" could not be considered to constitute increased imports,
within the meaning of Article 6.2 of the ATC;
3. That if, the above notwithstanding, it was considered that these increased imports did
fall within the provisions of Article 6.2 of the ATC, the fact was that this showed the
US industry manufacturing underwear cut pieces to be in excellent condition and not
to be in need of any protection;
4. That serious damage and actual threat of serious damage were two different concepts
which, to be demonstrated, required the submission of separate information and a
different analysis;
5. That the finding of the TMB to the effect that the United States had not demonstrated
serious damage to its underwear-manufacturing industry should be upheld;
6. That, given the unreliable, erroneous, contradictory and incomplete nature of the
information submitted by the United States in an attempt to justify its account of the
situation of its industry, that country had failed to fulfil its obligation to demonstrate
serious damage;
7. That the United States, having changed the ostensible basis for its measure, had
nonethelessnever submitted theinformation required or provided theanalysisnecessary
to demonstrate the existence of actual threat of serious damage to its
underwear-manufacturing industry;
8. That, even assuming the existence of increased imports and serious damage or actual
threat of serious damage, the United States had not demonstrated the existence of a
causal link between the two, and indeed that the agreements which it had reached with
the other countries called to consultations in this category confirmed the non-existence
of such a causal link;
9. That, even supposing that the United States had met the three basic requirements for
entitlement to resort to the special transitional safeguard mechanism, it had never
submitted the information necessary nor carried out the analysis required to attribute
the alleged damage or threat to imports from Costa Rica;
10. That the various factors present in this case and, in particular, the proposals for restraint
made by the United States to Costa Rica and the quota levels which it had negotiated
with the other countries called to consultations in this category, indicated that what
the United States was really seeking was to protect not the underwear-manufacturing
industry but rather the branch of the domestic industry which manufactured the cloth
used in underwear production;
11. That the ATC did not permit the imposition of a safeguard measure on an imported
clothing product in order to protect the cloth used to produce it;
12. That the United States had imposed and renewed the restriction on the basis of the
existence of an actual threat of serious damage, despite never having held consultations
on the subject;
13. That in June 1995 the United States had imposed a unilateral restriction on Costa Rica,
making it retroactive to March of that year, despite the fact that under the ATC it had
no authority to do so; and

14. That the United States violated the spirit and the letter of Article 8 of the ATC by
refusing, without any justification, to follow the recommendations made by the TMB,
in particular, that it should hold consultations with Costa Rica bearing in mind that
serious damage had not been demonstrated, that no consensus could be reached on
the existence of actual threat of serious damage, that the trade concerned had particular
features and that there were equity considerations which should be taken into account,
and by failing to submit a report explaining its inability to conform with those
recommendations.
3.2 Costa Rica further requested the Panel, on the basis of the above considerations and in view
of the fact that the United States had proceeded in violation of the ATC, to find in its report that the
Government of the United States should ensure that the unilateral restriction adopted against Costa Rica
should comply with the ATC and that in this particular case compliance should be through the immediate
withdrawal of the measure. Costa Rica based its request on Article 19.1 of the DSU, which authorized
the Panel to specify the appropriate way of applying its recommendations.
3.3 The United States requested the Panel to find that:
- the United States application and maintenance of a safeguard restriction on imports
of cotton and man-made fibre underwear from Costa Rica was consistent with Article 6
of the ATC;
- the restriction was not inconsistent with Articles 2 and 8 of the ATC; and
- the above measure did not nullify and impair benefits accruing to Costa Rica under
the ATC or GATT 1994.
3.4 With respect to Costa Rica's request that the Panel find
"in accordance with the terms of reference assigned to it by the DSB, that the United States
should withdraw the unilateral restriction imposed on Costa Rica forthwith",
and also to find in its report
"that the United States should proceed to bring its measure into conformity with the ATC,
which implies immediately withdrawing it";
the United States considered that the heterogeneity of phrasing left Costa Rica’ s objective in doubt,
but argued that if the request was for a Panel recommendation that specific actions should be taken,
or for findings that would amount in effect to such a recommendation, the request was inconsistent
with Article 19.1 of the DSU.
3.5 In the view of the United States, the DSU gave WTO panels explicit instructions with respect
to the one and only recommendation that properly may be offered if the measures of a Member were
found to be inconsistent with its obligations: to bring the measures into conformity with its obligations.
The avoidance of granting specific remedies, such as the withdrawal or modification of a measure,
was a well-established practice under the GATT, and had been codified in Article 19.1 of the DSU,
which provided:
"Where a panel or the Appellate Body concludes that a measure is inconsistent with a covered
agreement, it shall recommend that the Member concerned bring the measure into conformity
with that agreement."

The Panel need to make no recommendations at all, as the measures at issue were fully consistent with
US obligations under the ATC; however, if any recommendation was made, in their view, the Panel
was not authorized to make any recommendation other than that provided for in Article 19.1 of the
DSU.
3.6 Costa Rica replied that, Article 19.1 of the DSU, contrary to the statement made by the
United States, authorized the Panel to specify the appropriate way of applying its recommendations
by providing that:
"Where a panel or the Appellate Body concludes that a measure is inconsistent with a covered
agreement, it shall recommend that the Member concerned bring the measure into conformity
with that agreement. In addition to its recommendations, the panel or Appellate Body
may suggest ways in which the Member concerned could implement the recommendations."

Other Issues
3.7 On 21 June 1996, the United States requested the Panel's attention to breaches in confidentiality
by Costa Rica concerning proposals made by the United States in consultations, and Costa Rica's use
of that information in this proceeding to prejudice the United States case. On 24 June 1996, Costa
Rica had responded in the first substantive meeting of the Panel with information concerning disclosures
made by the US embassy in San Jose, Costa Rica, concerning US proposals in consultations with Costa
Rica. Subsequently, the US had investigated those disclosures and discovered that they were made
in response to the numerous press statements in San Jose by journalists and members of the Costa Rican
Government. US embassy statements had been made solely in response to this press offensive by Costa
Rica.
3.8 Costa Rica emphasized that publication of any article prior to the initiation of the dispute
settlement procedure under the DSU, which in any case was at the initiative of the United States as
part of their strategy to exert pressure on the Government of Costa Rica, was irrelevant from the point
of view of the confidentiality prescribed by Article 4.6 of the DSU because this applied to consultations
initiated under the dispute settlement mechanism of the DSU and not to any event that occurred prior
to that time. Accordingly, one of the documents referred to by the United States was irrelevant as
it was published prior to the initiation of the consultation procedure under the DSU. The other two
articles were replies to public declarations by representatives of the United States Government or by
the enterprise which the United States was seeking to protect. Moreover, Costa Rica indicated that
the fact that Article 4.6 stated that consultations were confidential could not be interpreted as a limitation
on the rights of parties at the Panel stage. On the contrary, confidentiality must be understood as
referring to parties not involved in the dispute and to the public, but not in any way to the Panel itself.
It was not the intention of Article 4.6 to limit the possibilities available to the Panel to be apprised
of information on the dispute before it because this would be to the detriment of the procedure itself.
3.9 The United States accepted that since the US embassy was responsible for some of the
disclosures, they withdrew the request. This withdrawal was made without prejudice to the other points
made concerning Costa Rica’ s misuse and distortion of information on consultations in this case.

IV THIRD PARTY SUBMISSION: INDIA
4.1 India had indicated their interest in the matter and their desire to participate in the Panel process
as an interested third party pursuant to Article 10 of the DSU. Accordingly, India was invited to present

their views to the Panel at its first meeting on 25 June 1996. In their submission India reviewed the
measure taken by the United States and provided views on various aspects. In particular, India requested
the Panel to include in its findings:
(a) that the United States did not have the option of claiming a situation of actual threat of serious
damage in July 1995 after having determined in March 1995 that there was a situation of serious
damage and having issued the consultation call to Costa Rica on that basis;
(b) that all the data necessary to be provided to Costa Rica in terms of the provisions of Article 6
of ATC had not been provided by the United States and some of the data provided was not
compiled objectively and therefore lacked reliability;
(c) that the data available had not indicated that there had been either a situation of serious damage
or one of actual threat of serious damage to the domestic industry of the United States,
attributable to imports;
(d) that imports from Costa Rica which had been almost entirely from US components supplied
bythe US industry producing underwear and mostly produced inCosta Rica by units established
by US underwear manufacturers could not have contributed to serious damage of actual threat
thereof to the same US industry which engaged voluntarily in such co-production activities;
(e) that the US action actually sought to protect the US industry producing fabrics for underwear
and not the industry producing underwear and this was inconsistent with the provisions of the
Article 6 of the ATC;
(f) that a temporary safeguard action under Article 6 of the ATC had to be pursued by the importing
country and reviewed by the TMB entirely on the basis of data that had been available to the
importing country at the time they made a determination that there was a situation of serious
damage or actual threat thereof;
(g) that the importing country had to choose between the grounds of serious damage and of actual
threat of serious damage at the time of determination of the market situation before initiating
the safeguard action and the data requirements for these two grounds was different in nature
and not in degree;
(h) that there was no provision in the ATC for retroactive restraints; and
(i) that if not endorsed by the TMB after the mandatory review, a safeguard action would not
survive.
4.2 With reference to the submission by India, the United States expressed the view that the ATC
did not require the importing country to choose between serious damage and actual threat when making
its determination and so the United States had relied upon both, and referred to both, in their request
for consultations. Also, Article 6.3 of the ATC did not provide any separate criteria for evaluating
serious damage on the one hand, and actual threat thereof on the other. The ATC also had no provisions
specifically addressing actual threat (unlike the WTO legal provisions concerning anti-dumping duties,
countervailing duties, or GATT Article XIX safeguards). India had also referred to "sharp and
substantial" and "imminent" increases in their submission. However, in the view of the United States,
those standards applied to a determination of attribution under Article 6.4 of the ATC, and were
irrelevant to a determination under Article 6.2 of the ATC.

4.3 Costa Rica endorsed and formally incorporated in its submission the arguments and observations
contained in the submission made by India and took the view that the Panel should make reference
in its written report to the points it had developed and to rule on each of them.

V MAIN ARGUMENTS BY THE PARTIES
A. THE SAFEGUARD ACTION TAKEN BY THE UNITED STATES
Statement of Serious Damage: Category 352/652 (March 1995 Market Statement)
5.1 Costa Rica noted that the March Market Statement of the United States (annexed to this report)
had said nothing about the percentage of "807 trade" in the production and import data and made no
attempt to analyze the impact of this factor on the trade in this category. Accordingly, there was no
way of determining whether domestic production really grew or not; what the actual market share
of the United States industry was; and the true ratio of imports to domestic production.
5.2 The United States explained by way of background that their Office of Textiles and Apparel
(OTEXA) at the Department of Commerce was responsible for collecting data and producing statements
of serious damage or actual threat thereof for consideration by the CITA. In early 1995, the CITA
had reviewed the data on total imports of cotton and man-made fibre underwear (category 352/652)
into the United States in accordance with Article 6.2 of the ATC. Following the criteria in that Article,
the United States had looked at total imports of category 352/652. In so doing, they had found that
such imports had surged from 65,507,000 dozen in 1992 to 79,962,000 dozen in 1993. The CITA
had found that total imports continued to surge in 1994, reaching 97,375,000 dozen, 22 per cent above
the 1993 level and 49 per cent above the 1992 level. These data included re-imports.
5.3 The CITA had estimated that approximately 395 establishments in the United States
manufacturing underwear employed about 6 per cent of total US apparel workers, and had annual
shipments of $3.2 billion, accounting for approximately 5 per cent of total annual apparel shipments.
The concentration of firms in this industry was higher in the men’ s underwear segment than in the
women’ s segment. In the men’ s segment, four firms had accounted for over 60 per cent of the
shipments. The production of women’ s underwear was more subject to fashion changes. As a result,
production was less standardized, requiring different types of knitting machines and a greater number
of workers being employed. There was, however, a large number of smaller producers which generally
did not have integrated operations but usually purchased fabrics and then cut and sewed them.
5.4 The CITA had then examined factors listed in Article 6.3 of the ATC, such as US production,
market share loss, employment, domestic prices, profits and investment, production capacity and sales.
The CITA had found that US production in category 352/652 had declined from 175,542,000 dozen
in 1992 to 168,802,000 dozen in 1993, representing a 4 per cent decline. Production had continued
to decline in 1994 falling to 126,962,000 dozen during the first 9 months of 1994, four per cent below
the January-September 1993 production level. US manufacturers' domestic market share had dropped
from 73 per cent in 1992 to 68 per cent in 1993, a decline of 5 percentage points. During the first
9 months of 1994 that share had dropped to 65 percent. As a per cent of US production, imports had
increased from 37 per cent in 1992 to 47 per cent in 1993, and had grown by 54 per cent in the first
nine months of 1994.
5.5 Costa Rica questioned if the data on employment and man-hours were a special situation linked
to increased imports or if they reflected a continuing trend within the industry. It was also observed
that no numbers were given for layoffs; there was no causal link made between imports and job losses;
and no basis was given for the statements about postponed investment or disinvestment, nor was

consideration given to the possibility that these might represent economically rational decisions on the
part of the companies concerned and might have no causal relationship at all with the trend or level
of imports. The comment was also made that shifting production capacity to other product lines should
be regarded as a positive trend, favouring the interests of the United States companies themselves.
5.6 Costa Rica affirmed that the United States had not satisfactorily established the existence of
problems affecting employment, sales and profits, investment or capacity in its industry inasmuch as
it was not possible to establish clearly the state of the industry on the basis of evidence from one or
two enterprises. The United States had not properly established either the facts related to imports,
domestic production and market size, especially because of the total absence of any analysis of the
question of 807 trade in its March statement.
5.7 The United States also pointed out that the CITA had found that the number of production
workers in the US underwear industry had dropped from 46,377 in 1992 to 44,056 in 1994, declining
by 5 per cent, resulting in the loss of 2,321 workers. Average annual man-hours worked had dropped
from 86.2 million in 1992 to 81.5 million in 1994. Based on a survey of individual firms producing
cotton and man-made fibre underwear, the following conditions were reported: individual firms had
reported layoffs, import-related plant closings and slowed sales; one firm had reported a decline in
sales of 17 per cent in 1994 and a decline in profits by 18 per cent and there was pressure on the bottom
line throughout the industry due to rising costs and stiff import competition. The uncertainty due to
the increasing imports had caused US companies to postpone investment in this industry. Some
companies had also closed plants permanently or shifted production capacity offshore, and additional
disinvestment of this nature was contemplated by underwear manufacturing firms. Import prices were
very low and placed considerable pressure on domestic producers.
5.8 Costa Rica did not accept that an increase in raw cotton prices had affected the producers of
cotton fabric or yarn or the producers of cotton or man-made fibre underwear. As to the price-edge
which imports enjoyed over domestically produced goods, there was no indication whether this meant
all imports or some imports were produced with lower priced fabric and no justification was given
for these assertions. Also, these statements did not take into consideration the fact that most of the
growth in "imports" of the products in question was concentrated in those assembled outside the
United States from US components. This meant that the domestic industry used the same raw material
as the "imports" of products assembled from US components, so that the cotton price increases mentioned
should have had no effect at all on import levels.
5.9 The United States, however, argued that competing imports had enjoyed a price edge over
domestically produced goods because the imports were produced with lower-priced foreign fabric.
As a result of the increased market share in underwear held by imports, average retail prices of
underwear in the United States had generally declined during the past two years, at a time when US
manufacturers' costs, particularly for raw cotton, had increased substantially. This development had
seriously eroded the profitability of US underwear manufacturers. Based on the above factors and
in accordance with Articles 6.2 and 6.3 of the ATC, the CITA had determined that there was serious
damage, or actual threat thereof, to the US underwear industry. The United States then proceeded
to identify Member countries to whom this damage could be attributed, as required by Article 6.4 of
the ATC.
Attribution to Exporting Countries
5.10 Costa Rica noted that data on their exports to the US made no reference to the process of
production sharing between the two countries, even though all the increase in imports could be attributed
precisely to such co-production.

5.11 The United States explained that in applying the criteria in Article 6.4 of the ATC, the CITA
had attributed the serious damage, or actual threat thereof, to imports from five WTO member countries -
Costa Rica, the Dominican Republic, Honduras, Thailand, and Turkey - and to two countries that had
not yet become WTO Members - Colombia and El Salvador. Total imports from the five WTO countries
had increased from 22,675,508 dozen in 1992 to 40,293,259 dozen in 1994. This increase had
represented a collective sharp and substantial increase of 78 per cent. Together, imports from these
countries had increased 32 per cent in 1994 over their 1993 level. Imports in 1992 for these countries
were 35 per cent of total US imports in cotton and man-made fibre underwear. In 1994, their share
had increased to 41 per cent.
5.12 In the case of Costa Rica, the CITA had found that the increase in imports from Costa Rica
alone was higher than the level of imports of category 352/652 from at least 85 other countries and
had exceeded the levels of six other suppliers whose imports were under quota. Costa Rica was the
second largest supplier to the United States. Consistent with the criteria in Article 6.4 of the ATC,
the CITA had found that there was a sharp and substantial increase of low-priced imports from Costa
Rica, as imports of cotton and man-made fibre underwear had reached 14,423,178 dozen in 1994,
a 22 per cent increase above the 1993 level of 11,844,331 dozen and 61 per cent above the 1992 level.
Such imports had entered the United States from Costa Rica at an average landed duty-paid value of
$9.39 per dozen, 69 per cent below the US producers' average price for the product. The CITA had
also found that imports from Costa Rica were equivalent to 8.8 per cent of US production of category
352/652 in the year ending September 1994.
Consultations with Costa Rica
5.13 The United States advised that, based on their findings, the CITA had requested consultations
with Costa Rica. In accordance with Article 6.7 of the ATC, the request was accompanied by a
statement (the March Market Statement) complying with Articles 6.2, 6.3 and 6.4 of theATC. Further,
as required by Article 6.7 of the ATC, the United States had proposed a level of restraint for underwear
imports from Costa Rica which would be at a level not less than the level existing at 12 of the
14 months preceding the month of the request for consultations.
5.14 During the first round of consultations, on 1-2 June 1995, the United States had discussed the
basis for its request for consultations and the high level of estimated re-imports in Costa Rican trade,
approximately 94 per cent of their total trade of 14,423,178 dozen at the time of the call. Taking
its estimates of re-imports from Costa Rica into account, the United States had proposed a specific
limit (SL) of 1.25 million dozen to cover the portion of imports not qualifying for more favourable
treatment that would have grown to 1,488,770 dozen in the final year of the three-year restraint period
specified in the ATC. Re-imports had represented a significant portion of Costa Rica's total underwear
exports to the United States. Accordingly, consistent with US policy and its obligation under
Article 6.6(d) of the ATC to provide more favourable treatment to such re-imports, the United States
had proposed a guaranteed access level (GAL) of 20,000,000 dozen. Costa Rica did not make a
counterproposal, but maintained that the request for consultations was unsubstantiated.
5.15 With respect to the first bilateral consultations, Costa Rica said that they had drawn attention
to a series of inconsistencies, defects and omissions in the March Market Statement, raising numerous
points with a view to questioning the compatibility of the Statement with the parameters established
by Article 6 of the ATC and hence showing that the Statement could not serve as a basis for the
imposition of a restriction.
5.16 Costa Rica also observed that the remedy being proposed by the United States
(21.25 million dozen) consisted of an extra dose (30 per cent or more) of the level they claimed to
be attacking (14.4 million dozen). Although 14.4 million dozen was supposed to be causing serious
damage, the United States had proposed that trade be restricted to 21.52 million dozen. From that

point on, a serious question had arisen as to the objective being pursued by the United States in their
attempt to establish new restrictions: was it to protect the underwear manufacturers - by guaranteeing
them a further increase in imports, or was it to benefit the US makers of the cloth used for manufacturing
the product? Without having replied to any of the questions raised by Costa Rica in connection with
the March Market Statement, on 22 June 1995 the United States had made a new proposal for the
establishment of a quantitative restriction, this time offering 1.3 million dozen SL and 20 million GAL
for the period from 1 January 1996 to 31 December 1996, with an increase of 6 per cent on the quota
for subsequent periods. Again, Costa Rica rejected this proposal as the United States was still not
complying with the requirements of the ATC for the application of a transitional safeguard.
B. REVIEW BY THE TEXTILES MONITORING BODY
Determining Domestic Market Data
5.17 In its review (see paragraphs 2.15 to 2.18), the TMB members had inquired concerning double-
counting in the data presented by the United States because in official US data, re-imports had appeared
in both imports and production. Such double-counting had resulted in an overstatement of the size
of the domestic market. The United States pointed out that the US Census Bureau counted domestic
apparel production by collecting data on unassembled garment parts cut in the United States before
they were assembled domestically or shipped offshore for assembly. As a result, Census statistics
reflected re-imports as apparel which was cut in the US, sent outside the country to be sewn, and then
returned under the tariff provision for re-imports as a finished garment. Re-imports were included
as domestic output (cut parts), exports (unassembled cut parts), and imports (finished garments).
5.18 Since export quantity data were generally less reliable than import data, the domestic market
for textile and apparel categories as derived by the United States for quota purposes, was: production
+ imports. As the TMB had requested export data, the United States was now defining the domestic
market as: production + imports - exports. Consequently, the domestic market was overstated by
the amount of the re-imported products, since re-imported products were counted as production (before
assembled) and imports (when finished). In an attempt to remove the double-counting from the US
market, the United States had subtracted the re-imports from domestic production. Costa Rica had
claimed during the TMB proceeding that such overstatement should be resolved by deducting re-imports
from import data instead of production data. However, as an exception the general rule, the Harmonized
Tariff Schedule identified re-imported textile and apparel articles as foreign goods. Therefore, the
re-imports were properly counted in import data. After adjusting for the overstatement of the size
of the market, the US producers' share of the domestic market had fallen from 69 per cent in 1992
to 62 per cent in 1993 and to 55 per cent in 1994, a 14 percentage point drop in two years.
5.19 Costa Rica highlighted that in the case of imports of cut pieces for assembly in the United States,
the United States Government had been treating the product as originating in the country in which the
pieces were cut. Thus, for example, fabric cut in China and then assembled in Costa Rica had been
treated as a product of China on entering the United States market. At the same time, the US Census
Bureau considered that fabric cut, for example in Alabama for assembly in Costa Rica was United States
domestic production. That was why "re-imports" were considered to be domestic production by that
US statistical office and why the United States included them as such in its March Statement. However,
it was also clear that the United States treated the same garments as "imports" when entered under
heading 9802 of its tariff, for the purpose of collecting duty on the value added abroad and preventing
the use of the "Made in the United States" label.

5.20 The United States also said that when the TMB had suggested later in the proceeding that the
overstatement in the US domestic market should be adjusted by introducing US export data, they had
pointed out to the TMB that the data derived from this formula would still be flawed because export
data were generally less reliable than import data. Despite its concerns about the validity of the available
export data, the United States had supplied the TMB with the requested export data. The introduction
of export data had left the import/production ratio unchanged from the ratio in the March Market
Statement, demonstrating the same picture of declining domestic production and surging imports. Data
showing the value of exports had been first presented because of their greater reliability. Data in
quantity terms had also been presented in a revised market calculation. The US producers' share of
the domestic market had shown a drop from 70 per cent in 1992 to 63 per cent in 1993 and to 57 per cent
in 1994, a 13 percentage point drop in two years.
5.21 Costa Rica recalled that they had asserted on numerous occasions that the requirements of "actual
threat of serious damage" had not been evaluated in the March Statement, nor was it included in the
publications in the Federal Register nor alleged by the United States in the first four proposals of
restriction it presented to Costa Rica.
The July 1995 Market Statement
5.22 Costa Rica considered that the updated data presented by the US was not relevant information
intended to develop the information contained in the March Market Statement but was information
which openly and expressly contradicted it. The United States was endeavouring to submit completely
revised and adjusted information in an attempt to justify the adoption of a restriction which it had already
adopted. The introduction of a new statement at that point was unacceptable to Costa Rica inasmuch
as the data and determinations contained in the March Market Statement had been those which had
served to initiate the consultations, impose a unilateral restriction and provide the grounds for the review
by the TMB.
5.23 The United States noted that they had supplied updated data and new relevant information at
the July 1995 TMB proceeding. Although not required, these submissions had been provided to the
TMB consistent with Article 6.10 of the ATC and as part of the practice of the CITA to bring the
data up-to-date, to make them as consistent as possible with the reference period for the March 1995
Market Statement, and to provide further information demonstrating that the finding of serious damage,
or actual threat thereof remained justified in light of the additional information continually becoming
available. The CITA had based its determinations of serious damage, or actual threat thereof on publicly
available information from official US Government sources. There was no need to independently verify
this information. The production, import, and market share data on which cases were based were
published quarterly by the OTEXA and available to all interested parties. The collection and analysis
of this data were part of a longstanding process that had been in place for as long as there had been
a comprehensive international textile trade agreement, i.e., since the MFA began in 1974.
5.24 The additional relevant information supplied at the time had concerned trade adjustment assistance
for US companies adversely impacted by imports and import prices. All of the information provided
at the time of the July TMB session had supported and was consistent with the March 1995 Market
Statement and the basic justification for the United States safeguard action with respect to underwear
imports from Costa Rica remained fully warranted.
5.25 Costa Rica pointed out that, in the July Market Statement there were 302 establishments in
the United States that manufactured garments classified in category 352/652, whereas according to
the March Market Statement the number of establishments was 395. The March and July Statements

indicated that annual shipments had amounted to $3.2 billion, although the data on which it was based
(domestic production and the US producers' average price) were not the same in the two Statements.
According to the July Statement, in 1992 employment in the sector was 35,191, falling in 1994 to 33,309.
According to the March Statement, employment in the sector was 46,377 in 1992, dropping to 44,056
in 1994. The July Statement did not explain why there should be this difference of about 10,000 between
the figures given in the two Statements. Nor did the data for annual man-hours coincide, inasmuch
as the July Statement gave a figure of 65.4 million in 1992 falling to 61.6 million in 1994, whereas
the corresponding figures in the March Statement were 86.2 million and 81.5 million respectively.
5.26 Costa Rica also noted that the July Market Statement included a section on trade adjustment
assistance for United States companies adversely impacted by imports, giving data on the current US
federal programmes for assisting industries and workers that had been unfavourably impacted by imports.
It was questioned how these programmes could be put forward as additional justification for imposing
a quantitative restriction when their purpose was precisely to provide alternatives to the imposition
of a restriction on imports. The fourth section of the July Statement which concerned the countries
contributing to serious damage described the price difference between US underwear production and
underwear production in other countries. It was noted that this section contained a discrepancy between
the July and March Statements, namely whereas in March the average United States producers' price
was said to be $30 per dozen, the July Statement indicated that that price varied between $16 and $20
per dozen, depending on where the product was assembled. No information had been given to explain
the reason for such a substantial error in the March Statement.
5.27 The United States commented that Costa Rica was incorrect in its characterization of the Trade
Adjustment Assistance programme as an "alternative" to safeguard action under the ATC. The
United States had not created the programme to replace US rights and obligations under the ATC,
Section 204, or similar actions under US law and the WTO. As regards the differences in price and
other figures between the March and July Statements, the United States noted that even though there
were differences in the updated data, the CITA's determination of serious damage or actual threat thereof
was still sustainable.
Outcome of the TMB Review
5.28 At the conclusion of its examination, the TMB had decided that the United States had not
demonstrated serious damage, but it could not reach consensus on the existence of actual threat of serious
damage (G/TMB/R/2). As a result, the TMB had not reached the issue of attribution. The TMB had,
however, recommended that the United States, Costa Rica and Honduras consult further,
"with a view to arriving at a mutual understanding, bearing in mind the above, with due
consideration to the particular features of this case, as well as equity considerations".
(G/TMB/R/2)
5.29 According to Costa Rica, at the new round of consultations as recommended by the TMB,
held on 17-18 August 1995, they had asked the United States to clarify the difference between serious
damage and actual threat of serious damage and for relevant factual information in support of the latter.
They had also urged the United States to explain why, having a market supposedly threatened by the
importation of 14.4 million dozen garments from Costa Rica, they had proposed to establish a quantitative
restriction which would allow imports of Costa Rican underwear to rise to 33 million dozen. The
United States had not offered any explanation, at least at that meeting, which ended without a satisfactory
solution having been reached. The two parties then submitted their reports to the TMB for review
purposes.
5.30 Costa Rica also pointed out that in October 1995, the OTEXA had published new statistics
for the category in question which showed the production situation to be different from that indicated

in the March and July Statements. Whereas according to the March Statement production had declined
by 4 per cent between 1992 and 1993 and by 4 per cent between 1993 and 1994, the July data indicated
that the decline was 4 per cent for the first period and almost non-existent in the second, while according
to the October information the percentage decreases were of the order of 1.5 per cent and 2.6 per cent
respectively.
5.31 At its meeting on 16-20 October 1995, the TMB received reports from Costa Rica and the
United States on the bilateral consultations they had held following the TMB recommendation. It took
note of the reports and of the fact that the two parties had not reached a mutual understanding during
the consultations. The TMB's discussions confirmed the Body's previous findings in this matter; there
being no further requests by the parties involved, the TMB considered its review of the matter completed
(G/TMB/R/5).
C. THE STANDARD OF REVIEW AND BURDEN OF PROOF
Standard of Review - The "Fur Felt Hat" Case2
5.32 The United States considered that the appropriate standard to apply to the importing country’ s
determination was a standard of reasonableness. Article 6 of the ATC referred to "a determination
by a Member," based on weighing of evidence on certain factors. The standard for panel evaluation
of such determinations should follow established GATT practice, which was based on the GATT 1947
case concerning thewithdrawal bythe United States under Article XIX of a tariff concession onwomen's
fur felt hats and hat bodies. In the Fur Felt Hat case, the Czechoslovak Government had sought a
determination that the US invocation of Article XIX had been improper, and asserted that the United
States had not met certain conditions under Article XIX to take the action, seeking revocation of the
measure. The Working Party rejected the Czechoslovak argument and stated:
"...it may be observed that the Working Party naturally could not have the facilities available
to the United States authorities for examining interested parties and independent witnesses from
the United States hat-making areas, and for forming judgements on the basis of such examination.
Further, it is perhaps inevitable that governments should on occasion lend greater weight to
the difficulties or fears of their domestic producers than would any international body, and
that they may feel it necessary on social grounds, e.g. because of lack of alternative employment
in the localities concerned, to afford a high degree of protection to individual industries which
in terms of cost of production are not economic. Moreover, the United States is not called
upon to prove conclusively that the degree of injury caused or threatened in this case must
be regarded as serious; since the question under consideration is whether or not they are in
breach of Article XIX, they are entitled to the benefit of any reasonable doubt" ("Fur Felt
Hat" case, paragraph 30).
5.33 The United States recalled that the US action involved in the 1951 GATT working party Report
had been taken under GATT Article XIX:1, which referred to the factual existence of increased imports
under conditions
"such ... as to cause or threaten serious injury to domestic producers ... of like or directly
competitive products".
The legal standard, and the facts required to be found, were similar to those involved in the case of
transitional safeguards under Article 6.2 of the ATC.
2Report on the Withdrawal by the United States of a Tariff Concession under Article XIX of the General
Agreement on Tariffs and Trade Concerning Women's Fur Felt Hats and Hat Bodies, 27 March 1951 - CP/106.

5.34 In October 1950, just before the Fifth Session of the CONTRACTING PARTIES, the
United States had announced its intention to withdraw the concession in question under Article XIX.
The US Government had entered into consultation with the contracting party with which the concessions
had been negotiated and with several contracting parties having a substantial supplying interest. The
following month, Czechoslovakia brought a complaint claiming that the action taken did not meet the
criteria of Article XIX:1, and sought a determination by the CONTRACTING PARTIES that this action
was inconsistent with Article XIX. The complaint was referred to a working party for study. The
working party had examined separately each of the conditions for invocation of Article XIX, and
presented a report in March 1951 which embodied the findings of the members other than the two
parties to the dispute. This report was then adopted at the Sixth Session in 1951. The report had found
that the United States had satisfied these conditions.
5.35 The United States suggested that the information used by the "Fur Felt Hat" working party
as a basis for its conclusions should be noted, that is GATT notifications, summary records of discussions
at the Fifth Session, some additional data submitted at the working party's request, and the report made
by the US Tariff Commission in connection with its determination of serious injury. However, in
examining whether serious injury and the other conditions in Article XIX:1 existed, the working party
chose to rely mainly on the data in the Tariff Commission report. These data were not perfect; for
instance, they failed to separate figures on production of men's and women's hat bodies. However,
they were the data available at the point in time determined by the working party to be legally relevant
in evaluating compliance with Article XIX. As the report stated:
"Since the Working Party was required to consider whether the action taken by the United
States in autumn 1950 fulfilled the requirements of Article XIX, the question here to be
considered is whether serious injury or a threat thereof to the United States women's hat body
industry could be considered to have existed at the time of the United States Tariff Commission
investigation on which the United States action was based ...".
5.36 The working party then examined the data and found them inconclusive. It stated that:
"... the United States is not called upon to prove conclusively that the degree of injury caused
or threatened in this case must be regarded as serious; since the question under consideration
is whether or not they are in breach of Article XIX, they are entitled to the benefit of any
reasonable doubt. No facts have been advanced which provide any convincing evidence that
it would be unreasonable to regard the adverse effects on the domestic industry concerned as
a result of increased imports as amounting to serious injury of a threat thereof; and the facts
as a whole certainly tend to show that some degree of adverse effect has been caused or
threatened. It must be concluded, therefore, that the Czechoslovak Government has failed
to establish that no serious injury has been sustained or threatened."
5.37 The working party members, excluding the two disputants, concluded that they were satisfied
that the US authorities had investigated the matter thoroughly on the basis of the data available to them
at the time of their inquiry, and had reached in good faith the conclusion that the proposed action fell
within the terms of Article XIX. If the working party in its appraisal of the facts naturally gave weight
to international factors, and the US authorities would normally give more weight to domestic factors,
"it must be recognized that any view on such a matter must be to a certain extent a matter of
economic judgment and that it is natural that governments should on occasion be greatly
influenced by social factors, such as local employment problems. It would not be proper to
regard the consequent withdrawal of a tariff concession as ipso facto contrary to Article XIX
unless the weight attached by the government concerned to such factors was clearly unreasonably
great".

