WT/DS161/R WT/DS169/R 31 July 2000
(00-3025)
Original: English
Report of the Panel
The report of the Panel on Korea - Measures Affecting Imports of Fresh, Chilled and Frozen Beef is being circulated to all Members, pursuant to the DSU. The report is being circulated as an unrestricted document from 31 July 2000 pursuant to the Procedures for the Circulation and Derestriction of WTO Documents (WT/L/160/Rev.1). Members are reminded that in accordance with the DSU only parties to the dispute may appeal a panel report. An appeal shall be limited to issues of law covered in the Panel report and legal interpretations developed by the Panel. There shall be no ex parte communications with the Panel or Appellate Body concerning matters under consideration by the Panel or Appellate Body.
Note by the Secretariat: This Panel Report shall be adopted by the Dispute Settlement Body (DSB) within 60 days after the date of its circulation unless a party to the dispute decides to appeal or the DSB decides by consensus not to adopt the report. If the Panel Report is appealed to the Appellate Body, it shall not be considered for adoption by the DSB until after the completion of the appeal. Information on the current status of the Panel Report is available from the WTO Secretariat.
WT/DS161/R WT/DS169/R
Page i
LIST OF ABBREVIATIONS OF PANEL AND APPELLATE BODY REPORTS REFERRED TO IN THE TEXT OF THE REPORT V
INTRODUCTION. 1
Terms of reference. 1
Panel composition 1
FACTUAL ASPECTS 3
Product coverage of the dispute 3
Korea's Schedule of Concessions 3
Records of Understanding 3
The Korean regulatory regime for beef 4
Measures affecting the importation, distribution and sale of beef 4
Measures applied to beef imported by the LPMO 4
The National Livestock Cooperatives Federation (NLCF) 5
Measures applied to beef imported under the SBS system 5
Mark-ups 6
Measures applied to the retail sale of imported beef 6
Domestic support measures to the Korean beef industry 7
Previous dispute settlement 7
Import liberalization programme 7
PRELIMINARY REQUEST FOR RULINGS ON TERMS OF REFERENCE 8
MAIN ARGUMENTS 12
GENERAL 12
CLAIMS TO A "TRANSITIONAL PERIOD" 13
Remaining restrictions 13
Transitional period 14
BOP Committee report 16
The Records of Understanding 20
Quarterly bilateral consultations 24
Prior panel reports 24
Article 26 of the Vienna Convention (good faith) 26
CLAIMS UNDER ARTICLE XI:1 OF GATT 27
No prohibitions or restrictions…on the importation of any product 27
Measures imposed on retail sale of imported beef 28
LPMO tendering opportunities 29
Measures with respect to the discharge of imported beef in the wholesale market 30
Measures applied through the SBS regime 35
Burden and standard of proof 36
CLAIMS UNDER ARTICLE III:4 OF GATT 41
"Like product" 41
Measures with respect to retail sale of imported beef 41
LPMO tendering opportunities 50
Measures with respect to the discharge of imported beef in the wholesale market 50
Other measures applying to imported beef 52
Measures applied through the SBS regime 52
Burden and standard of proof 55
CLAIMS UNDER ARTICLE XX(D) OF GATT 57
CLAIMS UNDER ARTICLE II OF GATT 68
LPMO tendering opportunities 68
Application of a mark-up on SBS imports 70
CLAIMS UNDER ARTICLE III:2 OF GATT 73
CLAIMS UNDER ARTICLE XVII OF GATT 74
LPMO tendering opportunities 74
Measures with respect to the allocation of imported beef in the wholesale market 74
WT/DS161/R WT/DS169/R
Page ii
CLAIMS UNDER THE AGREEMENT ON LICENSING PROCEDURES 77
CLAIMS UNDER THE AGREEMENT ON AGRICULTURE 84
Article 4.2 of the Agreement on Agriculture 84
Article 6 of the Agreement on Agriculture 85
De Minimis 85
(ii) 1997 85
Eligible production 86
Applied administered price and fixed external reference price 91
(v) 1998 93
Annex 3 of the Agreement on Agriculture 97
Total AMS-Current Total AMS 100
SUMMARY OF THE ARGUMENTS PRESENTED BY THIRD PARTIES 104
ARGUMENTS SUBMITTED BY CANADA 104
Article III of GATT 104
Article II of GATT 105
Article XI of GATT and Article 4.2 of the Agreement on Agriculture 106
ARGUMENTS SUBMITTED BY NEW ZEALAND 107
Article III of GATT 108
Article XX of GATT 110
Article II of GATT 111
Article XVII of GATT 111
Agreement on Agriculture - domestic support 112
The fixed external reference price for beef 112
The eligible production of beef 114
The AMS calculation for beef 116
Conclusion 118
INTERIM REVIEW 119
FINDINGS 124
GENERAL CONSIDERATIONS 124
Brief description of the beef import regime in Korea 124
Brief description of the claims 124
Methodology followed by the Panel 125
KOREA'S DEFENCE THAT "THE REMAINING RESTRICTIONS" SHOULD BENEFIT FROM A TRANSITION PERIOD AS ESTABLISHED IN ITS SCHEDULE LX 125
Legal Status of Note 6(e) to Korea's Schedule LX 126
Arguments of the Parties 126
Relevant jurisprudence on the WTO Schedules 127
The Panel's assessment 127
Scope and interpretation of the term "the remaining restrictions" 128
Negotiating history and circumstances that led to the inclusion of the words "According to the results of the 1989 consultation with BOP Committee and the Uruguay Round multilateral trade negotiation, the remaining restrictions" in Note 6(e) of Korea's Schedule 131
The 1989 GATT Committee on Balance-of-Payments Restrictions Consultations 131
The 1989 Panel Reports 132
The Records of Understanding 134
The 1990 Records of Understanding Between Korea and Australia; and Korea and the United States 134
The July 1993 Records of Understanding Between Korea and Australia; and Korea and the United States 134
The December 1993 Record of Understanding Between Korea and the United States 135
Material to be consulted in order to interpret Note 6(e) of Korea's Schedule 136
Determination of the measures which qualify as "remaining restrictions" 136
Measures challenged 136
Disputed measures that were in place in 1989 or originate in the ROUs and which therefore constitute "remaining restrictions" within the meaning of Note 6(e) 138
Disputed Measures not associated with the administration of the beef quota as of 1989 and not envisaged in the ROUs 142
Summary of the Panel's Conclusions with Respect to the Measures in Dispute and Note 6(e) of Korea's Schedule 145
CLAIMS AGAINST THE DUAL RETAIL SYSTEM AND RELATED MEASURES 147
General claims and defence of the parties 147
Article III:4 of GATT and the dual retail system 147
WT/DS161/R WT/DS169/R
Page iii
Like product determination 148
Law, regulation, or requirement affecting their internal sale, offering for sale, purchase, transportation, distribution, or use 148
Less favourable treatment 148
Arguments of the parties 148
The relevant GATT/WTO jurisprudence 149
The Panel's assessment 151
Conclusion 153
Article III:4 and the requirement to display a special sign 153
The arguments of the parties 153
The Panel's assessment 153
Korea's defence based on Article XX(d) of GATT 153
Arguments of the parties 153
Article XX(d) of GATT and the GATT/WTO jurisprudence 155
The Panel's assessment 156
"… secure compliance with GATT consistent regulation" 156
"necessary to prevent misrepresentation as to the origin of beef" 158
Conclusion on Korea's Article XX defence 161
Conclusion on the WTO compatibility of the dual retail system for beef 161
CLAIMS AGAINST THE (LPMO) DISTRIBUTION SYSTEM AT THE WHOLESALE LEVEL 161
General Arguments of the Parties 161
The Panel's Assessment 162
Restrictions on supply of beef from the wholesale market to specialized imported-beef stores – the dual retail system 162
Sales of imported beef through the wholesale market can allegedly only be on a cash basis 162
Record-keeping requirements 163
CLAIMS AGAINST THE SBS SYSTEM 163
General description of the claims of the Parties 163
The Panel's assessment in the light of Note 6(e) 164
Examination of two specific measures of the SBS system 164
Prohibition on cross-trading between end-users 164
Arguments of the Parties 164
The Panel's assessment 164
Additional labelling requirements 165
Arguments of the Parties 165
The Panel's assessment 166
CLAIMS AGAINST THE LPMO'S MINIMUM WHOLESALE PRICE, THE REFUSAL OR DELAYS IN CALLING FOR TENDERS AND THE DISCHARGE PRACTICES IN 1997-1998 166
General Arguments of the Parties 166
Minimum wholesale price 167
Arguments of the Parties 167
Panel's assessment in light of Note 6(e) 167
The LPMO's daily and monthly discharge practices; the withholding of imported stocks; and the refusal or delays in calling for import tenders 168
Arguments of the parties and factual determination made by the Panel 168
Were the beef import quotas filled in 1997 and 1998? 168
The LPMO's role in the non-filling of the import quota 170
The issue of the economic justifications for Korea to do so 170
clusion 173
The WTO provisions and jurisprudence on restrictions imposed by state-trading enterprises 174
Articles XI, the Ad Note to Articles XI, XII, XIII, XIV and XVIII and Article XVI of GATT 174
Article 4.2 of the Agreement on Agriculture 177
The Panel's assessment 178
CLAIM WITH REGARD TO THE GRASS/GRAIN FED BEEF DISTINCTION 179
Arguments of the parties 179
Factual determination by the Panel 179
The WTO provisions and jurisprudence 180
The Panel's assessment 181
CLAIM THAT KOREA'S IMPORT LICENSING SYSTEM PER SE VIOLATES VARIOUS PROVISIONS OF THE WTO AGREEMENT 181
CLAIMS AGAINST THE ALLEGED EXCESSIVE DOMESTIC SUPPORT TO KOREA'S CATTLE INDUSTRY 182
Korea's request for a preliminary ruling on the Panel's terms of reference and lack of specificity as concerns claims relating to domestic support of the US and Australian claims 182
WT/DS161/R WT/DS169/R
Page iv
Arguments of the Parties 182
WTO provisions and jurisprudence on terms of reference 183
The Panel's Assessment 185
The Measures at Issue 186
The claims under Articles 3, 6 and 7 of the Agreement on Agriculture 186
Korea's prejudice 191
clusion 191
Claims that Korea's domestic support for beef exceeded the 10 per cent de minimis and led to a Total Current AMS for 1997 and 1998 which exceeded Korea's scheduled annual commitment levels 191
Arguments of the Parties 191
The Panel's assessment 192
Korea's scheduled commitment levels of domestic support 192
Domestic support for the beef industry in 1997 and 1998 193
Market-price support 194
"Fixed External Reference Price (FERP)" 195
"Eligible/actual production" 196
"Total value of production" 196
Product specific programmes 197
Recalculation of the aggregate measurement of support for beef in 1997 and 1998 and of the Current Total AMS 197
Conclusion 199
CONCLUSIONS AND RECOMMENDATIONS 200
ANNEX 1 202
1990 RECORDS OF UNDERSTANDING* 202
ANNEX 2 206
JULY 1993 RECORDS OF UNDERSTANDING* 206
ANNEX 3 216
DECEMBER 1993 RECORD OF UNDERSTANDING 216
ANNEX 4 220
(Korea's Exhibit 45) 220
ANNEX 5 225
(Korea Exhibit 27) 225
ANNEX 6 226
(Australia, 1st Submission, paragraph 3.6) 226
ANNEX 7 227
(Korea Exhibit 19) 227
ANNEX 8 228
(Korea Exhibit 39) 228
ANNEX 9 229
(US Exhibit 60) 229
ANNEX 10 230
(New Zealand, Annex 7, Table 13) 230
ANNEX 11 231
(Korea Exhibit 35) 231
ANNEX 12 232
Australia Attachment 17 232
WT/DS161/R WT/DS169/R
Page v
LIST OF ABBREVIATIONS OF PANEL AND APPELLATE BODY REPORTS REFERRED TO IN THE TEXT OF THE REPORT
Argentina – Textiles(AB) - Appellate Body report on Argentina - Measures Affecting Imports of Footwear, Textiles, Apparel and Other Items, adopted 22 April 1998, WT/DS56/AB/R;
Canada - FIRA - Panel report on Canada - Administration of the Foreign Investment Review Act, BISD 30S/140, adopted 7 February 1984;
Canada- Marketing Agencies (1988) - Panel report on Canada - Import, Distribution and Sale of Certain Alcoholic Drinks by Provincial Marketing Agencies, BISD 35S/137, adopted 22 March 1988;
Canada - Marketing Agencies (1992) - Panel report on Canada - Import, Distribution and Sale of Certain Alcoholic Drinks by Provincial Marketing Agencies, BISD 39S/27, adopted 18 February 1992;
Canada - Periodicals - Panel report on Canada - Certain Measures Concerning Periodicals,
WT/DS31/R, adopted 30 July 1997;
Canada - Dairy - Panel report on Canada - Measures Affecting the Importation of Milk and Exportation of Dairy Products, WT/DS103/R (US), WT/DS113/R (New Zealand), adopted 22 October 1999;
Canada - Dairy(AB) - Appellate Body report on Canada - Measures Affecting the Importation of Milk and Exportation of Dairy Products, WT/DS103/AB/R, adopted 22 October 1999;
EEC - Processed Fruits and Vegetables - Panel report on EEC – Programme of Minimum Import Prices, Licences and Surety Deposits for Certain Processed Fruits and Vegetables, BISD 25S/68, adopted 18 October 1978;
EEC - Beef - Panel report on EEC - Imports of Beef from Canada, BISD 28S/92, adopted 10 March 1981;
EEC- Imports from Hong Kong, - Panel report on EEC – Quantitative Restrictions against Imports of Certain Products from Hong Kong, BISD 30S/129, adopted 12 July 1983;
EEC - Oilseeds - Panel report on EEC - Payments and Subsidies Paid to Processors and Producers of Oilseeds and Related Animal-Feed Proteins, BISD 37S/86 (US), adopted 25 January 1990;
EEC - Parts and Components - Panel report on EEC - Regulation on Imports of Parts and Components, BISD 37S/132, adopted 16 May 1990;
EC - Bananas III – Panel report on European Communities - Regime for the Importation, Sale and Distribution of Bananas, WT/DS27/R(Ecuador, Guatemala, Honduras, Mexico, and United States), adopted 25 September 1997;
EC - Bananas III (AB) - Appellate Body Report on European Communities - Regime for the Importation, Sale and Distribution of Bananas, WT/DS27/AB/R, adopted 25 September 1997;
EC – Hormones (AB) – Appellate Body report on European Communities – Measures Affecting Meat and Meat Products, WT/DS26/AB/R- WT/DS48/AB/R, adopted 13 February 1998;
EC - Computer Equipment (AB) - Appellate Body report on European Communities/United Kingdom/Ireland - Customs Classification of Certain Computer Equipment (AB), WT/DS62/AB/R (US), WT/DS67/AB/R (US), WT/DS68/AB/R (US), adopted 22 June 1998;
WT/DS161/R WT/DS169/R
Page vi
EC - Poultry - Panel report on European Communities - Importation of Certain Poultry Products, WT/DS69/R (Brazil), adopted 23 July 1998;
EC – Poultry(AB) – Appellate Body report on European Communities - Importation of Certain Poultry Products, WT/DS69/AB/R, adopted 23 July 1998;
India - Quantitative Restrictions - Panel report on India - Quantitative Restrictions on Imports of Agricultural, Textile and Industrial Products, WT/DS90/R (US), adopted 22 September 1999;
Indonesia – Automobiles – Panel report on Certain Measures Affecting the Automobile Industry, WT/DS54 (EC); WT/DS55 (Japan), WT/DS59 (US), WT/DS64 (Japan), adopted 23 July 1998;
Italian Agricultural Machinery - Panel report on Italy - Discrimination against Imported Agricultural Machinery, BISD 7S/60, adopted 23 October 1958;
Japan - Agricultural Products - Panel report on Japan - Restrictions on Imports of Certain Agricultural Products, BISD 35S/163, adopted 2 February 1988;
Japan –Semi-conductors, Panel report on Japan - Trade in Semi-conductors, BISD 35S/116, adopted 4 May 1988;
Japan - Leather – Panel report on Japanese Measures on Imports of Leather, BISD 31S/94, adopted 15 May 1994;
Japan - Alcoholic Beverages - Panel report on Japan - Taxes on Alcoholic Beverages. WT/DS8/R (EC); WT/DS10/R (Canada); WT/DS11/R (US), adopted 1 November 1996; Japan - Alcoholic Beverages (AB) - Appellate Body report on Japan – Taxes on Alcoholic Beverages, WT/DS8,10,11/AB/R, adopted on 1 November 1996;
Japan - Film – Panel report on Japan - Measures Affecting Consumer Photographic Film and Paper, WT/DS/44/R (US), adopted 22 June 1998;
Japan - Varietal Testing(AB) - Appellate Body report on Japan - Measures Affecting Agricultural Products, WT/DS76/AB/R, adopted 19 March 1999;
Korea - Beef - Panel report on Republic of Korea - Restrictions on Imports of Beef, BISD 36S/202 (Australia) 36S/268 (US), adopted on 7 November 1989;
Korea - Alcoholic Beverages (EC) - Panel report on Korea - Taxes on Alcoholic Beverages,
WT/DS75/R (EC), adopted on 17 February 1999;
Korea - Alcoholic Beverages(US) - Panel report on Korea - Taxes on Alcoholic Beverages,
WT/DS84/R (US), adopted on 17 February 1999;
Korea - Safeguards - Appellate Body report on Korea - Definitive Safeguard Measure on Imports of Certain Dairy Products, WT/DS/98/AB/R, adopted 12 January 2000;
Spain - Sale of Soybean Oil - Panel report on Spain – Measures concerning the Domestic Sale of Soybean Oil, L/5142, not adopted;
US - Hawaiian Regulations - Consultations on United States - Hawaiian Regulations Affecting Imported Eggs; L/411, 28 September 1955, no report;
US - Superfund - Panel report on US – Taxes on Petroleum and Certain Imported Substances
(Canada, EEC, Mexico), BISD 34S/136, adopted 17 June 1987;
WT/DS161/R WT/DS169/R
Page vii
US - Sugar Head Note - Panel report on United States - Restrictions on Imports of Sugar, BISD 36S/331, adopted 22 June 1989;
US - Section 337 – Panel report on United States - Section 337 of the Tariff Act of 1930,
BISD 36S/345, adopted 7 November 1989;
US - Malt Beverages - Panel report on United States - Measures Affecting Alcoholic and Malt Beverages, BISD 39S/206, adopted 19 June 1992;
US - Gasoline - Panel report on United States - Standards for Reformulated and Conventional Gasoline, WT/DS2/R (Venezuela); WT/DS4/R (Brazil), adopted 20 May 1996; US – Gasoline (AB) – Appellate Body report on United States - Standards for Reformulated and Conventional Gasoline, WT/DS2/AB/R, adopted 20 May 1996;
US- Shirts and Blouses (AB) – Appellate Body report on United States - Measure Affecting Imports of Woven Wool Shirts and Blouses, WT/DS33/AB/R, adopted 23 March 1997;
US - Shrimp (AB) – Appellate Body report on United States - Import Prohibition of Shrimp and Shrimp Products, WT/DS58/AB/R, adopted 6 November 1998;
US-Section 301 - Panel report on United States –Sections 301-310 of the Trade Act of 1974,
WT/DS152/R (EC), adopted 27 January 2000;
US-FISC (AB) – Appellate Body report on United States – Tax Treatment for Foreign Sales Corporations, WT/DS108/AB/R, adopted on 20 March 2000.
WT/DS161/R WT/DS169/R
Page 1
INTRODUCTION
On 1 February 1999, the United States requested consultations with the Republic of Korea ("Korea") pursuant to Article 4 of the Understanding on Rules and Procedures governing the Settlement of Disputes ("DSU"), Article XXII of the General Agreement on Tariffs and Trade 1994 (GATT 1994), Article 19 of the Agreement on Agriculture and Article 6 of the Agreement on Import Licensing Procedures, with respect inter alia to Korea's import measures on fresh, chilled, and frozen beef as well as its internal sale on the Korean market. Australia requested consultations with Korea on the same matter on 13 April 1999.
Consultations between the United States and Korea were held on 11 and 12 March 1999 and joined by Australia, Canada and New Zealand. Consultations between Australia and Korea were held 28 May 1999 and were joined by Canada, New Zealand and the United States. As the above- mentioned consultations did not result in a mutually satisfactory solution of the matter, the United States, in a communication dated 15 April 1999, requested the establishment of a panel with standard terms of reference as set out in Article 7 of the DSU (WT/DS161/5). Australia, in a communication dated 12 July 1999, requested the establishment of a panel with standard terms of reference as set out in Article 7.1 of the DSU (WT/DS169/5).
At its meeting on 25 May 1999 the Dispute Settlement Body (DSB) established a panel in accordance with the request made by the United States in document WT/DS161/5. At its meeting of 26 July 1999, the DSB agreed to Australia's request for the establishment of a panel (WT/DS/169/5) in the same matter. It also agreed, as provided for in Article 9 of the DSU in respect of multiple Complainants, that the Panel established on 26 May 1999 to examine the complaint by the United States will also examine Australia's complaint. Australia1, Canada, New Zealand and the United States2 reserved their third party rights to make a submission and to be heard by the Panel in accordance with Article 10 of the DSU
1. Terms of reference
4. The following terms of reference applied to the work of the Panel:
"To examine, in the light of the relevant provisions of the covered agreements cited by the United States in document WT/DS161/5 and by Australia in document WT/DS/169/5, the matter referred to the DSB by the United States and Australia in those documents and to make such findings as will assist the DSB in making the recommendations or in giving the rulings provided for in those agreements".
2. Panel composition
The parties to the dispute agreed on 4 August 19993 to the following composition of the Panel:
Chairperson: Lars Anell Members: Paul Demaret
Alan Matthews
The Panel met with the parties on 13 and 14 December 1999 and on 16 February 2000 and with third parties on 14 December 1999.
1 In the case requested by the United States.
2 In the case requested by Australia.
3 Date of the formal agreement by the panellists to serve.
WT/DS161/R WT/DS169/R
Page 2
The Panel submitted its interim report to the parties of the dispute on 10 May 2000 and the final report on 15 June 2000.
WT/DS161/R WT/DS169/R
Page 3
FACTUAL ASPECTS
1. Product coverage of the dispute
8. The case before the Panel concerned measures maintained by Korea on imports of beef of the following tariff description4: 02.01-10: meat of bovine animals (fresh or chilled/carcasses and half- carcasses); 02.01-20: meat of bovine animals (fresh or chilled/cuts with bone in); 02.01-30: meat of bovine animals (fresh or chilled/boneless); 02.02-10: meat of bovine animals (frozen/carcasses and half-carcasses): 02.02-20: meat of bovine animals (frozen/cuts with bone in); 02.02-30: meat of bovine animals (frozen/boneless);
2. Korea's Schedule of Concessions
9. Korea's Schedule of tariff concessions (LX) provides for the entry of fresh, chilled and frozen beef with market access opportunities rising from 123,000 tonnes in 1995 to 225.000 tonnes in 2000. The bound tariff will be reduced from 44.5 per cent to 40 per cent in 2004. Korea's Schedule also provides that it shall "eliminate or bring into conformity with GATT provisions all remaining restrictions" on a range of specific products, including fresh, chilled and frozen bovine meat imports, from 1 January 2001.
3. Records of Understanding5
Korea held consultations on beef with the United States, Australia and New Zealand, which resulted in the conclusion of separate bilateral "Records of Understanding" in 1990 and 1993. These Records were intended to implement the findings of the 1989 Korea - Beef panel (see paragraph 28). The Record of Understanding signed in March 1990 (L/6697) established base quota levels, which increased progressively over the period 1990-1992 to 66,000 metric tons. It also provided for the establishment of a "Simultaneous Buy/Sell" ("SBS") system to allow for an initial seven per cent of the quota to be entered by entities other than the Livestock Products Marketing Organization (LPMO)6. The Record of Understanding also provides that the SBS portion shall increase to 70 per cent by 2000. The three bilateral Records of Understanding signed in July 1993 (L/7270) between Korea on the one side, and Australia, New Zealand and the United States, respectively, on the other, specified quota amounts to be imported on a customs cleared basis for 1993-1995. These Records of Understanding also contained provisions intended to expand the scope of the SBS system. In the July 1993 Record of Understanding, Korea and the exporting countries agreed on the base amount of the beef quota covering the period '93-'95, the framework for the SBS system and the SBS mark-up. In that document, Korea also reaffirmed its commitment to eliminate its remaining restrictions or otherwise bring them into conformity with GATT provisions.
The Korea/United States 1 July 1993 Record of Understanding was modified in December of that year to the effect of extending the timetable for elimination of the quota to 31 December 2000. This timetable was ultimately made a part of Korea's WTO Schedule of Concessions. In the December 1993 Record of Understanding between Korea and the United States quota amounts, mark- up, and the SBS quota share were agreed upon for the period 1993 - 2000, as well as the annual tariff for the period 1995 to 2004. The December 1993 Record of Understanding also provides that all
4 Legal Instruments Embodying the Results of the Uruguay Round of Multilateral Trade Negotiations Done at Marrakesh on 15 April 1994 - Schedule LX, Republic of Korea, pages 12147, 12150, 12215.
5 The Records of Understanding are annexed.
6 The SBS System is defined in Section II of the July 1993 Record of Understanding between Korea and Australia as "the system through which suppliers of beef imported into the Republic of Korea conduct
business directly with super-groups, end-users or customers." See also, Records of Understanding with the United States and with New Zealand. The Management Guideline for Imported Beef contains the same definition.
WT/DS161/R WT/DS169/R
Page 4
balance of payments restrictions on beef shall expire no later than December 2000, and that there shall be no quota, no mark-up, and no LPMO involvement in 2001.
4. The Korean regulatory regime for beef
The Government of Korea operates a stabilization system for domestic beef producers pursuant to the Act on Distribution and Price Stabilization of Agricultural and Fishery Products which authorises measures to ensure the "smooth distribution of and maintenance of appropriate prices for agricultural and fishery products"7 and the Livestock Act, under which the Minister of Agriculture and Forestry is required to establish and implement comprehensive livestock industry development plans and policies regarding: (i) the improvement and production of livestock breeds
(ii) structural improvement of the livestock industry; (iii) balancing demand and supply of livestock and livestock products; (iv) stabilization of livestock and livestock product prices and enhancement of the livestock and livestock product distribution system; (v) stable supply of livestock feeds, treatment and utilisation of livestock excrement; livestock sanitation, etc.8
The import, distribution and sale of imported beef is regulated to give effect to the Government's stabilization policies. Article 25 of the Livestock Act provides that, in circumstances where it is deemed particularly necessary for consumer protection, the prevention of illegal distribution and the control of imported livestock products, the Minister of Agriculture and Forestry (MAF) retains certain powers in relation to the regulation and restriction of the quantity, timing, price, usage and sales methods for imported beef.9 Until 1 October 1999, these requirements were elaborated through the Regulations Concerning Sales of Imported Beef, Operational Guidelines for Beef Imported under the SBS System, Guidelines Concerning Registration and Operation of Specialized Imported Beef Stores and Imported Beef Dealer Designation and Product Supply Guidelines. On 1 October 1999 they were replaced by the Management Guideline for Imported Beef, which contain the same essential measures as the former regulations.
5. Measures affecting the importation, distribution and sale of beef
Import authority within the annual quota is divided between the Livestock Products Marketing Organization (LPMO) on the one hand, and the Simultaneous Buy and Sell (SBS) system on the other.
Measures applied to beef imported by the LPMO
The LPMO is a notified state trading agency for beef. The LPMO was established in 1988, and has, since its creation, been exclusively authorized by Korea to administer beef imports. In this role, it performs a variety of functions. The LPMO is the importer of a substantial share of the beef quota. The share imported by the LPMO has been progressively reduced and the LPMO currently imports 30 per cent of the beef quota. It also invites tenders and sells the imported beef at auction. In addition, LPMO exercises authority delegated from MAF to license imports made through the SBS system and to allocate quota share among the SBS quota holders. It imports its share of the annual quota through a tendering system.10 The import, distribution and sale of beef imported by LPMO are regulated by the Government through the Management Guideline for Imported Beef mentioned above. Prior to this, the LPMO system was regulated through the Regulations on Imported Beef and the Imported Beef Dealer Designation and Product Supply Guidelines.
7 Act on Distribution and Price Stabilization of Agricultural and Fishery Products Article 1.
8 Livestock Act (revised 1999), Article 3(1).
9 Ibid, Article 25.
10 G/STR/N/4/KOR.
WT/DS161/R WT/DS169/R
Page 5
Article 3 of the Management Guideline for Imported Beef notes that beef is imported by the LPMO to stabilize demand and supply in the market. The objective of the LPMO is "to protect both producers and consumers through the stabilization of demand-supply and price of livestock products".11
The LPMO derives its authority to import from Article 53 of the Foreign Trade Act12 and Article 24 of the Livestock Act. It imports beef at world market prices through a tender system and distributes it either by auction to wholesalers or directly to processors or the military. From 1988 to 1991, the LPMO was purchasing 100 per cent of the Korean beef import quota. Its share of the quota has been reduced over time. Currently the LPMO imports 30 per cent of the total beef import quota.
