On February 8th, a WTO panel report was released to the public on a U.S. safeguard case on imports of large residential washers. A challenge to the U.S. action was filed at the WTO by Korea on May 18, 2018 after safeguard relief was provided by the U.S. beginning February 7, 2018. The panel process was complicated by COVID restrictions on in person meetings. The challenge was to the U.S. International Trade Commission’s affirmative serious injury determination and remedy recommendation from December 2017 and the President’s issuance of import relief in late January 2018. See USITC, Large Residential Washers, Inv. No. TA 201 076, USITC Pub. 4745 (December 2017); Presidential Documents, Proclamation 9694 of January 23, 2018 – To Facilitate Positive Adjustment to Competition from Imports of Large Residential Washers, 83 FR 3553 (25 January 2018). As noted in footnote 11 to the Panel Report, “We note that in its comments to the Descriptive Part of the Panel Report, Korea noted that the safeguard measure at issue was extended on 14 January 2021 for two additional years, through 7 February 2023. (Korea’s comments to the Descriptive Part of the Panel Report (referring to US notification to the WTO, G/SG/N/10/USA/8/Suppl.7)).” WT/DS546/R at 10 fn. 11.

The panel found a number of aspects of the USITC determination and Presidential action to be contrary to U.S. obligations. The violations by and large raise important questions about needed reforms to GATT 1994 Art. XIX and the Agreement on Safeguards to ensure a functioning safeguard remedy as well as the proper role of dispute settlement in such cases. At the same time, a large number of challenges by Korea were rejected by the panel through the correct application of burden of proof and standard of review of administrative findings. Thus, the U.S. will have to decide if it will appeal the panel report, agree to its adoption or seek some other form of resolution with Korea.

GATT Art. XIX:1(a)

The first “violation” of obligations found by the panel reflects prior Appellate Body findings that provisions of Article XIX permit safeguard actions only where there are unforeseen developments and the problems are from the effects of obligations incurred by Members. The panel, following earlier decisions, found that these factors had to be explained and justified in the USITC determination and not raised after the fact during the dispute. WT/DS546/R at part 7.2, page 13-19. The concluding paragraph states, “7.35. In light of the above, we find that the USITC acted inconsistently with Article XIX:1(a) of the GATT 1994 and Article 3.1 of the Agreement on Safeguards because its report does not contain a reasoned and adequate explanation on ‘unforeseen developments’ and the ‘obligations incurred’ by the United States, within the meaning of Article XIX:1(a) of the GATT 1994.”

In the USTR report on the Appellate Body of the World Trade Organization from February 2020, USTR flagged six particularly eggregious decision areas of the Appellate Body that reflected the range of problems of concern to the United States. The fifth area was “The Appellate Body’s Non-Text-Based Interpretation of Article XIX of the GATT 1994 and the Safeguards Agreement Undermines the Ability of WTO Members to Use Safeguards Measures”. Report at 110-114, https://ustr.gov/sites/default/files/Report_on_the_Appellate_Body_of_the_World_Trade_Organization.pdf. The segment from the USTR Report is copied below.

“E. The Appellate Body’s Non-Text-Based Interpretation of Article XIX of the GATT 1994 and the Safeguards Agreement Undermines the Ability of WTO Members to Use Safeguards Measures

“• WTO Members specifically reserved for themselves the right to impose safeguard measures to protect their industries from import surges that cause or threaten to cause serious injury.

“• The Appellate Body has diminished this right by inventing additional requirements for the imposition of safeguards that Members never agreed to.

“• For example, the Appellate Body has found that prior to taking a safeguard action, a Member’s competent authority must include in its report a demonstration of the existence of ‘unforeseen developments,’ despite the absence of any such requirement in the GATT 1994 or the Safeguards Agreement.

“• The Appellate Body has also departed from the WTO agreements in creating a high threshold for serious injury determinations under the Safeguards Agreement.

“• Through the imposition of new obligations, the Appellate Body has rendered legitimate
safeguard measures significantly more difficult to defend.