Thus, the working party concluded that there was no conclusive evidence that the safeguard measure
in question constituted a breach of obligations under the GATT.
Applying the "Fur Felt Hat" Case to the Present Case
5.38 The United States argued that the reasoning of the "Fur Felt Hat" case applied equally to the
present case. Both the working party in that case and the present Panel have been charged with
determining whether a safeguard action was properly taken at the time that the decision was made.
In the case of Article XIX, the working party had examined the information collected by the Tariff
Commission in the investigation which was the basis for the decision, and whether the Commission’ s
evaluation of that information had been unreasonable. In the present case, the Panel had been asked
to evaluate the consistency of the CITA determination under Article 6.2 of the ATC with the requirements
of Articles 6.2 and 6.3 of the ATC. Article 6.2 of the ATC referred to certain facts to be demonstrated
"on the basis of a determination by a Member" and Article 6.3 of the ATC required that certain analyses
be carried out in making such a determination. Thus, in the view of the United States the focus of
the Panel’ s examination should be not the question of whether serious damage or threat of serious damage
exists now, but whether the CITA could reasonably determine that it existed at the time of the CITA
determination in March 1995 and whether, after giving the CITA the benefit of any reasonable doubt,
Costa Rica had established that no serious damage or threat thereof existed at that time.
5.39 The CITA determination could therefore only be evaluated on the basis of data existing at the
time of its original determination. The data presented later to the TMB in fact corroborated the analysis
done in March 1995, but they were not legally relevant in evaluating US conformity with Articles 6.2
and 6.3 of the ATC. Article 6.10 of the ATC provided for later refinement of data and for response
to TMB requests for additional information, consistent with the TMB spirit of conciliation, compromise
and negotiation. However, it was the March data that were legally relevant for evaluating the
determination, not the later data. The data recorded in the March Market Statement formed the entire
basis of the CITA’ s determination.
5.40 The data available in March need not have been perfect, as seen in the "Fur Felt Hat" case.
Article 6 of the ATC was a safeguard provision invoked in cases of serious damage or threat to an
industry, and could not be interpreted to require that the importing Member wait until its industry had
succumbed because a complete census of the industry had not yet been conducted. Article 6.7 of the
ATC recognized this fact by requiring only that the data submitted with the request for consultations
must be "as up-to-date as possible".
5.41 In the present case the burden was on Costa Rica to bring forward evidence and arguments
demonstrating a prima faciecase that theUnited States had acted inconsistentlywith Articles 6.2 and 6.3
of the ATC. When evaluating the CITA's analysis of the data available to it in March 1995, the Panel
should take into account that domestic authorities were uniquely well-placed to scrutinize and evaluate
the situation in a domestic industry, and that the facts in the March Statement clearly indicated that
there were adverse effects on the US underwear industry resulting from increased imports of underwear.
The Panel should examine whether Costa Rica had advanced facts which provided convincing evidence
that it was unreasonable for the CITA to determine that the adverse effects of increased underwear
imports on the US domestic underwear industry amounted to serious damage, or actual threat thereof.
A similar examination should be applied with respect to determinations under Article 6.4 of the ATC.
5.42 The United States considered that the "Fur Felt Hat" case was still relevant for purposes of
the present dispute, even after the incorporation of the Agreement on Safeguards in the WTO Agreement.
The Agreement on Safeguards provided for a package of rights and obligations differing from those
under Article XIX of the GATT 1994. This package included new procedural and transparency
requirements; additional obligations regarding the duration and review of safeguards measures; an explicit
ban on grey area measures; and on the other hand, a ban on compensatory withdrawals under

Article XIX:3 if the safeguard measure satisfied certain conditions. The standards for action provided
in the Agreement also reflected a shift in focus incorporating the jurisprudence of the "Fur Felt Hat"
case. While Article XIX itself referred to the existence of serious injury or threat, in the "Fur Felt
Hat" case the working party had focused instead on the evidence found by the authorities in the importing
country before their determination and the extent to which it had been shown that the authorities’
evaluation of that evidence was unreasonable. The Agreement on Safeguards adopted this approach.
Its standards were not phrased in terms of facts that the importing Member must prove (if necessary
to a panel). Rather, they were phrased explicitly in terms of the investigation to be undertaken by
the competent authorities in the importing country. For instance, Article 2.1 of the Agreement on
Safeguards provided 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."
Thus, the United States argued, a panel’ s evaluation of measures taken pursuant to the Agreement on
Safeguards should follow the approach taken in the "Fur Felt Hat" case.
5.43 It was noted by the United States that the approach adopted in the "Fur Felt Hat" working
party report had also been adopted in the Agreement on Safeguards because it had come to be widely
accepted. In 1951 the "Fur Felt Hat" report was viewed as an important precedent, and it was agreed
that, because of its value in relation to the interpretation of Article XIX of the General Agreement,
the text of the report should be published. This working party report had become the accepted benchmark
for panel evaluation of safeguards actions. No assertion was made that the approach adopted by that
working party had been legally incorrect. Indeed, the general acquiescence to this standard, in spite
of the many invocations of Article XIX:1 recorded in over 45 years of later GATT history, indicated
that this approach had become customary law, or at the least,
"subsequent practice in the application of the treaty which establishes the agreement of the
parties regarding its interpretation",
in the sense of Article 31.3(b) of the Vienna Convention on the Law of Treaties.
5.44 The United States stated that they had not argued, and would not argue, that the regime now
governing textile trade in the WTO was a sui generis regime. It was a safeguards regime just as the
regime under Article XIX and the Agreement on Safeguards were safeguard regimes. Both regimes
permitted a Member to restrict trade in fairly traded goods on the basis of a determination made by
that Member, subject to certain limitations. The textile regime diverged from Article XIX but many
of its basic concepts depended on the fundamental concepts behind Article XIX; like English and
American law, the two were originally one, have diverged over time, but still shared fundamental
concepts and structure. Where the negotiators had indicated their desire that the two regimes differ
(for instance, concerning the selectivity of actions taken or the duration of safeguards once imposed),
the difference in rights and obligations provided in the negotiated text must be respected. However,
the "Fur Felt Hat" case, an accepted precedent which predated the divergence between the two regimes,
was relevant and persuasive in interpreting the provisions in both, or either, of these regimes concerning
the initial decision to take safeguards action.
5.45 The United States confirmed its argument that the standard of review appropriate for this case
was the one enunciated in the "Fur Felt Hat" case. That is, the Panel should look to see whether the
authority's determinations were reasonable in light of the requirements of the relevant agreement, in
this case the ATC, and considering the data available at the time. The United States did not advocate

de novo review. In response to the Panel's question, the United States said that if "adequately motivated"
meant that the Panel was to explore the possible motives underlying the CITA's decision making process,
the United States disagreed with such a standard of review. If "adequately motivated" meant that the
Panel was to examine whether the domestic authorities had based their determination on an examination
of factors required in the ATC, and whether the basis for the determination had been adequately
explained, the United States would agree with this formulation as it was compatible with the standard
of review in the "Fur Felt Hat" case, and the United States did not advocate a position on how the
TMB's finding by consensus on serious damage should be treated by the Panel. It was only stated
that the United States did not agree with the TMB's finding and the ATC, Article 8, did not require
them to inform the TMB concerning their view on their finding. Instead, the ATC required that Members
endeavour to comply with recommendations and inform the TMB if recommendations could not be
accepted. In this case the TMB recommendation did not include a recommendation that they expressed
a particular view on the TMB's consensus finding or the lack of consensus on threat.
Views of Costa Rica on Standard of Review
5.46 As regards the standard of review, Costa Rica recalled that the United States had proposed
that the Panel should restrict itself, solely and exclusively, to verifying whether the United States had
followed the procedures laid down in Article 6 of the ATC and to ruling that its determination was
reasonable considering the information available at the time the determination was made. Costa Rica
argued and requested the Panel to rule accordingly, that on this point the United States was wrong,
since the standard of review which the Panel should apply was a very different one
5.47 In the view of Costa Rica, the standard of review applicable to this case,which must be based
on the general principles of GATT law and the provisions of the DSU, required the Panel to undertake
an analysis and monitor the following five aspects: compliance with the procedural rules; proper
establishment of the facts; objective and impartial evaluation of the facts in the light of the rules of
the ATC; proper exercise of discretion in interpretation of the rules; and compliance with the rules.
5.48 Although novel in the textile field, the standard of review to be applied by a panel, was not
new in the context of the GATT dispute settlement mechanism nor in the context of many legal systems.
Nor was it a question foreign to the WTO itself, since it had arisen in various WTO Agreements.
Neither was it unknown to the jurisprudence which, although not very abundant, nevertheless threw
useful light on the matter.
5.49 Firstly, Costa Rica noted that this subject had been dealt with on numerous occasions in the
reports of various panels set up to review the consistency of a particular measure with the GATT rules,
especially in the anti-dumping field. For example, in the case of the New Zealand transformers3, the
Panel did not share the view expressed by New Zealand to the effect that the determination of "material
injury" could not be challenged or scrutinized by other contracting parties nor indeed by the
CONTRACTING PARTIES themselves. In support of its ruling, the Panel pointed out that:
"To conclude otherwise would give governments complete freedom and unrestricted discretion
in deciding anti-dumping cases without any possibility to review the action taken in the GATT.
This would lead to an unacceptable situation under the aspect of law and order in international
trade relations as governed by the GATT."
5.50 Thus, the first thing that Costa Rica noted was that the GATT jurisprudence on this particular
point had not been uniform over the course of time and in relation to different subjects. It followed
that the above-mentioned "Fur Felt Hat" case could not be regarded as a leading case in this field which
3"New Zealand - Imports of Electrical Transformers from Finland", BISD 32S/67, paragraph 4.4.

ought necessarily to be followed by subsequent panels. The second argument was based on a general
principle of GATT law according to which, in the absence of an express rule to the contrary, it was
not possible to assume any limitation on the standard of review. This principle was clearly expressed
in Article 11 of the DSU, according to which:
"The function of panels is to assist the DSB in discharging its responsibilities under this
Understanding and the covered agreements. Accordingly, 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, and make such
other findings as will assist the DSB in making the recommendations or in giving the rulings
provided for in the covered agreements...".
5.51 At the same time, according to Article 3.2 of the DSU, the essential functions of the WTO's
dispute settlement system - and, consequently, of the DSB - were:
"... to preserve the rights and obligations of Members under the covered agreements, and ...
to clarify the existing provisions of those agreements in accordance with customary rules of
interpretation of public international law ...".
5.52 On the basis of these provisions, in Costa Rica's view, in order properly to perform its task
of preserving the rights and obligations of Members and clarifying the existing provisions of the WTO
Agreements, the DSB must require that the work of panels not be subjected to a priori limitations,
based on a putative restriction on its powers of review in a particular case.
5.53 With reference to Costa Rica's argument that the reference to objective assessment in Article 11
of the DSU required that panels' scope of review not be limited, the United States pointed out that
they had not argued that panels could not review Article 6 determinations by domestic authorities;
they had simply argued that these determinations should be accorded the proper weight. It should also
be noted that this reference to "objective assessment" and to making findings in DSU Article 11 did
not represent a policy-making initiative in the Uruguay Round, but it was the wholesale incorporation
of paragraph 16 of the 1979 GATT Understanding Regarding Notification, Consultation, Dispute
Settlement and Surveillance. As the drafters of the DSU had sought to make the review a comprehensive
text incorporating all prior codification efforts on dispute settlement, the GATT Contracting Parties
had intended the 1979 Understanding and its annex to reflect customary practice and improvements
in that practice, which included the standard of review in the "Fur Felt Hat" case.
5.54 Costa Rica pointed out that in the case of the Agreement on Safeguards and the ATC there
was no explicit (or implicit) provision establishing limitations on a panel's freedom of review, which
was why the above-mentioned general principle should be applied. Where anti-dumping was concerned,
the situation was different. Given the actual existence of Article 17.6 of the Agreement on
Implementation of Article VI of the GATT 1994 (hereinafter the "Anti-Dumping Agreement"), according
to which, in examining the matter submitted to it, the Panel:
"(i) in its assessment of the facts of the matter, shall determine whether the authorities'
establishment of the facts was proper and whether their evaluation of those facts was
unbiased and objective. If the establishment of the facts was proper and the evaluation
was unbiased and objective, even though the Panel might have reached a different
conclusion, the evaluation shall not be overturned;
(ii) shall interpret the relevant provisions of the Agreement in accordance with customary
rules of interpretation of public international law. Where the Panel finds that a relevant
provision of the Agreement admits of more than one permissible interpretation, the

Panel shall find the authorities' measure to be in conformity with the Agreement if
its rests upon one of those permissible interpretations."
Views of Authors Relating to Standard of Review
5.55 Costa Rica referred to this provision and the history of its negotiation, and noted that the authors
Croley and Jackson had pointed out that the aim of those behind the drafting of this Article had been
to establish limits on the standard of review which could be applied by a WTO panel, for which purpose
they had based themselves on the jurisprudence of United States administrative law.4 The idea was
to establish an express rule mainly for the purpose of introducing limitations, in the specific case of
anti-dumping matters, on the general principle mentioned above.
5.56 The United States considered the above-cited article by Croley and Jackson to be largely irrelevant
to the work of this Panel as it focused almost entirely on specific provisions of a different agreement
outside the Panel's terms of reference, the Anti-Dumping Agreement. They nevertheless noted in
examining this article that it too recognized the importance of the "Fur Felt Hat" case in GATT law5,
and referred to other GATT cases recognizing a restrained standard of review.6 They had also noted
that the authors, in their conclusions, overall had recommended caution on the part of WTO panels,
arguing that:
"... panels should also recognize that national governments often have legitimate reasons for
the decisions they take. At times for example such governments can justifiably argue that an
appropriate allocation of power should tilt in favour of the national governments that are closest
to the constituencies most affected by a given decision."7
Relationship to Other GATT Provisions
5.57 In the view of Costa Rica, these authors had clearly explained how it followed unequivocally
from the Decision on Review of Article 17.6 of the Anti-Dumping Agreement and the Declaration
on Dispute Settlement Pursuant to the Agreement on Implementation of Article VI of the GATT 1994
or Part V of the Agreement on Subsidies and Countervailing Measures that this limited standard of
review was applicable solely to the review of anti-dumping measures. It was important to make this
clear as it provided a useful guide to defining what should be the standard of review in a case in which
what was being scrutinized was the consistency of a clothing trade restriction with the requirements
of Article VI. As already pointed out, the limitation on the standard of review in anti-dumping matters
operated solely and exclusively in that field and, in that respect, must be regarded as an exception to
the general rule outlined above.
5.58 Costa Rica argued that, in view of the above, it was not possible to accept a standard of review
which would be just as restricted or even more restricted than that established in Article 17.6 of the
Anti-Dumping Agreement when a panel scrutinized matters other than those covered by that Agreement,
4Steven P. Croley and John H. Jackson, "WTO Dispute Procedures, Standard of Review, and Deference
to National Governments", in American Journal of International Law, Vol. 90, No. 2, April 1996, page 199.
5Croley and Jackson, op. cit. page 196.
6Citations include "United States - Restrictions on Imports of Tuna", DS29/R, paragraph 3.73; "United States -
Imposition of Anti-Dumping Duties on Imports of Fresh and Chilled Atlantic Salmon from Norway", ADP/87,
paragraph 232; "United States - Imposition of Countervailing Duties on Imports of Fresh and Chilled Atlantic
Salmon from Norway", SCM/153, paragraphs 209-212.
7Croley and Jackson, pages 212-213.

as the United States insisted. In fact, in the present case the United States wanted the standard of review
to consist in verifying that the procedures established in Article 6 of the ATC were followed and ruling
that the determination by the United States was reasonable, which was even more limited than the
obligation imposed upon any panel under the above-mentioned Article 17.6 of the Anti-Dumping
Agreement. This interpretation was not acceptable. The standard of review of this Panel was and
must be much broader than that proposed by the United States and that which Article 17.6 of the Anti-
Dumping Agreement established for the review of anti-dumping measures.
5.59 The United States noted the various GATT cases concerning anti-dumping determinations,
which Costa Rica had cited. In the US view, however, this was not an anti-dumping case. An
interpretation of the GATT or the Agreement on the Implementation of Article VI was clearly outside
of the scope of the terms of reference of the Panel. In any event, the US had never argued that an
importing Member was not required to carry out an investigation and carefully examine the facts before
making its Article 6.2 of the ATC determinations under Articles 6.2 and 6.4 of the ATC. The US
had also never argued that the determinations were exempt from Panel review. The US authorities
had carried out a careful investigation, the results of which appeared in the March Market Statement
annexed to their first submission. In that submission, they had established the facts of the case by
going through the March Statement and pointing out systematically how the CITA had met the
requirements of Article 6 of the ATC. They had simply argued that the expertise of US authorities
and the findings in the investigation should be accorded an appropriate weight or margin of appreciation.
This would also be consistent with the transitional nature of the ATC and the role of the TMB in
monitoring measures taken while textile and apparel trade was integrated into the GATT 1994 and
other Annex 1A Agreements.
5.60 Furthermore, according to the United States, Costa Rica's reference to anti-dumping cases
was also irrelevant because in an anti-dumping case before a WTO panel, Article 17.6 of the
Anti-Dumping Agreement superseded panel reports under GATT Article VI. Even in the
"Transformers" case cited by Costa Rica, the Panel had recognized the appropriateness in the context
of deferring to factual expertise of domestic investigating authorities:
"The Panel ... considered the evidence put forward by both sides as to the appropriateness
of the cost elements used by the New Zealand authorities in arriving at their decision that
dumping had occurred. The Panel noted that this evidence was of a highly technical nature,
especially because it related to complicated custom-built products. It also noted that Article VI
did not contain any specific guidelines for the calculation of cost-of-production and considered
that the method used in this particular case appeared to be a reasonable one. In view of this
and having noted the arguments of both sides ... the Panel considered that there was no basis
on which to disagree with the New Zealand authorities' finding of dumping ...".8
5.61 Costa Rica argued that in order to define this standard of review for the specific case in question,
it was important to bear in mind various considerations. Firstly, effective compliance with the substantive
requirements of the ATC for the adoption of a transitional safeguard could not be achieved without
the certainty that the full extent of the determinations of the importing Member was open to review.
Without such a guarantee there was very little incentive for an importing Member to comply with the
basic rules of the Agreement which, in practice, meant a return to the situation that existed in the textiles
and clothing trade before the Uruguay Round. It was important to note the increasing legalization
of the dispute settlement system, firstly of the GATT and now of the WTO, with the aim of raising
legal standards. It was not for nothing that Article 8 and Article 14 of the Agreement on Safeguards
subjected the measures adopted to their review procedures, in accordance with the rules of the above-
mentioned dispute settlement mechanism.
8L/5814, adopted on 18 July 1985, BISD 32S/55, 67, paragraph 4.3.

Deference to National Authorities
5.62 Costa Rica recognized that although the national authorities could usually count on having access
to most of the factual information needed to carry out an effective investigation, for example for the
purpose of determining whether a domestic industry had suffered serious damage, it was also clear
that those same national authorities could become a hostage to the local forces of protectionism so that
they were prevented from carrying out the investigation properly or interpreting and applying the rules
of the agreement in question to the best effect. In this connection, for example, Meier wrote that for
deference to be paid to the decisions of a national body:
"... there should be agreement that the national body be independent of government, that all
interests be given due consideration, and that the national procedure of enquiry be similar to
that followed by the United States International Trade Commission".9
Pursuing this question further, Meier expresses the opinion that Article XIX of the GATT should be
revised in order to incorporate two key principles:
"(i) that the determination of conditions on which the executive is called to take action be
entrusted to a statutory body whose term of office should not be coextensive with that of the
executive, and (ii) that, after a preliminary investigation by its own specialized personnel, this
body should hold public hearings in which all interested parties, including the foreign firms,
could be represented and not only present their views but also cross-examine each other within
an adversary procedure".10
5.63 Costa Rica considered that the national body entrusted with applying the transitional safeguard
in the United States, CITA in no way resembled that described by Meier and neither did the procedure
it used toarrive at itsdetermination bear any resemblance to that recommended for enablingthe decisions
of the national body to be held in greater respect. Accordingly, at least in connection with the review
of a determination to apply a transitional safeguard, this argument should not carry much weight with
the Panel. Finally, the reasons for adopting a restrictive standard of review in the domestic administrative
law of some countries, for example the United States, not only could not be transposed to the context
of the WTO but, in many cases, if so transposed, would produce the opposite effect.
5.64 In the view of the United States, the points Costa Rica had cited from the article by Meier
were wrong or peculiar. The Uruguay Round negotiators appeared in practice to have overruled Meier
as they negotiated an original Agreement on Safeguards which facilitates access to Article XIX while
barring grey-area measures. Moreover Costa Rica had urged that the Panel adopt proposals by Meier
in 1977 for revision of Article XIX, which amounted to requiring that all governments install an imitation
of the US international trade commission. The Uruguay Round negotiators had rejected this point
as well. The WTO Agreements do not regulate the separation of powers or delegation of authority
by governments to domestic institutions of any WTO Member. US law happens toseparate the authority
for the implementation of safeguards taken on textiles and clothing purposes and that for safeguards
under Article XIX. It would be inappropriate, and legally unsupported to impose a model on any
government as a matter of its WTO obligations or to accord that model a legally privileged position
as argued by Costa Rica. The notifications made to the WTO concerning national safeguard systems
clearly showed great diversity in trade policy making and implementation, a diversity which the WTO
has not only tolerated but welcomed. In any event, the determination of serious damage or actual threat
9Gerald M. Meier, "Externality Law and Market Safeguards: Applications in the GATT Multilateral Trade
Negotiations", in Harvard International Law Journal, Volume 18, Number 3, Summer 1977, footnote 10, page
510.
10Idem, page 515.

thereof made by the US authorities in this case must be evaluated not against one academic proposal,
but against the law and practice of the ATC.
5.65 On the basis of the above, even if a high degree of deference was paid to the decision taken
by the national authorities, Costa Rica was of the opinion that the standard of review applicable in
this case required the Panel to scrutinize and verify the following aspects:
(i) Compliance with the procedural rules: this meant formally confirming not only that
all the steps in the process of applying the transitional safeguard followed each other
chronologically - as the United States would have it - but also that each of these
procedural rules was actually complied with. In this connection, the utmost importance
attached to the obligation upon the importing Member to bring evidence, as already
indicated, and, above all, the effective fulfilment of that obligation through the
submission of specific and relevant information, as required by the ATC, and the proper
scrutiny of that information in relation to the parameters of the Agreement, as Costa Rica
had previously pointed out. This same aspect also included the obligation upon the
importing Member to establish, at the time of making the determination, whether the
test of serious damage or actual threat of serious damage had been applied, as well
as the obligation to hold consultations with the exporting Member on the basis of the
premises on which the case was founded.
(ii) The proper establishment of the facts: from this aspect, the Panel should confirm that,
on the basis of the specific and relevant information submitted, a detailed examination
had been carried out, thereby enabling the facts to be properly established. From this
it followed that there must be a reliable and logical correlation between the information
in question and its examination, on the one hand, and between the latter and the
establishment of the facts, on the other. This meant, inter alia, properly justifying
each of the facts established and, conversely, that it was not possible to establish facts
which had not been duly justified. With this in mind, for example, it was not possible
in the view of Costa Rica to accept that the United States had demonstrated the existence
of problems affecting employment, sales and profits, investment or capacity in its
industry, inasmuch as these facts had not been properly substantiated, having been
established on the basis of the evidence of only one or two enterprises. Nor was it
possible to accept that the data on imports, domestic production and market size resulted
in the establishment of the facts adduced by the United States, considering the problem
created in this particular case by the fact that "807 trade" was counted twice, not to
mention the total absence of analysis of this question within the underwear trade.
(iii) The objective and impartial evaluation of the facts in the light of the rules of the ATC:
the Panel must determine whether the facts had been objectively and impartially
evaluated by the national body within the framework of the rules of the ATC.
Accordingly, the Panel must verify that the process of subsumption of the facts in the
legalarguments provided for by the rules had proceeded logically and naturally, without
distorting the evaluation of the facts or involving errors of judgement or abuse of power
which might have led to a result different from that which could have been anticipated
under conditions of objectivity and impartiality. Thus, for example, it was impossible
to conclude that the establishment of an SL quota below the call level could constitute
the more favourable treatment for re-imports envisaged in Article 6.6(d) of the ATC.
(iv) The proper exercise of discretion in the interpretation of the rules: when it became
necessary to interpret a rule of the ATC, the national body may not assume unlimited
powers of discretion, inasmuch as the ATC itself imposed limits which must be
respected. Thus, as Costa Rica had already pointed, the principles underlying the

adoption of a transitional safeguard were clearly established in Article 6.1 of the ATC,
according to which the safeguard should be applied,
"as sparingly as possible, consistently with the provisions of this Article and the effective
implementation of the integration process under this Agreement".
Given these limits, the rules could not be understood, for example, to mean that the
ATC authorized the retroactive imposition of a safeguard measure.
(v) Compliance with the rules: finally, the Panel must make sure that, despite having
complied with the requirements mentioned above, the importing Member had not
infringed the ATC in some other way.
5.66 Only a case which survived the scrutiny of a Panel on the basis of the above standard of review
could be considered consistent with the ATC. In the case in question, it had already been amply shown
that the restriction adopted by the United States on this occasion could not survive scrutiny of this kind,
which was why Costa Rica had requested the Panel to rule that it be withdrawn.
Burden of Proof
5.67 Recalling that the measures at issue were taken as an invocation of the multilaterally-agreed
safeguard provisions set forth in Article 6 of the ATC, the United States argued that, consistent with
accepted GATT dispute settlement practice that had been carried over in the WTO, the burden was
on Costa Rica in the first instance to demonstrate that United States actions were inconsistent with
the ATC. The burden was not on the United States to re-demonstrate that its actions were justified.
Itwas considered that the United States had presented ample material in the TMB justifying the safeguard
measure, and they were prepared to refute the claims that Costa Rica had made; however, the Panel
should first determine whether Costa Rica had indeed brought forward factual information and legal
arguments substantiating its case, which, in their view, Costa Rica had not done.
5.68 Costa Rica argued that this particular conclusion by the United States was wrong, since the
burden of proof in a dispute settlement proceeding under the DSU for the purpose of determining the
consistency of a clothing trade restriction with Article 6 of the ATC fell upon the importing Member
which had adopted the restriction. This followed from the ATC, since Article 6.2 of the ATC expressly
stated that the importing Member must demonstrate the fulfilment of the basic requirements which
must be satisfied before a transitional safeguard can be adopted. Accordingly, the importing Member
must show or prove that the actual situation against which it would protect itself fully satisfied the
basic requirements. The importing Member had two obligations to fulfil: firstly, they must submit
specific and relevant factual information in support of their claim and, secondly, review the factors
listed in Article 6 and show how their case fitted within the substantive criteria established by the ATC
as prerequisites for the adoption of a special transitional safeguard.
5.69 In the view of Costa Rica, the importing Member had an obligation to demonstrate the satisfaction
of these requirements not only to the exporting Member during the consultations but also to the TMB
and, where appropriate, to the Panel. In accordance with Articles 6.7, 6.9 and 6.10 of the ATC, it
was clear that the importing Member must demonstrate its compliance with the basic requirements
of the ATC to the TMB. In the case in question the TMB had ruled that "the existence of serious
damage had not been demonstrated" and "did not reach consensus on the existence of actual threat
of serious damage". From this it clearly followed that the burden of proof vis-à-vis the TMB fell upon
the importing Member, who must demonstrate the existence of the conditions laid down by the ATC.
The importing Member was also obliged to demonstrate the existence of damage in a dispute settlement
proceeding under the DSU, since logic forbid that, in this stage, suddenly and for no reason, the burden
of proof should be reversed, requiring the exporting Member to demonstrate that the basic requirements

of the ATC had not been fulfilled by the importing Member. To proceed in this way would be to
establish a presumption in favour of the latter, in the sense that any restriction on the textile and clothing
trade adopted by a Member would have to be assumed to be consistent with Article 6 of the ATC unless
the exporting Member could prove otherwise. It was clear that such a rule would make completely
pointless the existence of the substantive requirements established by the ATC to ensure that the special
transitional safeguard remained an emergency measure and did not become the general rule. There
was no reason to "reward" a Member which was unable to demonstrate its case to the TMB by relieving
this burden of proof. Moreover, establishing a presumption in favour of the importing Member even
against the ruling of the TMB did not make sense, since that would imply depriving the TMB of any
role in the supervision of the operation of the ATC.
5.70 Costa Rica pointed out that the United States was justifying its position on the basis of a single
case, whose findings should not be taken into consideration by the Panel since, in their view, they
were wrong. They stressed that no other panel, from 1951 up to today, had based its findings on that
case. It was also important to note that panels set up in other cases, in particular where anti-dumping
measures were concerned, had treated the question of the burden of proof very differently. For example,
when Finland requested a review of its dispute with New Zealand over an anti-dumping proceeding
initiated against shipments of electrical transformers from a Finnish company to a local power company
in New Zealand (see also paragraph 5.49), the panel had shared the view expressed by the panel on
complaints set up to examine a complaint against anti-dumping duties applied by Sweden (BISD, 3S/81)
to the effect that:
"it was clear from the wording of Article VI (of the GATT) that no anti-dumping duties should
be levied until certain facts had been established. As this represented an obligation on the part
of the contracting party imposing such duties, it would be reasonable to expect that that
contracting party should establish the existence of these facts when its action is challenged."
The report of that Panel did no more than recognize what was a general principle of GATT law,
according to which the burden of proof fell upon the Member which invoked Article VI or Article XIX
of the General Agreement. In this respect, the principle was clearly laid down in Articles 3 and 11
of the Agreement on Safeguards, according to which it was the importing Member which, in accordance
with a series of pre-established procedures, must demonstrate compliance with the basic requirements
in order to be able to proceed with the adoption of a safeguard measure. As the principle was of general
application, it should also govern the adoption of a special transitional safeguard under the ATC,
especially as Article 6.2 of the ATC itself was clearly based on the same principle.
5.71 The United States failed to see the relevance of the Costa Rican arguments that legal duties
under the ATC flowed from a general principle of GATT law; that the burden of proof fell on the
member which invoked GATT Articles VI or XIX; or that since a Member invoking safeguard action
under Article XIX must establish certain facts under Articles 3 and 11 of the Agreement on Safeguards,
that principle should govern transitional safeguards under the ATC. Interpretation of the GATT or
the Safeguard Agreement was beyond the Panel's terms of reference. Moreover since the US had not
yet integrated the apparel categories in question, neither the GATT nor the Safeguards Agreement applied
in this case. Even if Articles 3 and 11 of the Safeguards Agreement applied here, their provisions
only required that the importing country conduct an investigation, provide due process to interested
parties and publish a report. In particular there was nothing in either of these articles that shifted the
burden of proof in WTO Dispute Settlement to the importing Member.
5.72 Costa Rica noted that various authors had very sharply criticised the report on the "Fur Felt
Hat" case. Thus, for example, Meier wrote:
"In the United States withdrawal case (Hatters' Fur case), for example, the working party held
that the invoking party (United States) was 'entitled to the benefit of any reasonable doubt'

and that the complainant (Czechoslovakia) 'has failed to establish that no serious injury has
been sustained or threatened'. This hasmade itdifficult tomaintain thesubstantive requirements
with respect to causation of 'injury', and it has made access to Article XIX freer than it should
be. This procedural rule should be revised to require the invoking party to go forward with
the burden of proof of 'serious injury'."11
5.73 Commenting on the same case, Dam pointed out that:
"Whatever distinctions may be made between the burden of coming forward with evidence
and the burden of convincing the working party, it is clear that the effect of this procedural
rule is to permit much freer access to Article XIX relief than might appear possible from the
language of that article ...".12
5.74 Costa Rica suggested that the Panel should take this opportunity to correct the approach taken
in the case cited by the United States and proceed on the basis of the considerations previously advanced
to establish clearly that the burden of proof in this case rests upon the United States, which must
demonstrate to the satisfaction of the Panel that it has complied with the requirements laid down by
the ATC for the adoption of a transitional safeguard.
5.75 The United States noted that Article 3.1 of the DSU affirmed Members' adherence to the principle
inArticle XVI:1 of the Agreement Establishing the WTO thatMembers must be guidedby the decisions,
procedures and customary practices of the GATT 1947 and that such practice included findings and
recommendations of the "Fur Felt Hat" working party. Therefore, the United States suggested that
the Panel refrain from intervening, as requested by Costa Rica, to alter the established practice.
D. ARTICLE 6 OF THE ATC: GENERAL VIEWS ON ITS APPLICATION
5.76 Costa Rica argued that the United States had failed to comply with the principles applicable
to the adoption of a safeguard measure under Article 6 of the ATC. Article 6.1 of the ATC established
two principles that must guide the application of any safeguard to be adopted under the said provision.
Firstly, "The transitional safeguard should be applied as sparingly as possible ...". This principle of
sparing application of the measure carried an obligation of tempering or adjusting safeguard action
prudently or sensitively, avoiding excess. It imposed an obligation to be as scrupulous as possible
when seeking to establish new restrictions. Failure to comply with this principle would hinder or might
even altogether prevent attainment of the objective of further liberalization of trade in textiles and
clothing. Secondly, Article 6.1 of the ATC went on to say that the transitional safeguard should be
applied. "... consistently with the provisions of this Article and the effective implementation of the
integration process under this Agreement".
5.77 Costa Rica further argued that in accordance with this second principle, it was clear, firstly,
that any Member wishing to use this mechanism had an obligation to comply with the provisions
established by the Article for this purpose, and secondly, that the application of the measure must be
guided by the final objective of the ATC which was the full integration of textiles and clothing into
the GATT rules. When considering these two principles together, it was clear that Article 6 of the
ATC sought to prevent the arbitrary and/or unjustified use of the transitional safeguard, by imposing
on all Members a reference framework to which the application of any safeguard measure was subject
and against which the adoption of every safeguard must be measured. The imposition of the unilateral
11Meier, op. cit., page 516.
12Kenneth W. Dam, The GATT Law and International Economic Organization, The University of Chicago
Press, Chicago and London, 1970, page 103.

restriction by the United States on trade from Costa Rica in the category under consideration had
infringed Article 6.1 of the ATC because it was an arbitrary and unjustified action that did not comply
with the provisions of this Article.
5.78 The United States commented that Costa Rica's argument consistently depended on the assumption
that the ATC integration process must be read into Article 6 so as to accelerate the pace of integration.
This was not the case. It was clear in the ATC that integration was an independently determined process,
and that Article 6 applied only to products not yet integrated.
5.79 The United States noted that both parties to the dispute had agreed that the ATC was the only
relevant agreement in this case. In its view, it was clear from the structure of the ATC, Article 6 in
particular, and the express direction of Article 3.2 of the DSU, that the Panel’ s report,
"cannot add to or diminish the rights and obligations provided in the covered agreements".
Accordingly, where the negotiators of the ATC had failed to agree on certain provisions or otherwise
had chosen not to address them in the ATC, the Panel must refrain from appearing to create such
obligations. Article 6 of the ATC emphasized that it was the importing Member that made the
determination based on the "relevant factual information, as up-to-date as possible" and "information
... related, as closely as possible, to identifiable segments of production and to the reference period
set out in paragraph 8" of Article 6 of the ATC.
5.80 Accordingly, when examining conformity with the relevant procedures of Article 6 of the ATC,
the United States argued that the Panel should seek only to determine whether the investigating authority
had followed the procedures in Article 6 of the ATC and whether based on data available, the
investigating authority had acted reasonably (see Standard of Review in Section C). The substantive
standard for making safeguard determinations for textiles and clothing not yet integrated into GATT 1994
was provided for in the ATC and was substantially, as Costa Rica admitted in its submission, the same
as that existing under Article 3 of the Multifibre Arrangement (MFA).
5.81 The United States further argued that Article 6 of the ATC was not the same as other trade
remedy provisions withrespect to substantivestandards. The above-mentioned articles were therelevant
provisions to be considered by the Panel in its review. These provisions contained the universe of
factors and procedures to be followed by Members taking safeguard action. Article 6 of the ATC
did not include more detailed procedures for investigation, nor did it provide more specific definitions
to interpret the standard of law to be applied. This omission was a deliberate choice by the Uruguay
Round negotiators who in other contexts, such as the Agreement on Safeguards or the Agreement on
Subsidies and Countervailing Measures, were capable of providing detailed standards and procedures.
5.82 In the United States' view, the appropriate standard to apply to the importing country’ s
determination was a standard of reasonableness. Article 6 of the ATC referred to "a determination
by a Member," based on weighing of evidence on certain factors. The standard for panel evaluation
of such determinations should follow established GATT practice, which was based on the 1951 "Fur
Felt Hat" case (see Section C).
5.83 The United States argued that although the quantum of injury required to be demonstrated under
Article XIX was greater than that under the ATC Article 6, the fundamental process for weighing
information was the same. The Panel must determine whether based on the information available,
the US determination was made in good faith application of and, was therefore, consistent with Article 6
of the ATC.