The LPMO determines an annual purchase and distribution plan for the coming year taking into account current and forecast levels of domestic beef demand, production and pricing. The LPMO sets a minimum acceptable auction price13 for each cut and brand of imported beef on a daily basis,
The National Livestock Cooperatives Federation (NLCF)
The NLCF handles the storage and domestic auctions at the wholesale market on behalf of the LPMO. Under government regulations, the NLCF also been controls the discharge of beef on behalf of LPMO, including establishment and implementation of regional and purchaser-based sales plans and discretion to decide daily discharging volumes in consideration of price movements of domestic beef/cattle.14
Most beef imported by the LPMO, other than that consigned inter alia for processing and packaging, is in principle required to be traded on a livestock wholesale market or at an auction office in areas without a wholesale market.15 Sales participants at an imported beef wholesale market may only supply imported beef to specialized imported beef stores.16 Imported beef is required, in principle, to be supplied on a cash payment basis.17
Measures applied to beef imported under the SBS system
Since 1 October 1999, chapter 3 of the Management Guideline for Imported Beef, which regulates imports of beef under the SBS system, replaces those in the Operational Guidelines for Imported Beef. According to the 1993 Record of Understanding between the United States and Korea, the SBS system, is a system through which suppliers of beef imported into Korea carry out business directly with entities called "super-groups", end users, or customers. A super-group is defined as an organization or association of end users which has the right to import beef under the SBS system and, as appropriate, allocate SBS sub-shares among its affiliated end users. Twelve "super-groups" are currently entitled to import beef.18 With the gradual increase of quota share, the number of super-groups has been increasing to meet the various usage of imported beef and market
11 L.P.M.O, Foreword, page 1.
12 Foreign Trade Act.
13 Ibid, Article 11.1.
14 Regulations Concerning Imported Beef, Articles 4, 6(1), 6(2), 9(2).
15 Ibid, Article 5.
16 Ibid, Article 15.2.
17 See also Annex 4.
18 The super-groups are as follows: National Livestock Cooperatives Federation (NLCF); Korea Cold
Storage Company (KCSC); Korea Tourist Supply Centre (KTSC); Korea Restaurant Supply Centre (KRSC); Korea Meat Industries Association (KMIA); Korea Super Chain stores Association (KOSCA); Korean Federation of Meat Purveyors (KFMP); Livestock Cooperative Trading and Marketing (LCTM): Korea Meat Packers Association (KMPA); Woo Joo Industrial Company Ltd; Korea Imported Meat Distributors Association (KIMDA); Korea Meat Processing Industry Cooperatives (KMPIC).
WT/DS161/R WT/DS169/R
Page 6
demand. Each super-group has a defined set of end users. To import beef through the SBS system an end user must be a member of a super-group.19 An end-user can only belong to one super-group. Restrictions are imposed on cross-trading.20
Before the beginning of each fiscal year, the LPMO allocates to each super-group the annual quota that each may import under the SBS system.21 Each super-group sets up quarterly purchase and sales plans for each end user or customer and report these to the LPMO by 15 January of each year.22 End users and customers negotiate and contract with the exporter on cut, price, delivery, conditions of sale, etc, within the quarterly allocated amount;23 Super-groups seek import approval on behalf of end users under a licensing system pursuant to Article 24 of the Livestock Act and administered by the LPMO.24 Where the allocated amount is not purchased during the quarter, the super-group must withdraw the shortfall and reallocate this to its end users or customers in the following quarter.25 Quota allocation amongst end users of a super-group is done on forecast demand. When an end user does not meet its demand forecast, the resulting quota shortfall remains unused for the current period. Any reallocation of the shortfall takes effect the following period.
Each super-group must obtain information on the amount of any expected shortfall in its imports and report it to the LPMO President by 5 October of each year.26 The LPMO must then reallocate this shortfall to other super-groups in the same proportion as the initial allocation. The regulations also impose record-keeping, reporting and labelling requirements on super-groups and their end-users which are administered by the LPMO.27
6. Mark-ups
The Korean government requires that a mark-up be applied to all SBS imports. The mark-up is imposed pursuant to Article 25 of the Management Guideline for Imported Beef. The mark-up calculation is based on the difference between the duty-paid CIF price of beef and the weighted average wholesale price for all imported boneless grain-fed beef cuts purchased and distributed by the LPMO. It is calculated on both a weekly and monthly basis.
The mark-up was phased out on 31 December 1999 in accordance with the terms of the December 1993 Record of Understanding between Korea and the United States. The maximum rate was 100 per cent in 1993, 60 per cent in 1996, 40 per cent in 1997, 20 per cent in 1998 and 10 per cent in 1999. The mark-up was paid into a fund, the stated purpose of which is to provide support to the domestic livestock industry pursuant to Article 34 of the Livestock Act.
7. Measures applied to the retail sale of imported beef
26. The Government of Korea regulates retail outlets through the Management Guidelines for Imported Beef which came into effect on 1 October 1999 and prior to that date through the Guidelines Concerning Registration and Operation of Specialized Imported Beef Stores. The Management Guideline for Imported Beef specifies that imported beef (except for pre-packed imported beef) may only be sold in specialized imported-beef shops.28 It also specifies that large-scale distributors
19 Management Guideline for Imported Beef, Article 26.4.
20 Idem.
21 Ibid, Article 22.1.
22 Ibid, Article 22.2.
23 Ibid, Article 23.1.
24 Ibid, Article 23.3.
25 Ibid, Article 22.4.
26 Ibid, Article 22.5.
27 Articles 27.3, 27.4, and 28.1 of the Management Guideline for Imported Beef.
28 Management Guideline for Imported Beef, Article 15.
WT/DS161/R WT/DS169/R
Page 7
(department stores, supermarkets, etc) must provide a separate sales area for imported beef.29 Stores selling imported beef must display a "Specialized Imported Beef Store" sign to distinguish them from domestic meat sellers.
8. Domestic support measures to the Korean beef industry
27. Korea notified its domestic support arrangements to the WTO Committee on Agriculture in 1995, 1996, 1997 and 1998.30 In each year, the reported level of total domestic support (Current Total AMS) has been below its total AMS commitment level.31 The bulk of the support has been directed to rice production. Over the four years notified by Korea, the reported domestic support level for beef has increased from 1.12 billion won in 1995, to 23.59 billion won in 1996, and 195.27 billion won in 1997.
9. Previous dispute settlement
28. In 1988, Australia, New Zealand and the United States requested GATT panel proceedings relating to Korea's import measures for beef which they claimed were inconsistent with Articles XI, II, and subsidiary, with X and XIII. Korea justified its import restrictions under Article XVIII:B. The panel found that inter alia that Korea's "import measures and restrictions, introduced in 1984/85 and amended in 1988, were not consistent with the provisions of Article XI and were not taken for balance-of-payments reasons. The panel did not find it necessary to examine the Korean measures under Articles II, X or XIII since any inconsistency with these Articles would normally disappear once the Article XI inconsistency had been eliminated. In the reports32 of the panel circulated on 24 May 1989 the panel recommended that:
Korea eliminate or otherwise bring into conformity with the provisions of the General Agreement the import measures on beef introduced in 1984/85 and amended in 1988; and,
Korea hold consultations with Australia, New Zealand and the United States and other interested contracting parties to work out a timetable for the removal of import restrictions on beef justified since 1967 by Korea for balance-of-payments reasons.
10. Import liberalization programme
On 26 April 1994, in compliance with the results of the 1989 consultations with the BOP Committee and the Uruguay Round negotiations, Korea submitted an import liberalization programme concerning 150 products, including beef, in which Korea notified that all the remaining restrictions on beef will be eliminated or brought into conformity with the provisions of the GATT from 1 January 2001.
29 Ibid, Article 9.5.
30 G/AG/N/KOR/7; G/AG/N/KOR/14; G/AG/N/KOR/18; G/AG/N/KOR/24.
31 Legal Instruments Embodying the Results of the Uruguay Round of Multilateral Trade Negotiations Done at Marrakesh on 15 April 1994 - Schedule LX, Republic of Korea: Part IV - Agricultural Products: Commitments Limiting Subsidization, page 13049 and supporting tables provided in G/AG/AGST/KOR.
32 L/6504, 36S/202; L/6505, 36S/234; and L/6503, 36S/268.
WT/DS161/R WT/DS169/R
Page 8
PRELIMINARY REQUEST FOR RULINGS ON TERMS OF REFERENCE
Korea submitted that the Complainants' arguments that Korea has not fulfilled its commitments under the Agreement on Agriculture should be rejected. Korea noted that the request for the establishment of the Panel by the United States identifies the disputed measure as follows: "At the same time, Korea has increased the level of its domestic support for its cattle industry to the point that the total domestic support provided by Korea exceeds its Aggregate Measurement of Support (AMS) under the Agreement on Agriculture."33 In the opinion of Korea, the disputed measures before the Panel are accordingly limited to the Korean measures of domestic support for its cattle industry. The data and calculation methods used in Korea's Schedule LX Part IV, or in broad terms Korea's Schedule LX by itself, are not mentioned as disputed measures. Accordingly, the arguments now raised in respect thereof are outside the terms of reference of the Panel.
The legal basis identified by both the United States and Australia in their requests for the establishment of the Panel is limited to Articles 3, 4, 6 and 7 of the Agreement on Agriculture34. Korea requests that the Panel limit its examination to these articles. The Panel, therefore, should not allow the Complainants to now bring arguments which are based mainly on Annex 3 of the Agreement on Agriculture, because Annex 3 was not identified as a legal basis on which the Complainants wished this dispute to be examined.
With regard to claims under Articles 3, 4, 6 and 7, the lack of specification on what precise claims would be raised under these Articles, leads, according to Korea, to the conclusion that none of these claims are properly before the Panel. At most, by reference to the measure identified, one could expect that the Complainants would raise claims that Korea may not have included all its domestic support measures to its cattle industry in its AMS calculations. Korea has been prejudiced in its right of defense due to the lack of proper identification and failure to present the problem clearly with regard to the claims relating to the Agreement on Agriculture in the request for the establishment of the Panel, because Korea was not in a position to understand what claims the Complainants actually intended to bring and actually brought before the Panel. Therefore, Korea could not adequately prepare its defense in this case from the moment the decision was taken to establish a panel. Furthermore, Korea argued that the Complainants, following the third party submission of New Zealand, started to borrow heavily from the claims of New Zealand and introduced new claims, which are clearly outside the terms of reference of the Panel.
Australia considered that the Panel is required by its terms of reference to consider whether Korea has met its obligations under Articles 3, 6 and 7 of the Agreement on Agriculture. In order to do so, the Panel must consider both Annex 3 of the Agreement on Agriculture, including Korea's calculation of its AMS on beef and its Total AMS, as well as Part IV of Korea's Schedule. Australia was, therefore, of the opinion that the Panel should reject outright the claims in paragraphs 30-32 because they have been raised without justification in Korea's second written submission, contrary to the rules of procedure proposed by the Panel and agreed to by all of the parties, including Korea. Specifically, in raising its claim at this time Korea is acting contrary to paragraph (e) of the rules of procedure for this Panel, which states that "any requests for preliminary rulings shall be included in a party's first written submission to the Panel. If the respondent requests any such ruling, the complaining parties shall submit their responses to such request prior to the first substantive meeting
33 Request for the establishment of a panel by the United States, WT/DS161/5(16 April 1999); the request for the establishment of a panel by Australia (WT/DS169/5, 15 July 1999) contains nearly identical language and states: "Korea has also increased the level of domestic support for its cattle industry in amounts which result in the total domestic support provided by Korea exceeding its Aggregate Measurement of Support (AMS) under the Agreement on Agriculture."
34 Request for the establishment of a panel by the United States, WT/DS161/5 (16 April 1999); request for the establishment of a panel by Australia, WT/DS169/5, (15 July 1999).
WT/DS161/R WT/DS169/R
Page 9
of the Panel at a time to be determined in light of the request. Exceptions to this procedure will be granted upon a showing of good cause."
Australia argued that Korea has advanced no reasons at all to justify raising these issues now, rather than at the beginning of these proceedings. The claims relating to the Agreement on Agriculture were included in Australia's request for establishment of a panel and were developed in Australia's first written submission. Korea had the opportunity in its first written submission to raise the issue of adequacy of the panel request, but it did not do so. Australia submitted that the Panel cannot act contrary to its own rules of procedure and contends that in the absence of any Korean claim or argument as to good cause, the Panel is not permitted to examine Korea's claims.
If the Panel decides to permit Korea to make its claim, Australia submitted that Korea has not met its burden of proof in showing a deficiency in Australia's request for a panel. Australia has identified the measure at issue and has listed the specific provisions of the Agreement on Agriculture alleged to have been violated. It does not have to do any more than that. As the Appellate Body noted in EC-Bananas III, there is a significant difference between the claims identified in the request for establishment of a panel, and the arguments supporting those claims which are set out in the submissions of the parties.35
Korea has advanced no legal argument in support of its claim, Australia continued, that in examining Korea's obligations under Article 6, the Panel is prevented from considering either Annex 3 or Part IV of Korea's Schedule. Korea has not mentioned or argued an inconsistency with Article 6.2 of the DSU. Korea has neither claimed prejudice, nor provided proof of it. Korea did not raise the Korea - Safeguards case or any other legal argument to support its claims in either of its written submissions. Australia, therefore, submitted that Korea has failed to meet its burden of proof and that its claims of a deficiency in Australia's panel request must, therefore, be rejected. It would be an abuse of due process to permit Korea to use the opening statement of the final meeting with the Panel to make good its failure to raise or argue this preliminary issue in its written submissions. Furthermore, as the Appellate Body in Japan - Varietal Testing(AB) made clear, the Panel is not entitled to make determinations or provide legal arguments on behalf of a party who has failed itself to make a prima facie claim.36
Australia argued that the key principle to emerge from Korea – Safeguards (AB) was that a request for establishment of a panel must be sufficiently specific so as not to prejudice the ability of a responding party to defend itself. However, the Appellate Body also made it clear that it is Korea that bears the burden of proof in claiming prejudice. Korea did not claim prejudice at the time the request for a panel was made, or in its first or second written submissions, or at the first Panel meeting, or in its responses to factual questions from the Panel relating to its calculations of domestic support.
There is no basis for Korea to claim that it did not understand the claims being made or that it was not accorded an opportunity to respond to these claims. Quite the contrary, Korea responded to Australia's claims regarding Article 6, and through Article 6, to Annex 3 and Part IV of its Schedule, in its first written submission. In that submission, Korea stated 'the AMS for cattle in 1997 did not exceed 10 per cent of the total value of cattle production and Korea's 1997 Current Total AMS did not exceed its reduction commitment level specified in Schedule LX. Korea cannot now be claiming that it did not understand the claims being made against it when it responded to these very same claims in its first written submission, and it did so without any apparent confusion as to the claims being made or the arguments being put.
35 At paragraph 141.
36 Paragraphs 118-131.
WT/DS161/R WT/DS169/R
Page 10
In response to Korea's claim that Australia introduced new claims borrowed from the third party submission of New Zealand, Australia said that Korea was confusing claims with arguments. The Appellate Body had been very clear that Australia is not required to set out detailed arguments in its panel request. Australia raised no new claims in either its first or second written submissions which were not contained in its request for establishment of a panel. Furthermore, Australia included a range of arguments relating to Annex 3 in its first written submission. Nor did Australia "borrow" any new claims from New Zealand. New Zealand used arguments relating to Annex 3 in support of the claims already made by Australia and the United States that Korea's increased domestic support for beef had resulted in Korea's Total Aggregate Measure of Support for 1997 being over its permitted amount for that year. The most that could be said was that Australia supported the arguments of New Zealand in relation to Annex 3, but there is not prohibition in the DSU against that.
In case the Panel determines that it should consider the substance of Korea's claims, Australia submitted that a textual analysis of Article 6 makes it clear that if Article 6 is to have any meaning, the Panel must consider Annex 3 and Part IV of Korea's Schedule. Australia submitted that Annex 3 and Part IV of Korea's Schedule are so intrinsic to a panel's interpretation of Korea's obligations under Article 6 as to obviate any need to mention them specifically in a panel request. The fact that Korea has already responded to the substance of Australia's claims supports this view. It is not possible to make a determination about a Member's consistency with these obligations without reference to the formulations contained in Annex 3, because Annex 3 contains the methodology required to determine the AMS for specific products as well as the Total AMS. It is also not possible to decide whether Korea has met its obligations under these Articles without reference to the reduction commitments contained in its Schedule.
The Panel is required by its terms of reference to consider whether Korea has met its obligations under Articles 3, 6 and 7 of the Agreement on Agriculture. In order to do so, the Panel must consider both Annex 3 of the Agreement on Agriculture, including Korea's calculation of its AMS on beef and its Total AMS, as well as Part IV of Korea's Schedule.
The United States contended that Korea's arguments in paragraphs 30-32 are misguided. The scope of a panel's terms of reference has been considered in a number of Appellate Body reports. The beginning point is Article 7 of the Understanding on Rules and Procedures Governing the Settlement of Disputes (the DSU), which describes the standard terms of reference and directs that "[p]anels shall address the relevant provisions in any covered agreement or agreements cited by the parties to the dispute".
This issue has arisen most frequently in the context of arguments that the complaining party has not satisfactorily explained its claims as required by Article 6.2 of the DSU. The Appellate Body recently rejected an argument made by Korea in Korea – Safeguards (AB) that is similar to the one now made by Korea. There, the Appellate Body re-emphasized that "claims, not detailed arguments, are what need to be set out with sufficient clarity…" Indeed, in EC – Bananas III (AB), the Appellate Body agreed with the panel's conclusion that "the listing of the articles to the agreements claimed to have been violated satisfied the minimum requirements of Article 6.2 of the DSU" in view of the circumstances of that case and, in particular, the lack of any demonstrated prejudice to the defending party.
The approach described above was adopted by the Appellate Body in at least three separate disputes: those relating to EC – Bananas III(AB), Korea – Safeguards (AB), and EC - Computer Equipment(AB). In each instance, the Appellate Body examined the written panel request to determine whether the requirement contained in Article 6.2 for explication of the claim was satisfied and whether there was any indication that a defending Member had been prejudiced by lack of notice regarding the nature of the claim. In the cited cases, the Appellate Body found that no prejudice had
WT/DS161/R WT/DS169/R
Page 11
been shown and the descriptions of the claims, thus, were adequate to satisfy the purpose of Article 6.2 of the DSU.
The US description of its claim regarding Korea's domestic support obligations under the Agreement on Agriculture is plainly set forth in its request for the establishment of a panel. In pertinent part, the US request states: " … Korea has increased the level of domestic support for its cattle industry to the point that the total domestic support provided by Korea exceeds its Aggregate Measurement of Support (AMS) under the Agreement on Agriculture. The United States then concluded that it considered Korea's support measures to be inconsistent with Articles 3, 6 and 7 of the Agreement. The US claim, thus, plainly included a contention that Korea was not in compliance with its domestic support commitments as set forth in Articles 3, 6, and 7 of the Agreement on Agriculture and that this situation resulted from increases in the level of support provided to Korea's cattle industry. Korea has never claimed, and does not now allege, that it ever has been uncertain about or without adequate notice of the nature of the US claims regarding Korea's AMS obligations.
Apparently, Korea's argument is based on the fact that the United States did not expressly identify Annex 3 as one of the legal bases for its claims. However, even a cursory reading of Articles 6 and 7 of the Agreement on Agriculture reveals that the commitments there incorporated include a requirement that the applicable AMS be computed in conformity with the provisions of Annex 3. Korea could not possibly have been misled by the US panel request because the references in Article 6.1, for example, to "Total Aggregate Measurement of Support" and "Annual and Final Bound Commitment Levels" require consideration of the definitions set forth in Article 1 as well as the computation methodology contained in Annex 3. In fact, the definition of AMS set forth in Article 1 directs that AMS shall be "calculated in accordance with the provisions of Annex 3 of this Agreement
…."
Moreover, the United States continued, Annex 3 itself is entitled "Domestic Support: Calculation of Aggregate Measurement of Support" and contains provisions essential to the AMS computation. As a result, there is no question but that the Panel is compelled to consider Annex 3 in resolving the US claims under Article 6 of the Agreement. The United States specifically stated that its claim involved the calculation of the AMS under the Agreement on Agriculture. Annex 3 is so intrinsic to the calculation of the AMS that any analysis that ignores that provision could not possibly result in a construction of Article 6 which would be consistent with customary rules of interpretation under Article 3.2 of the DSU.
WT/DS161/R WT/DS169/R
Page 12
MAIN ARGUMENTS37
GENERAL
The complaint examined by the Panel is related to Korea's measures governing the importation and marketing of fresh, chilled and frozen beef in Korea, falling within HS codes 0201- 10, 0201-20, 0201-30, 0202-10, 0202-20 and 0202-30.
Australia requested the Panel to find that:
the requirements imposed on the retail sale of imported beef operate as a quantitative restriction and discriminate against imported product contrary to Articles III and XI;
the tendering process adopted by LPMO for the import of beef results in quantitative restrictions being applied to grass-fed beef, contrary to Articles II:1, III:4, XI:1 and XVII;
the discharge procedures for LPMO beef restrict the distribution of imported beef into the market in a manner which constitutes a quantitative restriction, imposes non-tariff measures made effective through state trading enterprises and discriminates against imported beef in a manner contrary to Articles III, XI and XVII of GATT and Article 4.2 of the Agreement on Agriculture;
restrictions on sales of beef imported by the LPMO, including cash payment and record-keeping requirements, discriminate against imported beef contrary to Article III:4;
Korea applies a mark-up on beef imported under the SBS system which is not applied to domestic beef and is inconsistent with Korea's obligations under Article II or III;
the SBS system applies limitations on the import and distribution of imported beef, and imposes labelling, reporting and record-keeping requirements, that discriminate against imported product contrary to Articles XI and III; and
in 1997, Korea provided domestic support to its beef industry at levels which exceeded de minimis and which, therefore, were required to be included in its calculations of its Current Total Aggregate Measurement of Support (AMS). This resulted in Korea's Current Total AMS for 1997 being in excess of its reduction commitments for that year, contrary to Articles 3.6 and 7 of the Agreement on Agriculture.
Australia further requested the Panel to recommend to the DSB that Korea bring its measures affecting the import of fresh, chilled and frozen beef into conformity with its obligations under the GATT 1994 and the Agreement on Agriculture.
The United States requested the Panel to find that:
Korea's requirement that imported beef be sold only in specialized imported beef stores and its laws and regulations restricting the resale and distribution of imported
37 This section contains the main arguments by the parties as summarized and understood by the Panel. If not otherwise stated, the footnotes in this section are those of the parties. Note that Article numbers refer to the General Agreement on Tariffs and Trade 1994 if not otherwise stated.
WT/DS161/R WT/DS169/R
Page 13
beef by SBS super-groups, as well as by retailers, customers, and end-users is inconsistent with its obligations under Article III:4;
Korea's discretionary import regime, including, but not limited to, laws and regulations prohibiting the import of beef by any entity other than the super-groups and the LPMO, as well as the LPMO's establishment of minimum import prices and delay of both invitations to tender as well as quota allocations is inconsistent with its obligations under Article XI:1of GATT, Article 4.2 of the Agreement on Agriculture, and Articles 1 and 3 of the Agreement on Import Licensing Procedures;
Korea's imposition of other duties or charges in the form of a mark-up not provided for in Schedule LX is inconsistent with its obligations under Article II:1; and
Korea has failed to fulfill its reduction commitment for domestic support and the level of domestic support provided and is thus inconsistent with Korea's obligations under Articles 3, 6, and 7 of the Agreement on Agriculture.
The United States further requested the Panel to recommend that Korea bring its measures into conformity with its obligations under the GATT 1994, the Agreement on Agriculture and the Agreement on Import Licensing Procedures.
CLAIMS TO A "TRANSITIONAL PERIOD"
Remaining restrictions
Korea stated that its Schedule of Concessions provides for a transition period until 1 January 2001 to eliminate or bring into conformity with the provisions of the GATT all remaining restrictions on beef. The claims raised by Australia and the United States are, therefore, inadmissible and contrary to Article II:1 of GATT 1994, Article 3:2 of the Understanding on Rules and Procedures governing the Settlement of Disputes (DSU) and Article 26 of the Vienna Convention. Korea, therefore, requested that the Panel rejects all arguments and claims made by Australia and the United States.
Korea submitted that the restrictions alleged by the Complainants were already in existence at the time of the conclusion of the Uruguay Round and hence constitute "remaining restrictions" within the meaning of Note 6 of Korea's Schedule LX. The term "remaining restrictions" should be interpreted in accordance with its ordinary meaning pursuant to Article 31 of the Vienna Convention. The ordinary meaning of the words suggests that the "remaining restrictions" are otherwise not in conformity with the provisions of the GATT. There would be no need to provide that they should be eliminated or be brought into conformity with the provisions of the GATT by 1 January 2001 if they were. Indeed, if the remaining restrictions were in conformity, it would make no sense to provide that they should be eliminated or brought into conformity with GATT provisions. The only qualification is that they are "remaining" at the time of the conclusion of the Uruguay Round agreement.
Should the Panel, nevertheless, consider that the ordinary meaning and scope of the term "remaining restrictions" is not clear, then Korea submitted that the Panel, in accordance with the recent Appellate Body ruling in Canada – Dairy (AB), should refer to the preparatory work of the treaty in accordance with Article 32 of the Vienna Convention [supplementary means of interpretation]. In the view of Korea, the December 1993 Record of Understanding concluded with the United States constitutes the preparatory work of the Uruguay Round agreements, and makes it clear that the remaining restrictions cover all restrictions which were in existence for balance-of- payments reasons at the time of conclusion of the Uruguay Round. No specific measures were enumerated as constituting remaining restrictions in Note 6 of Korea's Schedule LX, but Korea
WT/DS161/R WT/DS169/R
Page 14
considered that the language of Note 6 should be interpreted as Korea's commitment, in broad terms, to full liberalization of its beef import regime by the end of the year 2000. Therefore, even if any of the remaining restrictions are inconsistent with the provisions of the GATT, which Korea disputes, they would nevertheless be covered by the transitional period until 1 January, 2001.
Korea argued that the interpretation by Australia of the term "remaining restrictions" (see paragraph 83) in Note 6 of Korea's Schedule of Concessions contravenes the foregoing principles set forth by the Appellate Body (see paragraph 54). In the opinion of Korea, the interpretation advocated by Australia first of all contravenes Article 31 of the Vienna Convention which requires interpretation in accordance with the ordinary meaning to be given to the terms. Since Note 6 of Korea's Schedule refers to remaining restrictions, it is evident that more than one restriction was meant. Furthermore, Australia's interpretation of Note 6 as referring only to GATT inconsistent restrictions contained in the Schedule itself, in particular the quota, would deprive Note 6 of any effet utile. Indeed, Korea's Schedule LX Section I-B: Tariff Quota already explicitly provides for the quota to be eliminated by the end of the year 2000.
An interpretation in accordance with the ordinary meaning of the terms used in Note 6, Korea submitted, leads to the conclusion that all restrictions (limitations placed on actions) which existed at the end of the Uruguay Round and which were GATT inconsistent should be eliminated or brought into conformity with GATT by 1 January 2001. Indeed, if a cut-off date other than the conclusion of the Uruguay Round had been intended, it would have been so specified in Note 6. No other cut-off date is mentioned or implied by Note 6 and the Complainants have provided no evidence from the negotiating history showing that another cut-off date was meant. Therefore, in accordance with the ordinary meaning of the term "remaining," the restrictions at issue are those remaining at the time of conclusion of the Uruguay Round contained in Note 6. The phrase preceding the words "remaining restrictions," that reads "According to the results of the 1989 consultation with GATT/BOP Committee and the Uruguay Round multilateral trade negotiation" cannot be construed as implying that a 1989 cut-off date was meant. This phrase clarifies the negotiating background of the transitional period and grammatically does not qualify the term "remaining restrictions". To interpret this phrase as implying a 1989 cut-off date would be inconsistent with the ordinary meaning of the phrase "and the Uruguay Round multilateral trade negotiation" and deprive it of any effet utile.
Transitional period
In Korea's view, the operative consequence of Note 6 is that even if the Panel finds that certain "remaining restrictions" are inconsistent with GATT, no violation of Korea's obligations can be established at this point in time precisely for the reason that Korea still benefits from a transitional period until 1 January 2001. Hence, the claims brought by the United States and Australia with regard to the alleged GATT incompatibility of certain "remaining restrictions" are irrelevant at this point in time for all practical and legal purposes and, accordingly, Korea requests that the Panel dismiss these claims.
Korea objected to the Complainants' attempt to bring before the Panel and actively discuss, the issue of what the Korean measures on imported beef will exactly be on and after 1 January 2001. The possible future measures by Korea with regard to imported beef are outside the terms of reference of the Panel. Korea has still one year's time to review its current system and conform to the obligations contained in Note 6. For this reason, Korea also objected to the Complainants' attempt to prompt Korea to prematurely examine and decide which remaining restrictions are inconsistent with GATT and which remaining restrictions will be eliminated. Korea requests that the Panel limit its examination of the measures challenged within its terms of reference.