“Safeguard measures provide a crucial means for WTO Members to protect their industries from import surges (including surges that would destroy domestic industry). WTO Members specifically reserved for themselves the right to impose such measures and established rules for the application of such measures in the WTO Agreement on Safeguards (‘Safeguards Agreement’).

“1.The GATT and the Safeguards Agreement Reflect the Agreed Rules for Safeguard Measures

“Article XIX:1(a) of the GATT 1947 provides as follows:

“If, as a result of unforeseen developments and of the effect of the obligations incurred by a contracting party under this Agreement, including tariff concessions, any product is being imported into the territory of that contracting party in such increased quantities and under such conditions as to cause or threaten serious injury to domestic producers in that territory of like or directly competitive products, the contracting party shall be free, in respect of such product, and to the extent and for such time as may be necessary to prevent or remedy such injury, to suspend the obligation in whole or in part or to withdraw or modify the concession.

“As with most obligations in GATT 1947, panels evaluated compliance with Article XIX by examining, after the fact, whether the conditions justified a contracting party’s decision to suspend an obligation or withdraw or modify a concession. Parties to the proceeding could rely on information and findings from their domestic proceedings, or introduce new evidence and make new arguments to defend their actions.

“The WTO Agreement incorporated Article XIX of the GATT 1947 substantively unchanged into the GATT 1994, but added the Safeguards Agreement to ‘establish[] rules for the application of safeguard measures which shall be understood to mean those measures provided for in Article XIX of GATT 1994.”260 The Safeguards Agreement set out standards for determining when serious injury existed. The Safeguards Agreement also set forth a requirement that a Member apply a safeguard measure only after an investigation by the competent authorities of that Member ‘to determine whether increased imports have caused or are threatening to cause serious injury to a domestic industry under terms of the Agreement.’261 Article 3.1 provides that ‘[t]he competent authorities shall publish a report setting forth their findings and reasoned conclusions reached on all pertinent issues of fact and law.’ The Safeguards Agreement does not mention ‘unforeseen developments’ or require the competent authorities to evaluate whether serious injury is ‘as a result of unforeseen developments’ for purposes of Article XIX of the GATT 1994.

“2. The Appellate Body Has Created Additional Obligations for Imposing Safeguard Measures

“In 2001, in US – Lamb Meat, the Appellate Body proclaimed (1) that the WTO Member taking safeguard action must publicly demonstrate unforeseen developments as a matter of fact before applying a safeguard measure and (2) that the demonstration must have appeared in the report of the competent authorities.262 Neither of these determinations is based on the text of Article XIX. Indeed, the Appellate Body admitted that ‘Article XIX provides no express guidance’ on the issue of ‘when, where or how this demonstration should occur.’263 Undaunted, the Appellate Body based its new determination on ‘instructive guidance’ that it drew from its own findings in earlier safeguard disputes. The Appellate Body’s approach was erroneous. The Appellate Body took a statement from one of its earlier reports, that unforeseen developments are circumstances that ‘must be demonstrated as a matter of fact,’ and used this phrase in a different context to create an entirely new and additional obligation that is not in Article XIX or the Safeguards Agreement.

“The lack of ‘guidance’ on this issue in Article XIX and the absence of any reference to “unforeseen developments” in the Safeguards Agreement demonstrates that WTO Members have not consented to be bound by any particular approach. The United States and other Members have given the Appellate Body no authority to to use its own prior reports to create obligations that do not appear in the text that Members agreed to.

“First, Article XIX does not require a ‘demonstration.’ As with other trade remedies covered by the GATT 1994, Article XIX merely specifies the conditions that justify an action. Thus, a need to ‘demonstrate’ that the conditions exist could arise only if and when another WTO Member challenges the action’s consistency with the relevant condition in Article XIX. By requiring a ‘demonstration’ before application of a safeguard measure, the Appellate Body’s approach appears to reverse the normal burden of proof in dispute settlement proceedings – that the complaining WTO Member bears the burden to show that serious injury was not ‘a result of unforeseen developments.’ The Appellate Body ignored this, and instead required that the WTO Member maintaining a safeguard measure bear the burden of demonstrating the existence of unforeseen developments before another WTO Member even challenged the safeguard measure.