E. REQUIREMENTS FOR THE APPLICATION OF A SAFEGUARD MEASURE
5.84 Costa Rica argued that the United States had not fulfilled the specific requirements for the
adoption of a transitional safeguard measure. Such action required a demonstration of the existence
of a number of substantive elements laid down by Article 6 of the ATC itself. Thus, in accordance
with paragraphs 2 and 4 of that Article, two stages may be distinguished, with their corresponding
substantive requirements, that must be strictly fulfilled in order to be able to impose such a measure.
In a first stage, it was necessary to demonstrate the existence of the substantive prerequisites for the
importing Member to be entitled to have recourse to a transitional safeguard. Thus, Article 6.2 of
the ATC provided:
"Safeguard action may be taken under this Article when, on the basis of a determination by
a Member, it is demonstrated 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 producing like and/or directly competitive products ...".
5.85 The United States argued that the CITA had followed all of the procedures required under
Article 6 of the ATC in making its serious damage, or actual threat thereof, determination.
Determination of Serious Damage or Actual Threat Thereof
5.86 In the view of Costa Rica, Article 6.2 of the ATC established three requirements that must
be fulfilled and were the prerequisites for being able to impose a specific safeguard, namely: (a) an
increase in total imports of a particular product, regardless of their origin; (b) serious damage or actual
threat thereof to the domestic industry producing like and/or directly competitive products; and (c) a
causal relationship between the increase in total imports and the existence of the serious damage or
actual threat of serious damage.
5.87 The establishment of these three requirements, which were developed in detail in paragraphs 2
and 3 of Article 6 of the ATC, was not new in foreign trade law, as in one way or another they were
the conditions laid down by Article XIX of GATT 1994 and by the WTO Agreement on Safeguards
for the imposition of a safeguard measure. Broadly speaking, the idea was that these measures were
by definition an exception to the rule of free trade. Furthermore, since what they were intended to
restrict was fair trade and not unfair trade, such measures must comply with a number of strict
requirements so as to be able to "justify" departing from the principles of free trade. The fact that
the ATC had established a specific safeguard mechanism for use during the transition period did not
deprive it of the intrinsic nature or philosophy of any safeguard mechanism, and in particular its character
of being a temporary exception to free trade based on strict fulfilment of a number of requirements.
Indeed, in so far as the transitional safeguard provided for by the ATC did not require compensation,
its application must be strictly subject to the substantive criteria laid down by the ATC, and this must
be judged very rigorously.
5.88 The United States noted that the ATC transitional safeguard departed from the GATT Article XIX
requirement that the safeguard be applied on a non-discriminatory basis and that compensation must
be provided. The safeguard standard was serious damage, or actual threat thereof. Under the ATC,
Members must first determine that a product such as, in this case, underwear, was being imported
in such increased quantities as to cause serious damage or actual threat thereof to their domestic industry
producing like or directly competitive products. Article 6.2 of the ATC provided that:
"safeguard action may be taken under this Article when, on the basis of a determination by
a Member,[footnote omitted] it is demonstrated 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 producing like and/or directly competitive products. Serious damage

or actual threat thereof must demonstrably be caused by such increased quantities in total imports
of that product and not by such other factors as technological changes or changes in consumer
preferences."
5.89 Costa Rica submitted that to have the right to take safeguard action, the importing Member
must fulfil the requirements established for this purpose in Article 6.2 of the ATC as developed in
detail in that Article and in Article 6.3 of the ATC. Article 6.2 of the ATC obliged an importing
Member to demonstrate that the substantive requirements had been met before imposing a transitional
safeguard. This demonstration procedure required the Member to submit specific and relevant
information on the facts giving rise to its claim and to make the required examination of this information
in relation to the parameters of the Agreement. This information, together with the corresponding
analysis, must be submitted at the correct time, namely the time the importing Member determines
the state of the market, so that the exporting Member can exercise their right of defence. Any failure
to observe the provisions could not be remedied by the subsequent submission of information (the July
or October Statements) since, the information that was legally relevant for the purpose of analysing
conformity of the measure with the ATC was that contained in the March Statement. The exhaustion
of this first stage, with the fulfilment of each and every one of its requirements, was a sine qua non
condition for acquiring what might be called a "generic" entitlement to the use of a specific safeguard
measure, which may only be particularized or materialized against a specific Member when the second
stage of the process had also been fulfilled. The United States had not fulfilled its obligation to
demonstrate the existence of the substantive factors that were part of this first stage, and thus had failed
to fulfil the requirements laid down in Articles 6.2 and 6.3 of the ATC.
5.90 The United States pointed out that Article 6.3 of the ATC required that in making a determination
of serious damage, or actual threat thereof, a 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 investment;
none of which, either alone or combined with other factors, can necessarily give decisive
guidance."
This text required that a Member seriously examine the effects of imports on the industry as reflected
in changes in economic data on that industry. However, it did not require that the importing Member
examine only the listed variables, or all the listed variables. It only required that the importing Member
examine variables such as those listed. CITA had in fact examined many variables including those
listed as relevant in Article 6.3 of the ATC. The March Market Statement noted that CITA had examined
production, market share, imports, employment, profits, investment, sales, capacity, prices and
manhours. All of the information provided in the March Market Statement contained all the substantive
economic information on which CITA’ s decision had been based. While Costa Rica had pointed in
particular to exports, exports were only one variable of a long list in Article 6.3 of the ATC and as
that Article stipulated, any one variable alone could not necessarily give decisive guidance.
5.91 The United States noted that while export data were generally not as reliable as import data,
at the request of the TMB, the US had supplied an export table. Even after using export data to adjust
for the overstatement in the market, the figures before the TMB had confirmed the determination made
by CITA. After examining the import data, CITA examined output, market share, employment, domestic
price and profits and investment information. That information had led CITA to the conclusion that
there was a case of serious damage, or actual threat thereof to the US domestic industry. While the
United States did not supply data on productivity, inventory, wages and exports, it was not required
to do so under Article 6.3 of the ATC. The variables in Article 6.3 of the ATC not directly included
in the March Market Statement (productivity, inventories and wages) had been discussed during the

TMB examination in oral responses by the United States to questions from TMB members. Costa Rica
had omitted any recognition of the express proviso in Article 6.3 of the ATC that:
"none of [these factors] either alone or combined with other factors, can necessarily give decisive
guidance."
A similar proviso was also found concerning the additional factors for consideration in Article 6.4
of the ATC. Nevertheless, the United States had provided verbal responses to questions concerning
productivity, wages, and inventory to the TMB.
Increase in Imports into the United States
(see also The Counting of Re-imports, paragraphs 5.142-5.149)
5.92 Costa Rica further argued that, in accordance with its obligation to demonstrate the existence
of an increase in imports, the United States should have presented specific and relevant factual
information on the subject, and then have analyzed it. In this regard, however, the March Market
Statement only indicated that imports in this category had increased from 65.5 million dozen in 1992
to 79.9 million dozen in 1993 and 97.3 million dozen in 1994, reflecting increases of 22 per cent in
each year with respect to the previous year. The United States had not made any distinction concerning
the nature of this trade, nor any analysis thereof, an omission which was particularly serious in this
case given the increasing importance of "807 trade" in this category. In fact, over the last six years
there had been a substantial change in the United States industry producing cotton and man-made fibre
underwear. There had been a shift from producing and assembling the product locally to producing
the product components locally, which were then assembled abroad and returned to the same companies
in the United States for marketing. This co-production process (see Section II) had enabled the United
States industries to retain their market share in the United States.
5.93 Costa Rica questioned whether, in the case of clothing produced on the basis of the co-production
process, one was dealing with "imports" or rather with a case of domestic production which, despite
assembly in another country, did not for that reason alone cease to be domestic production. In fact,
the United States itself had considered imports of cut parts for assembly in the United States as products
of the country where the parts were cut. United States exports of cut parts should be considered
United States products. Furthermore, when this case was reviewed by the TMB in July 1995, the
United States itself had submitted a loose sheet giving alleged export data in this category, in which
cut parts subsequently assembled abroad were included as exports, which logically showed that for
this industry these were part of domestic production.
5.94 Costa Rica noted that the "807 trade" had risen from 31.8 million dozen in 1992 to
42 million dozen in 1993 and 57 million dozen in 1994, accounting for an ever larger part of trade
in category 352/652. This reflected a pattern which, by all indications, would continue and become
more pronounced in the future, driven by the investment policies and incentives that the United States
maintained in relation to the Caribbean Basin and Mexico.
5.95 In the view of Costa Rica, much of the cited increase in imports did not in fact exist, and
therefore the United States did not have the right to use the transitional safeguard. By nevertheless
having done so, it violated Article 6.2 of the ATC. However, if it were to be considered that there
was in fact an increase in imports of underwear, it was quite clear that if such imports were increasing
it was because United States production of the cut pieces, that were subsequently assembled, was
increasing in the same proportions. In other words, if ever more underwear was being assembled in
other countries it was because in the United States ever more cut pieces for underwear were being
produced that need to be assembled, from which it necessarily followed that any industry producing
cut pieces for underwear was thriving and therefore did not need to be protected from something that
was rather of benefit to it.

5.96 The United States considered that the ATC did not prohibit inclusion of re-imports in imports;
on the contrary, Article 6.2 of the ATC directed importing Members to examine increases in "total"
imports. The ATC also did not require Members to separate re-imports from total imports. In fact,
all textile and apparel re-imports were defined under United States law as foreign articles. The US
Bureau of the Census’ statistics reflected HTSUS 9802 re-imports as apparel which were cut in the
US, exported to be assembled, and then re-imported under HTSUS 9802 as finished garments.
HTSUS 9802 re-imports were included in domestic production (cut parts), exports (cut parts), and
imports (finished garments). Re-imports must clear customs like any other imported good. Costa
Rica had admitted to the TMB that companies producing goods for re-import into the United States
were subject to the same laws, fees and taxes as other domestic Costa Rican manufacturers.
HTSUS 9802apparel re-imports into theUS received duty reductions totheextent thatthey incorporated
US content.
Application of Safeguard to Individual Member(s)
5.97 Costa Rica argued that in the case of the ATC, since the Agreement allowed the selective and
discriminatory application of a safeguard measure, it was necessary to fulfil this second stage which
was not normally present in other existing safeguard mechanisms in the multilateral system, precisely
in order to be able to identify the Member or Members to which the measure would be applied. Thus,
Article 6.4 of the ATC stated that:
"Any measure invoked pursuant to the provisions of this Article shall be applied on a Member-
by-Member basis. The Member or Members to whom serious damage, or actual threat thereof,
referred to in paragraphs 2 and 3, is attributed, shall be determined on the basis of a sharp
and substantial increase in imports, actual or imminent, from such a Member or Members
individually, and on the basis of the level of imports as compared with imports from other
sources, market share, and import and domestic prices at a comparable stage of commercial
transaction: none of these factors, either alone or combined with other factors, can necessarily
give decisive guidance ... ".
5.98 In the view of Costa Rica, in the second, attribution stage, the importing Member must
demonstrate the fulfilment of two substantive requirements: a sharp and substantial increase in imports,
actual or imminent, from such a Member or Members individually; and the causal relationship between
this increase and the serious damage or actual threat thereof created by total imports. In accordance
with the above provisions, the fulfilment of the three requirements set out in the first stage was an
essential pre-condition to be able to go on to the second stage of the demonstration process. Only
when, after having fulfilled the requirements of the first stage, and it had also fulfilled the two
requirements of the second stage, may the importing Member apply a transitional safeguard to an
exporting Member.
Obligation of Demonstration - Fulfilment of Substantive Requirements
5.99 Costa Rica argued that, in order to be able to fulfil the above-mentioned requirements, the
ATC imposed on the importing Member an obligation of demonstration. Under Article 6.2 of the ATC,
the Member wishing to apply a transitional safeguard was obliged to make a determination prior to
adopting the measure. In the determination, the Member had the obligation to demonstrate fulfilment
of the substantive requirements laid down in order to be able to establish such a measure. It was noted
that while it was the Member's obligation to make the determination, the actual content of the
determination was clearly established by Article 6 of the ATC itself: it consisted in demonstrating
the existence of the substantive requirements that must be fulfilled in order to adopt a transitional
safeguard. It was not a question of stating, alleging or repeating opinions without any grounds, but
rather of showing or proving that the factual situation on which the Member wished to take protective
action fully met the specified conditions. The burden of proof rested with the Member intending to

restrict trade. If the Member took safeguard action without having demonstrated the existence of all
the substantive requirements in the two stages as described above - as the United States had done in
this case, it was violating the ATC (see also Burden of Proof in Section C).
5.100 This demonstration process which the Member wishing to impose the safeguard must carry
out may in turn be divided into two: firstly, the Member must present the specific and relevant
information on the facts giving rise to its claim in accordance with Article 6.7 of the ATC; and secondly,
it must make an examination of the factors listed in Articles 6.2, 6.3 and 6.4 and of how the conditions
it was presenting fell within the substantive criteria laid down by the ATC as necessary requirements
to justify the adoption of a safeguard measure. If the information was not presented, the necessary
analysis could not be carried out, and consequently there would be a breach of the ATC. In the case
under consideration, the United States had failed to demonstrate the existence of the substantive elements
of the first stage of the demonstration process, and still less those of the second stage, thereby violating
Articles 6.2, 6.3, 6.4 and 6.7.
5.101 The United States stated that it had met all of the substantive requirements of Article 6 of the
ATC and that after doing so, met its burden of proof and the transitional safeguard action was justified.
It was now up to Costa Rica to show that the United States determination was unreasonable and
inconsistent with the requirements of the ATC, in particular Article 6.2, 6.3, 6.4, 6.7 and 6.6(d).
Consultations on Safeguard
5.102 The United States noted that, once the determination had been made, the importing Member
must request consultations with the relevant exporting Members. Article 6.7 of the ATC also provided
that requests for consultations on proposed safeguard action must be accompanied by "specific and
relevant factual information, as up-to-date as possible," particularly factors referenced in Articles 6.3
and 6.4 of the ATC.
5.103 As under the Multifibre Arrangement (MFA) system, during consultations on the application
of the safeguard, importing Members must take into account four areas of more favourable treatment
as appropriate. One area of more favourable treatment relevant in this matter was that accorded to
re-imports included in the determination of serious damage, or actual threat thereof that constituted
a significant proportion of an exporting Member's trade. It was not until the consultation stage that
the United States was required to give more favourable treatment in accordance with Article 6.6(d)
of the ATC. The ATC left the definition of re-imports and the manner of applying more favourable
treatment to the importing Member. If the consultations provided for in Article 6.7 of the ATC did
not result in a mutual solution, the importing Member must exercise its option to take action to limit
the relevant imports within 30 days. Once that action was taken, Article 6 of the ATC required automatic
review by the TMB.
Data Required for Consultations and Other Relevant Information
5.104 Costa Rica considered thatthe"other relevant information" shouldbe understood as information
relevant or related to the information specified in the earlier paragraph, which was taken into
consideration by the importing Member at the time of making its determination about the market situation
and which was available to the exporting Member. The main task of the TMB in this respect was,
in accordance with Article 6.10 of the ATC, to examine whether the determination made by the importing
Member fit the requirements of the ATC. Thus, the examination was restricted to those elements which
the importing Member had taken into consideration in making its determination and of which the
exporting Member was duly cognizant at the time. These may be different from the factual elements
mentioned in Article 6.7 of the ATC, but they must be related to them. It could not be argued that
the TMB could conduct its examination on the basis of information which the importing Member had
not taken into consideration at the time of making its determination - because it did not exist, because

it was not available or for any other reason - and which the exporting Member did not have an
opportunity to examine and refute before the imposition of the restraint. To do otherwise would
jeopardize the rights of the exporting Member and would be contrary to the provisions of the ATC.
5.105 Costa Rica recognized that paragraphs 2, 3 and 4 of Article 6 of the ATC did not distinguish
between "re-imports" and imports, but used only the latter term. However, they did not consider that
this by itself should be taken to mean that "807 trade" should necessarily be regarded as imports.
On the contrary, the word "imports" should be analysed in the context of the case in question and the
economic rationale of "807 trade", in order to determine whether, in this particular case, "807 trade"
could or could not be regarded as imports for the purposes of Articles 6.2, 6.3 and 6.4.
5.106 The United States pointed out that Article 6.7 of the ATC required that the call for consultations
must be "accompanied by specific and relevant data, as up-to-date as possible" relating to the factors
referred to in Articles 6.3 and 6.4 of the ATC. Like the working party in the "Fur Felt Hat" case,
Article 6.7 of the ATC did not require perfect data. The data relied upon by the CITA at the time
of its determination in March were in fact as up-to-date as possible, and provided information as close
as possible to the reference period. The United States had presented revised and updated data to the
TMB in July which only confirmed the correctness of the CITA's analysis in March that transitional
safeguard action was appropriate.
5.107 The data to be used in examining whether a determination was consistent with Article 6 of
the ATC must be those data actually used by the authorities of the importing Member at the time it
made the determination. The relevant data in this case were those required by Article 6.7 of the ATC.
Nevertheless, all later updated or supplementary data only corroborated the data in the March Market
Statement.
5.108 The United States pointed out that the TMB must review the case, determine whether the
safeguard action was justified and make appropriate recommendations to the Members concerned.
In addition to the data supplied in accordance with Articles 6.7 and 6.10 of the ATC also allowed the
TMB to consider "any other relevant information provided by the Members concerned." Importing
Members must notify the Chairman of the TMB, providing relevant factual data at the same time the
request for consultations was made. When a restriction was in place, the ATC placed a three-year
cap on the duration of safeguard measures applied by Members, unless the product concerned was
integrated earlier.
F. SERIOUS DAMAGE OR ACTUAL THREAT THEREOF
5.109 Costa Rica submitted that the second substantive requirement that any Member wishing to acquire
the right to take safeguard action must demonstrate was serious damage or actual threat thereof to the
domestic industry producing like and/or directly competitive products, as stated in Article 6.2 of the
ATC. It was noted that Article 6.2 of the ATC referred to the fulfilment of a requirement that may
take one of two forms: it may be that what existed was serious damage to the domestic industry, or
it may be that what existed was the actual threat of serious damage to the domestic industry. However,
it was also noted that while the requirement was fulfilled by the existence of either of the two conditions,
they were precisely two different hypotheses, owing to the time factor. In the case of serious damage,
the injury to the domestic industry had already occurred, whereas in the case of actual threat of serious
damage the injury to the industry had not yet occurred but there was an imminent and hence actual
possibility that it would occur. It was not possible to use the same information and the same type of
analysis to prove both that a supposed fact had occurred or that it was about to occur.
5.110 Costa Rica claimed that it was the understanding of the TMB itself that serious damage and
actual threat of serious damage were not the same thing, since in this particular case it had concluded
that the existence of serious damage had not been found, but it could not reach a consensus on the

existence of actual threat of serious damage. If the two conditions were a single hypothesis, the
conclusion that one did not exist would necessarily lead to the conclusion that the other did not exist.
However, the TMB had not taken this view. The most important consequence of this difference was
that the nature of the information submitted and of the analysis made to demonstrate each hypothetical
condition was necessarily different, as it was not the same thing to demonstrate that damage had already
occurred as to demonstrate that damage might occur. That was why the logical corollary of this
difference was that an importing Member could not submit the same information in this connection
and carry out the same type of analysis in order to argue indiscriminately that what had existed was
damage or threat of damage. At a given point in time - the moment when the call for consultations
was made - either one condition existed or the other condition existed. To make an appropriate
demonstration thereof the importing Member must at that point in time define what the supposed situation
of its industry actually was and make the call, submitting the corresponding information and, if
appropriate, adopting the restriction on the basis of the condition it selected.
5.111 Costa Rica stated that correct identification by the importing Member of the supposed claim
made in relation to the state of its domestic production was essential in order to comply properly with
its demonstration obligation. In the view of Costa Rica, it was only when the TMB had determined
that the existence of serious damage had not been proven that the United States changed tack and
appeared to assume that it could maintain its restriction on the basis of the purported threat, which
had not been alleged or proved previously. The United States affirmed that as the ATC was not worded
in the same terms as other WTO Agreements, it was not possible to require the presentation of different
information in order to prove serious damage or actual threat of serious damage. However, Costa Rica
argued that even though something may not be specifically stated in an agreement, common understanding
required it, because it was not possible to use the same information and the same type of analysis to
prove both that a supposed fact has occurred or that it is about to occur.
5.112 Costa Rica argued that, in some measure, that was what the United States had done in this
process. The great majority of the communications initially sent by the United States in connection
with the case, the Statement submitted in March and the adoption of the unilateral restriction in June
were all based on the purported existence of serious damage to the United States industry. The United
States had begun this case and had adopted this restriction on the basis of the existence of serious damage,
and had not considered that a threat existed. That was why the element of actual threat had not even
been taken into account. Hence, at the moment when the TMB determined that serious damage did
not exist, the United States should have withdrawn the unilateral restriction it had imposed.
5.113 However, the United States had not withdrawn the restriction, but had maintained and even
renewed it. Although the United States had not explicitly argued this at any time, it appeared to have
assumed that it was authorized to maintain the measure on the basis that the TMB could not reach a
consensus on the existence of actual threat of serious damage. In the view of Costa Rica, this reasoning
was incorrect and violated Articles 6.2 and 6.3 of the ATC, which specifically required the demonstration
that this was the condition, with the presentation and analysis of specific and relevant information
concerning the existence of actual threat of serious damage. The fact was that there existed neither
serious damage to the United States industry, nor actual threat of serious damage to that industry, which
was why, by adopting a restriction without this second requirement being fulfilled, the United States
had violated Articles 6.2 and 6.3 of the ATC.
5.114 The United States argued that Article 6.2 of the ATC required that a Member determine that
a particular product was being imported into its territory in such increased quantities as to cause "serious
damage, or actual threat thereof" to the domestic industry producing like or directly competitive products.
Unlike other agreements such as the Agreement on Implementation of Article VI, the ATC did not
provide separate requirements for determinations of threat of injury. "Serious damage" or "actual
threat" never appeared separately in the text of Article 6 of the ATC; each reference to one of these
two different legal concepts was coupled with a reference to the other. Thus, Article 6 of the ATC

provided only one standard, with one set of criteria, for determinations of serious damage or actual
threat thereof. This standard and these criteria had been employed in the CITA determination of
March 1995. Thus, this determination of "serious damage, or actual threat thereof" was fully consistent
with Articles 6.2 and 6.3 of the ATC.
5.115 The United States noted that their 27 March 1995 diplomatic note to Costa Rica making the
actual call for consultations had referred to "serious damage, or actual threat thereof" to the industry
producing underwear in the United States, even if the March Market Statement which accompanied
it abbreviated this reference to "serious damage". Furthermore, during consultations with Costa Rica
the United States had consistently taken the position that underwear imports from Costa Rica were
causing both serious damage and actual threat of serious damage. During TMB deliberations, in
July 1995, it was clarified that the reference in the March Statement had included both serious damage
and actual threat of serious damage, and the United States had corrected the statement accordingly.
5.116 Costa Rica was of the view that the US diplomatic note of 27 March 1995 was merely a standard
form used by the United States for its calls. Even though the note alleged a threat of serious damage,
the fact was that the statement attached to it in order to justify the restriction - the March Market
Statement - did not contain any information or analysis relating to this allegation. Moreover, during
the consultations held between the two governments under Article 6 of the ATC, no evidence or analysis
of any kind was submitted that might have demonstrated the existence of such a threat. Similarly,
there was no mention of the existence of a threat of serious damage as justification for the adoption
of a safeguard in the notes which the United States had attached to the various restraint proposals it
submitted to the Government of Costa Rica.
5.117 With respect to the status of the TMB finding that serious damage had not been demonstrated,
the United States pointed out that they did not agree with the TMB finding and did not at the time
it was made; nothing in the ATC made TMB findings or recommendations binding on the parties
concerned. As a practical matter in light of the TMB’ s initial finding the United States had been
compelled to shift the focus of its argument to "actual threat" after July 1995, but as a matter of law
the ATC did not confer upon the TMB the power to make findings of fact that legally bound Members.
Moreover, as noted in relation to the standard of review, the burden of proof was on Costa Rica to
produce a prima facie case that the US determination was inconsistent with Articles 6.2 and 6.3 of
the ATC; the United States did not have the burden here of proving that its actions had been consistent
with the ATC (see also Section V:C). Furthermore, the question to be addressed was not the existence
of "serious damage" as such, but whether facts had been advanced which provided convincing evidence
that it was unreasonable for CITA to determine that the adverse effects of increased underwear imports
on the US domestic underwear industry had amounted to serious damage, or actual threat thereof.
5.118 Costa Rica observed that, in its first review of this case, the TMB had reached the clear
conclusion that "serious damage ... had not been demonstrated", as required by Articles 6.2 and 6.3
of the ATC. It was clear that the restriction imposed by the United States infringed the above-mentioned
provision because the United States had failed to demonstrate the existence of serious damage to its
industry. As the TMB decision in this regard had not been challenged, it had to be understood that
both parties had accepted it. Consequently, the discussionas to the supposedexistence of serious damage
should not be reopened, since it was clear that this was not demonstrated at the time when it should
have been demonstrated.
5.119 Costa Rica argued that the United States had also failed to demonstrate the purported actual
threat of serious damage. The industry producing clothing classified in category 352/652 was not only
not suffering any serious damage but also not suffering any actual threat of serious damage, as required
under Article 6 of the ATC. Firstly, the United States itself did not consider that actual threat of serious
damage existed in this case. It never argued that this was the case in order to justify the unilateral
restriction imposed on Costa Rica. This was shown by the unreliable, erroneous, contradictory and

incomplete information it had included in the March Market Statement, which did not serve for making
an analysis of whether serious damage existed, and was not even designed to be used as a basis for
an alleged actual threat of serious damage. When the United States made the call for consultations,
the condition it had in view was that of serious damage and not of actual threat of serious damage.
That was why the March Statement did not make any specific reference to the issue of threat, except
indirectly in a single sentence of the text. That is also why, when the United States published in the
Federal Register the request for public comments concerning these negotiations, it referred only to
serious damage, and not to actual threat of serious damage.
5.120 The supposition of actual threat of serious damage became important when the TMB, after
having reached the conclusion that the existence of serious damage had not been demonstrated, did
not reach a consensus as to the existence of actual threat of serious damage - a strange decision,
considering that the hypothetical condition of actual threat was not in itself under consideration - and
recommended that the parties hold further consultations bearing this in mind, inter alia. It may be
thought that, following the TMB's decision, the only option open to the United States was to try to
justify a posteriori the restriction adopted, by now invoking a supposed threat to its underwear-producing
industry. However, the fact was that it also failed to establish this justification, even in subsequent
months.
5.121 Costa Rica argued that neither the March Market Statement, nor the July Statement, nor any
other information furnished by the United States, not even following the imposition of the unilateral
restriction, provided evidence or furnished an analysis of the kind required to demonstrate the existence
of actual threat. The obligation to demonstrate the actual threat of serious damage had two dimensions.
Firstly, it was necessary to demonstrate that an imminent increase in imports existed, on the basis of
objective criteria, such as the goods having already been exported and en route; or that they were
in port waiting to be shipped; or that they were covered by a contract and would be shipped once
production had been completed. A second dimension, closely linked to the first, referred to volume,
in the sense that not every possible increase in imports was capable of creating a threat. It followed
from the foregoing that it was necessary that the goods should be able to be counted, which in turn
was linked with the need for objective criteria to determine the imminence of the imports.
5.122 The United States argued that they were not required by the ATC to choose between serious
damage and actual threat in making their determination. The ATC standard allowed Members to assert,
at the same time, both serious damage or actual threat. The plain meaning of the standard invoked
merely the notion that there could be a determination on the basis of serious damage or actual threat.
Neither was exclusive of the other. There was no obligation in other safeguard proceedings that one
standard must be alleged instead of the other. The ATC treats them equally, that is, without any special
factors to establish a case for one or the other. The simple fact was that Members could allege both
based on the same factors. In addition, contrary to the assertion of Costa Rica, it did not follow that
if the TMB found that there was no serious damage, and reached no consensus on threat, there was
no threat. No consensus on threat was just that. No consensus on that finding, therefore, no finding
or decision on threat.
5.123 Upon request of the Panel, the United States argued that they did not take the view that a finding
of actual threat of serious damage implied some sort of prospective analysis because there was no
provision of this kind in the ATC that would have guided the United States in making its determination.
The United States did not split the phrase "serious damage, or actual threat thereof" and was not asking
the Panel to do so. The ATC did not provide separate criteria for threat. They maintained that whatever
analysis was chosen by the Panel must not add to or diminish the rights and obligations of the parties.
They believed that the ATC must be observed and that any interpretation that would re-write the ATC
would probably require the re-opening of the Marrakesh Agreement Establishing the WTO.

The March 1995 Market Statement
5.124 Costa Rica considered that the United States could base its restriction only on the March Market
Statement which was the statement the United States had notified within the terms of Article 6 of the
ATC and on the basis of which consultations had been held. It also provided the basis for the United
States' adoption of a unilateral restraint. Thus, it was clear that the March Market Statement alone
ought to be examined by the Panel in order to determine whether the restriction applied by the United
States complied with Article 6 of the ATC.
5.125 Conversely, Costa Rica was of the view that a finding of actual threat of serious damage implied
a prospective analysis. Since the ATC required that the threat be "actual", this implied that the Member
wishing to impose this ground could not do so on the basis of conjecture of speculation, but must
effectively demonstrate that there was an imminent damaging impact on the industry which was about
to occur in the future. Once this specific and relevant information had been presented, the importing
Member must carry out a prospective, forward-looking analysis of what could happen to its industry,
bearing in mind that what was under examination was the imminence of a situation that had not yet
occurred. In the case under consideration, the United States had submitted absolutely no information
aimed at seeking to demonstrate the existence of actual threat of serious damage, still less to carry
out any kind of analysis to that end. Hence, it was impossible to consider that the unilateral restriction
imposed could have been based on the existence of a supposed actual threat.
5.126 Costa Rica contrasted the requirements of Article 6.3 of the ATC with the information included
in the March Market Statement. According to Article 6.3 of the ATC, 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 investment; none of which, either alone or combined with other factors, can necessarily
give decisive guidance."
5.127 Costa Rica argued that, pursuant to this provision, the United States had to demonstrate the
effect of imports from Costa Rica on the state of its underwear producing industry, as reflected in changes
in the relevant economic variables. The first stage of this process of demonstration consisted of the
presentation of the necessary information to be able subsequently to make an analysis of the information.
In this connection, Article 6.7 of the ATC provided that:
"The request for consultationsshallbe accompanied byspecific andrelevant factual information,
as up-to-date as possible, particularly in regard to: (a) the factors referred to in paragraph 3,
on which the Member invoking the action has based its determination of the existence of serious
damage or actual threat thereof; ...".
5.128 Given the characteristics of the information in the March Market Statement - summarized by
Costa Rica in the following table - it was impossible in their view for the United States to fulfil their
obligation to demonstrate the existence of serious damage.

Information Required Under the ATC and Information
Presented by the United States
ATC Information included in the March Statement (MS) submitted by the
United States
Output The MS mentioned that production had declined by 4% in 1992 and 1993 and a
further 4% between 1993 and 1994; in July the United States indicated that the
percentage of decline of the first period remains the same but that in the second
there was no decline; in October the United States believed that for the first
period there was a decline of 1.5%, whereas in the second the supposed decline
was 2.6%.
Productivity No information was included on this variable.
Utilization of
capacity
No specific information was included on this variable, apart from a sentence
stating that because of the import competition, firms reported shifting
production capacity to other product lines. The source of this information was
the survey which the United States says that it had carried out, but the slightest
details of which were unknown.
Inventories No information was included on this variable.
Market share The MS states that the domestic industry's share of the market fell from 73%
to 68%. The problem of how to treat "807 trade" was not taken into
consideration, and therefore it was not determined for certain that the domestic
industry's market share did not rather increase.
Exports The MS did not include any information of this variable. In July the United
States had submitted a loose sheet stating that exports had increased from $284
million in 1992 to $406 million in 1993 and to $458 million in 1994. This
loose sheet did not indicate the source of the information.
Wages No information was included on this variable.
Employment The MS stated that employment declined from 46,377 workers in 1992 to
44,056 workers in 1994. In July, however, the United States said that the
number of workers in 1992 was 35,191 and that the number had declined to
33,309.
Domestic prices The MS stated that the producers' average price is $30 per dozen in 1994,
without giving the source of the information. In July the United States
"corrected" this information and indicated that it believes that this price is
between $16 and $20 per dozen.
Profits The MS stated that profits were down 18% at one firm - of the 395 which
supposedly existed - and there was pressure on the bottom line throughout the
industry due to rising costs and stiff import competition. The MS also stated
that sales declined and that one company had reported that their sales were
down about 17% in 1994. No statistics were given in this respect. The source
of this information was the survey that the United States said it carried out, but
the details of which were unknown.
Investment The MS stated that companies "generally" had been postponing investment in
this industry, that some companies had closed plants permanently or shifted
production offshore, and additional disinvestment of this nature "was being
contemplated". No statistics were given in this respect. The source of this
information was the survey that the United States said it carried out, but the
details of which were unknown.