The Complaining parties submitted that the Appellate Body in EC – Poultry(AB) outlined the approach that should be taken in relation to the interpretation of a Member's obligations under the
WT/DS161/R WT/DS169/R
Page 15
WTO Agreements. It found that Members' Schedules are annexed to the Marrakesh Protocol to the General Agreement on Tariffs and Trade 1994 and are integral parts of the GATT 1994. As such, they form part of the multilateral obligations under the WTO Agreement. The Appellate Body also noted that bilateral agreements are not "covered agreements" within the meaning of Articles 1 and 2 of the DSU. Nor are they part of the multilateral obligations accepted by Members pursuant to the WTO Agreement. The Appellate Body concluded that it is Members' Schedules which contain the relevant obligations of a Member under the WTO Agreement and it is the Schedules which form the legal basis for a dispute and which must be interpreted in accordance with "customary rules of interpretation of public international law" under Article 3:2 of the DSU. Consistent with Article 31 of the Vienna Convention, the term remaining restrictions in Note 6 must, therefore, firstly be interpreted according to its ordinary meaning in context and in light of the purpose of a Schedule and the commitments and obligations contained therein.
Referring to the text of Korea's note 6, Australia agreed with Korea, that the term remaining restrictions in the Note must be interpreted in light of the phrase "shall be removed or brought into conformity with GATT provisions". Australia agreed that it is only logically possible for the term remaining restrictions to refer to restrictions which are inconsistent with GATT provisions. In this respect, Australia agreed with Korea's statement in paragraph 54 that the ordinary meaning of the words suggests that the "remaining restrictions" are otherwise not in conformity with GATT provisions. Therefore, Note 6 only applies to those measures at issue in this dispute which are inconsistent with the provisions of the GATT. However, Korea also claims that, with the exception of the mark-up on SBS imports, none of the measures at issue in this dispute are in fact inconsistent with the provisions of the GATT.
Hence, Australia continued, Korea has claimed that the following measures are consistent with the GATT 1994 for reasons other than their coverage under Note 6:
Dual retail system
Discrimination against grass-fed beef
Restrictions applied through the SBS system
Quantitative restrictions arising from minimum prices for imports and withholding imported beef from the market
Domestic support for agriculture
Australia further submitted that Korea appears to suggest that the consistency or otherwise of the remaining restrictions on imported beef is a unilateral determination for Korea to make after 1 January 2001 (see paragraph 80). Australia would be very concerned if Korea were suggesting that, having taken advantage of a transition period to remove remaining restrictions, it then reserves to itself the right to determine whether in fact any of these restrictions are inconsistent. Australia would also be very concerned if Korea were suggesting that Australia would be required, after 1 January 2001, to once again challenge the WTO consistency of Korean measures before a dispute settlement panel, should it disagree with Korea's determination of which remaining measures are inconsistent. Australia does not accept that Korea can claim on the one hand that Australia agreed to allow it a transition period to remove inconsistent restrictions and on the other hand reserve for itself the unilateral right to determine, ex post facto, whether the restrictions in question are in fact inconsistent.
Australia contended that Korea cannot have it both ways. Either Korea argues that the measures in this dispute are inconsistent, were agreed to be so at the time of the signing of the Uruguay Round, are therefore covered by a transition period until 1 January 2001 and will be removed or brought into conformity on that date; or Korea submits that none of the measures are inconsistent, in which case they cannot, by definition, be covered by Note 6.
WT/DS161/R WT/DS169/R
Page 16
With respect to Australia's contention that Korea is trying to have it both ways (paragraph 64), Korea submitted that it has almost one full year left to examine and bring its remaining restrictions into conformity with its obligations. Korea considered that by bringing this dispute prematurely, the Complainants have improperly sought a ruling by the Panel on measures which are covered by the transitional period. Korea contended that it is not trying to maintain an "unspecified range of measures" during the transition period.
The United States was of the opinion that the disputed measures are not "remaining restrictions". Korea appears to claim that virtually all of the measures challenged by the United States in this dispute are "remaining restrictions" within the meaning of Note 6 to its Schedule and that such measures are, therefore, "grandfathered" at least for a transition period expiring on 31 December 2000. The United States considered that the reference to "remaining restrictions" relates only to balance-of-payments restrictions imposed prior to 1989. Therefore, the Panel does not even need to reach Korea's "grandfathered" argument since none of the challenged measures are included within the scope of the term "remaining restrictions."
Referring to an Appellate Body statement38 and to Korea's Schedule39, the United States submitted that the nature of a "remaining restriction" can only be determined in reference to a point in time or some other comparative reference. The words in Korea's Schedule, however, are ambiguous to the extent that they identify both the 1989 BOP Committee consultations and the Uruguay Round negotiations as possible reference points. Recourse to supplemental means of interpretation, consistent with Article 32 of the Vienna Convention, is, therefore, justified to that extent.40 For this purpose, examination of the 1989 GATT/BOP Committee proceedings, as well as any pertinent Uruguay Round negotiations, is appropriate as each is mentioned in the quoted excerpt from Korea's Schedule. A review of those proceedings and negotiations also will reveal whether the parties intended the term " remaining restrictions" to have a special meaning as provided in Article 31.4 of the Vienna Convention.
The United States contended that the more recent actions of the LPMO, including excessive delays in tendering for imports, withholding quota share from allocation, and failing to reallocate unused quota until late in the year are all questions of implementation that did not begin to occur until late in 1997. Thus, none of these "restrictions" could be encompassed within the scope of the term "remaining restrictions" appearing in Korea's schedule. Similarly, the national treatment violations that the United States has identified are not commonly referred to as "restrictions". In fact, the term "restriction" does not appear anywhere in the text of GATT Article III. Accordingly, Korea has no basis to assert that the term "remaining restrictions' encompasses any measure that would constitute a violation of Article III of the GATT.
BOP Committee report
The United States submitted that an examination of the 1989 GATT panel report shows that the phrase "remaining restrictions" originated in the 1987 report of the Balance-of-Payments Committee.41 As reflected in the panel report42, the BOP Committee found that "the current situation and outlook for the balance of payments was such that import restrictions could no longer be justified
38 US Shrimp (AB), paragraph 114.
39 "According to the results of the 1989 consultations with GATT/BOP Committee and the Uruguay Round multilateral trade negotiation, the remaining restrictions on the items marked as '*Note 6(a)', '*Note 6(b)',
'*Note 6(c)', '*Note 6(d)', '*Note 6(e) in column 5 of Section I-A of part I of this Schedule shall be eliminated or brought into conformity with GATT provisions from dates specified as follows: … Note 6(e): January 1, 2001".
40 Canada – Dairy, paragraph 132.
41 BOP/R/171.
42 Korea - Beef, paragraph 122.
WT/DS161/R WT/DS169/R
Page 17
under Article XVIII:B".43 The Committee then concluded that "Korea would be able in the meantime to establish a timetable for the phasing-out of balance-of-payments restrictions and that Korea could consider alternative GATT justification for any remaining measures, thus obviating the need for such consultations".44 The 1987 BOP Committee report, thus, establishes the missing temporal reference for the terms "remaining restrictions" contained in Korea 's Schedule. "Remaining restrictions", in the words of the Committee, are those measures that as balance-of-payments restrictions are to be phased- out since balance-of-payments restrictions are no longer justified. Any import restriction instituted by Korea after the Council's adoption of the BOP Committee report would necessarily be without balance-of-payments justification and, as a result, would not be a "remaining restriction".
Any doubt that the use of the term "remaining restrictions" was limited solely to GATT inconsistent quantitative restrictions existing at the time of the BOP Committee reports in 1987 and 1989, the United States continued, can be resolved through consideration of the BOP Committee's summary of its 23 October 1989 consultation with Korea.45 After acknowledging Korea's commitment to disinvoke Article XVIII:B, the Committee reported that "Korea was encouraged, in the light of established precedents, to develop, in consultation with other contracting parties, an orderly programme of liberalization which would phase-out remaining restrictions in a reasonably short time."46 (emphasis added) Obviously, the BOP Committee's reference to remaining restrictions could only mean restrictions still existing at that time. Certainly the Committee's use of that term could not contemplate new measures that had not yet been introduced.
Any uncertainty regarding the meaning of the term, the United States continued, is also dispelled by the manner in which the term "restrictions" was used by Korean officials meeting with the BOP Committee during 1989. In a Korean written statement, dated 27 June 1989, submitted to the BOP Committee, the responsible Korean official stated:
However, I do not foreclose the possibility of discussing disinvocation of Article XVIII:B, provided that the Balance-of-Payments Committee:
recognizes Korea's need for and agrees to a grace period sufficiently long enough for further liberalization and phase-out of the restrictions presently under BOP cover after its disinvocation, (emphasis added)47
The exact nature of the measures maintained by Korea at the time of the loss of BOP coverage can be best determined by consulting the 1989 GATT panel report concluding the dispute between the United States, Australia, New Zealand and Korea concerning Korea's then existing import measures. The 1989 panel considered four major issues: (1) whether Korea's maintenance of various restrictions on imported beef were justified by its balance-of-payments situation; (2) whether Korea's 1985-1987 ban and, after 1987, its quota on imported beef were inconsistent with Article XI:1; (3) whether the LPMO's capture of quota rents through the imposition of an import surcharge, a so-called "mark-up", was a violation of Article II:4; and (4) whether the LPMO's state- conferred monopoly constituted a separate import restriction within the meaning of Article XI:1. Korea fails to identify anywhere in the panel report any discussion of the measures challenged in the current dispute. For example, the panel did not consider whether Korea's dual retail sales regime is consistent with Korea's international obligations since Korea did not institute its retail system until
43 BOP/R/ 171, paragraph 22.
44 Ibid, paragraph 23.
45 BOP/R/183/Add. 1, October 1989.
46 Ibid, paragraph 7.
47 BOP/R/183/Add.1.
WT/DS161/R WT/DS169/R
Page 18
1990 when the Guidelines Concerning Registration and Operation of Specialized Imported Beef Stores were first issued.
Similarly, Korea cannot point to any discussion of the limitations imposed on participants in the SBS system, such as the prohibition on most cross-trading48 and the use constraints established for imported beef. This is because the SBS system is a creature of the 1990 and 1993 Records of Understanding and, thus, is later in time than the GATT panel and the measures considered by that panel. The same situation exists regarding the various LPMO measures, including minimum acceptable bid or award prices at wholesale auctions, delay of tenders, and withholding of quota allocations. Once again, Korea introduced each of these measures after the GATT dispute and, therefore, such measures cannot constitute "remaining restrictions" as that term was used by the BOP Committee. According to the United States, the parties adopted the Committee's usage of the term in the Records of Understanding that they negotiated and the term ultimately was used with the same meaning in Korea's Schedule.
The United States submitted further that Korea's current measures such as the dual retail sale regime and limitations on cross-trading, which are shown below to be inconsistent with Article III:4, cannot be considered to be "restrictions" as that term is used in the GATT. Moreover, since the BOP Committee's discussion of "restrictions" was entirely in the context of which restrictions could no longer be justified under Article XVIII for balance-of-payments purposes, the term must be interpreted in light of its meaning in the GATT's balance-of-payments provisions. The GATT consistently uses the word "restriction" to refer only to quantitative restrictions on importation, not to any internal measures governed by Article III or to any price-based measure on importation governed by Article II. Article XVIII:9, in particular, permits certain contracting parties to "control the general level of [their] imports by restricting the quantity or value of merchandise permitted to be imported" for balance-of-payments reasons, as an exception to the prohibition on quantitative restrictions in Article XI. Nothing in Article XVIII:9 permits a contracting party to take measures inconsistent with Article II or Article III.
The Korean Schedule commitment at issue was negotiated against the background of Korea's obligations under Article XVIII. The only reading of "remaining restrictions" that is true to this context is one that includes only quantitative restrictions on importation and not measures regulated by Articles II and III. For instance, of the measures at issue in this case, the segregation of distribution channels for imported beef and the mark-up are clearly not "restrictions" and, therefore, by definition cannot be "remaining restrictions."
Australia submitted that, on the basis of the words "According to the results of the 1989 Consultation with GATT/BOP Committee and the Uruguay Round negotiations" in Note 6, the remaining restrictions must, in addition to being GATT-inconsistent, be quantitative in nature and have been applied for BOP purposes. Korea applied a range of quantitative restrictions on a range of products for BOP purposes, which were required to be removed once Korea had disinvoked Article XVIII:B on 1 January 1990 in accordance with the BOP Committee conclusions of 1989.49 As a result of the 1989 BOP Committee consultations, Korea began a programme of removing quantitative restrictions on a range of products, one of which was beef. The reference in Note 6 to the BOP consultations, therefore, limits the restrictions covered by a transition period to those maintained earlier for BOP purposes, all of which were quantitative in nature.
The 1989 BOP Committee conclusions also contain the timetable for removal of measures maintained for BOP purposes. Three phases each of three years (1989-1991, 1992-94, 1995-97) were
48 The term "cross trading" is intended to refer to commercial activity between and among the super- groups or between and among their customers and end-users.
49 See BOP/R/183/Add.1, 27 October 1989, paragraph 12.
WT/DS161/R WT/DS169/R
Page 19
agreed for the phase-out of restrictions. The final phase-out date for the removal of these quantitative measures on beef was originally agreed by the BOP committee to be 1 July 1997. In the context of the Uruguay Round, the phase-out date was extended until 1 January 2001 for the measures which had been maintained on beef. However, while the phase-out date for the quantitative restrictions maintained for BOP purposes, i.e. the quota, was extended in the course of the Uruguay Round negotiations, there was no extension of a transition period to any new measures, applied for whatever reason. In the opinion of Australia, Korea has produced no evidence to show otherwise.
The United States submitted that the dual retail system is not a "remaining restriction" as it did not exist at the time of the 1987 BOP Committee report or the adoption of the 1989 GATT panel reports50 and could not be a measure taken for balance-of-payments purposes as it is not a "restriction". Likewise, Korea's argument that the current mark-up is a "remaining restriction" is difficult to comprehend. First, the 1989 panel ruled that the mark-up existing at the time of the dispute was not a violation of Article II:4 because it was imposed by an entity, the LPMO, which at the time possessed a monopoly on imports. Given the panel's ruling, there would have been no reason for treating the mark-up as a "remaining restriction" that was required to be eliminated due to any GATT inconsistency. Further, as indicated above, (paragraph 70 ) only quantitative restrictions were authorized measures for Article XVIII balance-of-payments purposes.
Korea's treatment of the current mark-up under the terms of the December 1993 Records of Understanding with the United States also belies Korea's contention that the mark-up was intended to be considered a "remaining restriction". As Korea concedes, Korea's Schedule provides for the elimination of all "remaining restrictions" by 1 January 2001. However, the December 1993 Record of Understanding requires that the mark-up be reduced to zero commencing on 1 January 2000. US exporters confirm that no mark-up has been imposed on imported beef in calendar year 2000. Korea has not explained why the mark-up has been eliminated already if it is a "remaining restriction" within the meaning of its Schedule and according to the terms of its Schedule is not required to be withdrawn until the beginning of 2001.
Korea submitted that 1 January 2001 is the deadline by which the phasing-out of remaining restrictions should be completed. It is up to Korea to decide which remaining restrictions should be eliminated or brought into conformity at which point in time during the transitional period. In response to the arguments in paragraph 79 with respect to the mark-up, Korea submitted further that it simply followed the agreed timetable for its elimination under the December 1993 Record of Understanding with the United States and executed the Record of Understanding in good faith, notwithstanding the current dispute brought by the Complainants. This in no way contradicts Korea's position that it benefits from a transitional period under its Schedule LX.
Note 6 of Korea's Schedule of Concessions, Korea continued, is in full conformity with Article 4.2 of the Agreement on Agriculture, and more specifically with footnote 1 which makes it clear that Members may maintain import measures for balance-of-payments reasons. According to the 1989 BOP Committee report, Korea's import restrictions for balance-of-payments purposes were supposed to end by 31 December 1997. However, as Note 6 of Korea's Schedule of Concessions makes it plain, WTO Members, including the Complainants in this dispute, agreed during the Uruguay Round to defer elimination of such restrictions to 1 January 2001. Referring to the Appellate Body report on Canada - Dairy51, Korea submitted that its Schedule of concessions is an integral part of the GATT. (See also arguments in paragraph 299 et sequitur.)
50 The dual retail regime was first introduced in January 1990, approximately two months after adoption of the GATT panel and BOP Committee reports.
51 At paragraphs131 and 133.
WT/DS161/R WT/DS169/R
Page 20
Australia submitted that to give the term remaining restrictions the broad meaning demanded by Korea, i.e. an unspecified list of any and all GATT-inconsistent restrictions existing at the time of the Uruguay Round, would be to undermine the binding nature of Schedule commitments and the certainty of Members in understanding the exact nature of the commitments which are agreed during trade negotiations. Australia also considered that Korea's proposed interpretation of Note 6 is contrary to the object and purpose of the GATT, which is "directed to the substantial reduction of tariffs and other barriers to trade and to the elimination of discriminatory treatment in international commerce".52
On this basis, Australia submitted that the remaining restrictions referred to in Note 6 can only be those contained in the Schedule itself, so that other Members can easily identify the restrictions to which the transition period applied. This would also be consistent with Members' understanding that the restrictions were only those previously maintained for BOP purposes. However, none of the measures at issue in this dispute are contained in Korea's Schedule and, therefore, cannot be covered by Note 6. Australia considered that this interpretation is both unambiguous and does not produce a result which is either manifestly absurd or unreasonable. Indeed, to come to any other conclusion would lead to a manifestly unreasonable result, since it would obligate all Members to agree to a transition period for an unlimited and unspecified range of restrictions until January 2001 as a result of bilateral arrangements to which they were not party and which were not notified to them. This would be contrary to the principles espoused in the US - Sugar Head Note case and would undermine the certainty provided by Members' Schedules about their commitments.
If the Panel considers that ambiguity exists as to the scope of measures covered by the transition period in Note 6, Australia submitted that none of the evidence adduced by Korea supports its claim that the measures in dispute are remaining restrictions within the meaning of Note 6. There is nothing in the preparatory work of the treaty, the circumstances of its conclusion, or the historical background, that supports Korea's interpretation of its commitments on beef. In fact, quite the reverse. The historical record proves that the term remaining restrictions has a much more limited application than claimed by Korea.
The notifications to the GATT referred to by Korea, Australia continued, do not provide any insight into the scope of restrictions for which Korea claims coverage through its Schedule. Korea's notification L/7449 of 29 April 1994, notes only that the "remaining restrictions" on the 150 items shall be eliminated or be brought into conformity with GATT provisions for the dates specified". There is no guidance on the range of restrictions applying to beef that are covered by this statement. It, therefore, adds nothing to the Schedule itself.
Australia also noted that the 1989 panel found that Korea was obliged to bring into conformity quantitative restrictions maintained on beef for balance of payments purposes. The panel's findings were limited to these quantitative restrictions and were based on the findings of the 1987 BOP consultations on Korea which found that there was no longer any justification for Korea to maintain import restrictions for BOP purposes. None of the measures at issue in the current dispute were adjudicated in the previous panel. Certainly, measures which violated the national treatment provisions of GATT were not maintained for BOP reasons, did not exist at the time of the earlier dispute and were not part of the negotiated outcome of that dispute.
The Records of Understanding
Korea emphasized its view that the December 1993 Record of Understanding concluded with the United States constitutes the preparatory work of the Uruguay Round agreements for the purposes
52 See Preamble to the GATT 1994.
WT/DS161/R WT/DS169/R
Page 21
of Article 32 of the Vienna Convention (see paragraph 55) and which was indeed consolidated into Korea's Schedule of Concessions, and makes it clear that the remaining restrictions cover all restrictions which were in existence for balance-of-payments reasons at the time of the conclusion of the Uruguay Round. Note 6 of Korea's Schedule LX does not list specific measures as remaining restrictions, but should be interpreted as Korea's commitment, in broad terms, to full liberalization of its beef import regime by the end of the year 2000. Consequently, even if it were assumed, for the sake of argument, that any remaining restrictions are inconsistent with the provisions of the GATT, they would still be covered by the transitional period until 1 January 2001.
Australia disagreed with Korea's assertion that the restrictions at issue in this dispute have been implemented by Korea in accordance with the Records of Understanding concluded with interested parties following the 1989 GATT panel. Australia submitted that its Records of Understanding with Korea, signed in 1990 and 1993, are only relevant to the extent that they reflect the negotiated outcome of the 1989 panel and are not, therefore, works preparatory to the WTO Agreements. Australia's 1993 Records of Understanding with Korea expired in 1995 and was not renewed in the context of the Uruguay Round. Furthermore, the Records of Understanding were attempts to give effect to the findings of the panel in the 1989 case and must be read in that context.
Australia, therefore, did not accept that the existence of now-expired Records of Understanding can be held to represent Australia's agreement that the measures in dispute in this case are covered by the transition period in Note 6. The Record of Understanding to which Korea refers as being signed in December 1993 was a bilateral agreement between the United States and Korea. This agreement cannot be "read into" Korea's Schedule or even be used to interpret the intentions of Australia, or indeed those of any WTO Member, other than the parties involved. Australia cannot be held to have agreed to the terms of a bilateral agreement to which it was not a party and which was not notified to the then GATT CONTRACTING PARTIES, let alone to have agreed that the terms of that agreement were incorporated into Korea's Schedule without this being made specific in the Schedule itself. Korea has produced no evidence to support its claim that Australia should be bound by the terms of Korea's December 1993 Record of Understanding with the United States.
Schedules are multilateral in character, Australia continued, and subject to the basic principles of MFN. In Australia's view, the multilateral nature of Schedules would be undermined if bilateral arrangements, particularly those not notified to other Members, and which may contain elements both inconsistent with WTO rules and prejudicial to the interests of other Members, could diminish the commitments specified in a Member's Schedule, to the detriment of all other Members. In this respect, Australia takes issue with Korea's reliance on the findings of the Appellate Body in Canada- Dairy (see paragraph 54) to support its view that its December 1993 Records of Understanding with the United States should be interpreted to permit Korea a transition period for measures existing at the time of the Uruguay Round. While Australia does not disagree with the approach to interpretation, the facts of that case can be distinguished from the current situation. In Canada - Dairy the Appellate Body considered the failure of Canada and the United States to reach agreement on improvements to existing conditions for cross-border trade of milk in the context of interpreting Canada's Schedule commitments and the intentions of the parties at the time the commitments were entered into. On this basis, the Appellate Body overturned the panel's interpretation of Canada's Schedule commitments, given that the panel's interpretation would have increased Canada's obligations in relation to that cross-border trade even though it was clear that the parties had not so agreed. This is a different proposition altogether from binding all other WTO Members to the terms of a bilateral agreement which, according to Korea, reduces Korea's Schedule commitments and permits it to act in a manner detrimental to the interests of all other WTO Members without their knowledge, let alone their agreement.
Australia further submitted that, to the extent that the Panel might consider any of Australia's Records of Understanding with Korea relevant to determining Australia's intentions, its Records of
WT/DS161/R WT/DS169/R
Page 22
Understanding could only be relevant to the extent that they contain explicit reference to the measures at issue in this dispute. However, the Records of Understanding do not contain reference to any such measures except the mark-up on SBS imports. This is because the Records of Understanding were intended to give effect to the 1989 panel on quantitative restrictions maintained for balance of payment purposes as mentioned in paragraph 88. None of the measures in dispute in this case were, in the opinion of Australia, maintained for BOP reasons.
Australia and the United States contended that none of the measures challenged by the Complainants, with the exception of the SBS mark-up, are addressed anywhere in the various Records of Understanding. They are entirely silent regarding a dual retail sales regime and separate, and more onerous, requirements for the operation of specialized import stores. Indeed, the July 1993 Records of Understanding specifies that Korea shall not impose any unnecessary obstacles to trade. Thus, no provision in the Records of Understanding speaks to prohibitions on commercial transactions between end-users and customers for imported beef or limitations on the use of imported beef by those end-users and customers. Similarly, the Records of Understanding contain no reference to delays in LPMO tendering or delayed allocation of SBS quota sub-shares. All of those measures were imposed by Korea without prior consultation with the Complainants. There is no reference in any of the Records of Understanding to measures on retail sale, limits on grass-fed beef, manipulation of volumes and prices at wholesale, restrictions on end users and usage imposed through the SBS system, and other limitations on the wholesale sale of imported beef in either Korea's Schedule or in its Records of Understanding.
Australia added that Korea has no basis to argue that Australia "agreed" to these measures or agreed that they be covered by a transition period. Australia noted that the Records of Understanding specifically state that both parties reserve their GATT rights. Clearly, the parties agreed that disputes were to be resolved through the WTO dispute settlement mechanism. The fact that Australia has not previously opposed Korea's measures in no way indicates its acceptance that those measures fall within the scope of Note 6 in Korea's Schedule. Nor does it prejudice Australia's right to challenge these measures at any time in the WTO. A breach of WTO obligations does not become valid because of a lack of challenge or because of the expiration of time.53
The United States was of the view that the history of the Records of Understanding entered into by the United States and Korea demonstrates that two contentions central to Korea's arguments in this case are factually untenable. First, the terms of the three Records of Understanding make it abundantly clear that the restrictions that Korea promised to eliminate in the Records of Understanding and then in its WTO Schedule are those associated with the 1989 BOPs report and dispute. Thus, any later-in-time measures imposed by Korea, namely those that are the subject of the present dispute, cannot be encompassed by the term "remaining restrictions" as that term was used, first, in the BOP Committee Report, then later, in the Records of Understanding, and still later, in Korea's WTO Schedule.
In response, Korea submitted that Section IV B2(e) of the July 1993 Record of Understanding makes it plain that the Complainants were well aware of the fact that a system of separation of sales outlets was in operation when the Record of Understanding was negotiated. The mentioned paragraph states that "Also beginning January 1, 1995, any butcher shops that are or become registered dealers of imported beef shall have the right to participate…" (emphasis added). In Section IV C6(a) of the same Record of Understanding, Korea continued, it is stated that "Beef imported…must be distributed and sold through legal channels…" (emphasis added). Korea submitted that it is clear from these excerpts that the negotiators were fully aware of the existence of the system of separation of sales outlets at the time of negotiating the Record of Understanding leading up to the Uruguay Round.
53 EEC- Imports from Hong Kong, paragraph 28; Japan - Leather, paragraph 45.
WT/DS161/R WT/DS169/R
Page 23
The United States submitted that Korea's contention that the term "remaining restrictions" encompasses most, if not all, of the measures challenged by the United States is refuted by language used in each of the three Records of Understanding negotiated between the United States and Korea. The Panel need only to consult Korea's notification of the 1990 and July 1993 Records of Understanding to satisfy itself that "remaining restrictions" could only have been intended to refer to the restrictions on market access for imported beef that Korea had in place in November 1989, when the BOP Committee and GATT panel reports were adopted. That the term "remaining restrictions" was used in the same manner, and with the same meaning, both in the BOP Committee Reports, and then in each of the Records of Understanding, is strong evidence that Korea and the United States intended the term, when incorporated in Korea's Schedule, to have the same meaning as when used in the Records of Understanding, and not a different meaning.
Each of the Records of Understanding contained references to "remaining restrictions" or "restrictions on beef" taken for balance-of- payment purposes.54 Since there was no justification for continuing BOP restrictions, let alone introducing new BOP-based restrictions, after the finding of the 1987 BOP Committee, the reference to remaining BOP restrictions can mean only those BOP restrictions still in effect at the time the Committee report was issued in 1987, or at the very latest, the 1989 date of adoption of the Committee's report. Therefore, in the view of the United States, any measure introduced after that date was by necessity without BOP justification and could not constitute a "remaining restriction" for BOP purposes.
Korea in its communication of 4 July 1990, transmitting the 1990 Records of Understanding to the GATT Council, the United States continued, stated that Korea had held consultations with the three contracting parties to the 1989 dispute in accordance with the recommendations in the panel reports (L/6503, L/6504 and L/6505) adopted on November 7, 1989. More importantly, Korea reaffirmed in that communication its "undertaking to eliminate its remaining import restrictions on beef or otherwise bring them into conformity with GATT provisions." That the reference to "remaining restrictions" in Korea's WTO Schedule is intended to mean the same "restrictions" in place at the end of the 1989 dispute is made clear from consideration of the July and December Records of Understanding. The July 1993 Record of Understanding contained a reaffirmation by Korea of its commitment to eliminate its "remaining import restrictions on beef." Again, the discussion of these restrictions took place in the context of implementation of the recommendations of the GATT panel report. Thus, there can be no confusion about the nature of the commitment that Korea declared to undertake: it was the elimination of the GATT inconsistent import restrictions found by the 1989 panel.