“Second, the Appellate Body states that the ‘demonstration’ must be made by a WTO Member’s competent authorities, and in their published report, and not by any other official of the WTO Member or in any other manner. But Article XIX makes reference neither to competent authorities nor to published reports, two concepts that originate in the Safeguards Agreement, not in Article XIX. And, the Safeguards Agreement charges the competent authorities with the investigation of serious injury – not the other elements of Article XIX. For example, in Korea – Definitive Safeguard Measure on Imports of Certain Dairy Products, the Appellate Body correctly found that there is no obligation for the competent authorities to make findings justifying the type and extent of a safeguard measure. There is simply no textual basis for the Appellate Body’s conclusion in US – Lamb Meat that Article XIX requires the competent authorities to make any finding on unforeseen developments in their report.

“The Appellate Body supports its interpretation by claiming that any other approach would leave the means for complying with Article XIX ‘vague and uncertain’. This is simply not true. WTO Members take most measures without providing an advance demonstration of consistency with the WTO. A WTO Member challenging a safeguard measure must prove that a measure fails to meet one of the relevant requirements, and the Member applying that measure needs to demonstrate consistency only to the extent that the complaining WTO Member has proven its case. The same approach should apply to those elements of Article XIX, like unforeseen developments, that the Safeguards Agreement requires to be subject to the investigation and determination of the competent authorities. In any event, it is outside the mandate of the Appellate Body to elaborate on the text to satisfy the Appellate Body’s own sense of what is ‘clear’ or ‘certain.’ That is a task that WTO members reserved for themselves. Article 3.2 of the DSU is quite clear on this point.

“Other Members also have criticized the Appellate Body’s reasoning as well. As Korea explained in statements to the General Council, the Appellate Body’s reasoning left Members with ‘an ambiguous requirement to demonstrate the existence of ‘unforeseen developments’ [that was] not in line with the drafters’ intention.’ Korea also noted that the drafting history of the Safeguards Agreement demonstrated that ‘it would be unreasonable to conclude that the negotiators had left an essential requirement in Article XIX of GATT 1994 and had not included it in the new Agreement, which was meant to be the final embodiment of the rules on safeguards.’264

“The Appellate Body also strayed from the text of Article XIX and the Safeguards Agreement in US – Wheat Gluten in 2000, and US – Line Pipe in 2002. In these proceedings, the Appellate Body imposed a heightened threshold on the serious injury determinations by the competent authorities.

“Article 4.2(a) of the Safeguards Agreement provides for the competent authorities to conduct ‘an investigation to determine whether increased imports have caused or are threatening to cause serious injury to a domestic industry under the terms of this Agreement.’ It instructs them to ‘evaluate all relevant factors of an objective and quantifiable nature having a bearing on the situation of that industry,’ and lists several of these. Article 4.2(b) of the Safeguards Agreement then provides:

‘The determination referred to in subparagraph (a) shall not be made unless this investigation demonstrates, on the basis of objective evidence, the existence of the causal link between increased imports of the product concerned and serious injury or threat thereof. When factors other than increased imports are causing injury to the domestic industry at the same time, such injury shall not be attributed to
increased imports.

“Relying on a negative obligation not to attribute injury from other causes to imports, the Appellate Body fashioned an affirmative requirement to analyze not only the nature of other factors, but to identify their ‘extent’ and then ‘separate and distinguish’ the effects of other factors from the effects of increased imports. The Appellate Body could even be understood to have suggested that the extent of injury from other factors should be mathematically ascertained so as to precisely separate and distinguish the injury.265 None of these additional requirements appear in the treaty text. The Appellate Body’s erroneous approach could also be understood to prevent an investigating authority from evaluating the injury caused by other factors and then examining whether that injury attenuates the causal link between the increased imports and serious injury. This would diminish the rights of WTO Members to take safeguard action in the circumstances set out in GATT 1994 Article XIX and the Safeguards Agreement.