5.129 Costa Rica noted that of the 11 factors listed in Article 6.3 of the ATC, the March Market
Statement had not included any information concerning four of them; it had included information which
the United States itself subsequently considered wrong in the case of three of them (two of which were
output and prices); and included information for three factors based on a survey whose coverage,
methodology, representativeness, dates etc. were not mentioned - and indeed, on another occasion the
United States itself declared that it could not use this type of instrument to collect information in these
cases. In these circumstances, the only possible conclusion was that the information submitted by the
United States was unreliable, erroneous, contradictory and lacking, and therefore any measure based
on it was in breach of Articles 6.2, 6.3 and 6.7 of the ATC.
5.130 Costa Rica argued that the information submitted was unreliable for three reasons: firstly,
much of it did not give the source from which it is taken; secondly, where a source was specified,
it turned out not to be very serious; and lastly, the best evidence that the information of the March
Market Statement was unreliable was that in July the United States itself submitted fresh information
that substantially contradicted all the major indicators covered in the March Statement. Then, a few
months later the United States again published information that was at variance both with the information
produced in July and with the information included in the March Statement.
5.131 Costa Rica recalled that Section III of the March Market Statement was divided into two sections,
the first headed "serious damage to the domestic industry" and the second "industry statements". The
first of these sections included data on domestic production, market share loss and import penetration,
for which the source was given. In the case of the information on employment and man hours it stated
that the data were derived from various sources, which were not identified with any degree of precision.
It was noted that the industry statements had a questionable source, being
"Based on a survey of individual firms producing cotton and man-made fibre underwear ...
the observations are concentrated in the men's underwear sector but also include the even more
heavily import-impacted ladies underwear sector."
5.132 In effect, the data on employment, sales, profits, investment, capacity and prices included in
the March Market Statement were based on an alleged survey whose coverage, methodology,
representativeness, date, etc., were unknown since the Statement was completely silent in this respect.
This explained the opinions included in the Statement for which there was so little basis or justification.
Clearly, it was impossible to make generalizations of any kind or determine the state of the industry
on the basis of a number of opinions from one or two firms - it was recalled that the Statement itself
stated that there were 395 establishments producing in this category - for which no grounds or
explanations were given and included in a survey whose details were unknown. It was also obvious
that this could not constitute any kind of demonstration of the impact of imports on the industry in
question, since it did not shed any light on the effect of the increased imports on the variables mentioned.
5.133 Costa Rica did not consider the data based on the alleged survey of individual firms, of which
nothing was known, to be serious. The survey referred to the opinions of one or two firms as to capacity
utilization, inventories, exports, wages, profits and investment. The submission of information was
so important that the United States should have included in its Statement data on at least all the factors
set out in Article 6.3 of the ATC and perhaps even on some others; however, it had failed to do so.
5.134 The problem of the March Market Statement was not confined to the lack of information but
also to the total absence of any analysis of that information. The United States did not make any kind
of analysis of the information, although given the incoherencies of that information, it would have
been difficult to do so. This led Costa Rica to the conclusion that with the information submitted,
the United States had failed to fulfil its obligation to demonstrate the existence of serious damage to
its industry, as required under Articles 6.2 and 6.3 of the ATC, and as the TMB itself had found.

The July 1995 Market Statement
5.135 Costa Rica considered that the reliability of the information was also brought into question
by the United States, which published further data in July and again in October 1995, altering the March
data substantially. Thus, in July data that differed from the March data were given in essential fields
including: (a) number of establishments producing underwear in category 352/652: in March there
were 395, but in July there were 302; (b) supposed decline in output: whereas in March output was
believed to have declined by 4 per cent between 1992 and 1993 and by a further 4 per cent between
1993 and 1994, in July it was indicated that the first percentage remained the same but that in the second
period there was no decline; (c) market size: whereas in March, "807" production was wrongly counted
twice, both as domestic production and as imports, in July this market size was "adjusted", introducing
significant alterations compared with the March Statement; (d) number of workers employed in the
sector: whereas the March Statement stated that 46,377 people worked in the sector in 1992, in July
it was stated that that was not the number, but rather 35,191 persons, in other words the March Statement
was wrong by 11,000 workers; (e) average price of United States underwear production: whereas
in March it was stated that this was $30 per dozen, in July it was "clarified" that this figure had a margin
of error of nearly 100 per cent, the price being between $16 and $20 per dozen.
5.136 Costa Rica emphasized that the March Market Statement, on which the consultations had been
held and the unilateral restriction imposed in June 1995, had so many errors that all its main parameters
were modified in July. Virtually the only section of the March Statement that was not modified was
that based on the survey. Furthermore, in October 1995 the Textile and Apparel Office of the United
States Department of Commerce had published updated statistics to June 1995 for category 352/652
in which some of the data given in July were "revised" once again, having already been "revised"
with respect to the March Statement, and the results obtained were at variance with those submitted
earlier. It thus turned out once again that the data for output and market size were different. This
lack of reliability of the information submitted by the United States was enough to maintain beyond
all doubt that the United States had failed in its primary duty of presenting the necessary information
to proceed to carry out an analysis of whether the serious damage it alleged actually existed.
5.137 The July Statement had been used by the United States from July 1995 and up to the
establishment of the Panel as an "ex post facto" justification for the restriction applied to Costa Rican
trade in this category in June 1995. Nevertheless, Costa Rica had always maintained that the July
Statement could not be regarded as the basis for the call, since it was not. The information contained
in the July Statement was not that which should be analysed for the purpose of determining whether
the restriction adopted by the United States complied with Article 6 of the ATC. In this respect, it
was correct to say that this statement had no legal relevance. The July Statement was useful for
confirming how erroneous was the information included in the March Statement which formed the
basis of the unilateral restriction adopted in June 1995. This Statement - which for the most part was
based on the same information that was available in March - was useful as evidence, inasmuch as it
showed that the information which served as basis for the adoption of the restriction in question was
seriously flawed.
5.138 The United States pointed out that it had a general practice of monitoring and updating textile
and apparel production and trade data. The data provided in July only confirmed the correctness of
the CITA's analysis in March that transitional safeguard action was appropriate. As regards the updated
information provided in October 1995, these were equally irrelevant. The United States pointed out,
however, that the October 1995 data still showed a 5.5 per cent decline in underwear production during
the January-June 1995 period. Furthermore, more recent published updates in March 1996 showed
that underwear production actually declined by 2.8 per cent for the period from 1 October 1994 to
30 September 1995. This and other updated information demonstrated that the situation for US
underwear manufacturers progressively deteriorated during 1995.

Analysis of March and July Market Statements
5.139 According to Costa Rica, both the March Market Statement and the July Market Statement,
annual shipments amounted to $3.2 billion. However, analysing the data on the basis of which this
information had been obtained it found that this figure was not correct. Thus, considering that the
amount of annual shipments was obtained by multiplying the volume of clothing produced by the average
producer price of the clothing, and making this calculation for 1994, the ensuing result would be $5.06
billion according to the data in the March Statement, while according to the information in the July
Statement this figure could be $3.37 billion or $3.03 billion, according to which United States producer
price was used. In any case, what was important to stress was that while one section of each of the
Statements gave a figure, if the data in the Statement itself were multiplied in order to obtain the same
figure a different result was obtained. Clearly, there was an error in the figure of the annual shipments,
production data or in the price, which then also significantly affected other data included in the
Statement.
5.140 The United States considered that the information provided in the March and July Statements
was not contradictory and was consistent with the requirements of Article 6 of the ATC. Costa Rica
had asserted that the data available in March 1995 contradicted the updated data the United States had
provided to the TMB in July 1995. The March Statement presented by the United States contained
data from a variety of official sources, current at that time. Article 6.7 of the ATC provided that when
requesting consultations the requesting Member must supply "factual information as up-to-date as
possible". The March data had satisfied that requirement, even though some of the information had
been preliminary. During consultations and the TMB proceeding, the United States had been asked
to provide other and updated information. The TMB had put many questions to the United States for
response during the proceeding as well. In the context of the Article 6.10 of the ATC reference that
the TMB must consider the earlier statement and "any other relevant information", the United States
had provided a revised statement during the July proceeding which was accepted by the TMB.
5.141 The information in the July Statement had not, in the view of the United States contradicted
the March Statement, but had only supported it. Since Article 6.7 of the ATC stated that
"the request for consultation shall be accompanied by specific and relevant factual information,
as up-to-date as possible, ..." and that "... the information shall be related, as closely as
possible, to identifiable segments of production and to the reference period ..."
of the call action, there was no credibility issue with respect to the data presented in March or July.
Article 6.7 of the ATC clearly recognized that the data upon which the initial request for consultations
was based, would necessarily be imperfect. Article 6.10 of the ATC similarly acknowledged that data
would not be as accurate as desired at the time of the call, requiring that the TMB
"have available to it the factual data provided to the Chairman of the TMB, referred to in
paragraph 7, as well as any other relevant information provided by the Members concerned".
The latter was clearly designed to include further updated information that was available at the time
of TMB review.
The Counting of Re-imports
(see also Increase in Imports, paragraphs 5.92-5.96)
5.142 According to Costa Rica, one of the most serious mistakes in the March Market Statement,
was the double counting of "807" production and the problem of the alteration of market size. In
its statistics, the United States had rightly included as domestic production the production of pieces
that were part of a garment subsequently assembled in another country and then reimported into the

United States under tariff heading 9802.00.80. However, it had also included as imports the same
pieces once they had been assembled, even though they had already been counted as domestic production.
This resulted in an alteration in the size of the market, because the same product was included twice.
5.143 Having been made aware of this problem by the comments addressed to it by Costa Rica, the
United States had tried to correct the situation in its JulyMarket Statement, but, according to Costa Rica,
in the wrong way. Thus, in July the United States counted "807" production once; but it chose to
include "807" production as imports and not as domestic output, which appeared inconsistent as
"807" production was domestic production in the sense of manufacture and/or cutting of cloth.
Assembly, which was the only part of the process carried out abroad, had a much smaller weight in
the final cost of production of underwear, and therefore this "807" production should not have been
counted as imports.
5.144 In support of this same approach, although in contradiction with what it had done in the July
Statement, when the case was being reviewed by the TMB in July the United States submitted a loose
sheet giving the supposed export data in this category, in which it included cut pieces as exports. In
other words, whereas in the July Statement the United States counted "807" production as imports,
in the export data it provided in the same month it counted it as domestic production. Then, in the
data published in October they returned to the March situation, disregarding the entire problem of double
counting of "807" production which the July Statement had tried to take into consideration.
5.145 The United States explained that under Article 6.2 of the ATC, before taking safeguard action
an importing Member’ s authorities must make a determination that a particular product was being
imported in such increased quantities as to cause serious damage or actual threat thereof; this serious
damage or actual threat thereof must be caused by increased quantities of "total imports" of the product
concerned. The reference to "total" imports included re-imports. No distinction was made between
re-imports and other imports in Articles 6.2, 6.3 or 6.4 of the ATC. The drafters of the ATC were
quite aware of the existence of re-imports and outward processing trade, which were significant
commercial factors inworld textileand clothingtrade and whichwere explicitlyreferred toin Article 6.6
of the MFA. The drafters had chosen to refer specifically to re-imports in Article 6.6(d) of the ATC,
inrelation tothe applicationof a transitional safeguard, after the determinations necessary for a safeguard
action have been made. Thus, if the drafters had meant to exclude re-imports from the scope of "total
imports", thus barring transitional safeguard action against re-imports, they certainly could have done
so. However, they did not, and it must be assumed that this omission was intentional. It therefore
could not be assumed that re-imports are incapable of causing or threatening damage to the industry
of an importing Member. Thus, the increase in “ total imports” referred to in Article 6.2 of the ATC
included increases in re-imports as well.
5.146 The United States referred to the allegation of Costa Rica that the March Statement had overstated
the level of imports through its treatment of re-imports. It was explained that during the process of
negotiations and the TMB examination of this case, it was recognized that there was double-counting
of re-imports, and the United States had made appropriate corrections. However, the effect of this
double-counting was not an overstatement of the level of imports but an overstatement of the size of
the US underwear market. CITA practice, long accepted by the TSB in their examination of calls
by the United States, had consistently been to treat the total market for a textile or apparel category
as production plus imports. In response to questions during bilateral consultations with Costa Rica,
the United States had deducted re-imports from production, because re-imports are of foreign origin
under the relevant US rule of origin. Costa Rica has repeatedly asserted that the origin of apparel
re-imports was determined by the place where the pieces were cut, but, as discussed below, this is
a factual error.
5.147 Costa Rica had then claimed during the TMB proceeding that re-imports should be deducted
from imports. The TMB had suggested that the overstatement in the US domestic market should be

adjusted by using US export data. The United States had pointed out to the TMB that export data were
generally less reliable than import data, but they supplied the TMB with the requested export data in
a table adjusting for the overstatement in the US underwear market. The changes in the data did not
contradict the March Statement. In fact, the data corroborated the original determination of serious
damage or actual threat thereof. The change in the data was minimal; even as adjusted, the data still
showed a large increase in imports. The adjustment in market size also had no impact in the data on
important factors listed in Article 6.3 of the ATC, such as production, output, capacity, employment,
domestic prices, profits and investment. Even taking the adjustments into account, the data as a whole
still showed a picture of a seriously damaged industry threatened with further damage.
5.148 The United States also noted that the updated data and other relevant information presented
to the TMB only supported the basis for the determination of the United States. At the time when
the data were initially presented in the March 1995 statement, they were the latest available and most
correct. The updated data presented in the July 1995 statement to the TMB also provided import data
through April 1995, indicating that imports continued to increase, supporting the determination. Contrary
to the statement of Costa Rica in its submission, the United States considered that the TMB had not
excluded or disregarded the updated data provided in July. In fact, the TMB referred mostly to the
revised data throughout its examination. The TMB considered the updated and other relevant data
in the July Statement, with full regard to the relevant provisions in Articles 6.7 and 6.10 of the ATC,
despite attempts of Costa Rica and others to characterize the data in both statements as inaccurate and
contradictory. In fact, during the TMB proceeding the United States had adjusted data to reflect concerns
about double counting of re-imports. The United States had initially properly deducted re-imports
from production. The United States had then responded to TMB comments and requests by further
adjusting the data, using US export data. After these adjustments, the data still showed declines in
production and increases in imports.
5.149 In the view of Costa Rica, by failing to treat this aspect correctly in its March Market Statement
or in July or October, the United States was not only making a mistake from the standpoint of the
counting of data; this error also proved to be very important in this particular case, given the nature
of the trade between Costa Rica and the United States in this category. If the United States had not
differentiated this "807" production, it should not have continued with this case. Accordingly,
Costa Rica argued that the information submitted by the United States to demonstrate the supposed
serious damage was not only unreliable, erroneous and contradictory, but above all it was also
incomplete.
G. EXISTENCE OF A CAUSAL LINK
5.150 Costa Rica claimed that the third requirement whose existence the United States should have
demonstrated in order to be able to invoke a transitional safeguard measure was the existence of a causal
link between the supposed increase in imports and the supposed serious damage or actual threat of
serious damage to the domestic industry producing a like and/or directly competing product. The United
States did not do so, and consequently violated Article 6.2 of the ATC. This Article provided that
a measure of the kind described may be applied when an importing Member demonstrated 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 producing like and/or
directly competitive products. Serious damage or actual threat thereof must demonstrably be
caused by such increased quantities in total imports of that product and not by such other factors
as technological changes or changes in consumer preference" .
5.151 It followed that, prior to demonstrating the existence of a causal link, the United States should
have demonstrated the existence of the two conditions which it would be trying to link in this exercise,
namely, the increase in imports and the serious damage or actual threat thereof. Since the United States

had failed to fulfil that part of the exercise, it was impossible to analyze whether or not a causal link
existed. Even assuming for the sake of argument that there had existed an increase in imports and
serious damage or actual threat thereof to the United States industry producing cotton and man-made
fibre underwear - which, as repeatedly stated by Costa Rica, did not exist - it would not be possible
to conclude that this supposed damage or threat was being caused by imports.
Restraint Agreements with Other Countries
5.152 In Costa Rica's view, the best proof of the non-existence of this causal relationship lay in the
levels of restraint which the United States had obtained with the other countries that had been called
for consultations in category 352/652 - Colombia, El Salvador, Honduras, the Dominican Republic
and Turkey. It was pointed out that the access which the United States had granted to the five countries
with which it had reached an understanding in this category was about 170 million dozen for 1996,
equivalent to an increase of 478 per cent with respect to imports from the same five countries in 1994,
which amounted to 29 million dozen. If 29 million dozen were causing or threatening to cause serious
damage, how could the United States have negotiated an increase in this quantity by a percentage of
478 per cent?
5.153 Costa Rica argued that the foregoing provided grounds for categorically maintaining that if
the United States underwear industry was suffering any serious damage or actual threat thereof - which,
it claimed, it was not - it was impossible to believe that imports were the cause of it, as in that case
it would be most strange for the United States itself to seek to increase the source of its supposed
problems in such a significant way as to cause its ruin. The only reasonable conclusion was that imports
were neither causing nor threatening to cause serious damage to the United States industry and that
by nevertheless taking safeguard action the United States had violated Article 6.2 of the ATC.
5.154 The United States noted that Costa Rica had made extensive use of information on negotiated
settlements with countries not party to this dispute in its first submission and at the first substantive
Panel meeting. This information, in the US view, was inappropriate to the Panel’ s task and the Panel
should not allow it to be used to prejudice US rights in this case. Article 6.9 of the ATC provided
a mechanism for collective review of negotiated settlements in the form of TMB review. Costa Rica’ s
argument undercut and attacked those settlements in a manner which also undercut the TMB. These
settlements and Article 6.9 of the ATC were not within the Panel’ s terms of reference. However,
since the Panel’ s questions had focused in part on these settlements, the United States responded to
the question while reserving their rights in this matter.
5.155 Upon request of the Panel, the United States commented that the Panel should consider the
situation which required them to impose the restraint on Costa Rican underwear in a broader context.
When a finding of serious damage or threat thereof was made, and in the resulting imposition of a
restraint and formulation of a negotiating strategy, various considerations needed to be taken into account,
some of which may be in conflict as measures were devised to achieve the greatest degree of fairness
to all concerned. These included: special attributes of the individual major suppliers, which affected
equity considerations towards other countries under restriction; the US obligation to comply with
Article 6.6(d) of the ATC; and the diverse nature of the US industry and the differing impact of the
increased quantities of underwear imports on the individual segments of the industry. After making
a finding of serious damage, or actual threat thereof, affecting the industry producing a particular product,
the United States must then consider attribution to the particular countries whose imports were causing
the serious damage, or actual threat thereof. It was at this stage of the process that a range of factors
must be integrated into the decision such as the nature of the imports, the various levels of imports
accounted for by the supplying countries (both controlled and uncontrolled), and the specific impact
on the US firms and their employees (including those that participate in outward processing and those
that do not). When the underwear calls were made, there were many divergent interests involved.

5.156 In establishing attribution to individual countries, the basic situation facing the CITA was that
in the 352/652 category, half of the import total was accounted for by imports under outward processing
arrangements (cut parts assembled offshore), and 30 per cent of the imports were from the two largest
suppliers, Dominican Republic and Costa Rica, both uncontrolled. The United States had to establish
a balance when implementing policies affecting its own outward processing programmes with no one
consideration taking precedence over another. The underwear restraint on Costa Rica was an example.
5.157 The United States explained that many countries supplying underwear to the United States that
were under restriction, did not utilize the "807" programme and were not eligible for the "807A"
programme. Many of the specific limits to which these countries were subject had been substantially
exceeded by the import level attained by Costa Rica at the time its restraint was imposed. Costa Rica's
higher level was attained because of its participation in outward processing, yet it evidently was not
interested in participating in the programme designed to give more favourable treatment to the trade.
The US policy allowing liberal import access for Caribbean-assembled clothing thus had resulted in
a situation whereby competing imports from non-CBI countries in category 352/652 had been placed
at a disadvantage. The proposed levels were intended as a partial redress to this situation. In a safeguard
action, a number of factors such as equity towards other suppliers, welfare of US firms, and broader
trade policy considerations were also reflected in the overall position taken in negotiations. In
conjunction with the offer of substantial GAL made to Costa Rica, the United States had proposed
to set a Specific Limit to cover the imports of underwear made from fabric not formed and cut in the
United States that, while lower than the call level, was more than enough to allow for the estimated
existing level of this trade. This offer was consistent with the offers accepted by other major suppliers,
the Dominican Republic, for example, which agreed to an SL well below the level of trade.
5.158 The limits established covering the 1995 underwear calls were heavily weighted in favour of
"807A trade". The US policy to allow more liberal treatment for the CBI products that contain US-made
fabric obviously maximised the benefit to US economic welfare. In evaluating the damaging impact
of imports, absolute levels were only one of many elements taken into consideration, along with rates
of growth, the ability of the domestic producers to adjust, employment patterns, industry structure,
etc. Goods imported under the "807A" provision were not regarded as less damaging than non-GAL 807
and other imports, but it was recognized that the nature of their effect on the domestic industry could
be significantly different. Unlike GALs, non-GAL imports were not eligible for increased quota access.
One significant distinction among US companies was between those that had moved their finished garment
assembly facilities to the Caribbean to take advantage of the 807 duty provision and CBI liberal access,
and those that continued to produce finished garments domestically. The former were the companies
which had moved the bulk of their underwear production offshore and were reaping enormous benefit
from the trade concessions affecting the CBI. At the same time, the restrictions were also intended
to furnish a degree of temporary protection for the US producers which had not yet begun to or were
in the early stages of making the adjustment to increased international competition in this product
category.
5.159 In the view of the United States, the GAL programme recognized the economic realities of
apparel manufacturing and was intended to furnish a competitive option to US firms operating in this
industry and, from a policy perspective, provides some important benefits: (i) the comparatively high
levels offered allowed sufficient flexibility and latitude for US companies and their CBI partners to
efficiently serve the market, while providing some certainty and a reference level for those domestic
producers that were unable or unwilling to participate in outward processing arrangements; (ii) prior
to eventual CBI parity with the NAFTA, the GAL programme provided a means of identifying the
goods that would qualify for parity while allowing a lower Specific Limit to exercise a degree of control
over the non-GAL component of trade which could conceivably be filled by goods with non US content;
and (iii) the high GAL levels offered in 352/652 were intended as a guarantee of ample access to the
US market during the three-year term of the restraint and in anticipation of the CBI countries' future

inclusion in a wider Free Trade Area of the Americas. They were not expected to be fully filled
immediately.
5.160 Costa Rica pointed out that none of these considerations were included in the ATC: Therefore,
they could not be used as justifications to deviate from the ATC provisions. Although these
considerations could be useful at the domestic level, they did not authorize the United States to breach
its obligations under the ATC.
5.161 Costa Rica emphasized that GAL trade and "807 trade" were not the same thing. The
"807 trade" referred to products assembled using US components which could represent all or part
of the components used to assemble the product and must be cut in the US, although the fabric could
be sourced from anywhere. Thus, within "807 trade", there might be garments that qualify for GAL,
which would be those made from fabric formed and cut in the US, and others that require SL, which
would be those made with any amount of non-US formed and cut fabric. In sum, for US restraints,
"807" trade included both SL and GAL to the extent that both of them shared the characteristic of being
made from at least some fabric cut in the US.
5.162 The United States, commenting on the above, agreed that it was impossible to distinguish,
from the data available, between Category 352/652 products that would qualify for a GAL quota and
those that would not. This had been their position throughout the proceeding. This consideration was,
in fact, a major element in the US offers of a GAL quota in negotiations with Costa Rica, since such
a determination could not be made without an agreement in place containing a GAL provision.
5.163 Costa Rica also drew particular reference to the US statement in the penultimate sentence of
paragraph 5.149. With reference to this, Costa Rica pointed out two aspects, first, it was only after
finding that the imposition of a restraint was justified that the importing Member could implement it,
bearing in mind its obligation to grant the minimum SL level mandated by Article 6.8 of the ATC,
which in the present case would be equal to 14,423,178 dozen. Moreover, according to the language
of Article 6.6(d), a "more favourable treatment" to re-imports, which would necessarily represent an
improvement in the conditions to which the Member whose trade had been restricted would have been
entitled, must also be granted. Any other interpretation of this provision was considered to be incorrect.
Costa Rica further argued that by pretending to impose on Costa Rica an SL quota lower than the call
level and attempting to justify its action under Article 6.6(d) of the ATC by granting a GAL quota
of 40 million, the United States was violating Article 6.8 of the ATC as well as Article 6.6(d).
Article 6.8 mandated that the minimum SL level should be the quota level. On top of that level, the
importing Member was obliged to offer a more favourable treatment to re-imports from the exporting
Member. In any case, an unconditioned access could not be substituted by a conditioned access, even
if the latter were larger in quantitative terms than the former.
5.164 Costa Rica reiterated that in the absence of GAL procedures, it was impossible for the US
to identify and monitor imports that might be entitled to the GAL programme and therefore to determine
that the SL quota offered, although lower than the call level, was "more than enough" since there was
no data to determine that amount. The standard provided in the ATC was not an SL level that was
more than enough, but an SL level that equalled the call level as a minimum. The United States was
justifying its offers on estimates that had no basis, being only arbitrary estimates made by the US
Government.
5.165 In response to the above point, the United States agreed that it was only after the importing
Member had determined that a safeguard restriction was necessary and justified that the Member could
implement the restriction. The United States had always maintained that this was the case here. They
disagreed that their proposals during consultations were inconsistent with Article 6.8 of the ATC.
It was clear that all proposals to Costa Rica involved levels above the reference period mandated in
Article 6.8. The proposals made concerning the guaranteed access level (GAL) component of the

restriction were consistent with Article 6.8 and the requirements of Article 6.6(d) of the ATC. The
GAL proposals were offered with the understanding that the programme was improved access for Costa
Rica. The improved access was evidenced in earlier agreements with Costa Rica, and other Caribbean
Basin countries, as well as the fact that companies established in Costa Rica participating in the
GAL programme had resulted in more employment for Costa Rican nationals and investment in Costa
Rica and that products exported to the United States under the GAL programme were treated even
in Costa Rican statistics as Costa Rican products when exported to the United States (and as imports
when entering Costa Rica as cut parts).
5.166 The United States had met its obligation under the ATC to provide more favourable treatment
to re-imports. That obligation had been met after the United States satisfied the requirements of Articles
6.2, 6.3 and 6.4. Article 6.6(d) gave the importing Member wide discretion on how more favourable
treatment to re-imports was to be provided. That is the way the text was negotiated. The United States
has established a GAL programme which requires, for proper monitoring and certification, the agreement
of the exporting Member. The United States could not be faulted if Costa Rica chose not to accept
its offer of more favourable treatment. All outward processing programmes in other countries typically
were preferential programmes which allowed the importing country the latitude to establish the criteria
for participation in the programme - including the conditioning of the use of fabric manufactured in
the importing country. The United States was not alone concerning that condition; other WTO Members
maintained quotas, which limited outward processing traffic. The policy basis for the various conditions
for participation in an importing country's outward processing programme may inherently represent
the balancing of various domestic interests. In the case of the United States, the balancing of interests
reached beyond the industry provided relief when safeguard action was taken on imports that includes
re-imports. The safeguard action taken in this case was not action to provide adjustment to an "upstream"
product.
5.167 Costa Rica pointed out that the US had mentioned that equity was one of the factors taken into
account when establishing a safeguard. However, the United States, besides having no justification,
never achieved half of the minimum SL level to which Costa Rica was entitled, nor was this level
comparable in either relative or absolute terms to the levels agreed with the other countries called under
this same category. Other countries received an SL quota higher than their call levels, in some instances
obtaining increases that went up from 54 to 99 per cent in SL access. In the view of Costa Rica, the
Dominican Republic had accepted an SL quota lower than its call level as a result of findings reached
by the US after a number of investigations that determined the existence of transshipment in this category.
5.168 The United States responded to the above point, stating that the equity considerations taken
by theUnited States were discussed thoroughly withCosta Rica andother countries during consultations.
Costa Rica insisted on access that was beyond what was equitable in the case of access to the US market
for Costa Rica and compared to other countries. It was incorrect that all of the other countries received
SL's higher than the call level. Most egregious of Costa Rica's assertions on that point was the false
statement that the lower SL portion for the Dominican Republic was to account for transshipments.
The alleged transshipments referred to by Costa Rica were already covered before the agreement with
the Dominican Republic, and the transshipment cases took place before the time frame of the safeguard
action. Further, in the view of the US, even the Dominican Republic did not agree with the assertion
of Costa Rica.
5.169 Costa Rica also noted that the US had stated (paragraph 5.158) that "unlike GALs, non-GAL
imports are not eligible for increased quota access"; however, the US had notified both SL and GALs
under Article 2 of the ATC. Therefore, both quotas were subject to the increased percentages mandated
by Article 2.1 of the ATC. Also, the US considerations intended to justify the GAL levels offered
and agreed in this category (NAFTA Parity Programme or the Free Trade Area of the Americas) could
not be used as justifications to deviate from the ATC provisions.

5.170 The United States argued that Costa Rica was incorrect in its interpretation of Article 2.1 of
the ATC concerning growth for quotas, and in particular growth for GALs notified by the United States
under Article 2. First, Costa Rica did not understand what the United States meant concerning eligibility
for increased quota access. Eligibility for increased quota access referred to the requirements of the
GAL programme which was a US domestic programme, not established under the ATC. Second,
the United States could not discern any increased percentages of quotas mandated by Article 2.1 of
the ATC as claimed by Costa Rica. Even if Costa Rica meant to refer to another provision of Article
2, the provision would only apply to those levels that were specifically allocated growth before
notification under Article 2. The GALs notified under Article 2 specifically did not include growth
percentages since GAL quotas already provide preferential access. US policy considerations when
providing more favourable treatment or negotiating any settlement with Costa Rica, especially when
those policy considerations included benefits for both the United States and Costa Rica, were not breaches
of the ATC. There was no issue here concerning whether the ATC contained or required any policy
considerations. The United States noted in this proceeding, however, that the very discretion provided
in Article 6.6(d) for more favourable treatment did account for such policy considerations - including
taking into account NAFTA parity for textile and apparel products - which the United States thought
was of general interest to Costa Rica.
The United States Policies in Applying the Safeguard
5.171 In the United States' view, the CITA determination had been entirely reasonable, based on
the situation of serious damage or actual threat, and Costa Rica had not demonstrated otherwise. If
the United States had shown generosity in the context of its bilateral negotiating strategy, this still did
not change the fact that the original determination had been made on the basis of serious damage or
actual threat thereof. In bilateral textile negotiations, the United States formulated its overall position
by integrating a number of policies, such as the need for time for structural adjustment in the US
industry, equity toward other suppliers, the requirements of ATC Article 6.6 of the ATC, and broader
trade policy and foreign policy considerations. The ATC did not limit the policies that could be taken
into account in this context; indeed, to do so would be contrary to the interests of textile and apparel
exporters. Should the ATC be interpreted in accordance with Costa Rica’ s arguments, so as to require
an importing Member to offer in negotiations only the most restricted access to its market?
5.172 In the context of Article 6.6(d) of the ATC, the United States had proposed to Costa Rica a
restraint of 7 million dozen on a specific limit (SL) basis and an additional 40 million dozen guaranteed
access level for future GAL-qualifying trade. CITA had determined that imports in Category 352/652
were causing serious damage or actual threat thereof to the US underwear industry, and that this serious
damage was attributable to the 14.4 million dozen imports from Costa Rica. The access levels proposed
to Costa Rica were designed to provide security of access for Costa Rican exports during the restraint
period. In return, the agreement would have provided for an orderly flow of imports from Costa Rica,
allowing the US industry time to adjust to the increased import competition in the US underwear market.
5.173 The United States argued that, in evaluating the GAL programme, the Panel should not lose
sight of the overall goals of the ATC. The Agreement will accomplish the long-sought integration
of the textile and clothing sector into the GATT, over its ten-year lifetime. Accomplishment of that
goal will require substantial and difficult structural adjustment by the textile and apparel industries
of importing Members during that period. The GAL programme served as an adjustment mechanism.
Safeguards under Article 6 of the ATC were only transitory matters, lasting a maximum of three years.
However, the Agreement had recognized the need for such safeguards in order to allow industry to
adjust and prepare for the post-integration environment that was now less than ten years away. The
Agreement provided procedural provisions that required that such safeguards not be taken without
consultation and discussion with the exporting country and maximized the possibility that safeguards
would be implemented consensually in a manner that took the interests of the exporting country into
account. The GAL programme was fully consistent with those policies.