The December 1993 Record of Understanding, unlike those that preceded it, was not limited to trade in beef, but also contained provisions relating to pork, poultry, dairy, and citrus. The purpose of the provisions governing beef were primarily to extend forward in time the terms of the July 1993 Record of Understanding. The December Record of Understanding provides for continuation of the beef quota through the year 2000, (ultimately made part of Korea's WTO Schedule of Concessions) as well as for increases in the quota, and identifies the relevant percentage of the quota to be assigned to the SBS system in each remaining year of the quota, together with the applicable maximum amount of
54 In paragraph 2.1 of Korea's notification of the 1990 Record of Understanding to the Council, L/6697, Korea stated that it "reaffirms its undertaking to eliminate its remaining import restrictions on beef . . ." Article V of the July 1993 Record of Understanding with the United States reads as follows: "With regard to beef, the ROKG reaffirms its undertaking to eliminate is remaining import restrictions or otherwise bring them into conformity with GATT provisions as provided in the conclusion of the report on the GATT Balance of Payments Committee on consultations with the Republic of Korea adopted by the GATT Council on 7 November 1989." The December 1993 Record of Understanding simply states that "All balance-of-payments restrictions on beef shall expire no later than December 31, 2000."
WT/DS161/R WT/DS169/R
Page 24
the mark-up. In all other respects the July 1993 Record of Understanding was left unchanged.55 Finally, the December Record of Understanding reiterated the same passage contained in the previous Record of Understanding and committed Korea to elimination of "all balance-of-payments restrictions on beef" and required that to be accomplished by "no later than December 31, 2000."
The United States noted that it did not participate in the formulation of the challenged measures. Korea's argument that the challenged measures were implemented at the request of the United States and other countries exporting beef to Korea cannot withstand scrutiny. The three Records of Understanding between the United States and Korea were all concluded after the adoption of the 1989 panel report. In the view of the United States, the Records of Understanding were intended to provide a transition for Korea from a situation in which imported beef was banned toward a liberalized market where commercial forces would determine the quantity of beef imported. An examination of the Records of Understanding reveals that Korea was not willing to accept a quick progression to an open market and an incremental approach was necessary.56
While the United States did press Korea to develop a market-oriented regime for imported beef and, in doing so, requested that Korea establish the SBS system as a bridge between the LPMO's monopoly control of imported beef and a market driven by commercial forces, the United States was by no means a partner in developing the specific regulatory provisions governing the operation of the SBS system. Likewise, the United States had no role in developing the LPMO's daily operating procedures, including the manner in which the LPMO conducts its wholesale auctions or the timing of its opening of tenders.57 In fact, in quarterly meetings with Korea, the United States was forced repeatedly to seek Korea's implementation of the market liberalizing reforms that already had been negotiated.
Quarterly bilateral consultations
Australia submitted that Korea's claims regarding Australia's participation in bilateral quarterly consultations (see paragraph 105) in relation to the beef trade are of no relevance, and cannot be held as proof of Australia's agreement to the measures at issue in this dispute or to any transition period for Korea in relation to these measures. If any relevance is to be ascribed to the bilateral quarterly consultations, it is the dissatisfaction of the Australian government with the range of measures adopted by Korea which Australia argued were not envisaged when the bilateral agreements were reached. Australia, in good faith, agreed to a transition period to permit Korea to move towards liberalization through the use of a time-limited quota. This cannot, however, be interpreted as an agreement by Australia to the measures challenged in this dispute. It is because Korea failed to adequately address Australia's concerns about these measures in a bilateral context that Australia now find itself before a WTO dispute settlement panel.
Prior panel reports
The United States emphasized that regardless of the meaning given to the term "remaining restrictions" there is no legal basis for concluding that a Member may unilaterally limit or reduce its
55 More specifically, the last paragraph of the December 1993 Record of Understanding stipulates that "The current July 15, 1993 Record of Understanding (L/7270) shall continue to apply except as modified to incorporate the provisions of the new understanding."
56 Thus, the 1993 Record of Understanding provided for annual increases in the quota quantity, for a gradual increase in the number of super-groups participating through the SBS system, and for incremental
increases in the proportion of the quota share dedicated to the SBS system, where customers and end-users could contract with foreign shippers relatively free from interference by the LPMO.
57 Although the July 1993 Records of Understanding specified when unused SBS quota would be reallocated among the various super-groups, the Records of Understanding did not direct either when or how allocation of quota increases would be made to new super-groups.
WT/DS161/R WT/DS169/R
Page 25
GATT 1994, or other WTO, obligations by providing in its Schedule for a supposed right to restrict imports. Thus, Korea's contention that it possesses the right to continue until 1 January 2001, all WTO inconsistent restrictions on imports of beef which were in place at the time of the conclusion of the Uruguay Round negotiations is entirely without foundation.
The United States referred to the US – Sugar Head Note case,58 which considered whether import restrictions provided for in US Schedule XX were consistent with the obligations contained in Article XI:1. In finding that the US restrictions were inconsistent with the requirements of Article XI, the panel examined the issue in light of the wording of Article II. Based on the text of that Article, the panel found that Article II "permits contracting parties to qualify the obligation to exempt products from ordinary customs duties in excess of the levels specified in the Schedule, not however to qualify their obligations under other Articles of the General Agreement."59 The panel concluded that " … Article II gives contracting parties the possibility to incorporate into the legal framework of the General Agreement commitments additional to those already contained in the General Agreement and to qualify such additional commitments, not however to reduce their commitments under other provisions of that Agreement."60 Korea's assertion that the Schedule LX reference to "remaining restrictions" exempts Korea from all of its obligations relating to beef under GATT 1994 is, therefore, untenable. In recent disputes involving EC – Bananas III (AB) and EC – Poultry (AB), the Appellate Body reiterated the legal conclusions reached by the US - Sugar Head Note panel.
Referring to the United States' arguments in paragraph 103, Korea replied that it does not contend that it may "unilaterally" exempt itself from specific GATT obligations. Korea merely referred to the existence of a transitional period in its Schedule of Concessions, which is based on multilateral negotiations and agreement between WTO Members in the Uruguay Round, explicitly referred to and confirmed by the language of Note 6. Second, none of the cases cited by the United States as legal authority dealt with the issue of whether a Schedule of Concessions can contain a transitional period and a phasing-in of GATT obligations. All the cited cases dealt with the issue of whether a provision in a Schedule of Concessions could allow GATT/WTO Members to violate certain GATT provisions on a permanent basis. Note 6 contains an obligation for Korea to eliminate or bring its remaining restrictions into conformity with GATT by 1 January 2001. The agreed transitional period has to be seen against the background of prior BOP restrictions, the previous GATT panel reports, the ensuing Records of Understanding and quarterly consultations which shape the transition to bring Korea's measures into conformity with GATT and the full liberalization of beef imports by 1 January 2001.
Hence, Korea continued, the issues contained in the cited panel and Appellate Body reports and Korea's Schedule of Concessions refer to two factually different situations: the former contains a prohibition to permanently deviate from the obligations of the GATT through agreements reflected in the Schedule of Concessions, whereas the latter contains a temporary provision which will expire on a set date. Korea, fully respecting its obligations under the GATT/WTO, did not diminish its obligations by indicating in its Schedule of Concessions that it will bring its measures into conformity within a defined transitional period. In other words, Korea did not add a right through its Schedule of Concessions: it accepted an unambiguous obligation to fully liberalize a previously protected market within a specified time period.
Australia and the United States also referred to the EC – Poultry (AB) in which the Appellate Body dismissed Brazil's claim that a concession contained in the European Communities' Schedule establishing a tariff-rate quota for poultry need not be administered consistently with Articles I and XIII. Brazil had argued that the terms of a bilateral agreement between the European
58Page 331.
59 Ibid, paragraph 5.2.
60 Id., paragraph 5.3.
WT/DS161/R WT/DS169/R
Page 26
Communities and Brazil following the EEC - Oilseeds dispute, accorded Brazil the entire tariff-rate quota for poultry. The Appellate Body, citing the US Sugar Head Note case, rejected Brazil's argument. In doing so, the Appellate Body emphasized the following finding from the EC – Bananas III(AB) dispute: "… a Member may yield rights but not diminish its obligations and … [that principle] is equally valid for the market access concessions and commitments for agricultural products contained in the Schedules annexed to the GATT 1994."61 The Appellate Body then observed that "a Member may yield or waive some of its own rights and grant benefits to other Members, but that it cannot unilaterally diminish its own obligations."62 These legal conclusions refute Korea's argument that it is entitled to continue WTO inconsistent measures relating to beef until the year 2001.
Article 26 of the Vienna Convention (good faith)
Korea submitted that by bringing the current dispute, the Complainants are denying the binding force of their agreement to Korea's Schedule of Concessions and are not acting in good faith. As such, they violate Article 26 of the Vienna Convention which stipulates the principle of pacta sunt servanda - a basic principle of public international law. The claims brought by the Complainants should necessarily fail for the reasons stated in paragraph 54 alone. But Korea also considered that none of the claims has any merit.
In response to Korea' arguments in paragraph 108, Australia contended that it is not clear to Australia that Article 26 of the Vienna Convention adds anything to the provisions of interpretation required to be applied by the Panel under Article 3:2 of the DSU, which explicitly incorporates the rules of interpretation of customary international law. Australia noted, however, that the Panel is limited by its terms of reference to consideration of the measures against the provisions of the WTO Agreements. Australia rejected Korean allegations of a lack of good faith on Australia's behalf and submitted that Korea has not met its burden of proof in making such a claim. Australia also rejected any links made by Korea between considerations of good faith and the admissibility of Australia's claims at this time. Korea's allegations, however, do highlight Australia's fundamental disagreement with Korea about its commitments rather than any lack of good faith.
To the extent that the notion of good faith has any relevance at all, Australia continued, it would only pertain to those measures that Korea concedes are GATT-inconsistent restrictions. Only then could Korea conceivably attempt to argue that the claims in this dispute have been brought prematurely. However, with the exception of its claims about the mark-up on SBS imports, Korea has made no such concession, indeed defending the GATT consistency of every other measure.
Australia noted that good faith is a matter requiring reciprocity. In the course of this dispute Korea has asserted that it alone has the right to unilaterally determine which of the remaining restrictions on imported beef it will remove on 1 January 2001. And although Korea has declared that it will remove or bring into conformity any remaining inconsistent restrictions, it has argued to the Panel the GATT-consistency of the majority of its measures. Australia is also concerned about reports it has received about measures proposed by Korea to limit the effect of the end of the quota on domestic beef. These measures include maintaining the dual retail system and increasing the level of financial support to domestic beef stores, the introduction of a mark-up on LPMO quota sales, the introduction of country-of-origin labelling in restaurants as well as the banning of two current SBS groups, NLCF and LCTM, from the imported beef trade. Australia can but conclude that, if there is any question of good faith in this dispute, it does not rest with Australia.
61 EC – Poultry (AB), paragraph 98.
62 Id.
WT/DS161/R WT/DS169/R
Page 27
The United States submitted that, contrary to Korea's claims in this regard, it has acted in good faith in this dispute. The United States has shown in paragraphs 100 et sequitur and 107 that the underlying basis for Korea's claims of bad faith are entirely groundless. Accordingly, Korea's request that the Panel find the US challenge to Korea's measures to be inadmissible must be rejected.
CLAIMS UNDER ARTICLE XI:1 OF GATT
No prohibitions or restrictions…on the importation of any product
Referring to the text of Article XI:163, Australia argued that panels have interpreted the scope of Article XI:1 broadly, providing for a general ban on import or export restrictions or prohibitions. The panel in Japan – Trade in Semi-conductors considered the wording of Article XI:1 to be comprehensive; it applies "to all measures instituted or maintained by a Member prohibiting or restricting the importation, exportation, or sale for export of products other than measures that take the form of duties, taxes or other charges.64 Similarly, the panel in India – Quantitative Restrictions considered that the scope of the term "restriction" was also broad, as seen in its ordinary meaning which is "a limitation on action, a limiting condition or regulation".65 The scope of the term "restriction" has most recently been defined by the Appellate Body as "a limitation on action, a limiting condition or regulation".66 Restrictions applied on the entry of grass-fed beef through the tender process are, in the opinion of Australia, quantitative import restrictions within the meaning of Article XI:1. For a four-month period in 1999 all cuts of grass-fed beef, which is predominantly supplied by Australia, were arbitrarily excluded from the thirty per cent of the market controlled by the LPMO.
In some circumstances, Australia continued, a measure affecting imported product (for example, availability of end-points of sale) has the practical effect of restricting importation of the product itself, and is, therefore, covered by Article XI:1. This is supported by the fact that Article XI:1 uses the broad term "restrictions" on importation, rather than "laws, regulations or measures on importation". The reference to "whether made effective through quotas, import or export licences or other measures" indicates that the measure itself need not be directed at importation or apply at the point of import (such as import licences or quotas). It is sufficient that it has an effect on importation. Given that "restriction" has a broad scope, Article XI:1 applies to any measure which has the practical effect of restricting imports. Furthermore, restrictions at the point of distribution may have the practical effect of a quantitative restriction where they restrict the imported products end-points of sale.
Australia referred to the panel on Canada – Alcoholic Drinks which considered that limitations on the points of sale available to imported beer were restrictions within the meaning of Article XI.67 Restrictions on distribution were within the meaning of "other measures" under Article XI:1, even though such measures might be examined also under Article III:4. Here, the restrictions, although related to distribution, were on importation. This was cited by the panel in India – Quantitative Restrictions which examined inter alia an Indian measure in which import licences were available only to "actual users". The panel considered that the "actual user" condition was a restriction on imports because it precluded imports of products for resale by intermediaries, i.e.
63 "No prohibitions or restrictions other than duties, taxes or other charges, whether made effective through quotas, import or export licences or other measures, shall be instituted or maintained by any contracting party on the importation of any product of the territory of any other contracting party or on the exportation or sale for export of any product destined for the territory of any other contracting party."
64 Paragraph 104.
65 Paragraph 5.128.
66 India – Quantitative Restrictions (AB), paragraph 5.128.
67 Paragraph 4.24.
WT/DS161/R WT/DS169/R
Page 28
distribution to consumers who are unable to import directly for their own immediate use is restricted. It operated as a restriction on imports within the meaning of Article XI.68
In addition to maintaining a quota, the United States argued, Korea maintains quantitative restrictions consisting of import licensing requirements ("import recommendations") and sales and distribution constraints on imported beef. These restrictions are set forth in the Livestock Industry Act, the Final Livestock Act, as well as MAF's implementing Guidelines and Regulations. Korea also identified several of the restrictions that are the subject of this dispute in its 21 November 1996 reply to the questionnaire on import licensing procedures from the Committee on Import Licensing Procedures.69 Measures associated with the administration of the beef quota were also notified to the Committee on Agriculture.70 These restrictions constitute continuing violations of one of the most fundamental rules of the world trading system, i.e. Article XI:1.
The United States submitted that the measures that are the subject of this dispute are "restrictions other than duties, taxes or charges" as defined in Article XI:1. Under the WTO, the panel in EC – Bananas III acknowledged that "Past GATT panel reports support giving the term 'restriction' [in Article XI:1] an expansive interpretation.71 Referring to the GATT 1950 working party report on a "Notification by Haiti under Article XVIII"72, to the 1950 report on "The Use of Quantitative Restrictions for Protective and other Commercial Purposes" which was approved unanimously by the CONTRACTING PARTIES under Article XXV73 and which refers to import licensing as an import restriction74, to the 1978 panel in EEC –Processed Fruits and Vegetables which found that a non- automatic licensing system denying licences for imports below certain minimum prices was a "restriction" within the meaning of Article XI,75 to the panel in Japan –Semi-Conductors which found that "this wording [of Article XI:1] was comprehensive; it applied to all measures instituted or maintained by a contracting party prohibiting or restricting the importation, exportation or sale for export of products other than measures that take the form of duties, taxes or other charges76, as well as to the panel on India – Quantitative Restrictions,77 which concluded that a non-automatic licensing system in India operates as a restriction on imports within the meaning of Article XI:1, the United States contended that Korea's import "recommendation" system is, like India's licensing regime, a discretionary system and as such an import restriction that is inconsistent with Korea's obligations under Article XI:1.
2. Measures imposed on retail sale of imported beef
In the present case, Australia argued, Korea restricts the sale of imported beef to specialized imported beef stores. This prevents domestic butcher shops from purchasing imported beef and limits the end points of sale for imported beef. The sale of imported beef is limited to only 5,000 stores, compared with the other 48,000 outlets which would be available if the restriction did not apply. While the restriction is related to the distribution of imported beef, it has the effect of a restriction on the importation of beef within the meaning of Article XI:1.
68Paragraph 5.141-5.143.
69 See G/LIC/N/3/KOR/1.
70 See G/AG/N/KOR/1, 31 May 1995.
71 Paragraph 7.154, citing panel report on Japan - Semiconductors, paragraphs 104-105; panel report on EEC - Processed Fruits and Vegetables, paragraph 4.9.
72 BISD Vol. I, page 46, Article XVIII:12. GATT/CP.5/25, adopted on 27 November 1950, BISD Vol. II/87.
73 GATT/CP.5/33, adopted on 3 April 1950, republished as "The Use of Quantitative Restrictions for Protective and other Commercial Purposes," Sales No. GATT/1950-3.
74 Id., page 7, paragraphs 5-7.
75Paragraph 4.9.
76 Paragraph 104.
77 WT/DS90/R, adopted 26 September 1999, paragraph 5.19-5.130.
WT/DS161/R WT/DS169/R
Page 29
Korea submitted that Australia's argument concerning separate retail stores for imported and domestic beef (see in particular paragraphs 114, 115 and 118) is fundamentally flawed in several respects. The separate sales outlets system, which is designed to prevent the fraudulent practice of passing off imported beef as domestic beef, applies the same restrictions both to stores selling domestic beef and to specialized stores selling imported beef. Domestic beef stores are equally prohibited from selling imported beef. The separate sales outlets system does not, therefore, disadvantage imported product and cannot be considered a restriction on the importation of beef. More importantly, there are no restrictions relating to the number of imported beef stores which may operate at any given time, or with respect to their geographic location. Regarding the Complainants' arguments in, for instance paragraphs 118 and 175 with respect to the small number of imported-beef shops, Korea admitted that the number of imported beef stores is at the present time smaller than the number of domestic beef stores. However, this is a consequence the quota on beef products. The supply of imported beef is, therefore, insufficient to support further imported beef stores at the present time. Following the liberalization of Korea's beef sector on 1 January 2001, imported and domestic beef stores and beef product will compete freely in the market, and the number of either domestic or imported beef stores will be determined in accordance with market demand. The separate sales outlets system is the result of purely internal anti-fraud measures and is in no way related to the importation of products. Therefore, Article XI:1 does not apply to this measure. Since the same restrictions are applied to both domestic and imported beef stores, it is meaningless to refer to a "restriction on importation" within the meaning of Article XI:1.
The separate sales outlets system applied by Korea, Korea continued, bears no resemblance to the type of "restrictions" examined by the panels in Canada - Marketing Agencies and India - Quantitative Restrictions, cited by Australia. In the Canada - Marketing Agencies case, the limitation on the points of sale available to imported beer applied solely to imported product, while domestic product was not similarly constrained In the present case, as the same rule applies to both domestic and imported beef stores, there can be no claim that a limitation on the points of sale is being applied to the imported product compared with domestic product.
Similarly, the restriction at issue in India - Quantitative Restrictions, the "actual user" condition, precluded imports of products for sale by intermediaries while no such restriction applied to domestic product. The measure thereby restricted the importation of the relevant products by foreclosing an avenue of distribution solely for imported products, restricting the points of distribution compared with domestic product. While Korea does maintain a quota on beef, no restrictions of any kind are applied at the retail level with respect to the number of imported beef stores, their location, or any other restriction.
3. LPMO tendering opportunities
Australia submitted that the restrictions applied on the entry of grass-fed beef through the LPMO tender processes were quantitative restrictions within the meaning of Article XI:1. The LPMO has used its tender processes to exclude grass-fed beef from the market: in the period from June to September 1999, the LPMO held three tenders from which grass-fed beef was excluded. Although Korea claimed that this exclusion was on the basis of reduced demand, its own figures showed that sales of grass-fed beef had increased by over three times sales in the same period in 1998 (when the LPMO did purchase grass-fed beef)78. Prior to the exclusion of grass-fed beef in the 1999 tenders, grass-fed beef had generally secured approximately 50 per cent of each tender.
Korea submitted that the complaints raised by Australia with respect to grass-fed beef have no basis under Article XI:1. All tenders are open to all supplying countries and perfectly origin neutral. Australian exporters are free to participate both in tenders for grass-fed and grain-fed beef.
78 122,000 MTs in May/June 1998 compared with 372,000 MTs in May/June 1999.
WT/DS161/R WT/DS169/R
Page 30
The distinction between grass-fed and grain-fed beef does not by itself constitute discriminatory treatment or an infringement of MFN principles. As long as Korea does not discriminate on the basis of origin of the products obtained, in violation of the MFN principle, Korea is not obliged to affect its purchases of beef according to sub-groupings of various beef types. The LPMO consistently purchases its full quota amount, according to an open bidding procedure and according to origin- neutral criteria. It cannot, therefore, be claimed that Korea applies quantitative restrictions with respect to beef (beyond that resulting from the quota). Australia has not adduced any evidence that Australian products have been discriminated against based on their origin. On the contrary, total purchases from Australia (by the LPMO) in the first six months of 1999 represented a 44 per cent share of all purchases which is much higher than their previous shares of 33.3 per cent in 1997 and of 30 per cent in 1998. These data do not suggest any de facto discrimination of Australian products. Hence, Korea submitted that the claims of Australia with respect to this issue are unfounded and the question of import restrictions contrary to Article XI:1 does not arise. CF paragraph 324.
(Cf also paragraphs 287-289 and 346.)
Australia and the United States submitted that panels have found that restrictions on points of sale and distribution are quantitative restrictions within the meaning of Article XI:1. Therefore, measures which restrict the number of points of import will also fall within Article XI:1. In India – Quantitative Restrictions, the panel found that an "Actual User" condition which denied a licence for imports by intermediaries constituted an import restriction within the meaning of Article XI. In considering the scope of the prohibition under Article XI:1, the panel drew on earlier panel reports, noting that a minimum import price system had been considered to be a restriction within the meaning of Article XI:1, as had limitations on points of sale available to imported beer because they had imposed "limitation on action, a limiting condition or regulation". The panel found that, applied to the "Actual User" condition, they led to the conclusion that it is a restriction on imports because it precludes imports of products for resale by intermediaries, i.e. distribution to consumers, who are unable to import directly for their own immediate use. Based on the foregoing, the Complainants argued, the procedures of the LPMO, itself a state-trading enterprise, restrict imports by inter alia withholding quota allocations and delaying any invitations to tender, and, thus, are inconsistent with Article XI:1.
Referring to the arguments by the Complaining parties that some of Korea's measures on beef are a violation of both Article. III :4 and Article XI, Korea was of the view that there is a clear dividing line between the two provisions. The former deals with internal measures, that is measures applicable to products after they have been cleared through customs, whereas the latter deals with border measures, namely QRs. Hence, it is logically impossible for a domestic measure to be 'caught' simultaneously by the two provisions. For a violation of Article XI to be established, the Complaining parties need to show that a government-induced QR restricts imports of foreign products independently of the manner in which domestic like products are treated. With respect to the argument by the Complainants that the LPMO delayed invitations to tender, Korea noted that the LPMO has consistently filled its quota share, even during the height of the crisis in 1997 and 1998. In addition, Korea contended that the Complainants' assertion that Korea delayed quota allocations to super-groups is inaccurate. At the beginning of 1999, Korea explained, part of the quota was reserved for three new super-groups which started participating in the SBS system. The quota was allocated by 14 June 1999, i.e. once the quantities required by these super-groups were established. None of the super-groups had exhausted their initial quota by that time and, according to Korea, no negative effects on beef imports resulted from this circumstance.
4. Measures with respect to the discharge of imported beef in the wholesale market
Australia claimed that both the LPMO and the NLCF, pursuant to their obligations under the
Regulations Concerning the Sale of Imported Beef, have acted to withhold beef imported by the
WT/DS161/R WT/DS169/R
Page 31
LPMO from the wholesale market in order to stabilize demand and supply for domestic beef. The limitations are applied through the LPMO monthly sales plan, minimum wholesale prices and the daily discharge practices of the NLCF. The result of the discharge system has been to artificially constrict the supply of imported beef and constrain imports to the extent that in 1998 and the first half of 1999 there was substantial under-filling of the LPMO beef quota. The cumulative effect of these pricing and distribution measures has been a significant increase in LPMO stocks of imported beef during the last two years.79 In turn, these rising stock levels have led to delayed tenders and reduced imports by the LPMO.80 Shipping delays have also been necessary in relation to the 1999 quota, with delivery dates extending into 2000.
Australia and the United States submitted that the LPMO sets a minimum acceptable auction price on a daily basis for each cut and brand of beef and that the NLCF periodically withholds imported product from the market. Australia produced charts showing demand, sales and acceptable bid prices for a range of brands and cuts of beef which, Australia submitted, proved the operation of a minimum price. Whilst auction participants do not know this price, the previous day's acceptable price is, according to the Complainants, a good guide. It is well understood in the trade that bids below the minimum price will not be accepted. Such measures are taken to stabilize the price of domestic beef, with prices being set for imports that are contingent on the price of competing domestic product. The price of imported beef in the wholesale market is, therefore, decided by reference to the price of its domestic competition. A press release issued by the MAF on 22 July 1999, reflects this policy.81 The Complainants argued that the minimum price has been set at levels which have considerably dampened demand for imported beef but which have ensured that imported beef prices have stayed sufficiently high so that domestic product could remain competitive. The minimum price has generally been too high to attract the interest of end users and as a result distribution of imported beef has been considerably less than stocks actually held. These measures have the effect of quantitative restrictions on imported beef contrary to Article XI:1. Australia claimed that these measures are also contrary to Article 4.2 of the Agreement on Agriculture.
Australia did not accept that minimum pricing was the result of Korea's financial crisis in late 1997/early 1998 or of losses incurred by the LPMO during that period arising from the currency crisis. Australia's calculations, based on data provided by the LPMO relating to import prices, shipping dates and exchange rate fluctuations, show that there were several months in 1998 where the LPMO did not sustain losses resulting from the difference between the import price and the minimum wholesale price. Except for beef purchased in Korea's final tender in 1997, none of Korea's 1997 purchases of beef were affected by the currency crisis. The currency crisis hit Korea in November 1997, reached its peak in December 1997 and January 1998 and began to improve by July 1998. However, the last tender for beef in 1997 was held on 21 October 1997 and was for a quantity of 9361 tonnes. While most of this last tender purchase would have arrived in Korea during the currency crisis, all other 1997 tenders were purchased and customs cleared by the time the currency crisis hit. Furthermore, no more imported beef entered Korea until July 1998, when the exchange rate was recovering. Australia, therefore, submitted that LPMO had stocks on hand which were purchased at pre-currency crisis levels and which entered Korea before the currency crisis hit. Korea would have been able to sell, without loss, from these stocks. Australia hence argued that the only
79 In October 1997, the LPMO had an estimated 28,000 tonnes of imported beef in stock. By the end of 1998 LPMO had accrued stocks of 67,934 tonnes of imported beef, more than the LPMO's entire quota allocation for 1999. As at July 1999, these stocks had fallen only slightly to 61,524 tonnes, notwithstanding rising demand in the market for imported beef.
80 In 1998 40,237 tonnes (53.8 per cent), of a total 1998 quota of 74,800 tonnes, was not permitted to
enter Korea until 1999. As a consequence, 1999 imports have been affected. As at 22 October 1999, the LPMO will have purchased 35,099 tonnes out of a total quota for 1999 of 61,800 tonnes i.e. 56.8 per cent of its annual quota amount.
81 "MAF to raise unlimited supply of imported beef to stabilize extraordinary cattle prices", Ministry of Agriculture and Forestry press release, 22 July 1999.
WT/DS161/R WT/DS169/R
Page 32
explanation for the high minimum prices of imported beef at that time was that LPMO was acting to protect the competitiveness of domestic beef vis-ä-vis imported beef.
Australia also noted that minimum prices have continued to be imposed throughout 1999, regardless of the recovery in the Korean economy, stabilization of exchange rates and rising levels of demand for beef. The cumulative effect of the pricing and distribution measures has been to significantly increase LPMO stocks of imported beef, leading directly to tender and shipment delays in 1998 and 1999, causing imports to fall to amounts considerably less than the LPMO quota share in those years. The persistence of minimum pricing in 1999 will also have an impact on LPMO imports for 2000, given that significant amounts purchased in 1999 are not actually permitted to enter Korea until late 2000. (See also paragraphs 205-206 below.)
Korea responded that Korea has never established, nor employed, minimum import prices. The LPMO initiates international tenders, and the tenders are awarded on a purely commercial basis, in ascending order from the lowest bid received. All participants in the tender process therefore compete on the basis of price, and are awarded purely on the basis of the competitiveness of the offers submitted. The procedures employed by the LPMO, therefore, bear no resemblance to a system of minimum import prices. With respect to imports effected through the SBS system, contracts are negotiated and concluded between members and suppliers on an entirely commercial basis, without any government interference or scrutiny with respect to price.