“3. The Appellate Body Has Made It All But Impossible for WTO Members to Impose Safeguard Measures

“A number of safeguard measures have been challenged at the WTO and, with one exception, all have been found to be WTO-inconsistent. 266 This is not surprising given the Appellate Body’s erroneous interpretations. The additional requirements invented by the Appellate Body raise the threshold for an affirmative finding that increased imports cause serious injury to a height that makes it all but impossible to impose safeguards. Under the Appellate Body’s erroneous approach, even if the imports are the most important cause of serious injury, a WTO Member may not apply a safeguard measure if its authorities did not mathematically determine and isolate the effects of other factors. These invented requirements seriously detract from WTO Members’ ability to protect themselves from unforeseen surges in imports, a right clearly reserved to them in Article XIX and the Safeguards Agreement.

“260 Agreement on Safeguards, Article 1.

“261 Agreement on Safeguards, Articles 3.1 and 4.2(a).

“262 US – Lamb (AB), para. 72 (2001).

“263 Id.

“264 Dispute Settlement Body, Minutes of the Meeting Held on January 12, 2000), WT/DSB/M/73 (4 February 2000); accord T. Raychaudhuri, The Unforeseen Developments Clause in Safeguards under the WTO: Confusions in Compliance, 11 Estey Ctr. J. Int’l Law and Trade Pol’y 302, 314 (‘The addition of such a requirement does not appear to be at all consistent with the intent of the negotiators in the Uruguay Round. In fact, a perusal of the negotiating history reveals that the draft version of the AS did contain the unforeseen developments clause. By mid1990, however, the clause was omitted from the draft, while other conditions of Article XIX were repeated almost verbatim.’).

“265 See US – Lamb (AB) (2001), para. 130 (‘[t]he words ‘factors of an objective and quantifiable nature’ imply, therefore, an evaluation of objective data which enables the measurement and quantification of these factors.’).”

While it is perhaps not surprising that the panel would follow the prior Appellate Body decisions on the issue of GATT 1994 Article XIX:1(as), the problem flagged by the U.S. and others remains present in the current decision. Moreover, the lack of inclusion of the requirement in the Agreement on Safeguards may simply reflect the reality experienced by the United States between 1962 and 1974 that the Art. XIX language was not administrable, and hence represent the desire of Members to have the Agreement on Safeguards be operational in fact.

Look for the U.S. to need a resolution of this issue (among others) before the Dispute Settlement problems are resolved. Resolution could occur through a revision to GATT 1994 Art. XIX or the Safeguard Agreement and/or meaningful reform of the dispute settlement system including panel reports.

Likeness of domestically produced parts and imported parts of LRWs

The domestic industry was defined by the USITC as consisting of washing machines and certain parts. Korea made various challenges to the domestic like product including challenging whether domestic parts were like imported parts since such parts were designed for particular models and hence not interchangeable. The panel viewed the Commission’s determination as violative of U.S. obligations under Art. 4.1(c) of the Safeguards Agreement since the Commission indicated the products didn’t compete and the Commission didn’t provide an adequate explanation for why the products were nonetheless “like”. See Panel Report at 23-27. Paras. 7.66 and 7.67 provided the summary of the panel’s finding.

“7.66. In the underlying investigation, the USITC specifically found that imported and domestically produced parts did not compete. We note that the United States alludes to different ways in which conditions of competition could manifest in the market, including situations where imports of LRW parts that do not directly compete with either domestic parts or finished products may nevertheless have an indirect impact on domestic producers of parts and finished products if they are assembled into finished products in domestic screwdriver operations that do not change the fundamental character of the parts. However, the USITC did not undertake any such analysis alluded by the United States as part of its likeness analysis.112

“7.67. Based on the foregoing, we find that the USITC did not find imported covered parts to be like domestically produced covered parts in a manner consistent with Article 4.1(c) of the Agreement on Safeguards in defining the domestic industry. Having reached this finding, we do not consider it necessary to make additional findings under Article 2.1 of the Agreement on Safeguards.