H. ATTRIBUTION TO INDIVIDUAL EXPORTING COUNTRY(IES)
5.174 Costa Rica noted that the application of a transitional safeguard measure to the trade of a
particular Member required the fulfilment of two successive stages, each of which had its own substantive
requirements. In the case under consideration, the United States had failed to demonstrate the
prerequisites for having the right to resort to the safeguard mechanism in accordance with Articles 6.2
and 6.3 of the ATC. Consequently, an analysis of whether or not it had fulfilled the substantive
requirements laid down for the attribution stage provided for in Article 6.4 of the ATC was not required.
Nevertheless, for illustration, an analysis of how the United States had also failed to fulfil this second
stage of the process, thus once again demonstrating the unjustified nature of the restriction adopted
against Costa Rican trade in category 352/652, was provided.
5.175 The first requirement which the importing Member must demonstrate in this second stage of
the process was, under Article 6.4 of the ATC, the following:
" ... The Member or Members to whom serious damage, or actual threat thereof, referred
to in paragraphs 2 and 3, is attributed, shall be determined on the basis of a sharp and substantial
increase in the imports, actual or imminent, from such a Member or Members individually
...".
For these purposes, Article 6.7 of the ATC provided that
"... The request for consultations should be accompanied by specific and relevant factual
information, as up-to-date as possible, particularly in regard to: ... (b) the factors, referred
to in paragraph 4, on the basis of which it proposes to invoke the safeguard action with respect
to the Member or Members concerned".
Obligation to Submit Specific and Relevant Information
5.176 Costa Rica argued that in accordance with the above, the United States had the obligation to
submit specific and relevant information and to carry out an examination, on an individual basis, of
the specific case of Costa Rican trade. In the March Market Statement, the basis of the unilateral
restriction, the United States had claimed to show in four lines that there was a sharp and substantial,
real or imminent increase, in imports from Costa Rica. To this end, the United States had provided
a few statistics, without any kind of analysis. This omission of any analysis, which was part of its
demonstration obligation for this requirement, was extremely serious, all the more serious in this case
since, as the impact of "807 trade" on Costa Rican trade in products classified in category 352/652
was all-important.
5.177 The possibility of attributing a particular condition of serious damage or actual threat thereof
to another Member obviously depended on the existence of the serious damage or actual threat thereof.
In the case under consideration, firstly it was highly questionable whether an increase in Costa Rican
imports of this product existed, except if such imports were considered purely and simply as such,
without regard for their special features, and secondly, no such serious damage or actual threat thereof
existed.
5.178 It could be demonstrated that if such damage or threat had existed, it could not be attributed
to imports from Costa Rica, by referring to the proposals made by the United States to Costa Rica
in seeking to reach an agreement on the volume of the quantitative restriction. How could it be argued
that 14.4 million dozen of underwear, which was what Costa Rica exported in 1994, was causing serious
damage or actual threat thereof to the United States underwear industry if the United States had proposed
to Costa Rica that the restriction for this category should be in the order of 47 million dozen? The

only possible conclusion was that the United States had also failed to demonstrate this substantive
requirement, thus infringing Article 6.4 of the ATC.
The Nature of Costa Rica's Exports
5.179 It was recalled by Costa Rica that 99.5 per cent of their exports in category 352/652 in 1993,
and 99.76 per cent of their exports in 1994, had entered the United States under tariff
subheading 9802.00.80, in order to benefit from the tariff exemption provided for that subheading.
This meant that trade in the category under consideration between Costa Rica and the United States
concerned almost exclusively a process of co-production or shared production. In this condition, it
was questionable whether one was dealing with "imports" or rather with domestic production, which,
while assembled in Costa Rica, did not cease to be domestic production simply for that reason. It
was recalled that the United States itself considered imports of cut parts for assembly in the United
States as products of the country in which the parts were cut. In these circumstances, United States
exports of cut pieces should logically have been considered United States products. Accordingly, one
could not speak of an increase in "imports", since they were not really imports.
5.180 The United States noted that Article 6.6(d) of the ATC stated that re-imports were "... defined
by the laws and practices of the importing Member.” All apparel re-imports, qualifying for special
quota access or not, were defined under United States law and practice as "foreign articles" and were
accorded duty reductions to the extent of their US content. Under US law, quota benefits accrued
if an agreement with the exporting country had been concluded for apparel assembled with US formed
and cut fabric. However, a high percentage of US content did not automatically confer US origin or
make a re-import a US good under US law.
5.181 The United States considered that Costa Rica had been given incorrect information with respect
to the re-imports of textile and apparel articles. Costa Rica had asserted in its submission that the rule
of origin in the United States for products entering under tariff heading 9802.00.80 was the place where
the pieces were cut. Thus, Costa Rica was asserting that because underwear exported by Costa Rica
to the United States had been cut in the United States, it was US origin under US law. Cutting did
not confer origin for these products under US law. Neither the rule of origin for textiles and apparel
which was in effect at that time nor the revised rule of origin, which became effective on 1 July 1996,
had any applicability to apparel re-imports because the US headnote to HTSUS 9802 clearly stated
that such goods were “ foreign articles” and not US goods. Therefore, underwear re-imported from
Costa Rica to the United States was treated by US law as Costa Rican goods.
5.182 Costa Rica argued that, if it were decided to consider that there had been an increase in imports
of Costa Rican underwear, it was quite clear that if such imports were increasing it was because
United States production of cut pieces that were subsequently assembled in Costa Rica was increasing
in the same proportion. If ever more underwear was being assembled in Costa Rica it was because
in the United States ever more cut pieces for underwear were being produced that needed to be
assembled. It therefore followed that any industry producing cut pieces for underwear was in a thriving
condition and so did not need to be protected from something that was rather of benefit to the underwear
producing industry. Consequently, under either hypothesis, the fact was that the measure imposed
by the United States against Costa Rica's trade in products included in category 352/652 had no grounds
in Article 6.4 of the ATC.
I. MORE FAVOURABLE TREATMENT FOR RE-IMPORTS
5.183 With respect to the provision of preferential treatment under Article 6.6(d) of the ATC,
Costa Rica considered that there were three aspects to be taken into account: (i) before establishing
a restriction it had to be justified under the terms of Articles 6.2 and 6.3 of the ATC; (ii) only after
that stage had been fulfilled, the importing Member could implement such a restriction, bearing in

mind its obligation to grant the minimum SL level mandated by Article 6.8 of the ATC (i.e. in the
present case 14,426,178 SL quota) and only over that minimum extend the more favourable treatment
established in Article 6.6(d) of the ATC; and (iii) according to the language of Article 6.6(d) of the
ATC this more favourable treatment was mandatory and shall represent an improvement on conditions
to which the Member whose trade has been restricted would have been entitled to if it had not had
the right to such more favourable treatment. Upon request of the Panel, Costa Rica clarified that it
had never rejected a more preferential treatment because such treatment had never been offered by
the United States. The best SL quota offered to Costa Rica had not even reached half of the minimum
SL level to which it was entitled under Article 6.8 of the ATC. Furthermore, the SL had been more
restrictive to the extent that it was subject to a sub-limit and to the "ratchet down" provision.
5.184 The United States noted that the sole reference to re-imports in the ATC appeared after the
stage when the importing Member had made its determination of serious damage, or actual threat thereof,
and attribution, in the context of consultations on the application of the transitional safeguard. The
United States had sought to provide preferential treatment to re-imports from Costa Rica consistent
with the requirements of Article 6.6(d) of the ATC which provided, in part, that,
"[i]n the application of the transitional safeguard, particular account shall be taken of the interests
of exporting Members as set out below: (d) more favourable treatment shall be accorded to
re-imports by a Member of textile and clothing products which that Member has exported to
another Member for processing and subsequent reimportation, as defined by the laws and
practices of the importing Member, and subject to satisfactory control and certification
procedures, when these products are imported from a Member for which this type of trade
represents a significant proportion of its total exports of textiles and clothing."
5.185 The United States argued that, in accordance with customary rules of international law concerning
treaty interpretation, as reflected in the Vienna Convention on the Law of Treaties, the United States
had looked to the plain meaning of the terms in their context and object and purpose. The plain meaning
of "more favourable treatment" did not mean that re-imports must be excluded from safeguard action.
If that were the intent, the agreement would have so stated. Concerning the context of Article 6.6(d)
of the ATC, they saw that this and the other provisions for favourable treatment in Article 6.6 of the
ATC appeared in the text of Article 6 of the ATC after and separate from the provisions on the
requirements for making determinations of the serious damage, or actual threat thereof, and attribution.
Also, the "chapeau" of Article 6.6 of the ATC plainly stated "in the application of the transitional
safeguard... ." To the extent that the meaning of the plain text of Article 6.6 of the ATC may be
considered ambiguous, Article 32 of the Vienna Convention on the Law of Treaties permitted recourse
to supplementary means of interpretation "in order to confirm the meaning resulting from the application
of Article 31" of the Convention. They could find supplementary assistance in a similar provision
in the MFA.
5.186 Article 6.6(d) of the ATC was derived from Article 6.6 of the MFA and paragraph 15 of the
1986 Protocol to the MFA concerning more favourable treatment to re-imports. These provisions for
more favourable treatment for re-imports were largely demanded by exporting countries benefitting
from outward processing programmes. MFA Article 6.6 provided that
"[c]onsideration shall be given to special and differential treatment to re-imports into a
participating country of textile products which that country has exported to another participating
country for processing and subsequent re-importation, in the light of the special nature of such
trade without prejudice to the provisions of Article 3 [ MFA safeguard]." Paragraph 15 of
1986 Protocol added that: "in conformity with the provisions of Article 6.6 of the Arrangement
for consideration to be given to special differential and more favourable treatment, in the light
of the special nature of the trade referred to therein, participants agreed that, in negotiating

bilateral restraints account shall be taken of the relative degree to which these exports contribute
to situations of market disruption or real risk thereof."
5.187 It was noted that one commentator in the United States13 had observed concerning the
interpretation of paragraph 15:
"To the extent it could be argued that paragraph 15 does go beyond Article 6 [of the MFA]
by defining 'special and differential treatment' to include an accounting of the extent to which
such merchandise contributes to market disruption, it appears to be applicable only in the
negotiation of bilateral restraints. In any event, neither the [MFA] nor the Protocol creates
a presumption that re-imports cannot cause or contribute to market disruption."
Both of these provisions clearly indicated that the preferential consideration for re-imports arose only
after the determination of market disruption had been made; that is, in the application of the safeguard
and in proposals for restraints to be applied by mutual agreement. The United States considered that
they had followed the requirements in Article 6.6(d) of the ATC in consultations with Costa Rica.
5.188 The United States also argued that the form of “ more favourable treatment” was left to the
importing Member. Whereas other provisions for favourable treatment in the ATC provided for specific
types of favourable treatment to be given, Article 6.6(d) of the ATC indicated that it was the importing
Member which accorded the more favourable treatment, and the negotiators had left it up to the importing
Member to assign the type of treatment to be given to re-imports. It followed that even the definition
of what kind of more favourable treatment was to be given to re-imports was left to the law and practice,
or otherwise discretion, of the importing Member. The relevant laws and practices included customs
laws, which affected the applied duty rate on re-imports, as well as the laws and regulations governing
textile and apparel trade quota programme, which affected the treatment accorded re-imports in this
context.
5.189 The ATC did not define how an importing country must give more favourable treatment. Nothing
in the text or negotiating history of Article 6.6(d) of the ATC provided otherwise. Importing countries
had different ways of according more favourable treatment to re-imports. No one country defined
its outward processing programmes the same way. Article 6.6(d) of the ATC, and the MFA provisions
from which it was derived, allowed for that fact. In this case, the United States had made use of the
GAL programme as its means of providing preferential quantitative treatment for apparel re-imports
from the Caribbean Basin. The United States could mitigate the effects of serious damage and actual
threat thereof to its domestic producers by offering more favourable treatment to some re-imports than
it provided to other re-imports.
5.190 Costa Rica considered that the restraint proposals made by the United States could not lead
to the conclusion that these could be situated within the concept of more favourable treatment provided
for in Article 6.6(d) of the ATC. The specific restraint level (SL) offered to Costa Rica was not even
close to the minimum SL level to which Costa Rica would have had the right pursuant to Article 6.8
of the ATC which obliged the United States to offer as a minimum an SL quota of 14,423,178 dozen
whereas the US' most generous proposal did not even reach half the level at the time of the request
for consultations and was even more restrictive due to the fixing of a sub-limit and the "ratchet-down"
provision. Since the United States had not granted the minimum level to which Costa Rica had a right,
it was not possible to consider that they had granted the more favoured treatment prescribed in
Article 6.6(d) of the ATC. On the contrary, the United States had granted Costa Rica less favourable
treatment than the treatment it was obliged to grant to any Member of the WTO under Article 6.8 of
the ATC.
13Jacob, B. "Renewal and Expansion of the Multifibre Arrangement" 19 Law and Policy in International
Business 7, 33 (Georgetown University Law Center, 1987).

5.191 The establishment of an SL quota below the level provided for in Article 6.8 of the ATC,
together with the establishment of a GAL quota to cover the difference and if necessary exceed this
level, was contrary to the spirit and letter of Article 6.6(d) of the ATC and would place an exporting
Member that did not participate in co-production in a better situation than a Member that does participate
because the former would enjoy the minimal unconditional level of access provided for in Article 6.8
of the ATC, while the second would see their market access subject to rigid conditions.
5.192 In the United States' view, Costa Rica's arguments treated the process of making determinations
under Article 6 of the ATC as a one-dimensional process in which the sole factors that governed action
by importing Members were those listed in Articles 6.3 and 6.4 of the ATC. In Article 6.6(d), the
ATC fully permitted Members to be flexible “ in the application of the transitional safeguard” for special
needs of the exporting country and the importing country. Article 6.6(d) of the ATC permitted the
importing country to provide more favourable treatment by taking advantage of special access policies,
such as the 807A (GAL) outward processing programme. It did not require that such programmes
reflect solely the needs of the exporting country. In fact, the access levels offered in the context of
the GAL programme do not legally correspond to the determinations required under Articles 6.2, 6.3
and 6.4 of the ATC. These factors were distinct from the factors that the authorities should take into
account when making the determinations required in Articles 6.2, 6.3 and 6.4 of the ATC. GALs
were arranged through negotiation and agreement in order to verify and certify that such goods met
the requirements of the programme. Article 6.6(d) of the ATC even made reference to satisfactory
control and certification procedures. A country may opt, as did Costa Rica, not to accept the type
of more favourable treatment offered.
5.193 The purpose of the safeguard was to provide relief from import surges, not to prevent growth
of imports. Therefore, if re-imports were surging, they would contribute to serious damage and actual
threat thereof. Unlike the other provisions for special treatment, Article 6.6(d) of the ATC allowed
importing countries the most flexibility to decide how to provide favourable treatment for re-imports,
taking into account the special nature of the trade, but it did not mandate any particular form or manner
of providing favourable treatment. The other subparagraphs in Article 6.6 of the ATC provided more
specific guidance on how the special treatment should be given in those cases. The United States at
one point had offered 7 million dozen specific limit and 40 million dozen GAL to Costa Rica. This
offer was made to provide security of access for Costa Rica exports throughout the three-year term
of the restriction. It also would have provided for orderly access of imports from Costa Rica allowing
the US industry to adjust to increased import competition in the US underwear market. The offers
made concerning a combination of SL and GAL access were consistent with the ATC and overall US
policy interests and were consistent with US policy under the MFA.
5.194 The United States referred to the assertion of Costa Rica that since some of the provisions for
special treatment in Article 6.6 of the ATC specified the form such treatment was to take, and
Article 6.6(d) of the ATC did not, then an importing Member must accord favourable treatment to
re-imports at some earlier point: while making its determination of serious damage, or actual threat
thereof; while making its attribution determination; and/or before consultations. This argument was
without basis in Articles 6.2, 6.3 or 6.4 of the ATC, which did not even mention re-imports, let alone
provide for special treatment. The only provision for special treatment was Article 6.6 of the ATC,
which only addressed special treatment to be given "[i]n the application of the transitional safeguard".
DSU Article 3.2 stated the fundamental principle that DSB recommendations could not "add to ...
the rights and obligations provided in the covered agreements." To read obligations into the purposeful
blanks left in Article 6.6(d) of the ATC would contradict this principle, which was central to the stability
of the dispute settlement system. The notion that favourable treatment under Article 6.6(d) of the ATC
must be accorded in a particular form was inconsistent with the plain text of Article 6.6(d) of the ATC,
which provided no such limitation on treatment.

5.195 The United States estimated that 94 per cent of Costa Rica’ s exports were re-imports made
from fabric cut in the United States. The remaining 6 per cent, made from fabric not cut in the United
States, amounted to 889,101 dozen. This meant that the portion made from fabric not cut in the United
States would not qualify for the guaranteed access level. The 889,101 dozen alone would still have
led the United States to attribute serious damage, or actual threat thereof to Costa Rica's imports.
Therefore, Costa Rica's assertion that the remaining 6 per cent could not damage or threaten damage
to the US domestic industry was false. Finally, the re-imports had posed a threat to the US domestic
industry that did not participate in outward processing (approximately 60 per cent of the US firms
producing underwear in the United States). The United States had taken this into account during
negotiations when balancing the effect of re-imports on the domestic industry and formulating proposals
for more favourable treatment under Article 6.6(d) of the ATC.
5.196 Costa Rica was concerned that there could be some confusion about the levels of trade in "807"
and those in GALs. In their view, the United States could not know prior to the implementation of
a GAL programmes which clothing was "eligible" or not under the programme because it was only
when the customs inspections under the programme were carried out that it was possible to know which
clothing had been manufactured using cloth formed and cut in the United States. The figure of
94 per cent which the United States had referred to was not necessarily all eligible for GAL. In fact,
according to the statistics published by the United States Department of Trade, the percentage of
Costa Rican trade in the 352/652 category within the framework of "807 trade" exceeded 99 per cent.
However, even if 99 per cent of a country's trade was under the "807 trade" framework, this would
bear no relation to the percentage of its trade which utilized fabric formed in the United States.
5.197 The United States pointed out that it had always stated in this proceeding that it could not identify
GAL eligible products until a country entered into an agreement with the US for GALs and the proper
certification was in place that would verify that US "formed" fabric was used, not just that it was fabric
"cut" in the US. Before a GAL agreement was established, the US only had data on fabric "cut" in
the US, not "formed" in the US as well. For GAL eligibility, US "formed" and "cut" fabric must
be used. As the United States had stated in its submissions, the 94 per cent figure only indicated "cut"
parts not whether the fabric was also "formed" in the United States. The United States had verified
that 94 per cent of Costa Rica's trade was made from parts "cut" in the United States.
The United States Fabric Industry
5.198 Costa Rica claimed that, from its analysis the question arose: what was the domestic industry
which the United States was really trying to protect by imposing the safeguard on Costa Rica in this
category? In accordance with Article 6.2 of the ATC it was clear that a safeguard measure as provided
for therein had the purpose of providing temporary protection for the domestic industry producing
"like and/or directly competitive products" with respect to the specific products that were being imported.
That was why the proper action to provide such protection, once the due justification had been provided,
was the restriction of imports.
5.199 Costa Rica argued that, as the product being imported was cotton and man-made fibre underwear,
the only domestic industry which it could be sought to protect through Article 6 of the ATC was the
United States industry that produced cotton and man-made fibre underwear, and not any other industry.
Although the United States had formally stated that the industry it was seeking to protect was the cotton
and man-made fibre underwear industry, the fact of the matter was that in view of the proposals made
by the United States to Costa Rica and the agreements it had reached with other countries called for
consultations over this category, the clear conclusion was that the United States was not seeking to
protect the domestic industry producing such products. It was impossible to consider that that was
its objective when in the negotiations it had agreed to a substantial increase in market access for imports
of such products. On the other hand, neither did it appear reasonable to consider that the United States
had no motives for its decision to apply a specific safeguard measure to Costa Rica in category 352/652.

The United States certainly did have a motive, but, in the view of Costa Rica, that motive was not
covered by the ATC.
5.200 Costa Rica considered that the reply to this question was to be found both in the proposals
made by the United States to Costa Rica and in the agreements reached with the other countries called
for consultations in this category, and it was the following: what the United States was seeking to
do was to protect the domestic industry that produced the fabric used in the production of underwear.
For this purpose, the United States had followed two routes: firstly, it had sought to restrict access
to its market for underwear made from fabric not produced in the United States, and secondly, it had
guaranteed wider and substantial access to its market for underwear made from fabric formed and cut
in the United States. As the same time as imports of underwear produced from non-US fabric were
restricted, a guaranteed broad level of access was provided for imports using fabric formed and cut
in the United States. That was why the various proposals made by the United States to Costa Rica
to try to reach an agreement on the level of restriction were two-fold in nature: a lower access level
for non-conditional or specific level (SL) trade - in the order of 1.5 to 4.5 million dozen versus the
14.4 million dozen which was the minimum guaranteed for Costa Rica by the ATC - and a "generous"
level for conditional or GAL trade, amounting to as much as 40 million dozen depending on the specific
proposal. That was also why among the agreements reached with the other countries called for
consultation in this category, more than 80 per cent of the negotiated restraint volumes - or access
volumes - required the use of United States formed fabric, while only the remaining 20 per cent may
use non-United States formed fabric.
5.201 Costa Rica stated that the United States may wish to promote the use of fabric produced in
that country; however, the problem lay in the mechanism it had decided to use for this purpose.
Imposing a restriction on imports of underwear from a country in order to oblige that country to use
United States cloth for the production of the underwear as a requirement for it to be able to enter the
United States market was not a condition provided for in Article 6 of the ATC. The ATC did not
allow imposition of a safeguard measure on a clothing product in order to protect the fabric used to
produce it. The ATC only envisaged the safeguard governed by Article 6 of the Agreement to protect
the domestic industry producing "like and/or directly competitive products". Underwear was not a
like or directly competing product with respect to the fabric used to produce it, since these were products
which had different characteristics from the standpoint of any objective or subjective criterion. The
fact that underwear and fabric were not like or directly competitive products was recognized by the
United States itself. This was shown by the fact that the United States had not even attempted to argue
this openly, since in its reports it had always argued that the domestic industry allegedly affected was
the underwear industry and did not mention the fabric industry explicitly. However, the reason why
the case was confusing was that basically the United States was trying to justify an action whose true
objective was very different from its apparent objective in order to try to bring it within the terms of
a provision which did not authorize action to attain the objective which the United States was actually
pursuing. By proceeding in this way, the United States had affected not only Costa Rica but also all
the producers of this type of fabric, whose rights would be impaired in so far as the action restricted
and possibly hindered their ability to become suppliers of this raw material.
5.202 The United States argued that they had properly based their determination on damage or threat
to the domestic industry producing like or directly competitive products. The United States had satisfied
the Article 6 requirement that the serious damage, or actual threat thereof, must be to the domestic
industry producing like or directly competitive products, as could be seen from the March 1995 Statement
and further confirmed by the US statements. Unlike agreements that permit other safeguard actions,
the ATC did not provide a definition of domestic industry nor did it require that the importing member
apply a transitional safeguard that corresponded exactly to the scope of the industry seriously damaged
or actually threatened by serious damage. While the US fabric industry may incidentally benefit from
the more favourable treatment provided for re-imports incorporating US formed and cut fabric, it had
been made clear in the March 1995 Statement that the serious damage, or actual threat thereof

determination was made solely on the basis of the situation in the US underwear industry, which included
both vertically integrated firms which manufactured their own fabric and domestic firms that did not
use offshore operations. There were approximately 220 underwear manufacturers in the United States,
85 of which used outward processing operations and the remaining 60 per cent, or 135 firms, which
did not use offshore operations. In making its determination under Article 6.2 of the ATC, the CITA
had examined the situation of the broad array of US underwear producers, including the integrated
firms which spun their own yarn, knit fabric, and cut and assembled the finished product; the large
number of small “ cut and sew” operators who obtained their fabric and trim from a variety of
independent sources, and did not have offshore operations; and those operators who knit fabric and
cut pieces in the United States for final assembly overseas. The fact that the underwear industry in
the United States was a diverse industry, and that some producers also made their own fabric, did not
change the fact that the CITA’ s determination was based on the economic conditions in the underwear
industry, not the industry producing only fabric.
5.203 The United States noted that many countries with outward processing programmes condition
participation in that programme on use of fabric manufactured in their countries. They also maintain
quantitative limits on how much of that trade can be re-imported.
5.204 In the view of the United States, the facts before the CITA and the record before the Panel
demonstrated that US underwear producers (including both those which did and those which did not
manufacture offshore) had been seriously damaged or actually threatened with such damage from a
surge in re-imports. It was the responsibility of the United States to balance the damage to and interests
of many different types of domestic underwear producers. The ATC permitted Members to impose
a transitional safeguard even if the damage did not extend to 100 per cent of the industry. Any
requirement that the damage must be sustained by a percentage or majority of the industry or a certain
size or type of firm, was conspicuously omitted from the ATC. In other WTO safeguard procedures,
there were express requirements with respect to the proportion of the affected industry represented.
Clearly, the negotiators of the ATC had been aware of those procedures, but had chosen to continue
the safeguard mechanism used under the MFA system.
J. THE REQUIREMENT TO HOLD CONSULTATIONS
5.205 Costa Rica argued that even if, for illustration, it was considered that the United States had
fulfilled the substantive requirements needed to have the right to apply a transitional safeguard measure
to Costa Rican trade in category 352/652, which, as they had already shown, the United States had
not done, the fact was that the unilateral restriction imposed was fraught with its own problems and
in itself also violated the ATC. The adoption, maintenance and renewal by the United States of this
unilateral restriction suffered from two serious flaws of different kinds. First, the United States had
adopted, maintained and renewed a measure unilaterally, without having held consultations on the basis
of the substantive requirement on which the measure was supposedly based, thus violating Articles 6.7
and 6.10 of the ATC. And second, it had applied the measure retroactively to the date of the call for
consultations, thus violating Article 6.10 of the Agreement.
5.206 The request for consultations made by the United States, the information presented in the
Statement on which the action taken was based, the consultations held with Members and the unilateral
restriction adopted in this case all referred to the condition of the existence of serious damage to the
United States industry. In other words, the United States made the call for consultations and proceeded
thereafter until it adopted the transitional safeguard in June 1995 on the basis of the purported existence
of serious damage to its industry.
5.207 Costa Rica noted that, at its July meeting the TMB had determined that serious damage did
not exist. The United States should then have immediately withdrawn the measure. Nevertheless,
it did not do so, but rather appeared to have interpreted that, as the TMB had not reached a conclusion

as to the existence or not of actual threat of serious damage, it could continue maintaining the measure
on that basis. By proceeding in this way, the United States had violated Articles 6.7 and 6.10 of the
ATC, in so far as they contained an obligation to hold consultations during a 60-day period before
a unilateral restriction may be adopted. In other words, it was impossible to adopt a unilateral restriction
without having held consultations with the Member affected, as provided for by the various paragraphs
of Article 6 of the ATC.
5.208 This meant that, in order to have been able to adopt a measure on the basis of the existence
of actual threat of serious damage, the United States should have made the call, presented the information
and held consultations on that basis. It could not be admitted that a unilateral restriction may be imposed
without specifically having had the opportunity to rebut the alleged existence of a substantive requirement
on which the measure was allegedly based. To maintain the contrary would imply leaving the exporting
Member completely defenceless, because there would not be a point in the proceedings at which it
could try to defend itself. In the case under consideration, if the United States had considered that
the basis for its call was the existence of actual threat of serious damage, it should have said so in its
call for consultations, and should have presented the factors and information required to demonstrate
its existence, and then should have imposed the unilateral restriction on that basis.
5.209 The United States pointed out that Article 6.10 of the ATC regulated the date when, if
consultations had failed to reach agreement, an importing Member may move ahead unilaterally with
implementation of the textile restriction in question. Provision of such deadlines was fully consistent
with the scheme of Article 6 of the ATC, which attempted to maximize the possibility that transitional
safeguards would be applied on a consensual basis; any negotiator could appreciate that a lack of
deadlines would mean lack of any incentive for negotiation and agreement. However, Article 6.10
of the ATC did not regulate the effective date for a unilateral transitional safeguard. The United States
had applied its transitional safeguard with respect to imports of underwear from Costa Rica effective
on 23 June 1995. This date fell within 30 days following the 60-day period for consultations after
the initial call made on 27 March 1995. The reference year for imports within the levels specified
in this transitional safeguard began on March 27. This reference year was fully consistent with US
obligations under Article 6.10 of the ATC.
5.210 Costa Rica argued that, when the TMB determined that serious damage to the United States
industry did not exist in this case, what the United States should properly have done was to withdraw
the measure adopted on that basis and, if there really were grounds justifying the existence of actual
threat of serious damage, beginthe procedure anew onthat ground, tocomply with Articles 6.7 and 6.10
of the ATC, and give Costa Rica a chance to defend itself. By failing to do so, the United States violated
the above-mentioned provisions.
5.211 The United States argued that they were not required by the ATC to choose between serious
damage and actual threat in making their determination. The ATC standard allowed Members to assert,
at the same time, both serious damage or actual threat. The plain meaning of the standard invoked
merely the notion that there could be a determination on the basis of serious damage, or actual threat.
Neither was exclusive of the other. There was no obligation in other safeguard proceedings that one
standard must be alleged instead of the other. The ATC treated them equally, that is, without any
special factors to establish a case for one or the other. The simple fact was that Members could allege
both based on the same factors. In addition, contrary to the assertion of Costa Rica, it did not follow
that if the TMB had found that there was no serious damage, and reached no consensus on threat, there
was no threat. No consensus on threat was just that. No consensus on that finding, therefore, no
finding or decision on threat.
5.212 The United States also stated that it held consultations with Costa Rica in accordance with
Article 6.7 of the ATC before placing a restriction. It then applied the restraint, and referred the matter
to the TMB, pursuant to Article 6.10. Article 6.12 therefore permitted the United States to maintain

the restraint for up to three years, without extension. Article 6.10 expressly allowed for the placement
of a unilateral restraint before TMB review. Nothing in the text indicated that the restraint must be
withdrawn in the absence of any recommendation to do so. A lack of consensus in the TMB, or even
a finding without a recommendation to withdraw, did not obligate an importing Member to withdraw
a restraint. Even if there was a recommendation to withdraw a restraint, Members must only
"endeavour" to comply, and provide reasons to the TMB if they could not comply with the
recommendation. In this case, the United States had complied with the TMB recommendation.
K. EFFECTIVE DATE OF THE RESTRICTION
5.213 Costa Rica also argued that the United States had applied retroactively the unilateral restriction
imposed on trade with Costa Rica in category 352/652, thereby violating Article 6.10 of the ATC.
This Article provided that:
"If, however, after the expiry of the period of 60 days from the date on which the request for
consultations was received, there has been no agreement between the Members, the Member
which proposed to take safeguard action may apply the restraint by date of import or date of
export, in accordance with the provisions of this Article, within 30 days following the 60-day
period for consultations ...".
5.214 In accordance with the above, if the Members failed to reach agreement on the application
of the safeguard once the 60-day period fixed for holding consultations had expired, the Member which
proposed to take safeguard action may do so unilaterally within the following 30 days. Thus, the
provision under consideration granted the importing Member the power during a specified period to
impose a unilateral restriction on the imports after a certain number of days had passed. Nowhere,
in Costa Rica's view, did Article 6.10 of the ATC authorize the imposition of a unilateral restriction
retroactive to the date of the call for consultations. The fact was that retroactivity could not be assumed,
but must be explicitly authorized, as it was under the MFA. Article 3.5(i) of the MFA explicitly stated
that:
"... If, however, after a period of sixty days from the date on which the request has been
received by the participating exporting country or countries, there has been no agreement either
on the request for export restraint or on any alternative solution, the requesting participating
country may decline to accept imports for retention from the participating country or countries
referred to in paragraph 3 above of the textiles and textile products causing market disruption
(as defined in Annex A) at a level for the twelve-month period beginning on the day when
the request was received by the participating exporting country or countries not less than the
level provided for in Annex B ...".
5.215 Costa Rica further argued that, if retroactivity was not explicitly provided for, as in the case
of Article 6.10 of the ATC, the measure in question must be applied "forwards". This was particularly
clear in the case of this provision of the ATC which, when establishing a procedure similar to that
provided for in the MFA for the imposition of a unilateral restriction, differed from the latter in respect
of retroactivity, by eliminating the explicit provision the MFA contained in this regard. This
interpretation was bolstered by the principles established in Article 6.1 of the ATC, according to which:
"... The transitional safeguard should be applied as sparingly as possible, consistently with
the provisions of this article and the effective implementation of the integration process under
this Agreement".
5.216 Since any gaps or doubts arising in the legal text governing the imposition of a transitional
safeguard must be interpreted on the basis of the principles and spirit guiding the ATC, it was not
possible to conclude that a restriction adopted under the Agreement may be applied retroactively in

the absence of any explicit provision to that effect. This interpretation was supported by other agreements
that were an integral part of the WTO Agreement and which therefore must also serve as interpretative
sources for the ATC in the absence of any express provision in the latter. Thus, for example,
Article XIII:3(b) of GATT 1994, referring to import restrictions involving the fixing of quotas, expressly
authorized retroactive application of a restriction only for products that were en route at the time at
which public notice was given of the restriction.
5.217 Accordingly, in the view of Costa Rica, the only possible conclusion was that, where Members
had not reached agreement, the importing Member may, within the following 30 days, adopt a unilateral
restriction which would begin to be applied as from the time when it was adopted, and not before.
This meant that the imposition of the restriction by the United States should have begun as from
16 June 1995, the date when the restriction was established, and could not be made retroactive to
27 March 1995, the date of the request for consultations, as the United States in fact had done. By
proceeding in this way, and by continuing to do so, the United States had disregarded the very significant
revisions of the information presented as a basis for its action, disregarded all the aspects discussed
in the consultations, and the conclusions of the TMB and had violated Article 6.10 of the ATC.
5.218 The United States argued that the ATC was silent concerning the effective date of safeguard
measures, and did not prevent a Member from providing that the effective date would be the date of
the request for consultations. The United States had held consultations with Costa Rica in accordance
with Article 6.7 of the ATC before placing a restriction; had then applied the restraint at issue in this
case; and had referred the matter to the TMB, pursuant to Article 6.10 of the ATC. Article 6.12
of the ATC therefore, permitted the United States to maintain the restraint for up to three years, without
extension. When asked by exporting countries including Costa Rica to address this question, the TMB
had responded recognizing this fact. The TMB had noted that
"with respect to the introduction of a safeguard measure, the [ATC] does not provide any
indication with respect to the effective date of implementation of that measure" (G/TMB/R/2).
The MFA explicitly recognized the customary practice of counting imports during the consultation
period against restraint levels, and the ATC did not change this practice. The universal application
of textile restraints on this basis and the recognition accorded to this practice generally in the TSB
and TMB, demonstrated that it was in fact a matter of accepted custom which constitutes "subsequent
practice in the application of the treaty which establishes the agreement of the parties regarding its
interpretation" in the sense of Article 31.3(b) of the Vienna Convention on the Law of Treaties (1969).
5.219 In this regard the United States (and Costa Rica) were of the view that the reference in
Article XVI:1 of the WTO Agreement to "decisions, procedures and customary practices followed
by the CONTRACTING PARTIES to GATT 1947 and the bodies established in the framework of
GATT 1947" did not include the MFA. Costa Rica noted that GATT 1947 and the MFA were two
independent, self-standing agreements while the United States pointed out that to some extent, the MFA
was an agreement relevant to the history of the ATC, as even though the MFA had expired, many
of the provisions of the ATC were drawn from the MFA.
5.220 The United States emphasized that the omission of an explicit reference to the effective date
of the restriction in the ATC could not be construed as an attempt to prevent it. It was essential to
the effective application of transitional safeguard as an adjustment mechanism. Textile restrictions
would not work without the flexibility to set the effective date. Without it, a flood of imports would
vitiate their adjustment function. Under Article XIX an importing country could simply act when it
had made its determination of serious injury, but under the MFA and the ATC importing countries
had been required to wait for consultations before acting. It was argued that the principle of effective
treaty interpretation requires that transitional safeguards under Article 6 of the ATC must be permitted

to have an effective date as of the date of the request of consultations as any contrary position would
make the ATC-consistent transitional safeguards ineffective.
5.221 Along these same lines, it was observed that restraints were normally applied effective on the
date of the call as a call would trigger speculative trade. If traders believed that imports before
completion of the consultation process would not be counted, speculative imports would aggravate
injury or bankrupt the remaining industry. A transitional safeguard was an adjustment measure which
facilitated the ultimate accomplishment of the ten-year programme of the ATC. A sudden flood of
speculative imports for stockpiling in warehouses could not be permitted to frustrate this adjustment
process. The widespread recognition of application of textile restrictions as from the date of the request
reflected a common-sense appreciation of the practical aspects of this larger policy imperative. As
a matter of treaty law, the principle of effective application of treaties (ut res magis valeat quam pereat)
argues that restrictions must be permitted to have an effective date as of the date of the request for
consultations, as any contrary position would make ATC-consistent transitional safeguards ineffective.
5.222 Article 6.10 of the ATC expressly allowed for the placement of a unilateral restraint before
TMB review. Nothing in the text indicated that the restraint must be withdrawn in the absence of any
TMB recommendation to do so. A lack of consensus in the TMB, or even a finding without a
recommendation to withdraw, did not obligate an importing Member to withdraw a restraint. Even
if there was a recommendation to withdraw a restraint, Members must only "endeavour" to comply,
and provide reasons to the TMB if they could not comply with the recommendation.
5.223 The United States noted that the ATC provided for an absolute sunset of three years for an
Article 6 safeguard measure. Furthermore, it was recalled that such safeguards were transitional and
could only be invoked until the ATC expired, eight and a half years from now. The United States
had continuously reviewed data on products subject to restraint and monitored production and trade
data on a voluntary basis, even though the ATC did not so require. When new data warranted review
of a safeguard measure, the United States considered whether it was necessary to maintain the restraint.
5.224 With respect to the Panel’ s question to the United States concerning "retroactive application
of treaty obligations"; this could be read to refer to Article 28 of the 1969 Vienna Convention.
However, this was not a case of retroactive application of a treaty to events which took place before
the treaty entered into force; Article 28 was not relevant at all. All events which had led to this dispute
took place after entry into force of the WTO Agreement, and in particular took place within the time
frame provided for under ATC Article 6, including Articles 6.7 and 6.8. It could not be argued that
Costa Rica was unaware of the applicable treaty rules at the time these events took place.
L. ARTICLE 2 OF THE ATC
5.225 Costa Rica argued that the United States had introduced a new restriction on its trade in the
clothing products classified in category 352/652, without basing itself on the provisions of the ATC,
and thereby violated Article 2.4, of the said Agreement. As recalled in the Preamble of the ATC,
the terms of reference of the Uruguay Round Negotiating Group on Textiles and Clothing had established
that:
"Negotiations in the area of textiles and clothing shall aim to formulate modalities that would
permit the eventual integration of this sector into GATT on the basis of strengthened GATT
rules anddisciplines, thereby also contributing to theobjective of further liberalization of trade."
In order to carry out this mandate, Article 1.1 of the ATC, provided that:
"This Agreement sets out provisions to be applied by Members during a transition period for
the integration of the textiles and clothing sector into GATT 1994."