The LPMO will, however, as a trading entity operating under commercial considerations, seek to ensure that the imported beef product is not sold at a loss at the wholesale auction. For this reason, while no rigid minimum price is set, basic target prices are set for the sales at wholesale auction. Target prices are established by the LPMO and are used by the NLCF as a guideline during wholesale auctions to avoid the sale of imported beef below a certain price level. However, these target prices are not inflexible and the establishment of target prices does not mean that bids falling below the target price will never be accepted. Despite the severe market situation prevailing in 1998, Korea continued to exert its best efforts to sell the maximum amount of imported beef possible. To this end, Korea resorted to selling below the established target price. The target prices are closely linked to import prices (c.i.f. plus tariff plus sales cost). During the financial crisis, Korea argued, the LPMO would have made losses on the imports of beef and that therefore it was justified in maintaining the target price at a level preventing losses on sales of imported beef (see Annex 4).
The Complaining parties responded that the LPMO had not sold imported beef below the minimum price during the financial crisis and as a consequence, stocks of imported beef rose rapidly. Australia contended that if the target price is not reached, the beef is not sold. The LPMO did not make any attempt to run down its stocks during either 1998 or 1999, which would possibly have been the most commercially viable option. Instead, LPMO continued to withhold imported beef from the market by setting an artificially high minimum price, based on domestic beef prices. As a result, stocks of imported beef rose to nearly 61,000 tonnes by mid-1999." They added, amongst other things, that the high level the LPMO sales costs may explain Korea's assessment of the LPMO's losses.82
Australia and the United States contended that various discharge procedures adopted by the LPMO represent "restrictions" which fall within the purview of Article XI:1. They referred to the ad note to Articles XI, XII, XIII, XIV and XVIII, which states that the term 'import restrictions' in these Articles covers restrictions made effective through state trading operations. They also referred to the panel in Japan - Agricultural Products which firmly rejected Japan's argument that Article XI:1 did not apply to import restrictions made effective through state trading. Likewise, in the 1988 panel
82 The United States contended that the 32- 40 per cent sales costs of the LPMO are in striking contrast with the 2-3 per cent cost that the super-groups are allowed to charge by the MAF.
WT/DS161/R WT/DS169/R
Page 33
report on Canada - Marketing Agencies (1988), the panel observed that the ad note provided that throughout these Articles "the terms 'import restrictions' and 'export restrictions' include restrictions made effective though state-trading operations".
The United States also referred to the Haitian import restrictions mentioned above (paragraph 117) which were maintained through a tobacco monopoly, as well as to the working party on the Italian Restrictions Affecting Imports from the United States and Certain Other Contracting Parties, which states that "Insofar as the State-trading operation had the effect of restricting imports, the Italian authorities fully recognized that, by virtue of the interpretative notes ad Articles XI, XII, etc. in Annex I to the General Agreement, it constituted an import restriction within the purview of Article XI."83 Furthermore, in the 1989 panel report on the US complaint concerning Korea - Beef, that panel found that the Korean import restrictions, administered through a state trading entity, violated Article XI.84
Australia submitted that Members should not be able to avoid their obligations by establishing state trading enterprises to carry out functions which have the effect of influencing the level of imports beyond an established concession such as a tariff or a quota. The issue is not whether the state trading operation is a monopoly but the effect on trade.85 The panel in Japan - Film acknowledged "a risk that WTO obligations could be evaded through a Member's delegation of quasi- governmental authority to private bodies." The value of concessions would be undermined if governments, through the activities of state trading enterprises, whether or not they are monopolies, could avoid the requirements of Article XI:1. In the case of the release of beef imported and distributed under the LPMO system, Australia continued, it is artificial to make a distinction between restrictions imposed by import monopolies and those carried out by state trading enterprises that have as their stated objective the stabilization of domestic beef and cattle prices. It is with this purpose in mind that the LPMO has established monthly sales plans and minimum wholesale prices for imported beef and the NLCF has withheld daily discharge volumes of imported beef onto the wholesale market. The effect has been a rise in stocks of imported beef, restricting, in the view of Australia, the LPMO's imports beyond the limits imposed by the quota.
The United States submitted that in its notification to the Committee on State Trading Enterprises, Korea identifies the LPMO as the entity appointed by MAF to administer the import regime for beef.86 Moreover, MAF has delegated extensive powers to the LPMO to administer Korea's licensing regime for imported beef while retaining control over the LPMO's functions in this regard. The LPMO not only possesses the exclusive right to import a substantial portion of the beef quota, but also exercises considerable control over the use of the remaining portion of the quota through its authority to allocate quota shares to the SBS super-groups and to approve their import requests.87 In this latter role, the LPMO not only delayed the initiation of tenders for imports until approximately mid-year in 1998, it also severely limited the invitation of tendering in 1999, so that as of June 1999, less than 9,451 metric tonnes had been imported by the LPMO out of a 1999 quota share of 61,800 metric tonnes. In addition, the LPMO has withheld allocation of quota share to the super-groups and placed pressure on them to reduce the quantity of imported beef for which they seek import approvals.
83 Report of the working party under Article XXII:2 on Italian Restrictions Affecting Imports from the United States and Certain other Contracting Parties, L/1468, adopted on 16 May 1961, BISD 10S/117, 119, paragraph 7.
84 Paragraphs 113, 115.
85 See Korea - Beef, paragraph 115.
86 See G/STR/N/4/KOR, 10 December 1998.
87 See page 7 of G/STR/N/4/KOR, 10 December 1998.
WT/DS161/R WT/DS169/R
Page 34
Korea submitted that the arguments advanced by the Complainants with respect to the discharge procedures of the LPMO in no way establish a violation of Korea's obligations under Article XI:1. Korea stressed that it is under no obligation to actively take steps to import its entire quota amount, regardless of the prevailing market conditions. Despite this, Korea has consistently exerted its best efforts to ensure that the quota is fully absorbed, even under the very difficult circumstances surrounding the financial crisis. The LPMO has without fail purchased its entire quota amount on an annual basis.
The severe financial crisis affecting Korea in 1998, from which Korea is still in the process of recovery, resulted in a substantial negative impact on Korean demand for beef and the Korean beef market. Slumping demand in Korea, as well as currency fluctuations which lessened the price differential between imported and domestic beef, had a depressing effect on demand for imported product. Under these exceptional circumstances, the LPMO, operating on the basis of commercial considerations, was forced to temporarily delay the initiation of tenders for imports between the end of October 1997 and end of May 1998. Korea argued that the LPMO did not call for tenders during this period because of stagnant beef sales due to decreased demand. Korea added that the reason for the release volumes being less than domestic demand is that bid prices for the bulk of imported beef were lower than the minimum auction prices. The developments which necessitated this move were entirely market-driven and outside the control of the LPMO. In addition, the LPMO accelerated the beef-purchasing schedule to fill its quota share despite enormous losses amounting to 37.4 billion won in 1998. In view of the fact that the LPMO fully absorbed the 1998 quota, the actions undertaken by the LPMO can in no way constitute a restriction on imports in violation of Article XI:1.
The additional allegation advanced by the United States (paragraph 136) that Korea "withheld allocation of quota share to the super-groups" is factually inaccurate. Korea explained that the LPMO allocates the quota share for itself and for each SBS super-group for every fiscal year. Korea does not intervene in the quota allocation process, however, as the total quota amount and the share for the SBS super-groups are pre-determined in accordance with the Uruguay Round commitments and the Records of Understanding.88 In 1999, in order to allocate quotas to any newly designated super-groups, 32,000 tonnes out of the entire 206,000 tonnes of quotas were reserved, a quantity which was allocated to the existing and new super-groups in April 1999. Therefore, contrary to the assertions of the United States, the LPMO did not restrict imports in violation of Article XI:1 by withholding the allocation of quota share to the super-groups.
Australia and the United States replied that Korea's own data shows that the LPMO did not make losses consistently throughout 1998. Furthermore, minimum prices for imports in the wholesale market continue to be applied, despite the recovery in the economy and improvements in exchange rates. In any event, Australia has shown that minimum prices for imports and manipulation of volumes permitted to be sold have resulted in additional quantitative restrictions being applied to imported beef. These restrictions have led directly to the substantial under-filling of the LPMO quota in 1998 and 1999 and will also affect the quota fill for 2000.89
Australia added that it did not take issue with the severity of the financial crisis in Korea in 1997/1998 Australia, like many other countries, was quick to offer extensive financial assistance to Korea during this period. However, Australia submitted that the economic crisis is irrelevant to the issues in dispute in this case, i.e. the measures taken by Korea which discriminate against imported beef and limit the benefit of the quota conferred by its Schedule. The majority of the measures at issue predate the financial crisis. They form part of the regulatory framework for imported beef which has as its fundamental policy goal the protection of domestic beef. That some of these measures may
88 LPMO Public Notice No. 217.
89 Tables submitted by Australia shows that the LPMO quota was under-filled on customs cleared basis by 8,234 tonnes in 1997, by 47,839 tonnes in 1998 and by 39,479 tonnes in 1999.
WT/DS161/R WT/DS169/R
Page 35
have had an even greater impact on imported beef at a time of economic upheaval in Korea is immaterial, except to the extent that they highlight the deleterious effect of the measures on the competitiveness of imported beef in times of economic downturn. Australia submitted that it is not acceptable that imported beef should have been made to bear the brunt of the financial crisis in order to protect domestic beef from the full impact of the downturn.
5. Measures applied through the SBS regime
Australia submitted that restriction of imports under the SBS system to specific super-groups and end users also falls within the scope of Article XI:1. The system imposes limitations on action, limiting conditions or regulations. The effect of these restrictions is to exclude from the SBS system any user or potential user which is either not a member of an SBS super group or not a defined user under the regulations. The restrictions imposed through the SBS system thus have the effect of quantitative restrictions contrary to Article XI:1. The effect of the measures which limit the range of end-users, restrict end-users to membership of only one super group and forbid cross trading is to limit the amount of beef that could otherwise enter the market under the existing quota. Australia considered that it has adduced proof that the system of end-user and usage restrictions as well as the system of quota and sub-quota allocation operate to restrict the opportunities provided by the quota contrary to Article XI:1. In the opinion of Australia, Korea has not rebutted these claims, except by reference to the financial crisis (see paragraph 138) which, in the view of Australia, is not pertinent to these measures. The measures at issue predate the financial crisis, exist in addition to the quota and limit the quota opportunity Korea is obliged to provide. According to Australia, the super-groups themselves have noted the limiting effects of the measures and requested the Korean government to remove them.
The United States argued that Articles 5 and 6 of the Operational Guidelines for Imported Beef Under the SBS System, which exclude all wholesalers, retailers, and end-users, other than a small number of super-groups, from eligibility for import licences is also a "restriction" on imports within the meaning of Article XI.90 GATT panels91 have found that a denial of licences for imports below certain minimum import prices constitutes an import restriction within the meaning of Article XI:1. For the same reasons, Korea's confinement of import approvals to super-groups is an Article XI:1 restriction on imported beef because Korea's measure precludes beef from being licensed for import by any other participants in the marketing and distribution of imported beef, and thereby diminishes import opportunities for beef in the same manner that a minimum price requirement does. Therefore, Korea's limitations on the eligibility to import also constitutes a "restriction" that violates Article XI:1.
In conclusion, the United States submitted, the restrictions that Korea imposes on importation of beef (i.e. granting import licences only on a discretionary basis, confining import licences to super- groups, prohibiting and penalizing any cross-trading in imported beef between and among the super- groups and their customers and end-users) the LPMO's delay in both inviting tenders from foreign beef exporters and in allocating quota share to the super-groups, and LPMO's establishment of minimum bid prices for imports at auction, each constitute a quantitative restriction within the meaning of Article XI:1 as construed in the various panel reports referred to. Therefore, such measures are inconsistent with Korea's WTO obligations. Any restriction on imports other than duties, taxes or other charges violates Article XI:1; the fact that Korea's import regime combines several separate restrictions on imported beef underlines the flagrant character of the violation in this case.
90 This restriction is also contained in the October 1999 Guidelines for Handling Imported Beef. See Articles 2 and 19.
91 EEC - Processed Fruits and Vegetables, paragraph 4.9. Canada - Marketing Agencies, paragraphs 5.28-5.31
WT/DS161/R WT/DS169/R
Page 36
Australia submitted that the allocation by super-groups to their end-users is done on the basis of forecast demand and not actual demand of end-users. Where an end-user fails to meet its demand forecast, the resulting quota shortfall remains unused for the current period. Any reallocation of the shortfall only takes effect the following period and there is no guarantee that all of the surplus will be taken up. The system gives rise to a possible situation where end-users, who want to import more beef, are restricted at the same time as the quotas of other end-users go unfilled. Australia considered that this lack of flexibility operates as a quantitative restriction on imported beef. The same applies, Australia continued, to the allocation of the quota to super-groups. While any shortfall may be reallocated to other super-groups later in the quota allocation, this is not done on the basis of individual demand, but in the same ratio as the initial allocation. There is no guarantee, therefore, that the full reallocation will be taken up. Moreover, reallocation so late in the season also prevents any shortfall from being taken up.92 The system of fixed quotas for super-groups and end-users and the prevention of cross-trading between super-groups and end-users, therefore, constitutes, according to Australia, a quantitative restriction on imports of beef.
6. Burden and standard of proof
Korea considered that Australia and the United States have failed to establish a prima facie case that any of the measures at issue violate Article XI:1. Indeed, no such violation exists as the targeted Korean measures merely implement a legally valid quota on beef, in full compliance with its commitments under the GATT 1994. A quota is, by definition, a quantitative restriction. In addition, in order to effectively enforce the quota, it is necessary to use various measures such as import licences, allocation of quota shares etc. The undisputed fact in this case, Korea argued, is that Korea currently maintains a legally valid quota on imports of beef. Therefore, the quantitative restriction on beef falls outside the scope of Article XI:1. In addition, since a quota cannot be enforced without implementing measures, these must also fall outside Article XI:1, provided that they do not, in and of themselves, create an additional, separate quantitative restriction which acts to intensify the quota effect by further limiting imports. Against this background, an examination is required as to what the Complainants must prove in order to establish a violation of Article XI:1.
First, since Korea is under no obligation to allow imports of beef above the quota level, a restriction (other than duties, taxes or charges) on importation for the purposes of Article XI:1 must in this context be taken to mean a separate, identifiable restriction which limits imports below the quota level. Korea is not required, under the GATT, to guarantee that the level of imports will in all cases reach the maximum quota level. Whether or not the quota is filled will depend on market factors, such as the competitiveness of the industries exporting to Korea, consumer preferences, patterns of consumption and fluctuations of currencies etc. The mere fact that a quota is not fully utilized does not, therefore, establish a violation of Article XI:1. On the other hand, if the quota is filled, this must be considered as a strong indication that Korea does not make effective additional restrictions to further constrain imports in violation of Article XI:1.
Furthermore, Korea added, Article XI:1 refers to prohibitions or restrictions which are "made effective" through quotas, import and export licences or other measures. The words "made effective" in this sentence indicates the results-oriented nature of this provision. Therefore, the Complainants must establish that a separately identifiable prohibition or restriction on imports exists and that such a restriction is actually having the effect of limiting imports to a level below the quota level. Since non-
92 In 1998, 112,200 tonnes was allocated among the SBS super-groups (60 per cent of Korea's minimum access requirement). Of this amount, only 69,933 tonnes or 62.3 per cent was actually taken up. Among the various super-groups, KMPA, LCTM and KMIA used up 99.8 per cent, 99.3 per cent and 97.0 per cent of their allocations, respectively. However, KTSC, KFMP and KRSC used up only 33.0 per cent, 26.0 per cent and 14.8 per cent of their allocation. This suggests that super-groups with excess demand were prevented from purchasing additional imports whilst other super-groups had unused quotas.
WT/DS161/R WT/DS169/R
Page 37
fulfilment of the quota can be due to a multitude of market factors which have nothing to do with any restrictive measures maintained by Korea, the provisions of Article XI:1 in the context of this case require that the Complainants establish a clear causal relationship between the measures, separately identifiable, which are alleged to be restrictions on imports on the one hand, and the non-fulfilment of the full quota amount on the other hand.
On the one hand, Korea continued, Article XI:1 is formulated broadly to apply to "measures" other than duties, taxes or charges which prohibit or restrict importation. On the other hand, the requirement to demonstrate a clear causal link and that restrictions are manifestly having their desired effect stems from the need to balance the sovereign rights of Members under this provision. If any measure maintained by a Member could be attacked merely by reference to allegations that such a measure could, theoretically, result in restrictions on the importation of goods, this would result in undue interference in the sovereign rights of Members.
Korea noted, as shown in paragraphs 146-149 above, that the quota maintained by Korea is legal (and thereby the measures implementing the quota, subject to the limitations outlined above). Moreover, the quota and the measures which serve to implement this quantitative restriction can not be considered as being based on an exception to GATT rules. The burden of proof does not, therefore, lie with Korea to establish the conformity of any targeted measures under Article XI:1. Nor are the targeted measures to be subject to a stricter necessity test, such as under the general exceptions to GATT obligations detailed under Article XX. On the contrary, the burden of proof for establishing each of the elements outlined above lies with the Complainants. With respect to burden of proof issues, GATT/WTO panels have consistently followed the approach of various international tribunals, and the vast majority of developed legal systems, in requiring that the party making an allegation bears the burden of proving that allegation. Only when a prima facie case has been established does the burden shift to the other party. In this regard, Korea referred to the Appellate Body report on US – Shirts and Blouses (AB) which provides:
"… the issue in this case is which party has the burden of demonstrating that there has, or has not been, an infringement of the obligation […]. In addressing this issue, we find it difficult, indeed, to see how any system of judicial settlement could work if it incorporated the proposition that the mere assertion of a claim might amount to proof. It is, thus, hardly surprising that various international tribunals, including the International Court of Justice, have generally and consistently accepted and applied the rule that the party who asserts a fact, whether the claimant or the respondent, is responsible for providing proof thereof."93
In the opinion of Korea, the Complainants' fall short of meeting this burden of proof. Each of the Complainants' allegations are mere unsubstantiated assertions and based on inaccurate characterizations of the measures and systems mentioned.
However, even if it were conceded, for the sake of argument, that any of the measures and systems criticized by the Complainants had any restrictive effect whatsoever, their arguments must be rejected because they have failed to provide prima facie evidence (i) establishing that a separately identifiable restriction or prohibition exists beyond the implementation of the quota itself; (ii) that such restriction has intensified the effect of the quota by restricting imports to a level below the quota level; and (iii) that any non-fulfilment of the quota has been actually caused by restrictive measures or systems (as opposed to other factors) and that the restrictions have thereby been "made effective" within the meaning of Article XI:1.
In the view of Korea, the Complainants do not properly explain how any of the alleged restrictions constitute restrictions in addition to those imposed for the purposes of implementing the
93 See pages 13-14.
WT/DS161/R WT/DS169/R
Page 38
legally valid quota. In support of their argument concerning the nature of a "restriction" on importation in the context of Article XI:1, the Complainants cite cases which, without exception, dealt with a situation where there was no legal quota in place and are, therefore, not relevant. In such a situation, measures which constitute quantitative restrictions must be evaluated differently than in the present case. This failure must lead to the conclusion that the Complainants have not identified any separate "restriction" within the meaning of Article XI:1 in addition to the quota.
Furthermore, the Complainants have failed to establish, in the opinion of Korea, a causal link between any alleged restrictions on importation on the one hand, and reduced imports below the quota level on the other hand. There has, therefore, been no showing that any alleged restrictions (beyond the legal quota) were "made effective" through, quotas, import and export licences or other measures. Specifically, in their arguments concerning the decrease in imports, particularly in 1998 (see, for instance, paragraph 136 and footnote 92), the Complainants virtually ignore the effects of the severe and widespread financial crisis in Korea and much of Asia. While this crisis commanded the focus of the world's financial media and trading partners, it is barely mentioned by the Complainants', much less analyzed in terms of breaking the causal link between any alleged restrictions and decreased imports from these countries. Korea considered that none of the measures cited by the Complainants constitute restrictions on importation contrary to Article XI:1. Korea requested the Panel to reject the Complainants' claims under Article XI:1 in view of the lack of evidence with regard to the factors required to establish a prima facie case of violation of Article XI:1.
Australia replied that it has proven each of its claims through factual evidence and legal argument and has made a prima facie case in relation to each of the measures. The burden of proof, therefore, transfers to Korea to disprove Australia's prima facie case. Korea has made several assertions about Australia's failure to meet its burden of proof but has not adduced either alternative factual evidence or persuasive legal arguments, including by reference to the findings of previous panels and the Appellate Body, to substantiate its assertions. Australia submitted that Korea has not disproved Australia's prima facie case. Australia further considered that Korea's specific claims about Australia's burden of proof under Articles III (see paragraphs 226-229) and XI are legally incorrect. Australia was of the view that it has shown that the exclusion of imported beef from the existing retail infrastructure for domestic beef has the effect of a quantitative restriction on imported beef additional to the current quota. Australia has also argued that a number of other measures are inconsistent with Article XI:1. Australia rejected Korea's attempt to expand the burden of proof under Article XI:1 to include proof of injury (see paragraphs 232-233). Australia contended that Article XI:1 only requires Australia to prove that there are prohibitions or restrictions in place on imports. Australia is not required to prove the trade effect of these measures by reference to the effect of that measure on another existing quantitative restriction. A plain reading of Article XI:1 indicates that Australia needs to prove the existence of prohibitions or restrictions made effective through quotas, import or export licences or other measures. Australia considered that it has proven that a range of measures, additional to the current quota, which meet the requirements of Article XI:1. The existence of a quota does not permit Korea to impose additional quantitative restrictions.
When the quota is taken into account, Korea submitted, none of the measures complained of constitute restrictions contrary to Article XI:1 in addition to the quota legally maintained by Korea. The undisputed fact in this case is that, with the exception of the extraordinary conditions prevailing in 1998, Korea has consistently and fully absorbed the applicable annual quota amount for imported beef. In Korea's view, this fact is irreconcilable with the Complainants' allegation that the Korean import regime for beef involves additional restrictions beyond the legal quota, in violation of Article XI:1 . Nearly all of the measures which the Complainants allege to be inconsistent with this provision are inherent to the basic architecture of the Korean beef import regime. If the Korean beef import regime inherently involves restrictions on the importation of beef in addition to the quota, then it would logically be expected that Korea would consistently have failed to absorb the full quota since the inception of the import regime. This is not the case, which, in Korea's view, is a conclusive
WT/DS161/R WT/DS169/R
Page 39
indication that the Korean beef import regime does not restrict the importation of beef in addition to, or beyond, the quota level.
The Complainants submitted that previous GATT panel reports have concluded that a showing of "trade effects" is not a requisite element of a violation under Article XI:1, as proposed by Korea. Thus, the panel in EEC - Oilseeds94 observed that the "CONTRACTING PARTIES have consistently interpreted the basic provisions of the General Agreement on restrictive trade measures as provisions establishing conditions of competition. Thus, they decided that an import quota constitutes an import restriction within the meaning of Article XI:1 whether or not it actually impeded imports." Similarly, the 1984 Report of the panel on Japan - Leather found that restrictions on imports of leather constituted a prima facie case of nullification and impairment. The panel concluded that " … the existence of a quantitative restriction should be presumed to cause nullification or impairment not only because of any effect it had had on the volume of trade but also for other reasons e.g. it would lead to increased transaction costs and would create uncertainties which could affect investment plans".95 The Complainants, therefore, are not required to show actual trade impact. (See also paragraphs 232-235)
The key principles underpinning the rejection of a trade effects test, Australia argued, and the interpretive approach to Articles III and XI, were recently reiterated by the panel in US-Section 301 The panel noted the importance, when determining whether a measure is in violation of the covered agreements, of taking into consideration the chilling effect on economic activity of a particular measure.96 The panel noted the findings in US - Superfund which reached its findings through consideration of the effect of measures on the relative competitive opportunities between imported and domestic products. The panel in that case stated that: "Both Articles [GATT Articles III and XI] are not only to protect current trade but also to create the predictability needed to plan future trade." (See also paragraphs 232-233. )
Australia submitted further that the range of restrictions applied by Korea to imported beef, including separation of retail sale, imposition of minimum prices, discrimination against grass-fed beef, end-user and usage limits and other distribution restrictions, as well as reporting, record-keeping and labelling requirements, have a negative impact on economic activity and investment in the imported beef trade. They will continue to do so for as long as they are maintained by the Korean government. (See also paragraphs 201, 232 and 233.)
The United States submitted that claims under Articles III:4 and XI:1 do not require a showing of economic harm. In the view of the United States, any proposition that the burden of proof is increased beyond what it would otherwise be in circumstances when a quota exists is contrary to GATT jurisprudence because its adoption would reward Members who maintain trade distorting practices. The United States considered that there is no minimum impact requirement under Article XI:1. However, if there were such a requirement, it is clear that the minimum auction prices set by the NLCF and the LPMO and the six month interruption in tender invitations are two examples of measures that had identifiable adverse effects on quota fill and, thus, on US beef exports to Korea. (See also paragraphs 234-235.)
Without prejudice to the fact that no showing of trade damage is required for a finding of violation of Article XI:1, the United States noted the following information for the Panel. Korea's claim that its measure mandating the separate retail sale of imported beef does not have an adverse effect on the number of outlets selling imported beef and, thereby, on beef imports, disregards the limited number of special imported beef stores when compared to the total number of retail beef
94 Paragraph 150, referring to Japan - Leather.
95 Paragraphs 47-48, 53, 55.
96 See analysis from paragraphs 7.71-7.86.
WT/DS161/R WT/DS169/R
Page 40
outlets in Korea. Korea also ignores the effect that the dual retail regime has had in disproportionately concentrating imported beef sales in the restaurant sector. Moreover, the decline in the last three years in the number of specialized imported beef stores suggests that the additional costs of maintaining stores to sell only imported beef is taking its toll even as that situation was aggravated by the financial crisis of 1998. No doubt, the situation of the imported beef stores was also aggravated by the LPMO's refusal to tender and the maintenance of high minimum bid prices for imported beef.
It is clear from the foregoing, the United States continued, that without the existing restrictions on the retail sale of imported beef and Korea's other trade restricting measures, a far larger distribution base could have been established for imported beef in anticipation of the end of the quota next year. Korea's policies have precluded the pursuit of such marketing strategies, and have enabled the Korean beef industry to keep a stranglehold on retail distribution, especially on the traditional butcher shops that account for approximately 90 per cent of all retail outlets for beef. If any proof of trade effects were necessary, the rapid decline in the volume of imported beef in 1998 and the decrease in the number of imported beef stores would be sufficient.
However, the issue that this Panel must consider is the denial of competitive opportunity to imported beef. The amount of damage done by Korea's discriminatory treatment of imported beef need not be quantified; nor need this Panel quantify the effect of Korea's violations of Article XI:1. Indeed, the loss of potential competitive opportunities is sufficient to establish that a measure is inconsistent with either Article III:4 or XI:1. Nonetheless, in this dispute, the United States has shown not only that Korea's measures relating to imported beef may result in competitive disadvantages, but that Korea's measures have actually had that effect.
Korea responded that the legal and factual circumstances pertaining to the Korean beef market must be fully examined in order for the Panel to reach a correct interpretation of Article III:4 and Article XI:1. Throughout these proceedings, the Complainants have in effect argued that the analysis of, in particular, Article III:4 and Article XI:1, can and should be separated from the analysis of the legal quota maintained by Korea. Korea submitted that this cannot be done. Korea also noted that it shares the concerns expressed by Canada in its third party submission with respect to the Complainants' erroneous application of Article XI:1 in the context of this case. None of the case law cited by the Complainants with respect to these two provisions have dealt with the specific legal and factual circumstances which are present in the current dispute.
In a case where a legal quota is maintained by a Member, Korea continued, the term "restriction" in Article XI:1 cannot be interpreted in the same way as was done in the cases cited by the Complainants. In the present case, Korea maintains a legal quota on beef and Korea has acquired a negotiated right not to permit market access for imported beef above the agreed quota level. In addition, the quota has consistently been fully absorbed with the exception of the crisis year. Under these circumstances, it is completely nonsensical for the Complainants to argue that the cited Korean measures restrict imports within the meaning of Article XI:1 because the maximum of their entitlement with respect to market access has been utilized.
Korea submitted that this is the reason why panels have not required a showing of actual trade effects in cases where no legal quota was applied. In these cases, a GATT-inconsistent quantitative restriction would virtually always have potential, if not actual, trade effects and therefore there is a restriction within the meaning of Article XI:1 since it is a restriction in relation to an otherwise limitless entitlement negotiated under the GATT. It is on this basis that the presumption of nullification or impairment has been made. On the other hand, where a legal quota exists and is being filled, this must be taken as overwhelming, if not conclusive, proof that no restriction within the meaning of Article XI:1 can be alleged. If the quota is being filled, it is clear that it cannot be claimed that actual competitive opportunities have been lost since there is no entitlement to further market
WT/DS161/R WT/DS169/R
Page 41
access. Equally, however, it is impossible to claim a loss of even potential competitive opportunities when the quota is being filled for precisely the same reason. In the opinion of Korea, this is a crucial difference between the present case and the cases cited by the Complainants.