“112 See e.g. United States’ response to Panel question No. 67(a), paras. 1-2. The United States clarified that the USITC did not undertake an analysis of any indirect competition between domestically produced and imported parts as part of its likeness analysis because LG and Samsung, the two Korean producers, had not yet commenced production of LRWs at their planned US LRW production facilities as of the date of the USITC’s vote on injury. The United States explains that the USITC reasonably considered the likelihood of indirect competition from imports of covered parts in recommending safeguard remedy be imposed on parts. We also note that the United States suggests that the USITC found that domestic and imported covered parts competed as they “offer[ed] alternative ways of satisfying the same consumer demand in the marketplace”. (United States’ comments on Korea’s response to question No. 67, fn 12 (referring to USITC report, (Exhibit KOR-1), p. 17)). However, we recall that the USITC stated that covered parts did not compete. Moreover, at the cited section of the USITC report, the USITC stated that “[d]omestically produced and imported covered parts share the same general functionality when installed in LRWs” (emphasis added). This statement does not imply that covered parts competed in the market. As the USITC noted, covered parts may only be installed in specific LRW models. (USITC report, (Exhibit KOR-1), p. 16).”

While the finding can be viewed as a narrow one and one perhaps readily addressable by the USITC in future investigations, the finding of violation is questionable at best. Imported parts were used for repairs and potentially for downstream assembly. Domestically produced parts were used both in original equipment and for sale as repairs. The fact that the parts weren’t interchangeable for a given model doesn’t mean there wasn’t competition. The panel report mentions elsewhere serious price depression found by the Commission for LRWs. The same was likely the case for parts in the aftermarket. It is not uncommon for merchants to promote the total cost of equipment including costs of repairs if needed. Lower replacement costs for an imported part would likely put pressure on domestic replacement part prices. The USITC questionnaires that went to producers and importers may have captured some information on shipments/sales of parts. In any event, for panelists to construe the ITC description of a lack of competition in terms of use within a given model as undermining the appropriateness of parts being found to be like products ignores commercial reality. See also Panel Report at 26 fn. 110 (“We note that in its third-party statement, the European Union argued that because LRW parts are used to repair the respective LRW units, the market for LRW parts may constitute an ‘aftermarket’, while the market for LRW units would be the ‘primary market’. The European Union considered that it is possible that the interaction between the primary market (LRW units) and the aftermarket (LRW parts) form one ‘system market’, so that competition would take place between LRW systems. In its view, if one single domestic market exists for LRW units and parts, within that market, imported and domestic LRW parts would be ‘directly competitive’ with each other because competition would follow from the competition at the system level. (European Union’s third-party submission, paras. 34-40). We note that the USITC did not take such “system market” approach in the underlying investigation. Therefore, whether such approach would be consistent with Article 4.1(c) is not an issue in the matter before us.”).

As part of its attack on the U.S. like product findings, Korea separately argued that the USITC had included parts pursuant to its product line approach to analysis. The panel agreed with Korea (Panel Report at 27-30), but that issue would be irrelevant if a proper analysis had been performed on the like product issue on parts.

Other issues

The panel faulted the USITC for not explaining why it had excluded one domestic producer from profit and loss data and why the remaining data were sufficient. It also faulted the U.S. for not giving Korea sufficient time to consult on the safeguard remedy once the Administration had decided to include product from Korea in the relief. Regardless of the merits of the panel’s findings on these issues, neither should pose significant challenges to the U.S. in future cases.

Conclusion

Because the panel report contains several significant errors, including at least one of longstanding concern to the United States as reflected in the USTR Report on the Appellate Body of the World Trade Organization, it is possible that the United States will choose to file an appeal at the WTO and hence join the 24 other disputes where appeals have been filed where resolution is helpdup by the lack of a functioning Appellate Body (including a case where Korea has appealed (22 January 2021:  Notification of Appeal by Korea in DS553: Korea — Sunset Review of Anti-Dumping Duties on Stainless Steel Bars (WT/DS553/6)).

However, relief under the U.S. safeguard action is due to expire on February 7, 2023. Moreover, on many issues raised by Korea, the panel found no violation of obligation by the United States. In such circumstances, it is possible that the U.S. will agree to resolve the dispute by terminating the 201 relief sometime in the Spring.

My bet would be on the resolution option.