Costa Rica further argued that for the purpose of attaining this objective, the ATC strictly
defined, inter alia, what type of restrictions may be applied to trade in textiles and clothing under cover
of the safeguard clause. These restrictions must necessarily fall within one of the following three
categories:
(a) Quantitative restrictions withinbilateral agreements maintained under the MFA inforce
on the day before the entry into force of the WTO Agreement and notified in accordance
with Article 2.1 of the ATC, which would continue to be governed by the provisions
of the ATC in this respect:
(b) restrictions established under the specific transitional safeguard mechanism governed
by Article 6 of the ATC, which may be applied, in accordance with paragraph 1 of
that Article, to all textile and clothing products that had not yet been integrated into
GATT 1994; or
(c) restrictions established in accordance with Article XIX of GATT 1994, in the case
of products already integrated into GATT 1994.
5.226 Thus, Article 2.4 of the ATC, provided very clearly that:
"No new restrictions in terms of products or Members shall be introduced except under the
provision of this Agreement or relevant GATT 1994 provisions."
Conversely, it followed from this provision that the introduction of new restriction in terms of products
or Members that had not been introduced in accordance with the rules of the ATC or GATT 1994
infringed Article 2.4 of the ATC.
5.227 In the case in point, imports into the United States from Costa Rica in category 352/652 were
not subject to any quantitative restriction based on the Multifibre Arrangement prior to the entry into
force of the WTO Agreement, and therefore the first option was ruled out. Furthermore, cotton and
man-made fibre underwear was not a product that the United States had already incorporated into
GATT 1994 and therefore Article XIX was likewise not applicable. Hence, the only possibility open
to the United States to restrict the imports under consideration was to apply the specific transitional
safeguard mechanism in accordance with the criteria established in Article 6 of the ATC. However,
the United States had failed to demonstrate the existence of the requirements laid down in Article 6
of the ATC as an essential condition for being able to apply a transitional safeguard. Consequently,
the United States had violated Article 2.4 of the ATC, as it had applied to Costa Rica a new restriction
on trade in products classified in category 352/652 without complying with the provisions of Article 6
of the ATC.
5.228 The United States argued that because the safeguard action taken on imports of underwear in
category 352/652 from Costa Rica was fully consistentwithArticle 6 of the ATC, there was noviolation
of Article 2 of the ATC.
M. A MEMBER MUST ENDEAVOUR TO ACCEPT RECOMMENDATIONS OF THE TMB
5.229 Costa Rica argued that the United States had violated Article 8 of the ATC, which in its
paragraphs 9 and 10, defined the nature of the recommendations made by the TMB. Thus, the first
of these paragraphs provided that: "The Members shall endeavour to accept in full the recommendations
of the TMB ...". Paragraph 10 provided that:

"If a Member considers itself unable to conform with the recommendations of the TMB; it
shall provide the TMB with the reasons therefor not later than one month after the receipt of
such recommendations ...".
5.230 In the view of Costa Rica, it was clear from an analysis of these two provisions that the TMB's
recommendations were not binding. However, it was also clear that the formulation of such
recommendations must have some purpose, because it was meaningless for the ATC to provide for
the TMB to carry out an exercise without any purpose. This aspect became clear from the reading
of paragraphs 9 and 10 of Article 8 of the ATC, from which it may be concluded that although Article 8
does not impose the obligation to abide by the recommendations of the TMB, it does impose other
obligations on Members. Article 8 of the ATC laid down two obligations on Members: firstly, in
paragraph 9 it imposed an obligation for Members to endeavour to accept in full the recommendations
of the TMB. This was a "best-endeavours" obligation, in the sense that while the TMB recommendations
were not binding, there was an obligation for Members to do their best to accept them. If, given the
TMB's recommendations, a Member did not even try to accept them, it would be violating the
best-endeavours obligation of Article 6.9 of the ATC.
5.231 Secondly, Article 8.10 of the ATC imposed on Members another obligation that complemented
the first, namely, that where a Member, having endeavoured to accept the recommendations of the
TMB, found itself unable to conform with them, it shall provide the TMB with the reasons therefor.
The imperative character of the verb used in this Article clearly indicated that, while the TMB
recommendations may not be binding, this provision did impose on a Member the obligation to justify,
"not later than one month after receipt of such recommendations", the reasons why it was unable to
conform with them.
5.232 Costa Rica argued that in the case under consideration, the United States not only had not tried
to accept the TMB recommendations, but furthermore did not submit to that body any document
explaining the reasons why it considered itself unable to conform with the recommendations, and
therefore it was in breach of Articles 8.9 and 8.10 of the ATC.
5.233 The United States argued that Costa Rica's allegation that the US had violated Article 6.9 of
the ATC was without legal or factual foundation. They had proceeded in good faith to reach mutual
understanding in consultations recommended by the TMB, consistent with obligations inherent in Article 8
of the ATC. They also noted that the TMB recommendation had been directed to both the United States
and Costa Rica. Contrary to the assertion of Costa Rica, the United States had followed the TMB
recommendation to consult and to take into account the considerations it had cited. Therefore, there
was no need to invoke Article 8.10 of the ATC and provide reasons to the TMB for not accepting
its recommendation in this case. As evidenced by the initiation of these Panel proceedings, it was
Costa Rica that could not ultimately comply with the TMB recommendation. The TMB’ s response
in October 1995 to the reports of the United States and Costa Rica did not characterize the United
States as having failed to follow the TMB’ s recommendation. The TMB stated that:
"[i]t took note of the reports and of the fact that the two parties did not reach a mutual
understanding during the consultations. The TMB's discussionsconfirmed the Body's previous
findings in this matter (G/TMB/R/2, first two sentences of paragraph 16). There being no
further requests by the parties involved, the TMB considered its review of the matter completed"
(G/TMB/R/5).
5.234 Costa Rica argued that the violation by the United States of the best-endeavours obligation
imposed by Article 8.9 of the ATC was clearly demonstrated by the following facts. In July 1995,
the TMB, pursuant to Article 6.10 of the ATC, had proceeded to examine the unilateral restriction
applied by the United States to Costa Rica in category 352/652. On that occasion, the TMB had found
that "serious damage", as envisaged in Articles 6.2 and 6.3 of the ATC, "had not been demonstrated",

but "could not, however, reach consensus on the existence of actual threat of serious damage".
Therefore, the TMB recommended:
" ... that further consultations be held between the United States and the parties concerned,
with a view to arriving at a mutual understanding, bearing in mind the above, and with due
consideration to the particular features of this case, as well as equity considerations".
Thus, the recommendation of the TMB had been that Costa Rica and the United States should hold
new consultations, but also that these consultations should be conducted on the basis of three
considerations: (a) that it was clear that the United States had not demonstrated the existence of serious
damage, but that a consensus had not been reached in the TMB as to the existence of actual threat
of serious damage; (b) that trade in this category between the United States and Costa Rica had some
particular features, which should be borne in mind; and (c) that equity considerations should be borne
in mind, with respect to the levels of restriction agreed by the United States with other countries called
for consultations on this same category.
5.235 In the view of the United States, the TMB recommendation went no further than a
recommendation to consult further and report back to the TMB. The TMB did not recommend that
the parties actually reach agreement, nor did it recommend that the United States withdraw the safeguard
measure, nor did it recommend that the parties even discuss dropping the restriction. Also, a lack
of consensus in the TMB did not translate into a recommendation to drop a restriction. In accordance
with the TMB’ s recommendation, the United States had duly consulted, and duly reported back; thus,
the United States had complied fully with the TMB recommendation. In its note of October 1995,
the TMB had stated that the parties had reported no solution and that it considered its review completed.
5.236 In Costa Rica's view, what subsequently had occurred, however, showed that the United States
had not fulfilled the obligation imposed by Article 8.9 of the ATC in the sense of at least endeavouring
to proceed in accordance with the recommendations of the TMB. Firstly, the United States did not
even attempt to justify the adoption of the safeguard measure on the basis of the alleged actual threat
of serious damage. Once the TMB had determined that serious damage did not exist and that there
was no consensus as to the existence of actual threat of serious damage, the United States - as a minimum
at that stage of the proceedings - should have demonstrated the existence of this latter hypothetical
condition brought to light by the TMB. However, the fact was that they did not even attempt to do
so, nor did it take into account the special characteristics or trade between the two countries in this
category - feigning to ignore the overriding importance of so-called 807 trade - nor did it take into
account any considerations of equity because, even if there were grounds for imposing the safeguard
in question, the levels of restriction proposed to Costa Rica were very different to those offered and
granted to other countries involved in consultations.
5.237 The United States argued that Costa Rica had misinterpreted the TMB recommendation to mean
that the TMB had asked the United States to reconsider, in consultations, its determination that there
was serious damage, or actual threat thereof to the domestic underwear producing industry which had
been attributed to imports from Costa Rica. Further, Costa Rica had misinterpreted the TMB
recommendation to take into account equity considerations in light of the specific case to mean that
the United States was to deem the re-import content in Costa Rica's trade not to cause or actually threaten
serious damage to US industry. Based on these misinterpretations, Costa Rica had asserted that the
United States was required in consultations to withdraw the restraint.
5.238 Costa Rica held that if the United States genuinely had accepted to consider the recommendations
of the TMB, when taking into account that the TMB had not reached a consensus as to the existence
of actual threat of serious damage it should have lifted the quota unilaterally imposed on Costa Rica
in category 352/652. This was because the letter and spirit of the ATC were very clear: the ATC
was conceived as a transitional system whose essential function was to integrate trade in textiles and

clothing into the rules and the disciplines of GATT 1994. From this statement, the transitional safeguard
provided for in Article 6 of the ATC was extraordinary by nature and should be applied only in cases
where it had been possible to demonstrate the existence of the requirements laid down by paragraphs 2
and 3 of that Article, and where consequently the TMB had arrived at a consensus that the existence
of the threat had been demonstrated. Conversely, if the TMB had not arrived at a consensus to that
effect, a restriction that had been imposed could not be maintained, because it would mean that the
TMB had not found the necessary justification for taking such action. There was nothing in the ATC
to establish a presumption that, in the absence of consensus in the TMB, it should be presumed that
the importing Member had the necessary justification to impose the measure. In the absence of any
explicit provision to that effect, following Article 6.1 of the ATC and the spirit of the ATC it was
necessary to proceed in the least restrictive manner, that is to say, the imposed restriction should have
been lifted as there was no justification for adopting it.
5.239 In this respect, the United States considered that Costa Rica had construed the TMB
recommendation to mean that the United States was to rescind the restraint on Costa Rican exports
by including an analysis of Article 6.1 of the ATC. Reference to integration and the taking of transitional
safeguard action and the re-import content of Costa Rican exports supported the notion that the United
States was required to rescind the restraint when it consulted with Costa Rica. Costa Rica's argument
consistently depended on the assumption that the ATC integration process must be read into Article 6
so as to accelerate the pace of the integration. This was not the case. It was clear in the ATC that
integration was an independently determined process, and that Article 6 applied only to products not
yet integrated. Article 2 of the ATC specifically allowed Members to designate what products would
be integrated and when, as long as they were chosen from the Annex to the ATC, from certain product
groups and comprised the appropriate proportion of trade indicated for each stage of the transition.
Nothing in the ATC required the United States or other Members to schedule sensitive products at
certain stages for integration. The negotiators had specifically left that decision to the importing
Members. Thus, Costa Rica could not use this Panel proceeding to compel integration of this category.
5.240 Costa Rica also argued that, in accordance with the TMB's recommendations, the United States
was obliged to take into consideration the particular features of the trade in this category between the
two countries. This meant that the United States should have borne in mind that, given that virtually
all exports from Costa Rica in category 352/652 were "807 trade" , the possibility that they should
have been causing serious damage or actual threat thereof was really non-existent. If the United States
had endeavoured to accept the recommendation of the TMB to consider the particular features of trade
with Costa Rica in this category, it would clearly have appreciated how absurd it was to impose a quota
in such circumstances. However, the United States had not made any effort to accept the
recommendation of the TMB.
5.241 The United States further argued that the TMB recommendation did not say what Costa Rica
claimed it did. Again, the TMB had not, in its 25 October 1995 note, responded to Costa Rica's same
assertions in their report back to the TMB dated 24 August 1995. (G/TMB/SPEC/107) The lack of
TMB consensus on actual threat of serious damage did not translate into a "recommendation" that a
restraint be withdrawn. Accordingly, there was no obligation on the United States, in consultations,
to assume such a proposition.
5.242 In the view of Costa Rica, if the United States had insisted on adopting a safeguard measure
in these circumstances - when in fact it should have withdrawn the measure - it should at least have
borne in mind the obligation to grant more favourable treatment to re-imports from Costa Rica, as
provided for in Article 6.6(d) of the ATC. In this regard, however, the position of the United States
appeared to have been somewhat self-contradictory. On the one hand, it started from the position that
the rise in imports of these products was causing serious damage to its industry, but on the other, the
level of these imports was of no importance whatsoever provided the product in question was produced
using fabric formed and cut in the United States. The ATC established this obligation to grant more

favourable treatment to re-imports - which the United States had never tried to fulfil in any of its
proposals - but what it certainly did not provide for was the establishment of new restrictions in order
to ensure that future trade consists solely of re-imports.
5.243 Costa Rica noted that the TMB had also indicated that equity considerations should be borne
in mind, by which it was referring to the fact that the same treatment should be accorded to those who
were in the same position. In this connection, apart from Costa Rica, the United States had called
for consultations six other countries concerning this category, had withdrawn the call addressed to one
of them and had reached an agreement with the remaining five. In the case of each of the latter, the
United States had agreed on specific level (SL) restraints that were much higher than the respective
"call" levels. Thus - and assuming that the United States had the right to adopt a safeguard, which,
in the view of Costa Rica, was not the case - in order to comply with the TMB's recommendation
it should have made restraint proposals to Costa Rica that reflected SL restraint levels which provided
for increases in relation to the call level, in the same way as it had granted to the other countries.
In none of the proposals formulated by the United States to Costa Rica was this equity factor taken
into consideration, because not even in its last proposal did the United States propose a SL restraint
level approaching the call level, still less exceeding it. In fact, the highest level that the United States
had offered at any time for the establishment of the SL restraint was about 40 per cent below what
should have been the level for Costa Rica in accordance with the ATC itself - assuming that the necessary
requirements for imposing it had been demonstrated, which was not the case.
5.244 Costa Rica argued that, on the basis of the above explanation, it was clearly demonstrated that
the United States had completely disregarded the recommendations adopted by the TMB in July 1995,
without even endeavouring to accept them as provided for in Article 8.9 of the ATC. Furthermore,
the United States had violated Article 8.10 of the ATC, which imposed on Members another obligation
that complemented the obligation established in Article 8.9 of the ATC. That is to say, the United
States had not fulfilled the obligation of presenting to the TMB its reasons explaining why it considered
itself unable to conform with the TMB's recommendations. Suffice it to say that the United States
had never at any time presented to the TMB any document to that effect. Failure to comply with this
requirement imposed under Article 8.10 of the ATC may be due to the fact that, since the United States
had not even attempted to follow the TMB's recommendations, it would be difficult, if not impossible,
for it to justify a hypothetical failure in its attempt to accept those recommendations, since it had made
no such attempt.
5.245 Costa Rica also noted that the United States had declared that they did not agree with the finding
of the TMB that the existence of serious damage had not been demonstrated. Moreover, as in the US
view there was no provision in the ATC that made the TMB's findings binding, the Panel was obliged
to consider the question of serious damage. In this connection, Costa Rica emphasized that the
United States had not contested at the appropriate moment in the procedure the TMB's finding that
the existence of serious damage had not been demonstrated, as required by Articles 6.2 and 6.3 of
the ATC. Costa Rica was, therefore, concerned that contesting the action of the TMB at this stage
of the procedure and calling into question its decisions would mean divesting the Body of any function
related to monitoring the implementation of the ATC.
5.246 The United States argued that they had made efforts to reach a mutual understanding with Costa
Rica. As recommended by the TMB, the United States had taken into account that the TMB could
not reach consensus on actual threat of serious damage (though they maintained that they had
demonstrated the existence of serious damage); had examined the nature of trade from Costa Rica;
and, in the interest of equity, had again compared Costa Rica's trade with trade from other countries
to which the serious damage and actual threat had been attributed. The record showed that Costa Rica
had refused to respond. In so doing, the United States had made a proposal to Costa Rica that, in
its view, took these factors into account in an effort towards mutual understanding. The United States
stated that the record showed that Costa Rica had refused to respond. The United States stated that

there was no requirement in the ATC that the United States respond to "findings" but must "endeavour
to comply" with TMB "recommendations". The United States did comply with the TMB
recommendation.
N. NULLIFICATION OR IMPAIRMENT OF BENEFITS
5.247 Costa Rica argued that the unilateral restriction imposed by the United States on trade in clothing
classified in category 352/652 from Costa Rica was a blatant violation of the obligations laid down
in the ATC, in particular Articles 2, 6 and 8. On this basis, and given that the ATC was a "covered
agreement" within the meaning of Article 1 of the DSU, the provisions of Article 3.8 of the DSU applied.
That Article stated:
"In cases where there is an infringement of the obligations assumed under a covered agreement,
the action is considered prima facie to constitute a case of nullification or impairment ...".
It clearly followed from the above provision that in the case under consideration, given the infringement
of Articles 2, 6 and 8 by the United States, benefits accruing to Costa Rica under the WTO Agreement,
and in particular under the ATC, had been nullified or impaired.
5.248 Considering that Article 3.1 of the DSU stipulated that
"Members affirm their adherence to the principles for the management of disputes heretofore
applied under Articles XXII and XXIII of GATT 1947 ...",
it was important to note that these Articles had established that the benefits accruing under the GATT
Rules - and consequently the WTO Rules - did not comprise exclusively those derived from the
Agreement at the time when a concession came into effect, but also the future trading opportunities
that would result from that concession. Thus, and by virtue of the prima facie case of nullification
or impairment of benefits that existed in cases of infringement of the obligations assumed under a covered
agreement, such as the ATC, the claims presented by one or more Members relating to the imposition
of infringing unilateral measures must be accepted even where statistical evidence of commercial damage
cannot exist.
5.249 It was also necessary to emphasize that nullification or impairment should be considered not
only in relation to the effect which the violation in question may have had on the volume of trade but
also in relation to possible increases in transaction costs and the creation of uncertainty liable to affect
investment plans.
5.250 As a result of all the foregoing, Costa Rica considered that the Panel should find that the
unilateral restriction imposed by the United States on the trade of Costa Rica in category 352/652
infringed Articles 2, 6 and 8 of the ATC and that, consequently, these infringements entailed the
nullification or impairment of benefits accruing to Costa Rica under the WTO Agreement. Accordingly,
Costa Rica urged the Panel to find in its report that the United States should proceed to bring its measure
into conformity with the ATC, which implied immediately withdrawing it.
5.251 The United States argued that Costa Rica's rights and benefits under the ATC had not been
nullified and impaired. The United States had demonstrated that they had not violated Articles 2, 6
or 8 of the ATC. Thus, nullification and impairment of any benefits and rights accruing to Costa Rica
in this case could not be presumed.

VI INTERIM REVIEW

6.1 On 4 October 1996, the United States and Costa Rica requested the Panel to review, in
accordance with Article 15.2 of the DSU, precise aspects of the interim report that had been issued
to the parties on 20 September 1996. Both Costa Rica and the United States requested the Panel to
hold a meeting for that purpose. The Panel met with the parties on 15 October 1996 to hear their
arguments concerning the interim report. The Panel carefully reviewed the arguments presented by
the parties.
6.2 In approaching the interim review stage, the Panel drew guidance from Article 15.2 of the
DSU, which states that "a party may submit a written request for the panel to review precise aspects
of the interim report prior to circulation of the final report to Members". While the Panel was willing
to approach the interim review stage with the broadest possible interpretation of Article 15.2 of the
DSU, it was of the view that the purpose of the review meeting was not to provide the parties with
an opportunity to introduce new legal issues and evidence, or to enter into a debate with the Panel.
The purpose of the interim review, in the Panel's view, was to consider specific and particular aspects
of the interim report. Consequently, the Panel addressed the entire range of such arguments presented
by the parties which it considered to be sufficiently specific and detailed.
6.3 The United States submitted to the Panel at the review meeting copies of press reports relating
to the interim report. At the meeting, the Panel expressed its disappointment about the apparent breach
of confidentiality and reiterated the utmost importance of maintaining confidentiality so as to preserve
the credibility and integrity of the dispute settlement process, particularly at the interim review stage.
6.4 Regarding the timing of settlements with other exporters, the United States argued that the
Panel had erroneously stated that the United States requested consultations with Costa Rica while at
the same time it settled with other countries. In order to clarify its findings, the Panel introduced
some drafting modifications in the final report at paragraphs 7.50 and 7.51.
6.5 The United States disagreed with the interim report that use of the ATC safeguard should be
exceptional. It based its argument on the fact that Article 6.1 of the ATC couples the term "sparingly"
with "as possible", suggesting that the standard was relative. The Panel was not persuaded by this
argument, which in effect would result in reading the text of the Article as meaning that the transitional
safeguard "should be applied sparingly if possible".
6.6 Regarding the causation analysis required under Article 6.2 of the ATC, the United States argued
that the Panel's finding in paragraph 7.46 of the final report was a mischaracterization of the CITA's
conclusions. The Panel slightly modified the language of this paragraph so as to avoid any
misunderstanding of its findings.
6.7 In respect of the relationship between Articles 6.2 and 6.4 of the ATC, the United States argued
that the Panel incorrectly merged the analyses under these two paragraphs. This was not the intention
of the Panel. To clarify its findings, the Panel introduced certain drafting changes in paragraphs 7.23,
7.24, 7.47 and 7.48.
6.8 The United States argued that in its review of the March Market Statement, the Panel had erred
by relying on the July Market Statement. It specifically argued that if Members were penalized in
the dispute settlement process for supplying updated data to the TMB, there would be a disincentive
to providing it at the TMB level. The Panel consequently examined the issue, as spelled out in
paragraphs 7.29 and 7.45 of its final report.
6.9 Regarding the Panel's interpretation of Article 6.6(d) of the ATC, the United States argued
that finding the United States in violation of this provision based on the requirements under Article
6.8 was erroneous because the US action was taken based on Article 6.10. The Panel's additional
discussion on this point is reflected in paragraph 7.59.

6.10 Both the United States and Costa Rica disagreed with the Panel's interpretation of Article 6.10
of the ATC regarding the effective date of application of the restriction. The United States argued
that the restraint was not a measure "of general application" within the meaning of Article X:2 of GATT
1994. It further argued that the restraint was not "enforced" until 23 June 1995, which was after the
date of the publication. The Panel's finding on these points can be found in paragraphs 7.65 and 7.69
of the final report. Costa Rica questioned the compatibility of the Panel's general approach that Article
6 of the ATC should be interpreted narrowly and its interpretation of Article X:2 of GATT 1994.
The Panel failed to see any incompatibility or contradiction between the two approaches. Costa Rica
further questioned the Panel's consideration of practical aspects of this issue. The Panel carefully
examined Costa Rica's argument, and decided to maintain paragraph 7.68 of the final report.
6.11 Costa Rica and the United States differed with respect to acceptable figures for the percentage
of 807 or 807A trade in Costa Rican underwear exports to the United States. In the absence of clear
verification by the importing country (i.e., the United States), the Panel decided to use the most
conservative figure of 94 per cent, coupled with the expression "at least" in paragraph 7.46 of the final
report.
6.12 Costa Rica and the United States made some other suggestions concerning language changes,
which the Panel accepted and introduced in its final report.
VII FINDINGS
A. CLAIMS OF THE PARTIES
Introduction
7.1 We note that the issues in dispute arise essentially from the following facts: On 27 March 1995,
the United States requested consultations with Costa Rica on trade in cotton and man-made fibre
underwear (US category 352/652) under Article 6.7 of the ATC. As consultations between the two
countries did not result in a mutually acceptable solution, on 23 June 1995 the United States implemented
a restriction on underwear imports from Costa Rica for a period of 12 months starting from
27 March 1995. At the same time, the United States referred the matter to the TMB in accordance
with Article 6.10 of the ATC. The TMB found that serious damage had not been demonstrated by
the United States, but it could not reach consensus on the existence of actual threat of serious damage.
The TMB recommended further consultations between the two parties. A series of further consultations
was held in which the United States put forward several new proposals as far as the level of the restriction
was concerned. However, the parties failed to reach a mutually agreed solution. The restriction,
augmented by the application of a growth rate of 6 per cent, was renewed for a 12-month period on
27 March 1996.
Main substantive claims
7.2 Costa Rica essentially claims before the Panel that the United States, by imposing a unilateral
quantitative restriction on cotton and man-made fibre underwear classified in category 352/652, has
acted in violation of Articles 2, 6 and 8 of the ATC. Costa Rica requests the Panel to recommend
that the United States withdraw the measure in question.
7.3 The United States essentially claims that it respected its obligations under the ATC when imposing
the restriction on cotton and man-made fibre underwear classified in category 352/652. Consequently,
the United States requests the Panel to dismiss Costa Rica's claim.
7.4 There is no disagreement between the parties to the dispute that the restriction applied by the
United States is a "transitional safeguard" and that transitional safeguards are to be applied in accordance

with Article 6 of the ATC. In this respect, Costa Rica claims that the United States has violated a
number of provisions of this Article. In particular, Costa Rica claims that the United States violated
its obligations under Article 6 of the ATC by:
(a) imposing a restriction on imports from Costa Rica without having satisfied the conditions
laid down in Article 6.2 and 6.4 of the ATC, namely by not having shown that serious
damage or actual threat thereof resulted from those imports;
(b) not granting, when applying the restriction, more favourable treatment to re-imports
from Costa Rica in contravention of Article 6.6(d) of the ATC;
(c) not consulting with Costa Rica on the issue of actual threat of serious damage contrary
to its obligations under Article 6.7 and 6.10 of the ATC; and
(d) applying the restriction retroactively in contravention of Article 6.10 of the ATC.
Costa Rica also claims that the United States violated Articles 2 and 8 of the ATC. In this respect,
Costa Rica claims that the United States violated Article 2.4 of the ATC which stipulates that: " [n]o
new restrictions in terms of products or Members shall be introduced except under the provisions of
this Agreement or relevant GATT 1994 provisions". With respect to the alleged violation of Article 8
of the ATC, Costa Rica essentially claims that the United States has not respected the recommendations
made by the TMB in this case.
7.5 We will deal first with what we view as Costa Rica's basic claim under Article 6 of the ATC:
that the United States imposed restrictions onimports into the United States of underwear without having
demonstrated, as required by Article 6.2 and 6.4 of the ATC, that the US underwear industry had
suffered serious damage from Costa Rican imports or that there was an actual threat of such damage.
In considering this claim, we examine the issues in the following order: First we consider general
interpretative issues. Second, we consider Costa Rica's basic claim by reviewing the findings by the
US investigating authorities on serious damage attributed to Costa Rica. Third, we consider the question
of actual threat of serious damage - a matter relating to the scope of Costa Rica's basic claim. Finally,
we consider Costa Rica's other claims, namely, its claims with respect to Article 6.6(d) of the ATC,
with respect to the alleged failure of the United States to consult, with respect to the alleged retroactive
application of the US restriction, with respect to the alleged violation of Article 2.4 of the ATC and
with respect to the alleged violation of Article 8 of the ATC.
B. GENERAL INTERPRETATIVE ISSUES
7.6 Before turning to the examination of the specific import restriction, we deal with four
interpretative issues relating to the application of the ATC, namely:
(a) the standard of review that should be applied in this case;
(b) the burden of proof;
(c) the interpretation of the ATC; and
(d) the structure of Article 6 of the ATC.

Standard of Review
7.7 We note that the two parties to the dispute present diverging views with respect to the standard
of review to be applied by the Panel in this case. The United States advocates a standard of review
similar to that applied in the "Fur Felt Hat" case14, in which the neutral members of the Working Party,
examining a US escape clause measure in light of the requirements of Article XIX of the General
Agreement on Tariffs and Trade (GATT) 1947, afforded to the US authorities considerable discretion
by concluding that the United States was not called upon to prove conclusively that the degree of injury
caused or threatened in that case should be regarded as serious. Costa Rica argues in favour of a five-
step procedure whereby the Panel would certify whether the administrative authority of the importing
country, when imposing the restriction had: (i) complied with the ATC's procedural rules; (ii) properly
established the facts; (iii) made an objective and impartial evaluation of the facts in the light of the
rules of the ATC; (iv) properly exercised its discretion in the interpretation of the rules; and (v) complied
with the rules in general, while also having complied with the other four requirements mentioned above.
7.8 We note that the ATC does not establish a standard of review for panels, contrary, for example,
to the WTO Agreement on Implementation of Article VI of the General Agreement on Tariffs and
Trade 1994, where Article 17.6 defines the standard of review that panels have to apply when reviewing
cases arising under that Agreement. We further note that the DSU does not contain a provision
mandating a specific standard of review.
7.9 In our view, the main relevant provision of the DSU in this respect is Article 11, which reads
as follows:
"The function of panels is to assist the DSB in discharging its responsibilities under
this Understanding and the covered agreements. Accordingly, 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, and make such other findings as will assist the DSB in making the
recommendations or in giving the rulings provided for in the covered agreements".
7.10 In our opinion, 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, and most notably in the panel
report on the "Transformers" case. 15
7.11 The panel in the "Transformers" case was confronted with the argument of New Zealand that
the determination of "material injury" by the competent New Zealand investigating authority could
not be scrutinized by the panel. The "Transformers" panel responded to this argument as follows:
"The Panel agreed that the responsibility to make a determination of material injury
caused by dumped imports rested in the first place with the authorities of the importing
contracting party concerned. However, the Panel could not share the view that such
a determination could not be scrutinized if it were challenged by another contracting
party. On the contrary, the Panel believed that if a contracting party affected by the
determination could make a case that the importation could not in itself have the effect
of causingmaterial injury to the industry in question, that contracting party was entitled,
14See "Report on the Withdrawal by the United States of a Tariff Concession Under Article XIX of the General
Agreement on Tariffs and Trade", GATT document CP/106, adopted on 22 October 1951 (CP.6/SR.19), version
published by the Secretariat in November 1951, preface by E. Wyndham White.
15"New Zealand - Imports of Electrical Transformers from Finland", adopted on 18 July 1985, BISD32S/55.

under the relevant GATT provisions and in particular Article XXIII, that its
representations be given sympathetic consideration and that eventually, if no satisfactory
adjustment was effected, it might refer the matter to the CONTRACTING PARTIES,
as had been done by Finland in the present case. To conclude otherwise would give
governments complete freedom and unrestricted discretion in deciding anti-dumping
cases without any possibility to review the action taken in the GATT. This would lead
to an unacceptable situation under the aspect of law and order in international trade
relations as governed by the GATT".
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 the TMB. 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.16 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/countervailing 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 the international 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.17 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 the facts as a whole supported
the determination made, and, consequently, whether the determination made was consistent with the
international obligations of the United States.18 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 ATC and whether the basis
16See the panel reports on "Korea - Anti-Dumping Duties on Imports of Polyacetal Resins from the
United States", adopted on 27 April 1993, BISD 40S/205; "United States - Imposition of Anti-Dumping Duties
on Imports of Fresh and Chilled Atlantic Salmon from Norway", adopted on 27 April 1994; "United States -
Initiation of a Countervailing Duty Investigation into Softwood Lumber Products from Canada", adopted on
3 June 1987, BISD 34S/194.
17A de novo review, if at all, is to be conducted by the TMB. Article 8.3 of the ATC reads as follows:
"The TMB...shall rely on notifications and information supplied by the Members under the relevant Articles
of the Agreement, supplemented by any additional information or necessary details they may submit or it may
decide to seek from them". Article 8.5 of the ATC calls for a "thorough and prompt" review of the matter by
the TMB.
18This approach is largely consistent with the approach adopted by the panel reports cited in footnote 16,
although it should be pointed out that the standard of review was expressed in slightly different terms in each
of the aforementioned panel reports.