Therefore, Korea argued, the Complainants' claims that any of the alleged measures constitute restrictions on importation within the meaning of Article XI:1 must be rejected. Contrary to the Complainants' assertions, they have not established a prima facie case that Korea maintains any separately identifiable restrictions in addition to the quota. In addition, the measures have conclusively been shown to permit market access for beef in Korea up to the quota level to which Korea is committed. Since virtually all the measures complained of were in force both during the years when the quota was filled, and in the exceptional year 1998 when it was not, it cannot logically be argued that it is these measures that are responsible for the exceptional drop in imports in 1998 and it is, therefore, impossible to claim that these measures restrict imports beyond the quota. Hence, the Complainants' arguments under Article XI:1 with respect to, among others, the separation of sales outlets, the operation of the SBS system including quota allocations, the alleged restrictions on cross- trading in the SBS system, and the operating and auctioning procedures of the LPMO, must conclusively be rejected.
CLAIMS UNDER ARTICLE III:4 OF GATT
"Like product"
Australia and the United States submitted that there are four requisite elements to any finding that a measure is inconsistent with Article III:4: (i) a law, regulation or requirement must be involved; (ii) the law, regulation or requirement must affect the internal sale, purchase, transportation, distribution, or use of the product; (iii) the imported product must be like the domestic product; and (iv) the imported product is accorded less favorable treatment than the like domestic product.97 Article III:4 not only covers laws, regulations and requirements expressly stated to apply to internal sale or purchase, but also those which affect conditions of sale or purchase.98
The Complainants submitted that an examination of the properties and characteristics, end- uses, consumer tastes as well as habits and tariff classification show that Korean beef and imported beef are "like products". In terms of physical characteristics (such as appearance and taste) and end- uses, Korean beef and imported beef is very similar if not identical. Indeed, Korea has justified separate distribution of imported beef on the basis of a perceived need to prevent cheaper imported beef from being fraudulently sold as more expensive Korean beef, because consumers are not able to tell the difference. The Complainants considered that imported and domestic beef are "like products" for the purposes of Article III:4.
Korea has not contested that imported and Korean beef are like products
2. Measures with respect to retail sale of imported beef
Australia submitted, that the purpose of Article III "is to ensure that internal measures 'not be applied to imported or domestic products so as to afford protection to domestic production". Toward
97 See US - Gasoline, paragraph 6.5. There is no requirement under Article III:4 that the regulation affords protection to a domestic industry. The Appellate Body in EC - Bananas III (AB) found that unlike Article III:2 which refers to Article III:1 by specific reference, Article III:1 does not comprise a part of the context of Article III:4. Therefore, the Appellate Body concluded that "a determination of whether there is a violation of Article III:4 does not require a separate consideration of whether a measure 'afford[s] protection to domestic production." See paragraph 216.
98 L/833, adopted 23 October 1958, 7S/60, 64 paragraphs 11-13. See also Japan - Alcoholic Beverages (AB), page 18; US - Section 337, paragraph 5.13; US - Gasoline, paragraph 6.10.
WT/DS161/R WT/DS169/R
Page 42
this end, Article III and various panel and Appellate Body reports99 indicate that treatment no less favourable requires equality of competitive conditions for imported products in respect of laws, regulations and requirements affecting internal sale.100 Where a benefit is conferred on domestic products, this must also be extended to imported products. Conversely, where a charge or requirement is imposed, this must cover both imported and domestic products.
Australia submitted that the panel report in US - Section 337 emphasised that Article III:4 is concerned with the effective equality of opportunities in the application of laws, regulations and requirements. The application of formally identical legal provisions, may, in some cases have the practical effect of according less favourable treatment to imported products.101 The application of the separate system results in imported beef having significantly fewer sales outlets, and therefore notably fewer sales and marketing opportunities, than domestic beef. Imported beef, Australia argued, is therefore subject to a competitive disadvantage vis-Ã -vis domestic beef.102 The requirement to establish separate sales establishments for imported beef, and the associated costs of doing so, have limited the competitive opportunities available to imported beef compared to those afforded to domestic beef. Put simply, the regulation separating the sale of imported beef from that of domestic beef denies to imported beef the opportunity to be sold in over 40,000 existing meat retail outlets through which the majority of beef in Korea is sold. Imported beef has been completely excluded from this retail infrastructure. The system imposes additional costs on the sale of imported beef by requiring that any existing meat retailer seek permission for, and open, new premises. The costs associated with the establishment of separate establishments reduces the competitive opportunities afforded to imported beef. The fact that all imported beef stores must carry a sign identifying them as such exacerbates the discrimination against imported beef.
Australia was of the view that the limitation on end points of sale and the separate display requirements in larger outlets discriminates against imported beef because it also has the effect of emphasising any perception of quality differences between domestic and imported product. There is a Korean perception that local Hanwoo beef is superior to imported product which is not based on an objective evaluation of quality.103 This perception is exacerbated by the separation of domestic and imported beef, either in separate shops or in separate cabinets and have a negative effect on the marketability of imported beef. The limited availability of imported beef relative to domestic beef aggravates this problem. This has the further effect of forcing lower prices for imported beef, to compensate for perceived differences in quality (see also the panel report in the US - Gasoline case.)
Australia did not accept Korea's claim that the separate retail sale of imported beef arises merely because of the existence of a quota. Nor does Australia agree with Korea's subsequent claim that the burden of proof in relation to Article III, in situations where a legal quota exists, requires Australia to prove that the internal measure has affected the filling of the quota. Australia rejects this claim on the basis that it would remove Korea's national treatment obligations under which Korea is required to provide equality of competitive opportunities for imported products once they have come across the border.
99 US - Section 337(AB), paragraphs 5.11 and 5.13. US – Gasoline(AB), paragraph 6.10. Japan - Alcoholic Beverages (AB), page 16. Japan – Film(AB) paragraph 10.379.
100 Japan – Alcoholic Beverages (AB) page 18; Italian Agricultural Machinery, paragraphs 11-13; Canada - FIRA , paragraphs 5.7-5.11; Canada - Marketing Agencies (1992), paragraph 5.5; and US - Malt Beverages, paragraphs 5.30-5.33.
101 Paragraph 5.11.
102 See also Canada - Marketing Agencies (1992), paragraph 5.5-5.6.
103 [In [the][a] sensory analysis conducted in 1995, 688 Korean consumers were asked to taste beef samples from Korea, Australia, USA and New Zealand. The consumers identified three groups of beef on the
basis of eating quality, not country of origin. "Sensory Analysis of Beef by Korean Consumers" op. cit pages 74-79. Nonetheless, the survey also identified a consumer preference for eating beef identified as Korean. Ibid, page 88.
WT/DS161/R WT/DS169/R
Page 43
The United States submitted that Korea's restrictions on the sale, distribution and use that apply exclusively to imported beef draw an impermissible distinction based on the origin of the beef. This distinction, which results in a Korean-imposed handicap on the competitiveness of imported beef, is inconsistent with both the intent and letter of Article III:4. A succession of panels has concluded that the intent of Article III:4 is "to provide equal conditions of competition once goods had been cleared through the customs".104 The Korean laws and regulations preclude such equal conditions of competition. By requiring imported beef to be sold in stores that cannot sell Korean beef, Korea denies imported beef the opportunity to sell in the vast majority of meat stores. Imported beef may be sold in approximately 5,000 stores, whereas there are approximately 45,000 stores where Korean beef may be sold. This disparity of opportunity cannot be ignored or minimized. The result is that imported beef is excluded from thousands of stores where Korean consumers shop for meat.
Korea's restrictions on the sale, distribution, and use of imported beef, the United States continued, are equally inconsistent with the requirements of Article III:4. Korea imposes these restrictions only on imported beef. Korean beef confronts no similar limitations on its distribution, use, and sale. Korean beef when sold to certain classes of customers the United States continued, is not confined to specific uses by those purchasers. There are no restraints on the resale of Korean beef akin to those imposed on imports. Whereas cross-trading of imported beef is forbidden, Korean beef may be freely sold without constraints by traders and distributors. This differentiation in distribution and sales opportunities denies imported beef the more favorable treatment accorded to the domestic product and, thus, is inconsistent with Korea's obligations under Article III:4.
The United States further contended that the information submitted by Korea shows that the number of imported beef stores declined between 1994 and 1998 from 6,088 to 5,498 stores; a decline of approximately 10 per cent. During this same period the volume of imported beef permitted under the quota increased from 106,000 to 187,000 metric tonnes. In recent years, there is, thus, no evidentiary support for Korea's assertion that the number of imported beef stores is a function of the quota quantity.
In very similar circumstances, United States continued, other panels have found that the exclusion of imported products from particular channels of distribution constituted discrimination, resulting in less favorable treatment for imports. In the 1992 panel report on Canada - Marketing Agencies (1992),105 the panel examined restrictions imposed by provincial liquor authorities on access for imported beer to points of sale. The panel concluded that by excluding imported beer from points of sale where domestic beer could be sold, imported beer was denied certain competitive opportunities enjoyed by domestic beer. A similar result was reached in the panel on US - Malt Beverages, where the panel concluded that a state exemption of domestic wine from a prohibition on the sale of wine resulted in less favorable treatment for imports where imported wine was banned. Korea's requirement that imported beef be sold in separate sales facilities denies competitive opportunities to imported beef. Like Canada's previous exclusion of imported beer from certain points of sale, Korea's exclusion of imported beef from most beef sales sites, constitutes a measure that is inconsistent with the obligations for national treatment under Article III:4.
104 Italian Agricultural Machinery, paragraphs 11-13; US - Section 337, paragraphs 5.11-5.13 Canada
- FIRA , paragraph 6.6.
105 Paragraph 5.5: The panel recalled:
… that the CONTRACTING PARTIES had decided in a number of previous cases that the requirement of Article III:4 to accord imported products treatment no less favorable than that accorded to domestic products was a requirement to accord imported products competitive opportunities no less favourable than those accorded to domestic products. The Panel found that, by allowing the access of domestic bear to points of sale not available to imported beef, Canada accorded domestic beer competitive opportunities denied to imported beer.
WT/DS161/R WT/DS169/R
Page 44
According to Korea, the Complainants have not been able to identify which "law, regulation, or requirement" led to discriminatory results as concerns the separate sales outlets. Korea emphasized that the same regulation applies to domestic beef stores and, therefore, Korea's system of separating sales outlets treats both imported and domestic beef on equal footing. Hence, Korea can only surmise that what the Complainants argue is a case of de facto discrimination. Korea submitted that under these circumstances, what matters is determining which precise fact causes the less favourable treatment. There is no discrimination between domestic and imported beef stores as to the opening and operation of the stores. Nor are there any additional costs or requirements involved in setting up an imported beef store as compared with a domestic store. An owner of a domestic beef store may change his store to one selling imported beef by submitting a notification to the authority and changing the sign. Likewise, an owner of an imported beef store may also change his store to one selling domestic beef by notifying the authority and changing the sign. The decision on whether to sell either domestic beef or imported beef depends entirely on the owner himself. It is, therefore, entirely baseless to imply that the number of imported beef stores in operation compared with that of domestic beef stores can constitute evidence, much less proof, of discrimination against imported beef.
The Complaining parties responded that the distinction between de facto and de jure discrimination being applied by Korea was a distraction from the question of equality of competitive conditions. The application of the separate system, applied by law under Article 15 of the Management Guideline for Imported Beef, results in imported beef having significantly fewer sales outlets than Korean beef, and therefore significantly fewer sales and marketing opportunities, than Korean beef.
Korea submitted that the standard of review with respect to de jure or de facto discrimination cannot be the same. A careful delineation of what the Complainants need to prove in this respect is required, after which a clear, uninterrupted causal link between the regulatory intervention by Korea and the alleged discrimination must be established. As concerns less favourable treatment, Korea considered that the Complainants' argument in this respect falls far short of the threshold required to discharge their burden of proof. The number of sales outlets selling imported beef is smaller than the number of sales outlets selling domestic beef simply because there is a legal quota in place which limits the overall quantity of imported beef sold in Korea. Presumably, the number of sales outlets will be much higher once the quota is removed by 1 January 2001. This is one more reason why Korea suggests that the Complainants' claim is at this stage inadmissible: the picture of the beef market in Korea is right now skewed because of the existence of the quota. The decision to open either type of outlet, Korea continued, rests entirely with private operators. In presence of the legal quota, more private operators tend to opt for sales outlets selling domestic beef. However, the regulatory requirements do not prejudge decisions by the private operators. It is the existence of the quota that has influenced these decisions so far. Korea submitted that in the absence of an element of causality between the regulatory intervention and the decision of private operators to opt for either type of outlet, it is not possible for the Complainants to discharge their burden of proof under Article III:4. Such actions by private parties are not attributable to Korea; the Japan - Film case lends full support to this proposition.
Referring to the Complainants arguments in paragraphs 177-178 concerning separate sales outlets for imported beef, Korea submitted that the US and Australian claims in this respect must be rejected. The separation of stores under Korean law selling imported and domestic beef does not contravene Article III:4 to the extent that the relevant legislation imposes identical regulatory requirements as far as the opening and the functioning of such stores is concerned. GATT, and more
WT/DS161/R WT/DS169/R
Page 45
recently WTO, panels have made it clear that the purpose of Article III is to ensure that WTO Members do not add to the consolidated border protection through internal measures 106.
Korea submitted further that the Complainants' arguments with respect to separation of sales outlets rest on the assertion that if imported beef cannot be sold in certain domestic stores, this will per se result in less favourable treatment. The fundamental aspect overlooked by the Complainants, however, is that the treatment afforded imported beef is inherently neutral because the same restriction applies to stores selling domestic beef. This is not comparable to the measures examined in Canada - Marketing Agencies (1992). In that case, the restriction on points of sale was exclusively applied to imported product. Likewise, in US - Malt Beverages, the measure at issue prohibited the sale of imported wine in circumstances where domestic wine was specifically exempted. It is obvious that in such circumstances, less favourable treatment for the imported product will result. These cases in no way approximate the present Korean situation, as there is no question of allowing special privileges or rules for domestic stores or product which do not equally apply to stores selling imported product. The Complainants' referral to the above-mentioned cases in the context of this dispute is, therefore, misleading.
Apart from the limitations inherent in the current legal quota system in terms of available quantities of imported beef, the stores selling imported beef are not subject to any less favourable treatment than that which applies to selling domestic beef. The imported beef stores and domestic beef stores operate under equal conditions in all fundamental aspects of business operations such as retail pricing, operating hours, advertisement as well as with regard to safety inspections involving marking of origin, grading, price display, and taxes. Korea thus contended that the Complainants' claim regarding separation of sales outlets must be rejected. The separation of stores under Korean law selling imported and domestic beef does not contravene Article III:4 to the extent that the relevant legislation imposes identical regulatory requirements as far as the opening and functioning of such stores is concerned.
Referring to the text of Article III:1107, Korea argued that the logical conclusion with respect to the scope of Article III is to ensure that the only form of permissible protection in the GATT/WTO system is that of legalized (i.e. negotiated and agreed upon) border protection. What is prohibited under Article III:4 is discriminatory treatment between domestic and imported like products which affords less favourable treatment to imported products than that accorded to like products of national origin. Korea was of the opinion that the 1989 panel report on US - Section 337 perfectly captures this point:
"… The words 'treatment no less favourable' in paragraph 4 call for effective equality of opportunities for imported products in respect of the application of laws, regulations and requirements affecting the internal sale, purchase, transportation, distribution or use of products. This clearly sets a minimum permissible standard as a basis. On the one hand, contracting parties may apply to imported products different formal legal requirements if doing so would accord imported products more favourable treatment. On the other hand, it also has to be recognized that there may be cases where application of formally identical legal provisions would in practice accord less favourable treatment to imported products and a contracting party might thus have to apply different legal provisions to imported products to
106 For a recent expression of this interpretation of Article III, see the panel report Japan - Alcoholic Beverages, upheld in this respect by the Appellate Body.
107 "The contracting parties recognize that internal taxes and other internal charges, and laws, regulations and requirements affecting the internal sale, offering for sale, purchase, transportation, distribution
or use of products, and internal quantitative regulations requiring the mixture, processing or use of products in specified amounts or proportions, should not be applied to imported or domestic products so as to afford protection to domestic production".
WT/DS161/R WT/DS169/R
Page 46
ensure that the treatment accorded to them is in fact no less favourable. For these reasons, the mere fact that imported products are subject under Section 337 to legal provisions that are different from those applying to products of national origin is in itself not conclusive in establishing inconsistency with Article III:4. In such cases, it has to be assessed whether or not such differences in the legal provisions applicable do or do not accord to imported products less favourable treatment."108
Korea also noted that Article XVII of GATS (which was enacted after the mentioned jurisprudence and has arguably been influenced by it) makes this point clear in its second paragraph concerning the national treatment obligation.
The United States considered that Article III:4 has been interpreted consistently by GATT/WTO panels as "establishing the obligation to accord imported products competitive opportunities no less favorable than those accorded domestic products."109 The United States contended that the MAF regulations deny such opportunities to US beef. The requirement for separate retail marketing channels for imported beef and the imposition of restrictions on the distribution and sale of imported beef, put imported beef at a competitive disadvantage to Korean beef. In similar circumstances, the panel in US - Section 337110 concluded with respect to Article III:4 that: "Given that the underlying objective is to guarantee equality of treatment, it is incumbent on the contracting party applying differential treatment to show that, in spite of such differences, the no less favourable treatment standard of Article III is met." Korea cannot fulfill this burden and, as a consequence, these measures violate the national treatment provisions .
Australia responded that the requirement to sell imported and domestic beef in separate stores is a matter of government regulation, not a private undertaking. The Korean government requires an existing domestic beef seller to open new and separate premises and undergo new licensing procedures if it wishes to sell imported beef. The regulation also removes from the retailer the power to sell the like products in the same store if they so desire. Australia emphasised that when Korea introduced the dual retail system, imported and domestic beef were not on the same competitive footing. When the regulation was introduced in 1990, there was an existing infrastructure for the sale of beef. However, given the longstanding import restrictions that existed on foreign beef until 1988, the majority of beef sold in Korea at that time was domestic beef. The introduction of separate requirements, therefore, removed imported beef from the existing retail infrastructure, including the small butcher shops through which the majority of beef was, and continues to be, sold in Korea.
In response to the US arguments in paragraph 177, Korea submitted that the figures contained in the table referred to by the United States (see footnote 111) show that the number of stores steadily grew during the period of 1994-1996, with a slight decrease in 1997. It was only in 1998 that the number of stores decreased substantially. Furthermore, Korea considered that, for the purpose of determining the effect of the system of separation of sales outlets on the number of stores, the relevant figure is the quantity of beef available for sale at the retail level, not the quota amount. Korea has provided such figures. The figures show that in 1998 there was a substantial decrease in the volume of beef sold at the retail level. If there is anything that can be derived from these figures, it is that the decrease in beef consumption in Korea during the period from late 1997 to 1998 was due to the financial crisis.
108 See paragraph 5.11.
109 See, e.g. US - Section 337, paragraph 5.11; Canada - Marketing Agencies (1992) at 75 and the panel report in the same styled case in Canada - Marketing Agencies (1988), at 90; Italian Agricultural Machinery,
paragraphs 11-13 ("the intention of the drafters of the Agreement was clearly to treat the imported products in the same way as the like products once they have been cleared through customs.")
110 Paragraph 5.11.
WT/DS161/R WT/DS169/R
Page 47
Korea considered that it has conclusively refuted the claims regarding price comparisons as unfounded. First, it is common knowledge in Korea that imported beef is generally cheaper than its domestic counterpart. Second, imported beef stores have precisely the same tools at their disposal as domestic beef stores to market, advertise and promote their products and indicate any competitive advantages such as price. In addition, consumers will compare prices between domestic and imported beef stores in precisely the same way as they compare prices between different domestic outlets selling beef, by shopping around. Finally, Korea argued that the Complainants must show how the system of separation of sales outlets results in "less favorable treatment" in the presence of undisputed evidence suggesting that for years the quota has been fully absorbed through a system of separation of sales outlets which remained virtually unchanged for a period of nine years.
Referring to the United States arguments in paragraph 175 above, Korea submitted that the fact that there are more stores selling domestic rather than imported beef does not constitute discrimination and does not engage the responsibility of Korea. To penalize Korea in this respect would amount to penalizing the legal beef QR since the limited volume of imported beef circulating in the Korean market (a government choice which is perfectly consistent with Korea's WTO obligations) explains the number of stores selling imported beef in the Korean market. Korea further submitted that the two cases referred to by the United States in paragraph 178 are irrelevant to this case since they both deal with issues of regulatory diversity: in both cases, there was a regulatory requirement which distinguished between domestic and imported products. In the Canadian case, imported beer had no access to some points of sale. In the US case, domestic wine was exempted from a prohibition on the sale of wine. This is not the case here. Imported beef can be sold anywhere in Korea. There are no differential regulatory requirements applied to imported beef. It all depends on the decision of private operators to opt for a store selling either domestic or imported beef.
Moreover, historically the number of stores has proven not to be a problem when it comes to absorbing the QR, in place for almost ten years now. It is the negotiated outcome of a previous dispute settlement between the present Complainants and Korea and part of Korea's commitments under the Uruguay Round agreements. The number of stores selling imported beef has evolved freely over the years since the introduction of the QR, as shown in the data below.111 Until 1997, the QR was fully used, 1998 being the first year in which the QR was not absorbed. The reason for this has nothing to do with the number of stores selling imported beef but rather with the well-known financial crisis that hit Korea in 1997 which led to a sizeable reduction of the demand in the market: overall beef consumption dropped by 4.5 per cent.
Imported beef obviously could not escape the reduction in demand, Korea continued, particularly since domestic beef prices collapsed to historical lows. The wholesale price difference between imported and domestic beef narrowed from 1.74 in 1995 to 1.39 in 1998. In addition, the price of the feed, which relies heavily on the price of imported raw materials, became untenably high and forced farmers to release their cattle irrespective of the falling prices. Another significant factor is that in view of the severe economic recession, demand in the restaurant sector which used to consume about 44.3 per cent of the total imported beef amount plummeted. Korea concluded that the number of stores which operate under identical regulatory conditions is irrelevant when it comes to explaining the reasons why the beef quota was not filled in 1998.
111 Number of foreign beef stores:
Year | 1990 | 1991 | 1992 | 1993 | 1994 | 1995 | 1996 | 1997 | 1998 |
Number | 2,193 | 4,178 | 4,472 | 4,838 | 6,088 | 7,713 | 7,569 | 7,026 | 5,498 |
Source: MAF
WT/DS161/R WT/DS169/R
Page 48
Australia responded that while quota levels have been rising, the number of imported beef stores have been falling, indicating that it was not the existence of a quota that was the cause of the relatively small number of imported beef stores. Australia stated that it was surprising that the number of imported beef outlets had not grown significantly in the early 1990s, given that the market had known that imported beef quotas would grow steadily until 2000 and that the quota would be removed from 1 January 2001. The additional costs associated with establishing an imported beef shop, the limited range of products that may be sold and the uncertainty of price and availability of imported beef have all mitigated against the growth of imported-beef shops over the past decade.
Korea submitted that the US and Australian arguments, if accepted, would amount to constructing the WTO as an instrument advocating de-regulation. This, in the view of Korea, is not the function of the WTO, which is simply an instrument outlawing discrimination between domestic and imported products. It does not put into question the regulatory function of Members to the extent that this has not been transferred at the international level. Under Article III, WTO Members only transferred to the international level their discretion to discriminate between domestic and imported products. They retain full authority to regulate as long as imported products are not treated less favourably than domestic ones.
In the present case, Korea considered that it regulated in a non-discriminatory manner: under identical conditions, traders are free to choose whether they will open a store selling domestic or imported beef. What counts, however, from a legal perspective is that whatever store they choose to open they will face an identical regulatory burden (or lack of it). Consequently, the Korean legislation affecting sale, offer for sale, etc. of beef does not reserve less favourable treatment for imported products and thus does not constitute a violation of Article III:4. Article XX is the best proof that this is the case. WTO Members can continue to pursue their regulatory objectives to the extent that their actions are not in conflict with their GATT/WTO obligations.
Australia responded that it was not claiming that Korea must de-regulate - only that its internal regulations for imported beef meet the requirements of Article III:4 - that is, that they provide for equality of competitive opportunities for imported beef vis-Ã -vis domestic beef.
Referring to the panel on US - Hawaiian Regulations112 as well as to the 1956 working party report on "Certificates of Origin, Marks of Origin, Consular Formalities"113, Australia remarked that the requirement to display the sign "Specialized Imported Beef Store" clearly goes beyond the indication of origin on products. GATT history indicates that a restriction of this type is contrary to Article III:4. This sign also has the effect of emphasising any negative perceptions about the quality of imported beef.
Korea responded that a specialized store must install a signboard indicating that it is a "specialized store of imported beef", as provided in Article 9 of the Management Guideline for Imported Beef. All stores in Korea choose their own trade name to promote their business by putting up a signboard. Hence, installing a signboard itself does not impose any additional financial burden on the person who intends to open a specialized store. The only trivial difference would be that the government has made it an obligation for stores selling imported beef. This requirement is inspired by the need to adequately inform the consumers that the store sells imported beef, thus preventing fraudulent practices.
The allegations made by the Complainants that such signboards may have negative promotional effects cannot be taken seriously. The effect of the indication on a signboard depends entirely on the consumer's perception of domestic and imported beef, and there is no allegation made
112 L/411/add.1; SR.10/13, 1955.
113 Paragraph 13.
WT/DS161/R WT/DS169/R
Page 49
by the Complainants that Korea has restricted in any way the promotion or advertising of imported beef in Korea. The perception of the signboard can be highly positive if Korean consumers consider imported beef to be inexpensive and of high quality. Thus, Korea considers that the requirement to install a signboard to indicate a specialized store selling imported beef cannot be deemed as being by definition less favourable treatment in circumstances where advertisements and promotion of imported beef (such as its price, quality, etc.) are freely allowed.
In Australia's view, it is irrelevant to the issue of equality of competitive opportunities that packaged imported beef is permitted to be sold in domestic beef stores, particularly given the declining importance of such sales.114 Australia furthermore submitted that the separation of retail sale should be seen as an effort to protect domestic beef from the impact of import competition. Korea has pursued a policy of systematic separation of the market as a means of creating a permanent distinction in the minds of traders and consumers between domestic and imported beef, despite the fact that they are like and competitive products. In doing so it sends misleading signals to the market that ultimately distorts the competitive relationship between imported and domestic beef.
As imported and domestic beef are "like products" for the purposes of Articles III, Australia argued, there is no justification for the further differentiation applied to imported product between grass-fed and grain-fed product, particularly since no such distinction is applied to domestic product. Nor does Korea's tariff schedule contain such a distinction. Nor is making a distinction between grass-fed and grain-fed beef a reliable indicator of quality, which is more accurately measured on the basis of such indicators as marbling, texture, meat colour, fat colour and maturing level. Indeed, these are the indicators applied by Korea to domestic beef to grade quality.
While applied through the tender system, Australia contended, the separation of grass-fed and grain-fed beef is a law, regulation or requirement affecting internal sale. In particular, the association of a quality differential between grass-fed (general beef) and grain-fed (high quality beef), has a negative impact on the internal sale of grass-fed beef among consumers who have been encouraged to associate grass-fed beef with a product of lesser quality than grain-fed beef.
The distinction between grass-fed and grain-fed, Australia continued, and the association by the Korean government and the LPMO of relative differences in quality between them, is a distinction applied only to imported beef. This distinction has allowed the LPMO to exclude grass-fed beef, the majority of which is supplied by Australia, from the tender on three occasions in 1999. No similar limitations are applied to sales of domestic beef because no such grass/grain-fed distinction exists for domestic beef. Less favourable treatment is also accorded to imported grass-fed beef because of the
follows:
114 The sale of imported packaged beef as a proportion of total imported beef sales since 1991 is as
Year | Total Packaged Sales | Total Sales | % of total sales |
1990 | 41,587 | 82,064 | 51 |
1991 | 55,802 | 124,741 | 45 |
1992 | 52,240 | 127,314 | 41 |
1993 | 36,988 | 103,373 | 36 |
1994 | 26,556 | 122,537 | 22 |
1995 | 27,203 | 146,495 | 19 |
1996 | 15,801 | 149,204 | 11 |
1997 | 14,612 | 134,225 | 11 |
1998 | 10,501 | 85,416 | 12 |
1999* | 7,341 | 130,000 | 7 |
*As at 30 November.
Source: MAF, LPMO Yearbooks, NLCF.
WT/DS161/R WT/DS169/R
Page 50
association drawn between grass-fed beef and beef of "general" or lesser quality. This has created an arbitrary distinction in the minds of consumers that has adversely affected imports, sales and prices of grass-fed beef in both the LPMO and SBS systems.
LPMO tendering opportunities
(For arguments under this section see paragraphs 122-125. Cf. also paragraphs 287-292 and 346.)
Measures with respect to the discharge of imported beef in the wholesale market
Australia submitted that pricing of imported product in order to protect and stabilise domestic prices is contrary to Article III:4. The sale of imported beef in Korea is, according to Australia, manipulated by the LPMO and the NLCF with the aim of protecting the competitiveness of domestic product. These organizations have both taken measures to raise the price of imported beef which is decided by reference to the price of its domestic competition. This results in less favourable treatment for imported beef contrary to Article III:4. In establishing a case that minimum prices are applied to imports, Australia argued, it is not necessary to point to an officially published minimum price for imported beef. Minimum pricing can also be established from an analysis of the discharge procedures operated by the LPMO and the NLCF in accordance with the Regulations Concerning Sales of Imported Beef and an assessment of whether this measure, in its application, has the effect of a minimum price for imported beef, contrary to Article III:4.