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.19
Burden of Proof
7.14 The parties to the dispute have divergent views on the question of burden of proof. The United
States essentially argues that it is not its duty to re-establish the consistency of the restriction with the
relevant rules of the ATC, since it has already established that in the March Statement. Costa Rica,
on the other hand, insists that in accordance with Article 6.2 and 6.4 of the ATC, it is incumbent upon
the United States to establish to the Panel's satisfaction that the conditions required before imposing
a restriction have in fact been met.
7.15 We recall in this context that one of the central elements of the ATC is the prohibition, in
principle, for Members to have recourse to any new restrictions beyond those notified under Article 2.1
of the ATC. Article 2.4 of the ATC reads as follows:
"...No new restrictions in terms of products or Members shall be introduced except
under the provisions of this Agreement or relevant GATT 1994 provisions" (emphasis
added).
We further note that Article 6.2 of the ATC reads as follows:
"Safeguard action may be taken under this Article when, on the basis of a determination
by a Member, it is demonstrated that..." (emphasis added).
7.16 In our view, Article 6 of the ATC is an exception to the rule of Article 2.4 of the ATC. It
is a general principle of law, well-established by panels in prior GATT practice, that the party which
invokes an exception in order to justify its action carries the burden of proof that it has fulfilled the
conditions for invoking the exception. Consequently, in our view, it is up to the United States to
demonstrate that it had fulfilled the requirements contained in Article 6.2 and 6.4 of the ATC in the
March Statement which, as the parties to the dispute agreed, constitutes the scope of the matter properly
before the Panel.
The Interpretation of the ATC
7.17 Article 3.2 of the DSU requires panels to interpret the covered agreements "in accordance with
customary rules of interpretation of public international law". The customary rules of interpretation
of public international law are embodied in the text of the Vienna Convention on the Law of Treaties
(VCLT).20
Article 31.1 of the VCLT reads:
"A treaty shall be interpreted in good faith in accordance with the ordinary meaning
to be given to the terms of the treaty in their context and in the light of its object and
purpose".
19See paragraph 5.45 above.
20See the Appellate Body Decision on "United States - Standards for Reformulated and Conventional Gasoline"
(WT/DS2/AB/R).

7.18 First, we pay attention to the phrase "ordinary meaning to be given to the terms of the treaty
in their context". The reason why, in our view, particular attention is paid to the context is simply
that the terms of a treaty should not be interpreted in isolation, but in their particular context in the
entire agreement. We recall that Article 31.2 of the VCLT expressly defines the context of the treaty
to include the text. Thus, it is clear that the entire text of the ATC is relevant in order to interpret
Article 6.2 to 6.4 of the ATC.
7.19 Second, the overall purpose of the ATC is to integrate the textiles and clothing sector into
GATT 1994. Article 1 of the ATC makes this point clear. To this effect, the ATC requires notification
of all existing quantitative restrictions (Article 2 of the ATC) and provides that they will have to be
terminated by the year 2004 (Article 9 of the ATC). The ATC allows adoption of new restrictions
in addition to those notified under Article 2 of the ATC for products not yet integrated into GATT 1994
pursuant to Article 2.6 to 2.8 of the ATC only exceptionally and in accordance with the relevant
provisions of the ATC or in accordance with the relevant provisions of GATT 1994. Article 2.4 of
the ATC reads:
"...No new restrictions in terms of products or Members shall be introduced except
under the provisions of this Agreement or relevant GATT 1994 provisions" (emphasis
added).21
The exceptional nature of these restrictions is confirmed by the wording of Article 6.1 of the ATC
which reads as follows:
"...The transitional safeguard should be applied as sparingly as possible, consistently
with the provisions of this Article and the effective implementation of the integration
process under this Agreement" (emphasis added).
7.20 Finally, we recall that the relevant provisions have to be interpreted in good faith. Based upon
the wording, the context and the overall purpose of the Agreement, exporting Members can legitimately
expect that transitional safeguards, adopted under Article 6 of the ATC, would only be applied sparingly
in order to serve the narrow purpose of protecting domestic producers of like and/or directly competitive
products. Exporting Members can, in other words, legitimately expect that market access and
investments made would not be frustrated by importing Members taking improper recourse to such
action.
7.21 We conclude from the interpretation of these provisions in the light of Article 31 of the VCLT
that recourse to transitional safeguards should be taken on an exceptional basis only. Consequently,
in our view, Article 6 of the ATC should be interpreted narrowly. This conclusion is consistent with
the past practice of GATT panels.22
21We note that a footnote to Article 2.4 of the ATC reads as follows: "The relevant GATT 1994 provisions
shall not include Article XIX in respect of products not yet integrated into GATT 1994, except as specifically
provided in paragraph 3 of the Annex".
22See the panel reports on "Canada - Administration of the Foreign Investment Review Act (FIRA)", adopted
on 7 February 1984, BISD 30S/140; "United States - Customs User Fee", adopted on 2 February 1988, BISD
35S/245; "Japan - Restrictions on Imports of Certain Agricultural Products", adopted on 22 March 1988, BISD
35S/163; "European Economic Community - Restrictions on Imports of Dessert Apples", Complaint by Chile,
adopted on 22 June 1989, BISD 36S/93; "Canada - Import Restrictions on Ice Cream and Yogurt", adopted on
5 December 1989, BISD 36S/68; "European Economic Community - Regulation on Imports of Parts and
Components", adopted on 16 May 1990, BISD37S/132; "United States - Countervailing Duties on Fresh, Chilled
and Frozen Pork from Canada", adopted on 11 July 1991, BISD 38S/30; "United States - Definition of Industry
(continued...)

The Structure of Article 6 of the ATC
7.22 Article 6.2 of the ATC conditions the application of a transitional safeguard on a finding that
a product is being imported in such increased quantities so as to cause serious damage, or actual threat
thereof, to the domestic industry producing like and/or directly competitive products. Article 6.2 of
the ATC reads as follows:
"Safeguard action may be taken under this Article when, on the basis of a determination
by a Member, it is demonstrated that a particular product is being imported into its
territory in suchincreased quantitiesas tocause serious damage, or actual threat thereof,
to the domestic industry producing like and/or directly competitive products. Serious
damage or actual threat thereof must demonstrably be caused by such increased quantities
in total imports of that product and not by such other facts as technological changes
or changes in consumer preference".
Article 6.3 of the ATC contains an indicative list of economic variables that can be taken into account
in order to assess the serious damage or actual threat thereof. After having satisfied the conditions
of Article 6.2 of the ATC, Members must attribute the serious damage or actual threat thereof to a
particular Member or Members, since, in accordance with Article 6.4 of the ATC, transitional safeguards
"shall be applied on a Member-by-Member basis". Article 6.4 of the ATC reads as follows:
"Any measure invoked pursuant to the provisions of this Article shall be applied on
a Member-by-Member basis. The Member or Members to whom serious damage,
or actual threat thereof, referred to in paragraphs 2 and 3, is attributed, shall be
determined on the basis of a sharp and substantial increase in imports, actual or
imminent23, from such a Member or Members individually, and on the basis of the
level of imports as compared with imports from other sources, market share, and import
and domestic prices at a comparable stage of commercial transaction; none of these
factors, either alone or combined with other factors, can necessarily give decisive
guidance. Such safeguard measure shall not be applied to the exports of any Member
whose exports of the particular product are already under restraint under this
Agreement."
7.23 The overall purpose of Article 6 of the ATC is to give Members the possibility to adopt new
restrictions on products not already integrated into GATT 1994 pursuant to Article 2.6 to 2.8 of the
ATC and not under existing restrictions, i.e., not notified under Article 2.1 of the ATC. Article 6
of the ATC, in our view, establishes a three-step approach which has to be followed for a new restriction
to be imposed. Articles 6.2 and 6.4 of the ATC constitute the first two steps which, taken together,
amount to a determination that serious damage has occurred or is actually threatening to occur and
that it may be attributed to a sharp and substantial increase in imports from a particular Member or
Members: No action can be taken on the basis of Article 6.2 alone.
7.24 A determination under Article 6.2 of the ATC is, therefore, a necessary but not sufficient
condition to have recourse to bilateral consultations under Article 6.7 of the ATC. Only when serious
22(...continued)
Concerning Wine and Grape Products", adopted on 28 April 1992, BISD 39S/436; "United States - Measures
Affecting Alcoholic and Malt Beverages", adopted on 19 June 1992, BISD 39S/206.
23Footnote 6 accompanying this text reads: "Such an imminent increase shall be a measurable one and shall
not be determined to exist on the basis of allegation, conjecture or mere possibility arising, for example, from
the existence of production capacity in the exporting Members".

damage or actual threat thereof has been demonstrated under Article 6.2 and has been attributed to
a particular Member or Members under Article 6.4 of the ATC, can recourse to Article 6.7 of the
ATC be made in a way consistent with the provisions of the ATC.
C. REVIEW OF THE FINDINGS BY THE US INVESTIGATING AUTHORITIES ON
SERIOUS DAMAGE ATTRIBUTABLE TO COSTA RICAN IMPORTS
7.25 We now turn to an examination of Costa Rica's basic claim: that the United States imposed
restrictions on imports of underwear into the United States without having demonstrated, as required
by Article 6.2 and 6.4 of the ATC, that the US underwear industry suffered serious damage from Costa
Rican imports. We first discuss the scope of the matter before us, i.e., the information that we will
consider in our examination of Costa Rica's claim. We then undertake an objective assessment of
the US action and its conformity with the ATC in accordance with the standard of review set out above.
In this respect, we will examine the determination by the United States in respect of (i) whether the
US industry suffered serious damage, (ii) the cause of the serious damage and (iii) the attribution of
serious damage to Costa Rican imports.
The Scope of the Matter
7.26 We agree with the parties to the dispute that we should restrict our review to an examination
of the March Statement. We believe that statements subsequent to the March Statement should not
be viewed as a legally independent basis for establishing serious damage or actual threat thereof in
the present case. A restriction may be imposed, in a manner consistent with Article 6 of the ATC,
when based on a determination made in accordance with the procedure embodied in Article 6.2 and
6.4 of the ATC. This is precisely the role that the March Statement is called upon to play.
Consequently, to review the alleged inconsistency of the US action with the ATC, we must focus our
legal analysis on the March Statement as the relevant legal basis for the safeguard action taken by the
United States.
7.27 Costa Rica submitted to the Panel information concerning the bilateral negotiations that took
place between Costa Rica and the United States before and after the imposition of the restriction. More
specifically, Costa Rica submitted information relating to settlement offers made by the United States
concerning the level of the restriction to be imposed. In this respect, we note that Article 4.6 of the
DSU reads as follows:
"Consultations shall be confidential, and without prejudice to the rights of any Member
in any further proceedings."
In our view, the wording of Article 4.6 of the DSU makes it clear that offers made in the context of
consultations are, in case a mutually agreed solution is not reached, of no legal consequence to the
later stages of dispute settlement, as far as the rights of the parties to the dispute are concerned.
Consequently, we will not base our findings on such information.
Serious Damage
7.28 Article 6.2 of the ATC authorizes safeguard action following a demonstration that a particular
product is being imported in such increased quantities as to cause serious damage, or actual threat thereof,
to the domestic industry. The factors that should be taken into account in order to establish serious
damage are listed in Article 6.3 of the ATC, which reads as follows:
"In making a determination of serious damage, or actual threat thereof, as referred
to in paragraph 2, 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 investment; none of which, either alone or
combined with other factors, can necessarily give decisive guidance" (emphasis added).
The United States determination in this regard is contained in the March Statement.
7.29 The March Statement included under the heading "Market Situation" one sub-heading entitled
"Serious Damage to the Domestic Industry" (sub-heading A), which contained general information
about the effect of underwear imports in Category 352/652, and a second sub-heading "Industry
Statements" (sub-heading B), which summarized statements to the US authorities by individual US
companies. To some extent, there was an overlap between the information contained under the two
sub-headings. The same categories of information were equally discussed in a statement submitted
to the TMB by the United States in July 1995 (the" July Statement"). While we have concluded that
the July Statement should not be viewed as a legally independent basis for establishing serious damage
or actual threat thereof, we feel that we can legitimately take the July Statement into account as evidence
submitted by the United States in our assessment of the overall accuracy of the March Statement.
Consequently, we will use the July Statement for this limited purpose only. By doing so, we do not
share the concerns expressed by the United States that such use of the July Statement would impair
proceedings in the TMB in the future. We consider that a reluctance to submit updated information
would normally adversely affect Members concerned. The interest to cooperate as required by
Articles 6.7 and 6.9 of the ATC would prevail.
7.30 In the following paragraphs, we evaluate the information in the March Statement in light of
the economic variables listed in Article 6.3 of the ATC, to the extent and in the order that they were
raised in the March Statement.
Overview
7.31 The March Statement under the heading "Industry Profile" refers to 395 establishments that
manufacture cotton and man-made fibre underwear, while the July Statement under the same heading
refers to "approximately 302 establishments". In our view, this basic and substantial inconsistency
concerning the scope of the domestic industry raises serious questions about the accuracy of the
information contained in the March Statement and the conclusion that serious damage exists.
Output (US Production)
7.32 The March Statement contains general information on the evolution of US production of
underwear. In this connection, however, Costa Rica argues that the US restriction was introduced
to protect the US fabric-producing industry and not the US underwear industry. We see two aspects
to this argument. First, this argument may be viewed as a claim that the United States had not
demonstrated the existence of serious damage to the US domestic industry producing products that
were like and/or directly competitive with products imported from Costa Rica (i.e., underwear). In
this connection, we do not see anywhere in the March Statement where fabric producers were treated
as the domestic industry. Rather, the Statement consistently refers to the industry that manufactures
"cotton and man-made fibre underwear", which is the subject of the restriction in question. The statistics
all purport to relate to that industry. Thus, the claim by Costa Rica would seem to lack a factual basis.
7.33 There is, however, a second aspect to Costa Rica's argument. The parties agree that the industry
situation within the United Sates is different between those manufacturers that produce underwear in
a totally domestic process and those that utilize the outward processing regime ("807 or 807A trade").
The manufacturers in the latter category are engaged in the cutting process, while assembly of the cut
pieces is contracted out to overseas manufacturers and then the finished products are re-imported by
the US manufacturers for sale in the US market. It is quite possible that in the case of increased imports

damage could occur to manufacturers in the former category, while those in the latter category could
see their position improve. The March Statement contains no breakdown of the effect of imports on
these two components of the US industry. That such an analysis would have been appropriate is
indirectly confirmed by statements of the United States, which recognize that the nature of the effect
of 807 or 807A trade on the domestic industry could be significantly different than non 807/807A trade
(paragraph 5.158).
7.34 Finally, we would note that the general statistics on declining production of underwear only
weakly support a demonstration of serious damage. For example, if those firms with declining underwear
production shifted their capacity to other products (see below under "Utilization of Capacity", where
this is reported as occurring), then it is quite possible that neither the firms nor their workers would
be seriously damaged. This uncertainty about the relation of production declines to serious damage
arises because of the limited statistics and cursory analysis contained in the March Statement.
Market Share (Market Share Loss/Import Penetration)
7.35 The March Statement contains general information on the market share of US underwear
producers and on import penetration levels. As noted in the preceding paragraph, however, the failure
of the March Statement to analyze the extent of 807 or 807A trade detracts from its conclusion that
serious damage was caused by the increase in imports.
7.36 With respect to the US analysis of imports, Costa Rica argues the volume of importation is
overstated because 807/807A trade should not be counted as imports by the United States. We disagree
with this assertion. Article 6.6(d) of the ATC clearly acknowledges the possibility that Members might
impose restrictions on re-imports "as defined by the laws and practices of the importing Member".
According to the United States, 807/807A trade is considered as re-imports. Consequently, the
United States could consider 807 and 807A trade originating in Costa Rica in its analysis of whether
the US underwear industry had suffered serious damage and could impose a restraint on such trade,
provided that the rest of the conditions of Article 6 of the ATC were met.
Employment
7.37 With respect to "Employment", the March Statement reads as follows:
"Employment in the US cotton and man-made fibre underwear industry dropped from
46,377 production workers in 1992 to 44,056 workers in 1994, a five percent decline
and a loss of 2,321 employees".
The same heading in the July Statement reads as follows:
"Employment in the US cotton and man-made fibre underwear industry dropped from
35,191 production workers in 1992 to 33,309 workers in 1994, a five percent decline
and a loss of 1,882 employees".
As we noted in respect of the general industry description discussed above, the extent of the discrepancy
between the statistics in the March and July Statements, which purported to cover the same time period,
raises questions about the accuracy of the information contained in the March Statement. This concern
was not alleviated by the industry statement in sub-heading B since information as to employment was
obtained from only two companies out of the more than 300 establishments in the industry, of which
only one was apparently suffering damage. The March Statement reads in this respect as follows:
"... one company reported that employees were also being transferred to production
of other types of garments. Employment losses have also occurred because of import-

related plant closing. A company that has already closed two plants employing 165
workers is anticipating two additional closures in 1995 representing total employment
of about 400".
Man-Hours
7.38 Under the heading "Man-Hours", the March Statement reads as follows:
"Average annual man-hours dropped from 86.2 million in 1992 to 81.5 million in 1994,
a five per cent decline."
The same heading in the July Statement reads as follows:
"Average annual man-hours worked dropped from 65.4 million in 1992 to 61.6 million
in 1994, a six per cent decline."
In our view, as expressed above, the extent of the discrepancy in the information included in the two
statements casts doubts as to the sufficient accuracy of the data included in the March Statement.
Sales
7.39 The March Statement reads as follows:
"Sales have slowed, and one company reported that their sales were down about
17 per cent in 1994".
The information on only one company, however, does not suffice, in our view, to support the general
statement that sales have slowed.
Profits
7.40 The March Statement reads as follows:
"Profits were down 18 per cent at one firm, and there is pressure on the bottom line
throughout the industry due to rising costs and stiff import competition".
Again, information on only one company does not suffice, in our view, to support the general statement
that profits were under "pressure" (whatever that may mean) generally.
Investment
7.41 The March Statement reads as follows:
"Because of the impact of imports and the uncertainty they have caused in the market,
US companies generally have been postponing investment in this industry. Some
companies have closed plants permanently or shifted production off-shore, and additional
disinvestment of this nature is being contemplated by underwear manufacturing firms".
In our view, the information contained in this statement is not sufficiently conclusive. We fail to see,
for reasons discussed above (paragraph 7.34), a sufficient causal link between imports and "postponing
investment" in the US industry. Moreover, the second sentence of this statement is indefinite ("some
companies") and merely speculative ("is being contemplated") and cannot support any definite conclusion

on the reasons why investment were slowing down in the United States. Finally, we note the absence
of any statistics on, or analysis of, the evolution of investment in the US industry.
Utilization of Capacity
7.42 The March Statement reads as follows:
"Because of the import competition, firms report shifting production capacity to other
product lines including outerwear".
Again, the statement is vague as no quantification is given. Moreover, it is not clear that a shift of
production, as opposed to a decline, would support the determination of serious damage in any event.
Prices
7.43 The March Statement indicates that the US producers' average price was $30.00 per dozen
in 1994, while the July Statement indicates that the average US price was $20.00 per dozen. The extent
of this discrepancy between the March and July Statements raises serious questions about the accuracy
of the information contained in the March Statement.
7.44 In addition, in respect of "Prices", the March Statement reads as follows:
"Import prices in these sectors have been very low which has placed considerable
pressure on domestic producers:
(a) Raw cotton costs in the United States have increased substantially, seriously
eroding US underwear producers' margins. These cost increases have not been
recouped because prices cannot be raised without becoming uncompetitive with
imports.
(b) Competing imports enjoy a price edge over domestically produced goods
because the imports are produced with lower priced foreign fabric which often
reflects a subsidized cotton price. As a result of the increased import market
share in underwear, average retail prices of underwear in the United States
have generally declined during the past two years at a time when US
manufacturers' costs, particularly for raw cotton, have increased substantially.
This development has seriously eroded the profitability of US underwear
manufacturing".
It could be argued that points (a) and (b) show that the damage to the US industry was not due only
to imports, but also to increases in the US price for raw cotton. The relative importance of these two
causes is not analyzed. There is, for example, no discussion of why US cotton prices increased and,
more to the point, whether the price increases are expected to continue in effect. Moreover, to the
extent that imports are 807A trade, the increase in cotton prices would be reflected in their prices as
well, but here again there was no consideration of 807A trade in respect of this item. Finally, we find
that the conclusion that profitability has been "seriously eroded" is not sufficiently precise to serve
as a basis for establishing serious damage.
7.45 In conclusion, in our view, the information submitted in the March Statement under the heading
"Market Situation" suffers from two important weaknesses: the information insome cases isinconsistent
with other information later submitted by the United States to the TMB and in other cases is inadequate
to demonstrate serious damage to the US industry. This latter problem is generally true in respect
of the information supplied by specific companies in sub-heading B, where the March Statement typically

refers to only one or two companies of indeterminate size or market share out of an industry consisting
of 395 establishments. Moreover, while there are general statistics on declines in production and market
share, there is no information at all on the general state and performance of the US underwear industry.
For example, the discussion of profits in the industry refers to only one company. In this connection
generally, we note that the TMB, in its more fact-intensive review in accordance with Article 8.3 of
the ATC, has by consensus concluded in this case that there was absence of serious damage caused
to the US industry. The weaknesses in the March Statement that are discussed above raise considerable
doubts as to whether serious damage has been demonstrated. However, we refrain from making a
finding on this point of law. The factors listed in Article 6.3 of the ATC do not provide sufficient
and exclusive guidance in this case. We are, therefore, not in a position to conclude that the United
States has failed to demonstrate serious damage or actual threat thereof.
Causality
7.46 In addition toestablishing serious damage or actual threat thereof, the United States was required
to demonstrate that such damage or threat was caused by imports. Article 6.2 of the ATC, second
sentence, reads as follows:
"Serious damage or actual threat thereof must demonstrably be caused by suchincreased
quantities in total imports of that product and not by such other factors as technological
changes or changes in consumer preference" (emphasis added).
Nowhere in the March Statement could we find a discussion or demonstration of causality as required
under this provision, beyond the mere statement that the imports were responsible for the damage.
This assertion is inadequate, in our view, because of special factors affecting trade in underwear between
the United States and a number of exporting Members including Costa Rica. (As noted above, most
of this trade with Costa Rica -- at least 94 per cent -- is apparently 807 or 807A trade.) While such
trade may certainly cause damage to the domestic industry, the nature of the trade is such that it may
benefit the domestic firms that participate in it (see paragraph 7.44). Thus, in a discussion of whether
such trade has caused serious damage, it is necessary to look at this trade to determine its effects on
the industry. Because of the nature of the trade it is not possible in these circumstances to conclude
from the simple fact that there has been a fall in production that there has also been serious damage.
The March Statement undertakes no such discussion. Moreover, the March Statement suggests other
possible causes of serious damage, such as rising cotton prices (see paragraph 7.44), but does not
consider their role as a cause of such damage. Thus, it cannot be said that the March Statement
"demonstrably" shows that serious damage was caused by increased levels of imports. We find,
therefore, that an objective assessment of the March Statement leads to the conclusion that the United
States failed to comply with its obligations under Article 6.2 of the ATC by imposing a restriction
on imports of Costa Rican underwear without adequately demonstrating that increased imports had
caused serious damage.
Attribution of Serious Damage to Costa Rica
7.47 We now turn to the issue of whether the March Statement adequately attributed serious damage
to Costa Rica. Article 6.4 of the ATC requires the attribution of serious damage, or actual threat thereof,
to a Member or Members before their imports may be restricted. This also raises an issue of causality
since attribution results in a direct linkage being drawn between exports from a particular Member
or Members and serious damage to the domestic industry of the importing Member. The question
facing the CITA in the present case was whether Costa Rican exports contributed to serious damage
in the US domestic industry. Since the US authorities have attributed serious damage in the present
case to imports from Costa Rica, all of the deficiencies with respect to the analysis of serious damage
and causality that are detailed in the preceding sections are relevant to the analysis under Article 6.4
of the ATC.

7.48 With respect to serious damage attributed to imports from Costa Rica, the March Statement
reads as follows:
"The sharp and substantial increase of low priced imports from Costa Rica is causing
serious damage to the US domestic industry producing cotton and man-made fibre
underwear.
"US imports of cotton and man-made fibre underwear, Category 352/652, from Costa
Rica reached 14,423,178 dozen in 1994, 22 per cent above the 11,844,331 dozen
imported in 1993 and 61 per cent above its 1992 level.
"US imports of cotton and man-made fibre underwear, from Costa Rica in Category
352/652, entered the US at an average landed duty-paid value of $9.39 per dozen,
69 per cent below U.S. producers' average price for cotton and man-made fibre
underwear.
"Costa Rica is the number two supplier of Category 352/652 imports with 15 per cent
of total US imports of Category 352/652 in 1994. Category 352/652 imports from
Costa Rica were equivalent to 8.8 per cent of US production of Category 352/652 in
the year ending September 1994."
7.49 Article 6.4 of the ATC requires that the attribution of serious damage to individual Members
be made on the basis of "a sharp and substantial increase in imports" and on the basis of "the level
of imports compared with imports from other sources, market share and import and domestic prices
... ". While there has been a significant increase in imports of underwear from Costa Rica, we would
note in overview that the position of Costa Rica in respect of each of these factors is not significantly
different from that of the other five exporting Members considered in the March Statement and that
the March Statement undertakes no comparative assessment of imports from Costa Rica and those five
exporting Members.
7.50 In our analysis of whether the US authorities appropriately attributed serious damage to Costa
Rican imports, we pay particular attention to the fact that imports into the United States from Costa
Rica had reached 14,423,178 dozen in 1994, an increase of 22 per cent during the period of investigation.
However, we also note the following facts: The restraint was imposed on Costa Rica on 23 June 1995;
Bilateral agreements were concluded with Colombia on 27 June 1995, with the Dominican Republic
on 25 June 1995 and with El Salvador on 6 July 1995; Later, agreements were concluded with Honduras
on 15 September 1995 and with Turkey on 19 July 1995. The United States imposed the restraint
on underwear imports from Costa Rica while, during the period that immediately ensued, it reached
agreement with five other exporters on quotas of 170,305,774 dozen, an increase of 478 per cent
compared to the actual exports from these countries during the period of investigation.
7.51 Thus, taking into account the US agreements with its other suppliers and the statement by the
United States that goods imported under 807A are not regarded as less damaging than non-GAL 807
and other imports (paragraph 5.159), we cannot reconcile the US restriction on imports from Costa
Rica with the requirements of attribution under Article 6.4 of the ATC. More specifically, in light
of the purpose of Article 6, we find that the United States cannot enter into agreements permitting
imports of 170,305,774 dozen units of a product (an increase of 478 per cent over then current import
levels) and at the same time claim that imports of 14,423,178 dozen units (an increase of 22 per cent
over then current import levels) are contributing to serious damage. In this regard, we recall the TMB's
consensus conclusion that the United States had not demonstrated that imports were causing serious
damage to the US underwear industry. We find therefore that an objective assessment of the March
Statement leads to the conclusion that the United States failed to comply with its obligations under

Article 6.4 of the ATC by imposing a restriction on imports of Costa Rican underwear without making
an adequate attribution of serious damage to such imports.24
7.52 In light of (i) the fact that restrictions under Article 6 of the ATC are to be applied only
sparingly, (ii) the fact that the United States has the burden of proving that it has complied with the
requirements of Article 6 of the ATC, (iii) the deficiencies detailed above in respect of the evidence
on the existence of serious damage, which raise serious questions in our view as to whether there was
serious damage shown under Article 6.2 at all, (iv) the fact that the United States failed to demonstrate
adequately that the cause of serious damage was imports, and (v) the fact that the United States
voluntarily agreed to accept import limits from other countries exporting underwear to the United States
that permitted increases over their current export levels that were far in excess of Costa Rica's export
levels to the United States, we conclude that the United States failed to demonstrate adequately in the
March Statement that its domestic industry suffered serious damage that could be attributed to Costa
Rican imports and thus, by imposing import restrictions on imports of Costa Rican underwear, the
United States failed to comply with its obligations under Article 6.2 and 6.4 of the ATC.
D. ACTUAL THREAT OF SERIOUS DAMAGE
7.53 We next turn to a question related to the scope of Costa Rica's basic claim: Whether the March
Statement contained a finding on actual threat of serious damage.
7.54 The United States argued before the Panel that the March Statement supports a finding on actual
threat. We note that the March Statement contains no reference to actual threat; the findings included
related exclusively to serious damage. We recall, however, that the parties to the dispute agreed that
the Diplomatic Note that was handed to Costa Rica along with the March Statement made reference
to actual threat of serious damage.
7.55 Article 6.2 and 6.4 of the ATC make reference to "serious damage, or actual threat thereof".
The word "thereof", in our view, clearly refers to "serious damage". The word "or" distinguishes
between "serious damage" and "actual threat thereof". In our view, "serious damage" refers to a situation
that has already occurred, whereas "actual threat of serious damage" refers to a situation existing at
present which might lead to serious damage in the future. Consequently, in our view, a finding on
"serious damage" requires the party that takes action to demonstrate that damage has already occurred,
whereas a finding on "actual threat of serious damage" requires the same party to demonstrate that,
unless action is taken, damage will most likely occur in the near future.25 The March Statement contains
no elements of such a prospective analysis.26 In our view, even if the mention of "actual threat" in
24We note that by the same reasoning we could have concluded that the United States failed to demonstrate
the existence of serious damage in the March Statement as required by Article 6.2 of the ATC. The fact that
the US underwear industry was able to accept and withstand such a huge inroad of products from the five other
exporting Members suggests that there was no serious damage to the industry in the first place. However, we
felt that the inadequacy of the US measure was more acutely represented in the attribution under Article 6.4,
which requires a source-specific or Member-by-Member analysis, as opposed to the analysis of total imports
under Article 6.2. See also our discussion in paragraph 7.45 above.
25See the panel reports on "United States - Measures Affecting Imports of Softwood Lumber from Canada",
adopted on 27 October 1993, BISD40S/358, paras. 402, 408; "New Zealand - Imports of Electrical Transformers
from Finland", op. cit., para. 4.8; and "Korea - Antidumping Duties on Imports of Polyacetal Resins from the
United States", op. cit., paras. 253, 272, 278.
26We note that the only elements that could be used in a prospective analysis were the following: in sub-heading
B ("Industry Statements") under "Employment", the March Statement reads: "A company ... is anticipating
(continued...)

the Diplomatic Note accompanying the March Statement were to be considered, the fact that the March
Statement made no reference to actual threat and contained no elements of such a prospective analysis
was dispositive per se. Consequently, we do not agree with the US argument that the March Statement
supports a finding on actual threat of serious damage.
E. OTHER CLAIMS
Article 6.6(d) of the ATC
7.56 Costa Rica claims that the United States violated Article 6.6(d) of the ATC by not granting
a more favourable treatment to Costa Rican imports under "807 trade". Article 6.6(d) of the ATC
reads as follows:
"In the application of the transitional safeguard, particular account shall be taken of
the interests of exporting Members as set out below:
(d) more favourable treatment shall be accorded to re-imports by a Member of
textile and clothing products which that Member has exported to another Member for
processing and subsequent reimportation, as defined by the laws and practices of the
importing Member, and subject to satisfactory control and certification procedures,
when these products are imported from a Member for which this type of trade represents
a significant proportion of its total exports of textiles and clothing".
7.57 The United States accepted before the Panel that "807 trade" should be considered a re-import
according to US laws. In our view, the legal issue before us is the interpretation of the term "more
favourable treatment". The "chapeau" to Article 6.6(d) of the ATC makes it clear that the more
favourable treatment must be granted "in the applicationof the transitional safeguard" (emphasis added).
This means, in our view, that Members availing themselves of the Article 6 transitional safeguard are
obliged to grant more favourable treatment to re-imports, independently of whether such treatment
has been previously rejected by the affected Member during the bilateral consultations or whether other
privileges were envisaged to be accorded to such a Member in negotiations based upon the implemented
safeguard measure. The term "more favourable treatment" is not further qualified in the ATC. We,
therefore, reject the United States argument (paragraph 5.157) that they had complied with Article 6.6(d)
of the ATC by offering Costa Rica enhanced access under GAL programmes during the course of the
consultations.
7.58 Costa Rica specifically argues in this respect that the United States was obliged to grant to
Costa Rican imports a quantitatively more favourable treatment. Costa Rica argues that the United States
was obliged to grant Costa Rica a quota larger than that under Article 6.8 of the ATC, which provides
that a quota cannot be fixed at a level:
"lower than the actual level of exports or imports from the Member concerned during
the 12-month period terminating two months preceding that month in which the request
for consultation was made".
26(...continued)
two additional closures in 1995 representing total employment of about 400". In the same sub-heading, under
"Investment", the March Statement reads: "... additional disinvestment of this nature is being contemplated
by underwear manufacturing firms". We note that both elements were used in the March Statement to support
a finding on serious damage. Even if, however, these elements were used to support a finding on actual threat,
they could hardly constitute adequate evidence of actual threat of serious damage.