Referring to price charts for imported beef, which indicate the maintenance of daily minimum prices for imported beef, as well as to the acknowledgement in the MAF press release of 22 July 1999 and the Yonhap News article relating to reductions in the minimum price, Australia argued that these reinforce the view that there is a minimum wholesale price for imported beef which is manipulated in relation to the state of domestic cattle and beef prices. In Canada - Marketing Agencies, the panel concluded that the maintenance by an import and sales monopoly of a minimum price for an imported product at a level at which a directly competing, higher- priced domestic product was supplied, was inconsistent with Article III:4. While the panel in that case was considering the practices of import and sales monopolies, the critical principle to emerge from its analysis, according to Australia, is that the setting of minimum prices for imports in relation to the price of competing domestic product, rather than by suppliers' prices, would be contrary to Article III:4. Australia claimed that the discharge system for LPMO beef does precisely this by making decisions on prices of imported beef on the basis of the price of domestic product. (See also paragraph 128 above)
Korea contended that the price of imported beef is decided by reference to the price of its domestic competition which would seem to be evidence of normal commercial behaviour rather than constituting treatment less favorable within the meaning of Article III:4. Any commercial enterprise will normally set its prices by reference to the prices of competing products. (See also paragraphs 130 and 131 above.)
Referring to the 1984 panel report in Canada - FIRA 115and to the 1992 panel report in US - Malt Beverages116, Australia contended that in relation to the wholesale requirement for imported beef under the LPMO system, less favourable treatment arises since beef imported by LPMO must be sold through a wholesale market (all of which are run by NLCF), or processed and packaged, i.e. producers of imported beef are denied the opportunity to choose their preferred method of marketing. No such limitation on marketing is applied to domestic producers. Moreover, the obligation to purchase LPMO beef through a wholesale market also imposes an additional distribution level for
115 Paragraph 5.10.
116 Paragraphs 5.30-5.33.
WT/DS161/R WT/DS169/R
Page 51
imported beef which gives rise to additional transaction and distribution costs (eg. middle-men charges) to which producers of domestic beef are not subject.
The United States was of the opinion that, consistent with Article 31 of the Vienna Convention, the terms "laws, regulations and restrictions" under Article III:4 are to be given their ordinary meaning in their context and in the light of the treaty's object and purpose.117 Korea's laws, regulations, and guidelines relating to the importation, sale and distribution of imported beef clearly are encompassed in the ordinary meaning of those terms, as used in Article III:4. The titles that Korea has given to the various legal documents restricting activities regarding the importation and distribution of imported beef also reinforces their categorization as "laws, regulations and requirements. The United States submitted that Korea's restrictions, therefore, constitute "laws, regulations and restrictions affecting the internal sale, " of imported beef within the meaning of Article III:4. This is confirmed by consideration of how other panels have construed the term "affecting" for purposes of Article III:4.118 Korea's laws and regulations adversely modify conditions of competition. Therefore, these measures constitute laws or regulations affecting their internal sale, purchase, distribution and use for purposes of Article III:4.
Furthermore, the United States continued, Korea's laws, regulations and guidelines specifically govern and confine the precise manner in which imported beef is sold in Korea, as well as its distribution and use. Korea restricts the sale of imported beef to specialized stores. In addition, Korea imposes tight limitations on the use of imported beef by end-users and customers, confining its use to designated purposes within each customer/end-user class. In addition, Korea severely circumscribes the distribution channels for imported beef. Cross-trading among super-groups or the members of super-groups is prohibited, and violations are punished with loss of quota sub-share and exclusion from further participation in the SBS system.
Referring in particular to the United States' arguments in paragraph 209-210, Korea responded that the LPMO and the twelve super-groups buy the quota amount and then distribute the products. This system is in place as a result of the US insistence to establish a system more responsive to market needs. The Records of Understanding is the best evidence of this statement. Subsequently, Korea agreed during the Uruguay Round to remove all remaining restrictions by 1 January 2001. Hence, the claim by the United States in this respect is illegitimately invoked at this point in time, since Korea can lawfully maintain the existing system until the end of 2000. Moreover, the US claim suffers from a number of inaccuracies : First, it is not true that super-groups do not trade with each other. Following government intervention to this effect, any super-group which has exhausted its share can request reallocation of the quota. In 1998, there was a request for reallocation of the quota three times and the requests were granted. Consequently, the US allegation in this respect must be rejected.
Second, it is not true, Korea submitted, that stores selling imported beef cannot cross-trade. Indeed, the opposite is true. Stores belonging to different super-groups can, and often do, cross-trade. The LPMO/super-group structure is there to administer the QR. Korea has to ensure somehow that the QR will be properly administered. In a demonstration of good faith, Korea did not establish the system in a unilateral manner but after consultations with interested parties, i.e. the United States. Korea explained that paragraph 14.5.5 of the former Imported Beef Sales Regulations prohibited the specialized stores from reselling or supplying imported beef to other specialized stores or domestic butchers. The revised Management Guideline for Imported Beef, however, prohibit only the resale of
117 The Appellate Body has declared that the Vienna Convention "has attained the status of a rule of customary or general international law. As such, it forms part of the 'customary rules of interpretation of public international law' which the Appellate Body has been directed, by Article 3(2) of the DSU, to apply in seeking to clarify the provisions of the General Agreement ..." (footnotes omitted) US - Gasoline, page 16.
118 Italian Agricultural Machinery, paragraphs 11-13; US - Section 337 paragraph 5.11.
WT/DS161/R WT/DS169/R
Page 52
imported beef by a specialized store to their counterparts selling domestic beef. Therefore, cross- trading between specialized stores is allowed. A comparable structure does not exist with respect to domestic beef because there is nothing like a QR for domestic beef. Korea did not take this measure in the context of Article XX(g). Only in that case would it have to ensure a comparable system for domestic products. Hence, in Korea's view, it is impossible to establish a violation of Article III:4.
5. Other measures applying to imported beef
Australia argued that the requirement for cash-only sales, which is not applied to domestic beef, discriminates against imported product by restricting the marketing possibilities and therefore the competitive opportunities available to imported beef vis-Ã -vis domestic beef.119 The availability of credit is a factor in encouraging sales. As such, a requirement that imported beef be sold on a cash payment basis affords it less favourable treatment as no such requirement applies to domestic beef. While the regulations give rise to the possibility of credit sales of imported beef, it is subject to administrative discretion as to duration, limits and availability ("when deemed inevitable"). There is no requirement that this discretion be exercised to permit credit sales in individual cases. In judging whether a measure is contrary to Article III:4, it is not relevant whether it applies across-the-board or on an ad hoc basis.120
Korea responded that the LPMO's sales of imported beef through the wholesale market shall in principle be on a cash basis. This requirement, however, is also applied to the NLCF sales of domestic beef to domestic beef stores. Both imported and domestic beef stores sell their products mostly on a cash basis except where a credit relationship is formed between the traders or when the trader has secured a mortgage bond.
Australia retorted that purchasers of domestic product are not limited to the NLCF markets to purchase their beef. On the other hand, beef imported by the LPMO is only permitted to be sold through these wholesale markets, unless processed and packaged.121
6. Measures applied through the SBS regime
Australia submitted that the SBS system restricts the marketing of imported beef by limiting the range of end-users eligible to make purchases through the system. Korea imposes no such controls on domestic beef. Purchasers of domestic beef are not required to join an industry association to purchase beef. They, therefore, do not have to meet the additional costs associated with such membership. Furthermore, the fact that an end-user may only import through the super-group to which it belongs, is only entitled to membership of one super-group, may only use imported beef for the uses permitted for that super-group and is forbidden from cross-trading, impose restrictions on the distribution of imported beef that are not applied to its domestic competition. The SBS system also excludes any user or potential user which is not a defined end user or customer under the regulations. No such restrictions exist on 'users' of domestic beef. For these reasons, the restrictions on end-users in the SBS system are contrary to Article III:4. The effect of these restrictions, both individually and cumulatively, Australia claimed, is to restrict the competitive opportunities available for imported beef.
Australia noted that previous panels have found inequality of competitive conditions when the possibility of purchasing imported product directly from a foreign producer is excluded,122 or when
119 Management Guideline for Imported Beef, Article 13; Regulations Concerning Sales of Imported Beef, Article 11.
120 Canada - FIRA , paragraph 5.5; US - Gasoline, paragraph 6.14, citing US - Section 337.
121 Article 15.2, Management Guideline for Imported Beef.
122 Canada - FIRA , paragraph 5.10.
WT/DS161/R WT/DS169/R
Page 53
imported products have to be sold only through in-state wholesalers.123 or when requirements result in imported product having access to fewer points of sale.124 Logically, requirements that result in imported product having access to fewer end-users than domestic beef would, therefore, also fall within the ambit of Article III:4 (For arguments by Korea and the United States see also paragraphs 209-211.)
Australia also considered that the requirement of super-group membership imposes additional costs on the purchase of beef, such as membership fees, and other expenses related to the operation of the super-group as a "middleman" for imported beef purchases by end users, additional costs that are not imposed on domestic beef. In the case of NLCF, there is further discrimination against imported beef arising from the operation of Article 21 of the NLCF's SBS Operation Guidelines. Australia noted that Article 21 states that the NLCF may adjust prices of imported beef "considering the domestic livestock product price trends and the wholesale market prices". Given that NLCF beef may be priced other than according to commercial considerations (i.e. to protect domestic beef production), beef imported through the NLCF super-group is subject to less favourable treatment than domestic beef.
Korea submitted that, as concerns the claim that the system constitutes a violation of Article III:4, since contrary to what is the case with respect to domestic beef, imported beef has to be sold through specialized organizations; and the claim that the system constitutes a violation of Article III:4, because end-users or customers cannot belong to more than one super-group; and that the system constitutes a violation of Article III:4, since it distinguishes between grain- and grass-fed beef only with respect to imported beef, Korea considered that these claims are inadmissible, since it is impossible to establish comparability between domestic and imported beef in these respects: there is no quota for domestic beef. Korea further noted that there are no costs or other requirements associated with becoming an SBS member.
Australia and the United States submitted that the SBS system imposes labelling, reporting and record-keeping requirements, that discriminate against imported product contrary to Article III. The effect of these restrictions is to limit the amount of imported beef which might be imported in the absence of such restrictions.125 The Management Guideline for Imported Beef and the Operational Guidelines for Beef Imported under the SBS System are, in the opinion of Australia, laws, regulations and requirements which directly govern the internal sale, offering for sale, purchase, transportation, distribution or use of domestic or imported beef. The requirement to report all monthly sales and importation to the LPMO President and the obligation to record all purchases and sales and retain such records for at least two years imposes compliance costs on end users and super-groups in terms of time and expense, which in turn has an impact on prices for imported beef. No similar requirements apply to distributors of domestic beef, hence according domestic product more favourable treatment.
Australia contended that the supervisory powers of the LPMO have been used to apply restrictive labelling requirements on imported beef. These conditions were agreed between the LPMO and the super-groups and require imported cartons to be labelled with a 10 cm x 5 cm label exclusively in the Korean language showing commodity name, contract number and importer's name. The new requirements apply to all imported product contracted from 1 October 1999 and is
123 US - Malt Beverages, paragraphs 5.30-5.33.
124 Canada - Marketing Agencies(II), paragraph 5.6.
125 For example, in 1998, a quota of 112 200 tonnes of imported beef was allocated among the SBS super-groups (60 per cent of Korea's total quota amount). Of this, only 69 933 tonnes or 62.3 per cent was actually taken up but Korea was not prepared at that time to eliminate restrictions on end users in order to encourage uptake of the full quota amount.
WT/DS161/R WT/DS169/R
Page 54
compulsory.126 This labelling requirement has been applied in addition to the existing Korean country of origin labelling requirements that apply to both domestic and imported product.127
Australia considered that the new and additional labelling requirement for imported beef is inconsistent with Korea's obligations under Article III:4 . The requirement leads to less favourable treatment for imported product than for like product of national origin and affects the internal sale of the imported product. The requirement imposes an unnecessary, impractical and expensive measure imposed only on imported product, thereby artificially reducing the competitive ability of the imported product. The measure is unnecessary because current labelling of Australian product clearly identifies the origin and product. It is, therefore, unclear what benefit the new requirement adds. The measure is impractical because the contract number and super-group may be unknown at the time the product is packed by the producer. The measure, therefore, requires re-labelling either prior to shipment or in Korea. Whether re-labelled in Korea or Australia, there will be additional costs for the re-labelling, which will serve to make the imported product less competitive, regardless of whether the cost is borne by the super-group or the Australian exporter.
Korea responded that stores selling imported beef are no longer required to keep records of sales under the Management Guideline for Imported Beef. The former Guidelines on Notification and Operation of specialized store 5(d) specified that the "Specialized Store" shall keep the records related to the supply of imported beef for not less than 2 years. This was to maximize protection against deceptive sale practices by ascertaining through records that no imported beef was sold as domestic Hanwoo beef. However this obligation has been eliminated. As concerns labelling, Korea continued, all imported livestock products including beef are required to be marked with, among other things, the name of the product, importer, the address of the importer, production date, and shelf life. These are necessary to facilitate the importation of these products and are also used for custom clearance purposes as well as distribution. The domestic beef traders must also mark the name of the products, producer, shelf life, and the production date. These requirements aim to protect public health and to establish sound distribution processes. There is no discrimination between imported beef and domestic beef.
Australia rejected Korea's claims with respect to record-keeping, reporting and labelling that these measures are now no longer in place or apply equally to domestic beef. In the opinion of Australia, Korea has not rebutted Australia's claims that limitations on end-users and usage unreasonably restrict and discriminate against imported beef. Australia acknowledges the apparent abolition of some cross trading prohibitions since December 1999128, but notes that access to imported beef is still dependent on SBS membership, end-users are still limited to membership of only one type of super-group and restrictions on usage remain. Quota allocation processes within this restrictive framework also have a negative effect on commercial trade of imported product. The largest proportion of the quota continues to be awarded to the state trading agencies LPMO and NLCF or their affiliates, all of which are dominated by domestic producers. There are also supervisory powers exercised by law over the super-groups with consequent obligations imposed in terms of reporting, record-keeping and labelling.
Australia further submitted that it makes no sense for Korea to claim that treatment of domestic and imported beef in the SBS system is permitted to be discriminatory because there is no quota for domestic beef. Korea does not substantiate its claim that super-groups can trade with each other. Government re-allocation of quota amounts is not the same thing as commercial trade between
126 Note from KMIA to Supplier's Agents informing them of Buyer Identification Label requested in relation to the Strengthening of Imported Beef Inspection.
127 Agricultural Product Country of Origin Labeling Guidelines, Ministry of Agriculture and Forestry Notice 1997-79 of 5 January 1998.
128 "Guideline for Handling Imported Beef", 3 December 1999, Article 26(1).
WT/DS161/R WT/DS169/R
Page 55
super-groups. In relation to the use of super-groups themselves as the sole channel for import, it is not sufficient for Korea to argue that this provides effective economies of scale and that small-scale retailers prefer to use super-groups. This is a commercial proposition and, if true, need not be enforced through compulsory regulation
7. Burden and standard of proof
Korea considered that it was up to the Complainants to show that the Korean measure at hand amount to a violation of Article III:4. Korea was of the view that the Appellate Body report on US Shirts and Blouses (AB) confirms this:
"… the issue in this case is which party has the burden of demonstrating that there has, or has not been, an infringement of the obligation assumed under … . In addressing this issue, we find it difficult, indeed, to see how any system of judicial settlement could work if it incorporated the proposition that the mere assertion of a claim might amount to proof. It is, thus, hardly surprising that various international tribunals, including the International Court of Justice, have generally and consistently accepted and applied the rule that the party who asserts a fact, whether the claimant or the respondent, is responsible for providing proof thereof."129
The burden of proof would shift to Korea only if the Complainants "adduce evidence sufficient to raise a presumption that what is claimed is true".130 Korea was of the opinion that the Complainants have not done so in this case. Korea submitted that its quantitative restriction (QR) on imports of beef has an impact on trade in beef between the Complainants and Korea, since it restricts the amount of foreign beef into the Korean market to the level permitted under the QR. The resulting injury cannot, however, be challenged under WTO law, since the QR is legal and indeed is not challenged in the present dispute. The Complainants, in order to discharge their burden of proof, need to demonstrate how the system of separation of stores selling beef prejudices their rights under the GATT independently of the injury resulting from the very existence of the Korean quota.
Theoretically, Korea argued, two situations could be imagined: the first is where the QR has been fully absorbed. In such a scenario, the Complainants would have to demonstrate that the WTO law has been violated and that, consequently, their rights under the WTO Agreement are prejudiced,
i.e. the Complainants would have to demonstrate that the Korean QR would not only have to be fully filled but to be filled in a particular manner. Korea considered that this would be absurd, firstly because when a QR is negotiated there is no obligation to import the full amount. Rather, it gives the right to the importing Member not to import beyond the set threshold. Even if there were an obligation to fully absorb the QR, it would be an obligation of result and not an obligation of conduct (cf. paragraph 232). This would mean that the QR must be absorbed independently of the means used. If nothing has been negotiated relating to the manner in which the QR must be absorbed, it is not up to the international adjudicating body to add to the existing obligations. As the Appellate Body has reminded us, echoing the standing jurisprudence of the International Court of Justice, no presumptions limiting the scope of national sovereignty is permissible in the realm of public international law. Hence, Korea argued, the only possible conclusion in this respect is that in case the QR is absorbed, the claim that the WTO Agreement has been violated, and as a result the Complainants' rights have been prejudiced, has to be rejected.
The second situation is where the QR has not been not fully absorbed. In this case, Korea submitted, the Complainants would have to show that the Korean regulation imposing on traders the obligation to sell domestic respectively imported beef in separate stores is the very reason why the QR
129 At pages 13-14.
130 Idem at page 14.
WT/DS161/R WT/DS169/R
Page 56
has not been absorbed. The Complainants would find themselves in an awkward position since the same number of stores in some years suffices and in some years does not suffice to ensure that the QR is fully absorbed. Hence the causal link between the number of outlets and the absorption of the QR cannot be established.
Australia did not agree with Korea's interpretation of what is required to prove an inconsistency under Articles III and XI:1 when a quota exists. If Korea's argument that its measures are permitted because of the existence of a quota were to prevail, it would be manifest to a finding that any and all measures taken with the existence of a quota are ipso facto WTO consistent. This interpretation would render Articles III, XI and XIII redundant, contrary to the rules of interpretation contained in the Vienna Convention. Australia considered that Korea is wrong in its assertion of Australia's burden of proof in relation to Article III:4. Australia submitted that it is not required to demonstrate that the measures claimed to be inconsistent with Article III:4 prejudice Australia's rights in relation to the filling or otherwise of an existing quota. The existence and/or filling of the quota is immaterial to a finding of consistency in relation to Article III. To find otherwise would be to limit the operation of the national treatment provision in instances where a quota exists. Neither Article III itself, nor any other provision of the GATT 1994, explicitly makes such an allowance, nor implicitly permits such an interpretation.
Korea contended, as stated in paragraphs 164-167, that the injury resulting from the very existence of the quota to US and Australian beef exporters should not be attributed to the Korean regulation requiring that, in principle, foreign and domestic beef should be sold through separate stores. The Complainants must show injury resulting from this regulatory requirement independent of the protection afforded to domestic production through the negotiation and conclusion of the quota for beef currently legitimately applied by Korea.
Australia submitted that Korea is attempting to read a trade effects test into Article III. The Appellate body has rejected such a test. The essence of Article III:4 is equality of competitive conditions. Australia submitted that the competitive opportunities afforded to domestic beef have been denied to imported product and that Korea is therefore in breach of its obligations under Article III . The existence or filling of a quota has absolutely no bearing on this fact. No trade effects, or proof of injury test, Australia continued, can be read into either Article III or XI. Previous panels have been explicit on this point, in relation to both Articles. In making out a case with respect to Article III:4 Australia considered that it is not required to show actual proof of injury, as claimed by Korea. In particular, Australia is not required to show injury through under-filling of the quota. Australia rejected Korea's claim (see paragraph 228) that Article III is an obligation of result rather than conduct. The Korean argument in this case seeks to insert a trade effects test into Article III. If the Panel were to accept Korea's argument, the national treatment provision would not apply in cases where a quota exists. This is clearly not the aim of Article III which requires non-discrimination once goods have come across the border. Australia is required to show inequality in competitive conditions. Australia has so shown, and Korea has not provided evidence to rebut this.
The panel in Korea - Alcoholic Beverages, endorsed by the Appellate Body, Australia continued, was explicit in its finding that "a focus on the quantitative extent of competition instead of the nature of it, could result in a type of trade effects test being written into Article III cases". The panel stated that, if a particular degree of competition had to be shown in quantitative terms, that would be similar to requiring proof that a tax measure has a particular impact on trade. It considered such an approach akin to a "type of trade effects test" and rejected the argument.131 The Appellate Body had previously found against inserting a trade effects test into Article III in Japan - Alcoholic Beverages. The Appellate Body found that "it is irrelevant that the trade effects of the tax differential between imported and domestic products, as reflected in the volumes of imports, are insignificant or
131 See at paragraph 10.42; and AB report at paragraphs 129-131.
WT/DS161/R WT/DS169/R
Page 57
even non-existent; Article III protects expectations, not of any particular trade volume, but rather of the equal competitive relationship between imported and domestic products".132 (Emphasis added.) (See also paragraphs 157-159 above).
While the United States submitted that its competitive opportunities in the Korean market have been prejudiced by the Korean requirement that imported beef be segregated for sale, as well as by the other limitations imposed only on imported beef, proof of actual trade damage is no more required by Article III:4 than by Article XI. Korea fails to point to any textual support for the existence of the alleged requirement. For the last 50 years, since the Brazilian Internal Taxes case,133 Article III has been interpreted as requiring no trade impact of the measures in question. Indeed, the GATT expressly rejected an injury test of the sort argued by Korea, when the GATT 1947 Council expressly rejected the mistaken panel report of 1981 on Spain –Sale of Soybean Oil.
Furthermore, the United States continued, GATT panels have consistently concluded that the pertinent criterion under Article III:4 is whether Members "provide equal conditions of competition" once goods are cleared through customs. (The relevant cases are cited in footnote 97.) The panel in the US - Section 337 dispute, for example, clearly rejected the position that Korea espouses. The panel concluded that:
"Article III would not serve this purpose if the United States interpretation [referring to the US defense advanced in the Section 337 dispute] were adopted, since a law, regulation or requirement could then only be challenged in GATT after the event as a means of rectifying less favourable treatment of imported products rather than as a means of forestalling it … [The panel] noted that this approach is in accordance with previous practice of the CONTRACTING PARTIES in applying Article III, which has been to base their decisions on the distinctions made by the laws, regulations or requirements themselves and on their potential impact, rather than on the actual consequences for specific imported products." [emphasis added; footnotes omitted]134
See also arguments in paragraphs 157-158 and 160 -163.
Korea reiterated that the Complainants have not met their burden of proof with respect to any of the claims raised under Article III and Article XI. Korea emphasized that the injury resulting from the existence of the QR itself cannot be challenged under WTO law because the legality of the QR is not in dispute. Korea argued that the Complainants have failed to establish a prima facie case that their rights have been prejudiced independently of the injury resulting from the legal QR.
CLAIMS UNDER ARTICLE XX(D) OF GATT
Korea explained that the "specialized store" system for imported beef was established in order to protect consumers from widespread deceptive practices of selling imported beef as domestic products. The majority of beef stores in Korea are operated in the form of small-scale butcher shops where all meat is stored in one huge freezer and sold in slices. It is extremely difficult for consumers to distinguish domestic beef from imported beef at sight, nor is there any practical technique developed for easy distinction between the two. Under such circumstances, the considerable price difference between the imported and the domestic beef would easily raise the incentives for the owners of the butcher shops to engage in fraudulent practices, which the Korean Government found
132 At page 17.
133 Working party on Brazilian Internal Taxes, Vol. II, pages 184-185, paragraph 13-16.
134 Paragraph 5.13.
WT/DS161/R WT/DS169/R
Page 58
were extremely difficult to detect and sanction.135 Thus, the system of separate sales outlets was introduced as the only practical solution to effectively deal with the problem of widespread fraudulent sales practices. Government intervention is limited to imposing identical regulatory requirements for both categories of stores in full compliance with Article III:4. Indeed, the same restrictions apply to domestic beef stores (they cannot sell imported beef), as to imported beef stores (they cannot sell domestic beef).
Korea submitted that, were the Panel to reject its arguments presented in the context of Article III:4 above and rule that sales of domestic and imported beef through separate stores constitute discriminatory treatment against imported goods, and thus a possible violation of Article III:4 is established, its legislation is justifiable through recourse to Article XX(d). Referring to the text of Article XX(d)136, Korea argued that sales of domestic and imported beef through separate stores is necessary to counteract fraudulent practices. Except for the exceptional circumstances surrounding the financial crisis in 1997, the price of domestic beef is substantially higher than that for imported beef. Beef is sold either pre-packaged or fresh. With respect to the first category, it is easy to impose labeling requirements indicating the origin of the beef; with respect to the latter it is impossible. Moreover, traders have a strong incentive to sell all beef as domestic beef since by doing so they can profit from the higher sales price. Such are the fraudulent practices that the Korean regulation aims at counteracting. Korea submitted that Article XX(d) provides the appropriate legal framework to justify the regulation regarding separation of stores selling beef.
Korea contended that the leading GATT137 case in the area of Article XX(d) is the US - Section 337, which report essentially made two points: on the one hand it interpreted what kind of measures are deemed to be necessary for the achievement of a regulatory objective at the national level, and on the other that the level of enforcement sought by the national regulatory objective cannot be put into question by a panel. The Appellate Body report on US – Shrimp(AB) where the Appellate Body, contrary to what used to be the case before, recognized the sovereign right of the United States to pursue its own environmental policy, made this point clear.
Regulatory diversity, Korea continued, to the extent that it is applied in a non-discriminatory manner, is not put into question in the WTO system. The WTO, and Article XX more specifically, support a pure necessity test whereby the adjudicating bodies put into question neither the invocation of the national regulatory objective sought, nor the desirable level of enforcement; they can only put into question the means used to reach the objective sought. Hence, the question that panels must answer when reviewing the compatibility of a national legislation with Article XX is whether the national mechanisms aimed at realizing the said objective are applied in a non-discriminatory manner and whether the option sought is necessary.
135 According to Korea, a Marketing Association confirmed, in the late 1980's that 28 per cent of imported beef transacted at general butcher shops had been faked and sold as Hanwoo. In 1990, the Report of the Proceedings of the National Assembly's Committee on Agriculture, Forestry and Fisheries found that fraudulent beef sales had taken place in 604 cases.
136 "Subject to the requirement that such measures are not applied in a manner which would constitute a means of arbitrary or unjustifiable discrimination between countries where the same conditions prevail, or a
disguised restriction on international trade, nothing in this Agreement shall be construed to prevent the adoption or enforcement by any contracting party of measures:
necessary to secure compliance with laws or regulations which are not inconsistent with the provisions of this Agreement, including those relating to customs enforcement, the enforcement of monopolies operated under paragraph 4 of Article II and Article XVII, the protection of patents, trade marks and copyrights, and the prevention of deceptive practices."
137 According to Japan - Alcoholic Beverages (AB), the GATT panel reports provide very meaningful guidance on the interpretation of the relevant provision and should be taken into account by subsequent panels dealing with the same issue.
WT/DS161/R WT/DS169/R
Page 59
Korea noted that the term "necessary" in Article XX has traditionally been interpreted as meaning that WTO Members must always, when intervening either in the context of Article XX(b) or Article XX(d), use the least restrictive among the available options. Korea considered that this interpretation is at best not very helpful since national authorities are not always in a position to know ex ante whether the least restrictive option can guarantee the level of enforcement sought. Referring to the panel report on US - Section 337 138, Korea submitted that, although it is difficult to quantify legal inconsistency, the panel most likely had in mind that in case various options are reasonably available to a domestic authority and all of them are inconsistent with the WTO obligations of the Member concerned, the latter must choose the one that causes the least burden possible to non discriminatory trade flows.
Korea noted that so far GATT/WTO case law has not explored the link between regulatory diversity, on the one hand, and the necessity requirement, on the other. Korea submitted that there is a correlation between the two in the sense that were a regulatory objective to be sought in a very strict manner, the choice of instruments would consequently be influenced. Since the level of protection sought cannot be put into question, the choice of instrument will have to be appreciated in the same context.
Korea furthermore noted that the judgement by the adjudicating body whether the instrument chosen is the necessary instrument will be done by reference to the instruments "reasonably available" to the Member at hand. This term provides the link to local circumstances. The situation (financial, health, environment, education, etc.) is not the same throughout the globe. There is nothing objective about setting regulatory targets and pursuing them. This is precisely the reality captured by the term 'reasonably available' in the cited panel report. Second, such regulatory choices are the outcome of a democratic process, reflecting the sovereign will of the electorate. To the extent that they do not constitute a clear-cut case of violation of international obligations, they should not be light-heartedly overturned.