We cannot fully share the approach advocated by Costa Rica. We agree with Costa Rica that
quantitatively more favourable treatment for the full three-year period is one of the options available
to Members in order to comply with the requirements of Article 6.6(d) of the ATC. We do not consider
it, however, to be the only option. In our view, a Member could, for example, comply with the
requirements under Article 6.6(d) of the ATC by imposing a restriction for a period shorter than three
years.
7.59 However, in our view, under Article 6.10 of the ATC, the level of Costa Rican imports required
to be admitted to the United States under an Article 6 of the ATC restraint was 14,423,178 dozen,
which equals the minimum level under Article 6.8. We reach this conclusion because of the following
two reasons: First, in the absence of a mutual agreement under Article 6.8, Article 6.10 authorizes
the application of "the" restraint. In our view, this reference points to Article 6.8. Second, the absence
of a minimum restraint level under Article 6.10, set at the level specified in Article 6.8, would
fundamentally undermine the balance of rights and obligations between exporting and importing Members
and any interest they might have to enter into negotiations. The restriction imposed on Costa Rican
imports under the implementing order of the March Statement was 14,423,178 dozen, i.e., identical
to the level required under Article 6.8 of the ATC, and did not make allowance for re-imports in a
quantitative way.27 Nor does the implementing order make allowance for re-imports in any other way.
We, consequently, conclude that the United States has violated its obligations under Article 6.6(d) of
the ATC.
Obligation to consult
7.60 We next examine Costa Rica's claim that the United States violated Article 6.7 of the ATC
by failing to hold consultations on the basis of actual threat of serious damage following the TMB's
conclusionthatthe existence of serious damage was notdemonstrated, sinceallthe bilateral consultations
were based on the March Statement which explicitly based its findings on the existence of serious
damage. We note that the United States maintains that the reference to "serious damage" in the March
statement was an abbreviated expression for "serious damage, or actual threat thereof" and the Diplomatic
Note to Costa Rica making the actual request for consultations in fact referred to "serious damage,
or actual threat thereof".
7.61 Since consultations under Article 6.7 are essentially a bilateral process and no official records
are kept, a panel generally is not in a position to know exactly what has been discussed during the
consultations. However, in our view, it is unnecessary to decide whether the basis of the consultations
in the present case was "serious damage" or "actual threat thereof", because we have already found
that the issue of actual threat did not dispose of this particular dispute. Both Costa Rica and the United
States agree that the March Statement should be the sole basis for the Panel to examine the legality
of the US action, and as noted above, in our view, the March Statement was not predicated on and
did not demonstrate the existence of actual threat.
Date of Application of the Restriction
7.62 Costa Rica argues that the United States retroactively applied the restriction in violation of
Article 6.10 of the ATC. The restriction was introduced on 23 June 1995 for a period of 12 months
starting on 27 March 1995, which was the date of the request for consultations under Article 6.7 of
the ATC. Although Article 6.10 of the ATC allows the importing country to "apply the restraint,
... within 30 days following the 60-day period for consultations", it is silent about the initial date from
which the restraint period should be calculated. In contrast, Article 3.5(i) of the Multifibre Arrangement
(MFA) stated that the restraint could be instituted "for the twelve-month period beginning on the day
27See the Implementing Order published in 60 Federal Register 32653, No. 121, 23 June 1995.

when the request was received by the participating exporting country or countries". Thus, the question
before the Panel is whether the silence of the ATC in this regard should be interpreted as prohibition
of a practice which was explicitly recognized under the MFA, and if so, what should be the appropriate
date from which the restraint period is to be calculated under the ATC.
7.63 In our view, this is not a question of retroactive application of a treaty to events that took place
before the entry into force of the treaty, as envisaged in Article 28 of the Vienna Convention on the
Law of Treaties (VCLT). Rather, it is a technical question regarding the opening date of a quota period.
7.64 Since the ATC is silent on this question, we will first examine how the matter is treated under
the provisions of the GATT 1994, which is an integral part of the WTO Agreement along with the
ATC. Article 1.6 of the ATC states that "[u]nless otherwise provided in this Agreement, its provisions
shall not affect the rights and obligations of Members under the provisions of the WTO Agreement
and the Multilateral Trade Agreements". Members assume under the WTO certain transparency
obligations when they implement trade-restrictive measures. Article X:2 of GATT 1994 is the relevant
provision, which reads:
"No measure of general application taken by any [Member] effecting an advance in
a rate of duty or other charge on imports under an established and uniform practice,
or imposing a new or more burdensome requirement, restriction or prohibition of
imports, or on the transfer of payments therefor, shall be enforced before such measure
has been officially published".
7.65 We note that Article X:1 of GATT 1994, which also uses the language "of general application",
includes "administrative rulings" in its scope. The mere fact that the restraint at issue was an
administrative order does not prevent us from concluding that the restraint was a measure of general
application. Nor does the fact that it was a country-specific measure exclude the possibility of it being
a measure of general application. If, for instance, the restraint was addressed to a specific company
or applied to a specific shipment, it would not have qualified as a measure of general application.
However, to the extent that the restraint affects an unidentified number of economic operators, including
domestic and foreign producers, we find it to be a measure of general application.
7.66 In the absence of a provision comparable to Article 3.5(i) of the MFA in the ATC, a Member's
obligation under this provision applies in the application of transitional safeguard measures for textiles.
If a Member sets the initial date of a restraint period as the date of the request for consultations, without
having officially published the content of the request for consultations, the Member is acting in violation
of Article X:2 of GATT 1994. Conversely, if the Member has published that information, specifying
the proposed restraint level and restraint period, it can, when implementing the restraint at a later time,
set the initial date as the date of the publication of the information, which could be the date of the request
for consultation if the information were published on the same day.
7.67 In this context, we note that the Panel report on the "Chilean Apples" case stated that "the
allocation of back-dated quotas, that is, quotas declared to have been filled at the time of their
announcement, did not conform to the requirements of Article XIII:3(b) and Article XIII:3 (c)" of the
GATT.28 While we agree with this conclusion, we note that the facts are different in the present case.
After having made the request for consultations on 27 March 1995, the United States published the
proposed restraint period and the restraint level in the Federal Register on 21 April 1995. The United
States therefore did not "back-date" the restraint period in the way which was found to be inconsistent
28"European Economic Community - Restrictions on Imports of Dessert Apples", Complaint by Chile, op. cit.,
at para. 12.26.

in the report on "Chilean Apples" since here it was made public well before the measure was imposed
on 23 June 1995.
7.68 Finally, we note the US argument that if the safeguard measure could only be applied starting
at some time later than the date of the request for consultations, there would be a flood of imports
in anticipation of the eventual restriction, which might defeat the whole purpose of the transitional
safeguard measure. We find this argument to be persuasive from a practical point of view. In order
to avoid such a consequence, in our view, all that is needed on the part of the importing country is
to publish the content of the request for consultations immediately.
7.69 In light of the foregoing, we conclude that the prevalent practice under the MFA of setting
the initial date of a restraint period as the date of request for consultations cannot be maintained under
the ATC. However, we note that if the importing country publishes the proposed restraint period and
restraint level after the request for consultations, it can later set the initial date of the restraint period
as the date of the publication of the proposed restraint. In the present case, the United States violated
its obligations under Article X:2 of GATT 1994 and consequently under Article 6.10 of the ATC by
setting the restraint period for 12 months starting on 27 March 1995. However, had it set the restraint
period starting on 21 April 1995, which was the date of the publication of the information about the
request for consultations, it would not have acted inconsistently with GATT 1994 or the ATC in respect
ofthe restraint period. The United States argues thatit did not"enforce" the restraint until 23 June 1995.
We note the US argument. However, in so far as the restraint was applied to exports from Costa Rica
which had taken place prior to the publication, it was implemented and therefore enforced within the
meaning of Article X:2 of GATT 1994.29
Article 2.4 of the ATC
7.70 In our view, a finding that the United States violated Article 2.4 of the ATC would depend
on a previous finding that the United States violated Article 6 of the ATC; conversely, a finding by
the Panel that the United States acted consistently with its obligations under Article 6 of the ATC would
automatically mean that Article 2.4 of the ATC was not violated.
7.71 We note our previous conclusion that the United States imposed the restriction in a manner
inconsistent with its obligations under Articles 6.2, 6.4 and 6.6(d) of the ATC. In our view, the United
States by violating its obligations under Article 6 of the ATC has ipso facto violated its obligations
under Article 2.4 of the ATC as well.
Article 8 of the ATC
7.72 Finally, we turn to Costa Rica's claim that the United States violated Article 8 of the ATC
by refusing to follow the recommendations made by the TMB and by failing to submit a report explaining
its inability to conform with the recommendations.
7.73 We have examined the contents of recommendations made by the TMB in the present case.
In the relevant part of its report, the TMB made the following recommendations after the review
conducted between 13 and 21 July 1995:
"During its review under paragraphs 2 and 3 of Article 6 of the safeguard action taken
by the United States against imports of category 352/652 from Costa Rica and Honduras,
the TMB found that serious damage, as envisaged in these provisions, had not been
29A similar conclusion was reached by the panel on "European Economic Community - Restrictions on Imports
of Apples", Complaint by the United States, adopted on 22 June 1989, BISD 36S/135, at para. 5.23.

demonstrated. The TMB could not, however, reach consensus on the existence of
actual threat of serious damage. The TMB recommended that further consultations
be held between the United States and the parties concerned, with a view to arriving
at a mutual understanding, bearing in mind the above, and with due consideration to
the particular features of this case, as well as equity considerations.
"These consultations shall be held consistent with the Agreement on Textiles and
Clothing, in particular with Articles 6 and 4, and be concluded within 30 days. Parties
shall report to the TMB on the outcome of such consultations no later than at the end
of that period."30
7.74 We note that the only obligation the United States assumed under these recommendations was
to hold consultations with Costa Rica regarding the safeguard action in question. The United States
and Costa Rica in fact held consultations on 16-17 August 1995. Therefore, we conclude that the
United States did not act inconsistently with its obligations under Article 8 of the ATC.
VIII RECOMMENDATION
8.1 Costa Rica requests the Panel to recommend if it reached the conclusion that the US restriction
was imposed in a manner inconsistent with the obligations of the United States under the ATC that
the United States withdraw the illegal act. The United States essentially argues that Article 19.1 of
the DSU prohibits panels from recommending such a remedy.
Article 19.1 of the DSU reads as follows:
"Where a panel or the Appellate Body concludes that a measure is inconsistent with
a covered agreement, it shall recommend that the member concerned bring the measure
into conformity with that agreement. In addition to its recommendations, the panel
or Appellate Body may suggest ways in which the member concerned could implement
the recommendations".
8.2 Under the second sentence of Article 19.1 of the DSU, panels can, in addition to their
recommendations, "suggest ways in which the Member concerned could implement the
recommendations".
8.3 We recall our conclusions that the United States violated its obligations under Article 6.2 and
6.4 of the ATC by imposing a restriction on Costa Rican exports without having demonstrated that
serious damage or actual threat thereof was caused by such imports to the US domestic industry and
under Article 6.6(d) of the ATC by not granting treatment more favourable to Costa Rican re-imports.
We further recall our conclusion that the United States violated its obligations under Article 2.4 of
the ATC by imposing a restriction in a manner inconsistent with its obligations under Article 6 of the
ATC. We also recall our conclusion that the United States violated its obligations under Article 6.10
of the ATC by setting the restraint period starting on the date of the request for consultations, rather
than the date of publication of that information. We, consequently, recommend that the Dispute
Settlement Bodyrequest the United States tobring themeasure challenged byCosta Rica into compliance
with US obligations under the ATC. We find that such compliance can best be achieved and further
nullification and impairment of benefits accruing to Costa Rica under the ATC best be avoided by prompt
removal of the measure inconsistent with the obligations of the United States. We further suggest that
the United States bring the measure challenged by Costa Rica into compliance with US obligations
under the ATC by immediately withdrawing the restriction imposed by the measure.
30Textiles Monitoring Body, Report of the Second Meeting (G/TMB/R/2), paras. 16 and 17.

MARCH 1995
STATEMENT OF SERIOUS DAMAGE: CATEGORY 352/652
Cotton and Man-made Fibre Underwear
Category 352/652
I. Product Description
Category 352/652 covers men's and boys', and women's and girls' underwear. The term
"underwear" refers to garments which are worn under other garments and are not exposed to view
when the wearer is conventionally dressed. Men's and boys' and women's and girls' knit underwear
is provided for in Harmonized Tariff Schedule (HTS) headings 6107, 6108 and 6109. Woven underwear
is provided for in HTS headings 6207 and 6208.
II. Industry Profile
There are approximately 395 establishments in the US that manufacture cotton and man-made
fibre underwear, Category 352/652. The establishments are located mainly in the Atlantic seaboard
states, especially New York, Pennsylvania, North Carolina, and Georgia. This industry employs close
to 6 per cent of the total apparel workers in the US, and the annual shipments from these establishments
at $3.2 billion account for approximately 5 per cent of the total annual apparel industry shipments.
The concentration of firms in this industry is higher in the men's and boys' underwear than
in the women's and girls'. In the men's and boys' segment, four firms account for over 60 per cent
of the shipments. The production of women's and girls' underwear is more diversified, largely because
women's underwear is subject to more fashion changes. As a result production is less standardized,
requiring different types of knitting machines and a greater number of workers employed. There is,
however, a large number of smaller producers which generally do not have integrated operations but
usually purchase fabric and then cut and sew it.
III. Market Situation
A. Serious Damage to the Domestic Industry
The sharp and substantial increase in imports of cotton and man-made fibre underwear,
Category 352/652, is causing serious damage to the US industry producing cotton and man-made
fibre underwear.
Category 352/652 imports surged from 65,507,000 dozen in 1992 to 79,962,000 dozen
in 1993, a 22 per cent increase. Cotton and man-made fibre underwear, Category 352/652,
imports continued to increase in 1994, reaching 97,375,000 dozen, 22 per cent above the
1993 level and 49 per cent above the level imported in 1992 (see Table I).
Serious damage to the domestic industry resulting from the sharp and substantial increase
in imports of cotton and man-made fibre underwear is attributed to imports from the Dominican
Republic, Costa Rica, Honduras, Thailand and Turkey.2 The combination of high import levels,
surging imports, and low-priced goods from these countries have resulted in loss of domestic
output, market share, investment, employment and man-hours worked.
2El Salvador and Colombia called under domestic legal authority not WTO.

MARCH 1995
STATEMENT OF SERIOUS DAMAGE: CATEGORY 352/652
1. US Production
US production of cotton and man-made fibre underwear, Category 352/652,
declined from 175,542,000 dozen in 1992 to 168,802,000 dozen in 1993, a decline
of 4 per cent. Production continued to decline in 1994, falling to 126,962,000 dozen
during the first nine months of 1994, 4 per cent below January-September 1993
production level (Table II).
2. Market Share Loss
The share of this market held by domestic manufacturers fell from 73 per cent
in 1992 to 68 per cent in 1993, a decline of five percentage points. The domestic
market share dropped to 65 per cent during the first nine months of 1994 (Table II).
3. Import Penetration
The ratio of imports todomestic production increased from 37 per cent in 1992
to 47 per cent in 1993, and reached 54 per cent during January-September 1994
(Table II).
4. Employment
Employment in the US cotton and man-made fibre underwear industry dropped
from 46,377 production workers in 1992 to 44,056 workers in 1994, a 5 per cent decline
and a loss of 2,321 employees (Table III).
5. Man-hours
Average annual man-hours worked dropped from 86.2 million in 1992 to
81.5 million in 1994, a 5 per cent decline (Table III).
B. Industry Statements
Based on a survey of individual firms producing cotton and man-made fibre underwear
the following conditions were reported. The observations are concentrated in the mens'
underwear sector but also include the even more heavily import-impacted ladies underwear
sector.
1. Employment
There have been layoffs in the sector and one company reported that employees
were also being transferred to production of other types of garments. Employment
losses have also occurred because of import-related plant closings. A company that
has already closed two plants employing 165 workers is anticipating two additional
closures in 1995 representing total employment of about 400.

MARCH 1995
STATEMENT OF SERIOUS DAMAGE: CATEGORY 352/652
2. Sales
Sales have slowed, and one company reported that their sales were down about
17 per cent in 1994.
3. Profits
Profits were down 18 per cent at one firm, and there is pressure on the bottom
line throughout the industry due to rising costs and stiff import competition.
4. Investment
Because of the impact of imports and the uncertainty they have caused in the
market, US companies generally have been postponing investment in this industry.
Some companies have closed plants permanently or shifted production offshore, and
additional disinvestment of this nature is being contemplated by underwear manufacturing
firms.
5. Capacity
Because of the import competition, firms report shifting production capacity
to other product lines including outerwear.
6. Prices
Import prices in these sectors have been very low which has placed considerable
pressure on domestic producers:
(a) Raw cotton costs in the US have increased substantially, seriously eroding US
underwear producers' margins. These cost increases have not been recouped
because prices cannot be raised without becoming uncompetitive with imports.
(b) Competing imports enjoy a price edge over domestically produced goods
because the imports are produced with lower priced foreign fabric which often
reflects a subsidized cotton price. As a result of the increased import market
share in underwear, average retail prices of underwear in the United States
have generally declined during the past two years at a time when US
manufacturers' costs, particularly for raw cotton, have increased substantially.
This development has seriously eroded the profitability of US underwear
manufacturing.

MARCH 1995
STATEMENT OF SERIOUS DAMAGE: CATEGORY 352/652
IV. Countries Contributing to Serious Damage: Category 352/652 (Table I, IV and V)
Serious damage, or actual threat thereof, to US producers of cotton and man-made fibre
underwear, Category 352/652, is attributed to the sharp and substantial increase in imports from the
Dominican Republic, Costa Rica, Honduras, Thailand and Turkey.3
Total imports from the five countries listed above increased from 22,675,508 dozen in 1992
to 40,293,259 dozen in 1994, a sharp and substantial increase of 78 per cent. As a group their imports
were up 32 per cent in 1994 over their 1993 level. Together their 1992 imports were 35 per cent of
total Category 352/652 imports. Their share of total category imports increased to 41 per cent in 1994.
A. Dominican Republic
The sharp and substantial increase of low-priced imports from the Dominican Republic
is causing serious damage to the US domestic industry producing cotton and man-made fibre
underwear.
US imports of cotton and man-made fibre underwear, Category 352/652, from the
Dominican Republic reached 16,442,148 dozen in 1994, 20 per cent above the 13,691,280 dozen
imported in 1993 and 60 per cent above its 1992 level.
US imports of cotton and man-made fibre underwear, from the Dominican Republic
in Category 352/652, entered the US at an average landed duty-paid value of $10.10 per dozen,
66 per cent below US producers' average price for cotton and man-made fibre underwear.
The Dominican Republic is the number one supplier of Category 352/652 imports with
17 per cent of total US imports of Category 352/652 in 1994. Category 352/652 imports from
the Dominican Republic in 1994 were equivalent to 10 per cent of US production of
Category 352/652 in the year ending September 1994.
B. Costa Rica
The sharp and substantial increase of low-priced imports from Costa Rica is causing
serious damage to the US domestic industry producing cotton and man-made fibre underwear.
US imports of cotton and man-made fibre underwear, Category 352/652, from
Costa Rica reached 14,423,178 dozen in 1994, 22 per cent above the 11,844,331 dozen imported
in 1993 and 61 per cent above its 1992 level.
US imports of cotton and man-made fibre underwear, from Costa Rica in
Category 352/652, entered the US at an average landed duty-paid value of $9.39 per dozen,
69 per cent below US producers' average price for cotton and man-made fibre underwear.
3El Salvador and Colombia called under domestic legal authority not WTO.

MARCH 1995
STATEMENT OF SERIOUS DAMAGE: CATEGORY 352/652
Costa Rica is the number two supplier of Category 352/652 imports with 15 per cent
of total US imports of Category 352/652 in 1994. Category 352/652 imports from Costa Rica
were equivalent to 8.8 per cent of US production of Category 352/652 in the year ending
September 1994.
C. Honduras
The sharp and substantial increase of low-priced imports from Honduras is causing
serious damage to the US domestic industry producing cotton and man-made fibre underwear.
US imports of cotton and man-made fibre underwear, Category 352/652, from Honduras
reached 6,550,810 dozen in 1994, 108 per cent above the 3,153,608 dozen imported in 1993
and 182 per cent above its 1992 level.
US imports of cotton and man-made fibre underwear, from Honduras in
Category 352/652, entered the US at an average landed duty-paid value of $11.39 per dozen,
62 per cent below US producers' average price for cotton and man-made fibre underwear.
Imports from Honduras were 6.7 per cent of total US imports of Category 352/652
in 1994, and were equivalent to 4 per cent of US production of Category 352/652 in the year
ending September 1994.
D. Thailand
The sharp and substantial increase of low-priced imports from Thailand is causing serious
damage to the US domestic industry producing cotton and man-made fibre underwear.
US imports of cotton and man-made fibre underwear, Category 352/652, from Thailand
reached 1,586,005 dozen in 1994, 20 per cent above the 1,323,116 dozen imported in 1993
and nearly double its 1992 level.
US imports of cotton and man-made fibre underwear, from Thailand in
Category 352/652, entered the US at an average landed duty-paid value of $18.58 per dozen,
38 per cent below US producers' average price for cotton and man-made fibre underwear.
Imports from Thailand were 1.6 per cent of total US imports of Category 352/652
in 1994, and were equivalent to nearly 1 per cent of US production of Category 352/652 in
the year ending September 1994.
E. Turkey
The sharp and substantial increase of low-priced imports from Turkey is causing serious
damage to the US domestic industry producing cotton and man-made fibre underwear.

MARCH 1995
STATEMENT OF SERIOUS DAMAGE: CATEGORY 352/652
US imports of cotton and man-made fibre underwear, Category 352/652, from Turkey
reached 1,291,118 dozen in 1994, 133 per cent above the 553,442 dozen imported in 1993
and two and a half times its 1992 level.
US imports of cotton and man-made fibre underwear, from Turkey in Category 352/652,
entered the US at an average landed duty-paid value of $10.43 per dozen, 65 per cent below
US producers' average price for cotton and man-made fibre underwear.
Imports from Turkey were 1.3 per cent of total US imports of Category 352/652 in 1994,
and were equivalent to 0.8 per cent of US production of Category 352/652 in the year ending
September 1994.

MARCH 1995
STATEMENT OF SERIOUS DAMAGE: CATEGORY 352/652
Table I
US Imports from Selected Suppliers
Cotton and Man-made Fibre Underwear
Category 352/652
(Dozen)
1992 1993 1994 94/92
% Change
94/93
% Change
World 65,507,078 79,961,555 97,375,350 48.65 21.78
Dominican
Republic
10,264,139 13,691,280 16,442,148 60.19 20.09
Costa Rica 8,935,565 11,844,331 14,423,178 61.41 21.77
Honduras 2,318,683 3,153,608 6,550,810 182.52 107.72
Thailand 796,235 1,323,116 1,586,005 99.19 19.87
Turkey 360,886 553,442 1,291,118 257.76 133.29
TOTAL 22,675,508 30,565,777 40,293,259 77.7 31.8
Table II
Category 352/652
Cotton and Man-made Fibre Underwear
US Production, Imports, Market, Import/Production Ratio and Domestic Market Share
Period Production1 Imports Market2 I/P Domestic
Market
Share
1,000 dozen Per cent
1992 175,542 65,507 241,049 37 73
1993 168,802 79,962 248,764 47 68
Year Ending September
1993 175,392 77,368 252,760 44 69
1994 164,252 88,961 253,213 54 65
January-September
1993 131,512 59,388 190,900 45 69
1994 126,962 68,387 195,349 54 65
1A new benchmark was established with the 1992 Census of Manufacturers Survey, therefore, US apparel
production data for 1992 forward is not comparable to previous years' data.
2US market for domestically produced and imported cotton and man-made fibre underwear.

MARCH 1995
STATEMENT OF SERIOUS DAMAGE: CATEGORY 352/652
Table III
Employment Data for Industry1 Producing Cotton and Man-made Fibre Underwear
Category 352/652
Employment Data 1992 1993 1994
Number of Production Workers 46,377 44,379 44,056
Average Weekly Hours 35.8 37.1 35.6
Average Annual Manhours (million) 86.2 82.5 81.5
Table IV
Average Landed Duty-Paid Value of Imports of Cotton and Man-made Fibre Underwear
Category 352/652
1994 Unit Value
($ per Doz)
% Above or Below US
Producers' Price
US Producers' Average Price 30.00
World 12.11 -60
Thailand 18.58 -38
Honduras 11.39 -62
Turkey 10.43 -65
Dominican Republic 10.10 -66
Costa Rica 9.39 -69
Table V
Selected Suppliers' Share of Imports and Production
Cotton and Man-made Fibre Underwear
Category 352/652
(Dozen)
1992
% of Imports
1994
% of Imports
1992
% of Production
Y/E 9/1994
% of Production
World 100.0 100.0 37.3 59.3
Dominican Republic 15.7 16.9 5.8 10.0
Costa Rica 13.6 14.8 5.1 8.8
Honduras 3.5 6.7 1.3 4.0
Thailand 1.2 1.6 0.5 1.0
Turkey 0.6 1.3 0.2 0.8
Total 34.6 41.4 12.9 24.5
1Data derived from 1992 US Census of manufacturers, Apparel Current Industrial Reports, and data from
the Bureau of Labor Statistics.

MARCH 1995
STATEMENT OF SERIOUS DAMAGE: CATEGORY 352/652
Table VI
Suppliers Report
Cotton and Man-made Fibre Underwear
Category 352/652
(Data in Dozens)
CalendarYears Year-to-date Year-endings YE 12/94
Country 1992 1993 12/93 12/94 % Change 12/93 10/94 11/94 12/94 % Change %
Share
World 65,507,078 79,961,555 79,961,555 97,375,350 21.78 79,961,555 91,625,866 94,555,451 97,375,350 21.78 100.00
Dom Rep 10,264,139 13,691,280 13,691,280 16,442,148 20.09 13,691,280 15,676,793 15,902,873 16,442,148 20.09 16.89
C Rica 8,935,565 11,844,331 11,844,331 14,423,178 21.77 11,844,331 13,846,643 14,196,660 14,423,178 21.77 14.81
SL Jamaica 6,596,435 8,106,198 8,106,198 9,978,577 23.10 8,106,198 9,169,675 9,665,903 9,978,577 23.10 10.25
FTAs1 5,490,979 6,464,009 6,464,009 9,860,275 52.54 6,464,009 8,743,600 9,344,737 9,860,275 52.54 10.13
SL Hg Kong 9,169,333 9,085,459 9,085,459 9,541,766 5.02 9,085,459 10,401,446 9,995,260 9,541,766 5.02 9.80
Bangladesh 5,164,020 6,819,003 6,819,003 7,830,510 14.83 6,819,003 7,127,727 7,527,240 7,830,510 14.83 8.04
Honduras 2,318,683 3,153,608 3,153,608 6,550,810 107.72 3,153,608 5,421,420 5,983,533 6,550,810 107.72 6.73
El Salvador 765,769 2,053,364 2,053,364 3,687,034 79.56 2,053,364 3,243,942 3,478,203 3,687,034 79.56 3.79
SL China P 4,437,640 3,484,724 3,484,724 3,562,255 2.22 3,484,724 3,302,675 3,373,159 3,562,255 2.22 3.66
SL China T 2,409,266 2,685,501 2,685,501 2,063,022 -23.18 2,685,501 2,254,257 2,176,921 2,063,022 -23.18 2.12
Thailand 796,235 1,323,116 1,323,116 1,586,005 19.87 1,323,116 1,463,139 1,512,123 1,586,005 19.87 1.63
Colombia 578,279 1,032,210 1,032,210 1,509,880 46.28 1,032,210 1,328,882 1,430,758 1,509,880 46.28 1.55
SL Phil R 2,048,570 1,727,028 1,727,028 1,478,666 -14.38 1,727,028 1,420,086 1,463,627 1,478,666 -14.38 1.52
Turkey 360,886 553,442 553,442 1,291,118 133.29 553,442 1,115,084 1,177,758 1,291,118 133.29 1.33
SL Sri Lanka 798,776 989,448 989,448 1,137,616 14.97 989,448 1,120,226 1,099,663 1,137,616 14.97 1.17
Guatemala 326,737 828,515 828,515 959,160 15.77 828,515 950,353 941,687 959,160 15.77 0.99
Bahrain 137,417 716,778 716,778 691,230 -3.56 716,778 704,461 671,224 691,230 -3.56 0.71
Panama 145,468 393,336 393,336 502,240 27.69 393,336 543,352 520,857 502,240 27.69 0.52
SL Mauritius 609,979 862,584 862,584 494,726 -42.65 862,584 487,706 526,852 494,726 -42.65 0.51
Indonesia 443,659 383,209 383,209 459,638 19.94 383,209 382,965 437,614 459,638 19.94 0.47
Macau 163,885 81,710 81,710 404,474 395.01 81,710 149,441 296,165 404,474 395.01 0.42
SL Pakistan 376,607 430,932 430,932 391,567 -9.13 430,932 373,324 384,040 391,567 -9.13 0.40
Malaysia 303,221 355,939 355,939 375,266 5.43 355,939 317,227 330,718 375,266 5.43 0.39
EC152 473,808 414,549 414,549 352,212 -15.04 414,549 364,664 362,983 352,212 -15.04 0.36
Haiti 923,951 872,826 872,826 228,920 -73.77 872,826 302,108 261,023 228,920 -73.77 0.24
Kor Rep 184,097 174,729 174,729 167,517 -4.13 174,729 149,556 150,762 167,517 -4.13 0.17
Guyana 124,382 83,955 83,955 160,373 91.02 83,955 127,108 145,311 160,373 91.02 0.16
Swaziland 64,290 148,958 148,958 147,389 -1.05 148,958 119,311 148,291 147,389 -1.05 0.15
Chile 11,990 84,730 84,730 128,507 51.67 84,730 147,957 135,107 128,507 51.67 0.13
Myanmar 0 0 0 125,705 * 0 48,125 71,126 125,705 * 0.13
Nicaragua 0 24,651 24,651 125,625 409.61 24,651 134,632 133,028 125,625 409.61 0.13
Bulgaria 0 123,367 123,367 119,775 -2.91 123,367 110,211 119,775 119,775 -2.91 0.12
Brazil 80,027 64,349 64,349 93,206 44.84 64,349 80,935 88,630 93,206 44.84 0.10
Egypt 203,163 29,528 29,528 82,926 180.84 29,528 75,854 81,133 82,926 180.84 0.09
SL Arab Em 1,000 50,388 50,388 55,598 10.34 50,388 50,302 50,552 55,598 10.34 0.06
Peru 74,285 85,630 85,630 51,302 -40.09 85,630 34,173 47,298 51,302 -40.09 0.05
1Free Trade Arrangements: Canada, Mexico, Israel.
2European Union.

MARCH 1995
STATEMENT OF SERIOUS DAMAGE: CATEGORY 352/652
Table VI (continued)
Suppliers Report
Cotton and Man-made Fibre Underwear
Category 352/652
(Data in Dozens)
CalendarYears Year-to-date Year-endings YE 12/94
Country 1992 1993 12/93 12/94 % Change 12/93 10/94 11/94 12/94 % Change %
Share
Syria 49,458 64,088 64,088 42,752 -33.29 64,088 47,680 46,832 42,752 -33.29 0.04
Mongolia 0 0 0 35,664 * 0 25,104 25,104 35,664 * 0.04
Ecuador 21,150 53,566 53,566 34,512 -35.57 53,566 45,523 41,821 34,512 -35.57 0.04
Australia 7,774 16,875 16,875 24,613 45.85 16,875 24,562 24,307 24,613 45.85 0.03
Barbados 23,778 31,977 31,977 24,290 -23.41 31,977 22,965 23,191 24,490 -23.41 0.03
Lesotho 375 11,748 11,748 21,248 80.86 11,748 26,848 21,248 21,248 80.86 0.02
S Lucia 14,939 21,324 21,324 20,457 -4.07 21,324 20,548 20,344 20,457 -4.07 0.02
India 851 4,832 4,832 14,885 208.05 4,832 7,650 11,689 14,885 208.05 0.02
Palau 0 0 0 13,044 * 0 13,044 13,044 13,044 * 0.01
Singapore 36,474 51,590 51,590 11,286 -78.12 51,590 17,010 13,111 11,286 -78.12 0.01
Switzerland 11,738 8,977 8,977 10,557 17.60 8,977 9,588 9,727 10,557 17.60 0.01
Japan 12,353 6,602 6,602 9,344 41.53 6,602 7,611 8,045 9,344 41.53 0.01
Qatar 6,950 0 0 8,890 * 0 5,408 8,890 8,890 * 0.01
Dominica 0 0 0 6,397 * 0 0 0 6,397 * 0.01
Maldives 153,021 177,739 177,739 5,174 -97.09 177,739 12,247 5,570 5,174 -97.09 0.01
Russia * 4,836 4,836 4,913 1.59 4,836 3,345 4,913 4,913 1.59 0.01
Nepal 0 0 0 3,465 * 0 0 3,264 3,465 * 0.00
Ukraine * 10,418 10,418 3,342 -67.92 10,418 9,142 9,142 3,342 -67.92 0.00
Jordan 0 139 139 3,150 2,166.19 139 3,289 3,289 3,150 2,166.19 0.00
St Kitts N 133,297 119,810 119,810 2,891 -97.59 119,810 22,382 15,119 2,891 -97.59 0.00
Venezuela 141,555 2,363 2,363 2,387 1.02 2,363 3,221 2,721 2,387 1.02 0.00
Poland 0 2 2 2,030 101,400.00 2 0 1,870 2,030 101,400.00 0.00
Lebanon 419 63,702 63,702 1,607 -97.48 63,702 1,448 1,607 1,607 -97.48 0.00
Rep S Af 0 538 538 1,365 153.72 538 1,365 1,365 1,365 153.72 0.00
Cyprus 7,512 10,144 10,144 1,334 -86.85 10,144 1,334 1,334 1,334 -86.85 0.00
Trinidad 0 808 808 1,165 44.18 808 1,165 1,165 1,165 44.18 0.00
Fiji 89,754 0 0 990 * 0 990 990 990 * 0.00
Tokelau 0 6 6 790 13,066.67 6 790 790 790 13,066.67 0.00
N Zealand 37 68 68 687 910.29 68 731 731 687 910.29 0.00
Oman 0 464 464 655 41.16 464 655 655 655 41.16 0.00
CocosIs. 0 0 0 442 * 0 442 442 442 * 0.00
St. Vincent 0 0 0 124 * 0 124 124 124 * 0.00
N Antilles 0 0 0 77 * 0 77 77 77 * 0.00
Vietnam 0 0 0 73 * 0 73 73 73 * 0.00
Tunisia 0 52 52 71 36.34 52 18 24 71 36.54 0.00
Brunei 0 0 0 60 * 0 60 60 60 * 0.00
Morocco 546 61 61 44 -27.87 61 11 11 44 -27.87 0.00
Monsrat 0 0 0 42 * 0 42 42 42 * 0.00
Romania 0 0 0 40 * 0 0 40 40 * 0.00
Hungary 4,452 0 0 30 * 0 30 30 30 * 0.00
Malta 0 0 0 21 * 0 21 21 21 * 0.00
Slovenia * 0 0 13 * 0 0 13 13 * 0.00
Zimbabwe 0 0 0 7 * 0 7 7 7 * 0.00
Norway 441 23 23 6 -73.91 23 9 15 6 -73.91 0.00