Korea explained that the Korean Government allows stores selling domestic beef to also sell pre-packed imported beef since in this case the risk of fraudulent practices is reduced. With respect to sales of fresh beef, however, the situation is not the same. The Korean Government found it impossible to come up with any other means that would enable it to reach the objective sought. Continuous policing of the shops is not an option in view of the substantial costs involved, since only an around the clock policing of all shops selling beef could help reach this objective (see also paragraph 249).
On the other hand, compulsory pre-packaging for all imported beef is not an option either. since such a requirement could easily amount to a violation of Article III.4, constituting a de jure discriminatory treatment against imported products, thus affording protection to domestic production. Hence, the measure would have to be justified under Article XX(d). Such a measure however, is far more restrictive than the option chosen in this case, since it would impose considerable adjustment costs to foreign producers and at the same time place the imported product at a disadvantage. Whereas domestic beef would be sold either fresh or pre-packaged, imported beef would be sold only in pre- packaged form. Hence, consumers would be in a position to choose from a much wider range of domestic products. The Korean policy choice is aimed at guaranteeing that no such competitive
138 "It was clear to the Panel that a contracting party cannot justify a measure inconsistent with another GATT provision as 'necessary' in terms of Article XX(d) if an alternative measure which it could reasonably be expected to employ and which is not inconsistent with other GATT provisions is available to it. By the same token, in cases where a measure consistent with other GATT provisions is not reasonably available, a contracting party is bound to use, among the measures reasonably available to it, that which entails the least degree of inconsistency with other GATT provisions."
WT/DS161/R WT/DS169/R
Page 60
disadvantage would result for imported beef and that the whole regulatory framework would be drafted in such a manner so as to ensure that it will strictly serve its assigned purpose.
Hence, Korea continued, the most feasible idea was to establish a dual distribution system whereby, under identical conditions, private operators can set up a retail store for sales of either domestic or imported beef. In such a manner, without imposing any additional burden on sales of imported beef, the Korean Government can be sure that the risk of fraudulent practices is significantly and effectively reduced since the Government can better guarantee, by supervising the distribution channel, that stores selling imported beef will only be buying imported beef whereas stores selling domestic beef will only be buying domestic beef.
To complement the system, Korea continued, the Government requests that stores selling imported beef indicate that they sell such beef. The sign should inform consumers that imported beef is being sold and accordingly they should expect to get cheaper prices than for domestic beef which has been traditionally more expensive. Without this regulatory requirement, these stores would have the incentive to 'cheat'. Stores selling domestic beef do not have such an incentive since they already paid a high price to buy the expensive domestic beef. But for the existence of the sign requirement, therefore, only one category of stores has an incentive to cheat and has recourse to fraudulent practices.
As the Appellate Body in its report on US – Shrimp(AB) made it plain, once a national legislation has passed the test of a particular sub-paragraph of Article XX, it must also be found to comply with the chapeau of that Article, in the sense that it must be applied in an even-handed manner. Korea submitted that its measures indeed comply with the requirement of even-handedness. Not only identical requirements apply for the opening of stores selling imported and domestic beef, but the Korean government ensures that this is the case in practice. Indeed, there has never been a claim that the Korean Government does not follow the letter of its legislation and the Complainants have not claimed that such is the case.
Korea did consider other alternatives to prevent these fraudulent deceptive practices such as more strict country of origin marking requirement and mandatory pre-packing requirement for all beef. However, these alternatives were not adopted. A labeling requirement, no matter how strictly enforced, could not do the trick since consumers, in general, demand that they be able to purchase fresh slices cut from unpacked chunks. The nature of the products and the commonplace retailing practice prevalent in Korea do not allow for any other method but separation of sales outlets system to distinguish the two products. Moreover, it would be virtually impossible for the law enforcement agency to gather sufficient evidence in the absence of the system of separation of sales outlets, since the stores would have at their disposal the packages, boxes, and other items used for both imported and domestic beef.
With respect to the "secure compliance with laws or regulations which are not inconsistent with the provisions of this Agreement" element of Article XX(d), Korea submitted that the law sought to be enforced through the system of separation of outlets is the "Unfair Competition Prevention and Business Secret Protection Act." The Unfair Competition Act purports to address anti-competitive acts (fraudulent practices). The purpose of the Act, as stated in Article 1, is to "maintain the order of sound transactions by preventing unfair competitive acts." In paragraph 1 of Article 2 of the Act, the term "unfair competitive acts" is defined as follows:
"(1) Act misleading the public to understand the place of origin of any goods either by falsely marking that place on any commercial document or communication, in said goods or any advertisement thereof or in any manner of misleading the general public, or by selling, distributing, importing or exporting goods bearing such mark;
WT/DS161/R WT/DS169/R
Page 61
Act making a mark misleading people to understand as if any goods were produced or processed in an area other than that where said goods are produced, manufactured or processed, on any commercial document or communication, in said goods or any advertisement thereof, or in any manner of misleading the general public, or act selling, distributing, importing or exporting goods bearing such mark."
Korea was, furthermore, of the opinion that the system of separation of sales outlets is in full conformity with Article XX(d). Korea reiterated that on the one hand, the system as such, if found to be discriminatory by the Panel, is justified through recourse to Article XX(d) as the necessary means to enforce the Unfair Competition Act; and that on the other, the only observable regulatory diversity between sales outlets selling domestic and imported beef, the sign requirement, is justified through recourse to Article XX(d) since it is necessary to enforce the Act which is aimed at combating fraudulent practices.
Its objective, Korea continued, is to avoid fraudulent practices (what has been translated as "unfair competitive acts" in Articles 1 and 2 of the Act) in the context of beef sales. To this end the Unfair Competition Act was enacted. The "prevention of deceptive practices" is specifically mentioned in Article XX(d) as one of the area where GATT-inconsistency is presumed to be established. Furthermore, Article IX(6) of GATT provides that "The Contracting Parties shall co- operate with each other with a view to preventing the use of trade names in such manner as to misrepresent the true origin of the product."
Korea pointed out that the enforcement of the obligation sought under the Act is the prevention of sales of "falsely marked" goods. Within the framework of this Act, the term "marking" covers all incidents of representations related to the country of origin of the product being sold. Hence, the term includes all representations made by a butcher shop as it relates to the country of origin of the beef sold, including, but not limited to, the sign posted in front of a "chunk" of beef as well as all verbal representations made by the shop operator. Korea noted that the marking of the place of origin is normally done through labeling on the product itself. In the case of beef sold in Korea, however, some are packaged along with proper labeling and others are sold un-packaged in "chunks." With respect to packaged beef a workable country of origin mechanism is in place and, therefore, there is no need for these products to be sold separately. However, the majority of imported beef is sold un-packaged and in these situations the "normal" way of marking is not practicable and an alternative was therefore necessary in the form of separation of sales outlets combined with the sign requirement.
The separation of sales outlets, Korea continued, does not have a mere indirect incidence on Korea's stated objective of eliminating fraudulent practices. On the contrary, there is an uninterrupted causal link between the measure and the objective sought. Korea noted that it carefully considered which traders have an incentive to cheat in view of the price differential between imported and domestic beef. This is only the case with respect to traders who purchase imported beef and then sell it as domestic beef. Traders that purchase imported beef and sell it as such do not profit from fraudulent practices.
However, if Korea only checks the supplies without checking whether what is sold corresponds with what is purchased, the risk for fraudulent practices remains. This is why Korea came up with the requirement to on the one hand separate sales outlets, and on the other require only those that sell imported beef to signal the origin of the beef sold. Korea is of the opinion that it's intervention is the least restrictive to achieve the stated objective, because, by virtue of the separation of outlets, Korea will have to examine only supplies to outlets selling domestic beef (since only such outlets have an incentive to cheat). On the other hand, by imposing the signalling requirement to outlets selling imported beef, the incentive to cheat is removed, since they would incur losses if they purchased domestic beef. It is therefore obvious, Korea argued, that the separation of outlets does not
WT/DS161/R WT/DS169/R
Page 62
simply share the same objectives with the Korean Unfair Competition Act. It is the enforcement mechanism of the said Act.
Korea further explained that when beef imports into Korea resumed in August 1988, imported beef was permitted to be sold in butcher shops together with domestic beef (hereafter referred to as the "simultaneous sales system"). In response to deceptive practices, the Korean Government introduced in March 1989 the specialized sales outlets system for imported beef, in addition to the simultaneous sales system but the deceptive practices still continued. As the magnitude of the fraudulent behaviour was being uncovered and publicized, this controversy evolved into a major social issue.139 Accordingly, with a view to preventing such deceptive practices, the Korean Government decided in 1990 to eliminate the simultaneous sales system, which was found to be the major source of deceptive sales practices, thereby integrating the imported beef sales into one system
- the specialized sales outlets system for imported beef - which has remained virtually unchanged.
In response to Australia's argument that no measures are in place to prevent the fraudulent substitution of different grades of domestic beef, Korea noted that this argument fails to take into account that it is relatively easy to distinguish by sight between lower and higher grades of domestic beef. As concerns the prevention of fraudulent substitution in restaurants, Korea submitted that a restaurant is a service industry selling the skill of the chef, ambience of the venue and convenience of location as well as quality of food. The price of beef is a mere fraction of what one pays at a restaurant. No solid argument can result from comparing a beef store with a restaurant. Besides, restaurants do not usually indicate whether they are using imported or domestic beef as ingredients in their prepared meals.140 Hence the type of fraud found in beef stores is not committed. In conclusion, the separation of sales outlets can also be fully justified under Article XX(d).
The separation of sales outlets system, Korea continued is not necessary in the case of meat from domestic dairy cows since Korea has already developed a reliable testing method for distinguishing meat from domestic dairy cows from domestic beef, "Hanwoo." Furthermore, in Korea's view, the amount of dairy cow meat sold at the retail level is quite negligible and does not warrant any special consideration.141
New Zealand's suggestion that audit trails could be used as the means to prevent deception, Korea continued, ignores Korea's underdeveloped distribution system. Audit trails are not a feasible option at the present time. In addition, few merchants in practice maintain comprehensive and accurate book records. New Zealand also argues that deceptive practices can be prevented by imposing stricter penalties. Article 18(3) of the Unfair Competition Act provides that a person "who commits an unfair competitive act may be subject to imprisonment for a period of up to three years or a maximum fine of thirty million won." These penalties are not to be regarded lightly. Korea, therefore, sees no merit in the argument that even stricter penalties would have any measurable impact on the situation. The problem is not the level of penalties but rather the fact that the penalties are in practice not effective due to the difficulties of investigating and gathering sufficient evidence to apply the laws.
139 Refer to articles from the Korea Herald, Chosun Daily and the Dong-A Daily.
140 Korea also stated that an important portion of imported beef (about 45 per cent) is also sold in the restaurant sector. Cf. paragraph 193.
141 According to Korea, beef imported in 1990 amounted to 84,000 MT in excess of the 58,000 MT quota for that year while according to MAF statistics, Korean beef production amounted to 95,000 MT of which
about 42 per cent came from dairy cattle. In 1991, imports of beef amounted to 124,000 MT and domestic beef amounted to 98,000 MT, of which 42 per cent came from dairy cattle. In 1998, total consumption in Korea amounted to 345,000 MT of which 91,000 MT was imported, and about 254,000 MT came from domestic production. According to statistics by the NLCF, dairy cattle represented, in 1998, 18.25 per cent of total Korean slaughter (head).
WT/DS161/R WT/DS169/R
Page 63
In view of the foregoing, Korea submitted that it has met the "necessity" requirement of Article XX(d) since the system of separation of sales outlets provide for a least restrictive method of complying with the Unfair Competition Act. Under this system, the Korean Government, without imposing any additional burden on sales of imported beef, can ensure that the risk for fraudulent practices is significantly and effectively reduced.
Australia and the United States, addressing Korea's claim that the separate retail sale of imported beef can be justified under Article XX(d), submitted that the burden of proof in making this claim rests with Korea. The Complainants considered that Korea has failed to discharge this burden. First, Korea has not shown which law or regulation, otherwise consistent with GATT 1994, that it is seeking compliance with. Secondly, Korea has not demonstrated that the measures actually secure compliance with these laws or regulations. Thirdly, Korea has failed to show that the measures are necessary to secure compliance. And finally, Korea has not proven that the measures meet the requirements of the chapeau of Article XX.
A measure cannot be said to be necessary to ensure the prevention of deceptive practices, Australia continued, unless it actually goes some way towards achieving that end in effect. In consultations with Australia on 28 May 1999, Korea conceded that it was difficult to quantify the number of specialized beef shops. When asked how it enforced its retail requirements if it did not know where the stores were, Korea stated that the central Government did not administer the enforcement of regulations. This was the responsibility of municipal governments which are under no obligation to report to the central Government. Furthermore, Korea admits that it is unable to enforce the requirements in supermarkets, where beef is required to be sold in separate display cabinets. Australia submitted that a measure cannot be necessary where it cannot be enforced and that there is no basis to Korea's claim that the regulation "strictly serve its assigned purpose" (see paragraph 245). The Korean measures are also not "necessary" where there are alternative measures reasonably available which prevent fraudulent substitution of imported and domestic beef and which are less trade restrictive. Korea admits that no regulations exist to prevent substitutions in restaurants. Restaurants are able to sell both domestic and imported beef. Separate distribution arrangements do not exist for imported and domestic pork or chicken. Nor, as detailed by the United States in paragraph 273, are separate distribution arrangements in place for a range of other products for which Korea claims there is a danger of substitution between like imported and domestic products. Finally, there are no measures in place to prevent the fraudulent substitution of different grades of domestic beef, even though this is reported to be a significant problem.
Australia considered that it was pertinent that while record-keeping requirements were imposed on imported beef stores, similar record-keeping requirements are not imposed on domestic beef stores. Australia questioned how Korea could ascertain the sources of supply for domestic-beef shops, and hence the existence of fraud, when no records are kept and when, as Korea argues, it is physically impossible to tell the difference between imported and domestic beef. Australia argued that it was difficult to understand how Korea is able to state with any certainty that the fraudulent sale of imported beef as domestic beef is a persistent problem when it is unable to prove the existence of fraud in the first place.
Australia submitted that Korea's claim that separation of domestic and imported product is only required for beef, and not for other products, because of the existence of a large number of tests to prove the physical difference between all other imported products and their domestic equivalents, were not convincing. Australia questioned why Korea did not separate the retail sale of these products before such tests existed, why beef was not separated in restaurants and why different types of domestic beef were not sold separately prior to the apparent discovery of DNA testing in 1998. Australia also submitted that, on the basis of advice from Australia's peak scientific research organization, it had serious doubts about the accuracy of DNA testing for cattle to classify individual beasts into a particular breed
WT/DS161/R WT/DS169/R
Page 64
Australia referred to US - Malt Beverages, in which case the panel found that the United States had failed to meet its burden of proving that wholesaler and common carrier requirements in various states were the only reasonable measure available to secure enforcement of state excise laws. The fact that not all fifty states maintained these measures indicated that alternative measures for the enforcement of state excise laws existed.142 Australia also submitted that in cases where there is no discernible difference in the product, i.e. if the products are identical in physical characteristics and have the same end uses, it is not necessary to put measures in place to distinguish between the products. These products are directly competitive and should be permitted to compete against each other in the market place on the basis of a variety of factors such as price, quality, consumer preferences etc.
Australia also submitted that Korea had failed to show a link between the dual retail system, including the signage requirements, and the enforcement of the prohibition against "falsely marking the place of origin of a product" in the Korean Unfair Competition Act. It was not clear how the dual retail system is related to the enforcement of laws relating to false marking of origin or how such a system was necessary to secure compliance with these laws.
Since the price differential between domestic and imported beef is largely a result of actions by the Korean government through the delivery of substantial market price support and protection of domestic beef from market driven competition, Australia also submitted that by maintaining separate retail sales, Korea is actually exacerbating the price differential between domestic and imported beef, and therefore increasing the likelihood of fraud. Australia did not agree with Korea's argument that the separate retail arrangements do not impose an additional burden on imported beef (see paragraph 246). The regulations prohibit the sale of imported beef from the majority of beef retail establishments in the country and impose additional compliance costs in relation to setting up new premises, or separate areas in supermarkets, as well as signage requirements. These are not insignificant and seriously affect the competitive opportunities afforded to imported beef.
The United States considered that Korea has not satisfied any of the requirements cited in paragraph 261 for the application of Article XX(d). Korea has not even specifically identified which of its laws or regulations are intended to be advanced through segregation of imported beef at the retail level. Furthermore, Korea has not shown the retail sale restriction to be necessary to secure compliance with any of its laws, including those relating to the prevention of deceptive practices. Without a reasonable showing that fraud is a real, and not an imagined, issue and that other measures would be inadequate to secure compliance with Korea's laws, Korea cannot demonstrate such measures to be necessary. Korea, therefore, cannot avail itself of Article XX(d) to insulate GATT inconsistent measures from challenge.
Korea has not met its burden of showing the requisite elements for Article XX(d) to apply, continued the United States. First and most fundamentally, the retail restrictions are not measures which fall within the scope of subparagraph (d) of Article XX. The panel in EEC - Parts and Components found that Article XX(d) covers only measures necessary to the enforcement of obligations under laws or regulations consistent with the General Agreement. In the opinion of the United States, the regulations relating to separate retail distribution channels do not serve to enforce any Korean laws relating to fair trading or deceptive practices. At best, the segregated distribution of imports serves the same objectives as these unfair competition statutes, but this is far from being necessary to the enforcement of such laws.
The proof necessary to meet the requirement of Article XX(d) in this regard was addressed by a panel in Canada - Periodicals. In that dispute, Canada asserted that a prohibition on imported magazines containing domestic advertising was required to secure compliance with a tax measure that
142 Paragraphs 5.43 and 5.52.
WT/DS161/R WT/DS169/R
Page 65
limited deductions to expenses incurred in advertising in domestic magazines. The panel concluded that although the ban on imported magazines might have the incidental consequence of ensuring that the tax deduction was not abused, and, therefore, the ban might have a common objective with the tax measure, that alone was insufficient to establish that the import ban was meant to secure compliance with tax legislation. The panel observed that any other construction of the requirement in Article XX(d) that the measure "secure compliance with laws and regulations" would lead to a situation where "[w]henever the objective of a law consistent with the General Agreement cannot be attained by enforcing the obligations under that law, the imposition of further obligations inconsistent with the General Agreement could then be justified under Article XX(d) on grounds that this secures compliance with the objective of that law".
The United States further submitted that the situation in the present matter, for the purposes of the application of Article XX(d), is the same as that before the panels in the Canada – Periodicals and in the EEC - Parts and Components disputes. Although Korea argues that the segregated sale of imported beef is meant to secure compliance with the provisions of the Unfair Competition Act, Korea has not shown how the retail restrictions do that. At most, the segregation of retail sales outlets may reduce the opportunities to misrepresent the identity of beef, but Korea has not shown that even this is achieved by the retail measures. The most that can be said is that the measures segregating the retail sale of imported and domestic beef may possess, in part, a common objective with the Unfair Competition Act.
Even if the Panel were to conclude, the United States continued, that the retail restrictions are "to secure compliance" with Korea's fair trading laws, Korea has not demonstrated that they are "necessary" for this purpose. Allegations concerning fraudulent practices do not relate to current activity, but instead are dependent on concerns regarding fraud allegedly occurring at the time that the dual regime was implemented in 1990. Korea has not indicated that any information exists that suggests that any fraudulent conduct persists, or that any fraud that does exist is at such levels as to warrant the draconian measures that Korea has instituted.
In addition, the United States submitted, there are a range of alternative measures that would make the maintenance of separate retail channels unnecessary in the event that any fraud is sufficiently prevalent to justify Korea's measures. That this is the case is evident from the fact that Korea has not elected to replicate the separate retail store requirement in other areas in which fraud of the same alleged nature is evidently occurring. In a Korean Fair Trade Commission announcement appearing on 19 August, 1999 in the Korean Economic Daily, it was reported that an investigation of 21 importing agencies involving 61 agricultural products, including oranges and milk, was underway. Yet, no product other than beef is subject to a requirement that separate stores be maintained. Korea has alleged fraud in connection with imported products as varied as sesame seeds, pork, rice and garlic, all of which are said to be less expensive than their Korean counterparts and subject to misrepresentation as Korean products. But no separate stores have been required for the sale of such products, indicating that Korea has found alternative ways of addressing any fraud.
In the case of these other products, Korea has relied on investigations and prosecutions to address instances of fraud that appear to be, if anything, much more widespread than any involving imported beef. Korea has not indicated why such measures are not equally effective in the case of beef for any fraud that might exist. Indeed, if Article XX(d) permitted Members to discriminate against imported products whenever they are sold at a lower price than a domestic counterpart, Article III:4 would no longer provide any meaningful national treatment protection.
The United States submitted that while Korea claims that this Panel should not interfere with the allegedly democratic process that led to the institution of the dual retail sale regime, the United States noted that the regulations prohibiting sale of imported beef in Korean beef stores were issued in January 1990 without benefit of legislative authority. Thus, the regulations were simply the result of
WT/DS161/R WT/DS169/R
Page 66
administrative action. This oversight was not corrected until the enactment of the Revised Livestock Act in 1999, approximately nine years after the regulations were first promulgated.
Replying to the US arguments in paragraph 273, Korea explained that with the exception of rice and potato flakes, all products mentioned by the United States in its statement contain certain physical characteristics which would allow Korean experts to distinguish the imported products from those of domestic origin. With respect to rice, the standard retail practice is to sell in its original packaging (i.e. unlike beef, rice retailing does not entail displaying portions outside of its original packaging). As for potato flakes, garlic and safflower seed, the imported volume and the total consumption simply do not warrant any special treatment. Furthermore, for products such as sesame seed, garlic and safflower seed, Korea has already developed a technical means of differentiating imported from domestically grown products. Beef is different from all the products mentioned by the United States in that it is hardly distinguishable by sight, nor is there technology to distinguish imported beef from domestic beef. Moreover, the import volume and the proportion it represents of general food consumption is too large to consider the issue of consumer protection lightly.143
With reference to the US assertion that, because Korea does not maintain separate sales outlets for a wide range of other products where fraudulent practices allegedly occur, the Korean measure with respect to beef cannot be "necessary" within the meaning of Article XX(d), Korea referred to the Appellate Body reports in the US – Shrimp (AB) and US – Gasoline (AB) cases that the analysis of a measure under Article XX must be made strictly on a case-by-case basis. The Panel is not called upon in this case to examine any measure as it relates to any product other than beef. Indeed, to do so would clearly fall outside the terms of reference of the Panel. It is therefore irrelevant what measures are or are not applied to other products. To draw any valid conclusions with respect to regulatory measures affecting these other products, and their relation to Article XX, the same comprehensive assessment would need to be made for each product on a case-by-case basis. Since this would fall outside the terms of reference of the Panel, it is clear that any consideration of other products, and measures affecting those products, must be disregarded entirely.
Australia submitted that ultimate availability of the Article XX exception is subject to the compliance by the invoking Member with the requirements of the chapeau.144 Notwithstanding that a measure falls within the list of exceptions, it must still satisfy the requirement that it was "not applied in a manner which would constitute a means of arbitrary or unjustifiable discrimination between countries where the same conditions prevail, or a disguised restriction on international trade." The Appellate Body in US – Gasoline(AB) stated that "the chapeau by its express terms addresses, not so much the questioned measure or its specific contents as such, but rather the manner in which that measure is applied".145 The Appellate Body in US – Shrimp (AB) also emphasised the application of a measure for Article XX.
The policy goal of a measure at issue, Australia continued, cannot provide its justification under the chapeau of Article XX. The legitimacy of the declared policy objective of the measure, the relationship of that objective with the measure itself, and its general design and structure, are examined under paragraphs (a)-(j). If the measure is not held provisionally justified under an exception, it cannot be ultimately justified under the chapeau. On the other hand, it does not follow from the fact that a measure falls within the terms of an exception that the measure will also comply with the requirements of the chapeau.146
143 Imported beef sold in retail shops range between 10 – 11 per cent of Korean beef consumption. Total beef imported amounted to 26 per cent of beef consumption in 1998.
144 US – Shrimp, paragraph 157.
145 Page 22.
146 US – Shrimp (AB), paragraph 149.
WT/DS161/R WT/DS169/R
Page 67
The terms "arbitrary or unjustifiable discrimination" and "disguised restriction on international trade" can be read side-by-side. The fundamental theme is to be found in the purpose and object of avoiding abuse or illegitimate use of the exceptions to substantive rules available in Article XX.147 Australia submitted that the potential for deceptive practices arises out of Korean government measures which create or exacerbate the price differential between domestic and imported beef, i.e. domestic price support, and lack of competition arising from separate retail sale. In the opinion of Australia, Article XX is not intended to justify such measures. Furthermore, the retail separation of imported and domestic beef constitutes "arbitrary or unjustifiable discrimination" and a "disguised restriction on international trade" in the context of Article XX because it affords protection to domestic production, is applied only to imported beef, and not to other imports, and is applied only between imported and domestic beef while not being applied to different types of domestic beef, where large price differentials also prevail.
Australia argued that Korea must have known that separating only imported and domestic beef sales, while imposing no equivalent separation requirements on different types of domestic beef, would have a disproportionate effect on imported product. In not dealing with the same apparent problem in the same way, Korea has arbitrarily and unjustifiably discriminated against imported beef. It has done so to protect domestic beef from the full impact of import competition, contrary to the chapeau of Article XX
The United States submitted that Korea has not satisfied the requirements of the chapeau as it appears that Korea has eschewed the application of the same requirement for separate stores to address a problem involving fraud related exclusively to Korean beef. Press reports indicate that some of the worst cases of fraud involve retailers mis-labelling and selling meat from Korean dairy cows as Hanwoo beef. Estimates indicate that almost 50 per cent of the Korean beef sampled in 1998 was mis-identified as being Hanwoo, when it was a much inferior grade from dairy cows. Furthermore, contrary to Korea's assertion that dairy beef sales are negligible, meat from dairy animals constitute approximately 10 to 15 per cent of total beef consumption. By not requiring separate stores for the sale of beef from Korean dairy cows, Korea has elected to apply one set of measures to address an alleged problem of fraud with respect to imports, while rejecting the same approach for fraud affecting a domestic product. Such action is unjustifiable discrimination within the meaning of the chapeau of Article XX. Moreover, within the context of the chapeau of Article XX it makes no difference whether the unjustifiable discrimination is prescribed by the measure or the result of its application.148
Indeed, in the US - Gasoline case (AB)149, the Appellate Body described the showing that must be made by a Member wishing to avail itself of the protection of Article XX: "In order that the justifying protection of Article XX may be extended to it, the measure at issue must not only come under one or another of the particular exceptions - paragraphs (a) to (j) - listed under Article XX; it must also satisfy the requirement imposed by the opening clauses of Article XX. The analysis is, in other words, two-tiered: first, provisional justification by reason of characterization of the measure under XX(g); second further appraisal of the same measure under the introductory clauses of Article XX."150
147 US – Gasoline (AB) page 25.
148 In US – Shrimp (AB), paragraph 160, the Appellate Body made the following observation: "We note, preliminarily, that the application of a measure may be characterized as amounting to an abuse or misuse
of an exception of Article XX not only when the detailed operating provisions of the measure prescribe the arbitrary or unjustifiable activity, but also when a measure, otherwise fair and just on its face, is actually applied in an arbitrary and unjustifiable manner."
149 See above.
150 See also US – Shrimp (AB), paragraph 118.
WT/DS161/R WT/DS169/R
Page 68
The United States referred to the US – Gasoline (AB) case, in which the Appellate Body stated that the purpose and object of the introductory clauses of Article XX is generally the prevention of abuse of the Article XX exceptions:
... The chapeau is animated by the principle that while the exceptions of Article XX may be invoked as a matter of legal right, they should not be so applied as to frustrate or defeat the legal obligations of the holder of the right under the substantive rules of the General Agreement. If those exceptions are not to be abused or misused, in other words, the measures falling within the particular exceptions must be applied reasonably, with due regard both to the legal duties of the party claiming the exception and the legal rights of the other parties concerned.151
In the opinion of the United States, Korea has failed to satisfy either the requirements of paragraph (d) of Article XX or the criteria contained in the chapeau. Therefore, Korea's reliance on Article XX to insulate its dual retail sale regime from challenge under Article III:4 must fail. Any other result would constitute an abuse of the exception contained in Article XX (d).
Korea rejected the argument advanced by the United States that it is inconsistent for Korea not to impose the same measure with respect to meat from Korean dairy cows. Korea argued that the separation of sales outlets is not necessary in the case of meat from dairy cows since Korea has already developed a reliable testing method for distinguishing between meat from dairy cows from domestic beef, "Hanwoo." Furthermore, the amount of dairy cow meat sold at retail level is quite negligible and does not warrant special consideration. Korea, therefore, argued that the system of separation of sales outlets and the accompanying requirement to indicate the origin of beef imposed only on imported beef are in full conformity with the requirements contained in the chapeau of Article XX. Korea reiterated its contention that the system of separation of sales outlets is in full compliance with Article XX(d) of GATT. Korea further noted that, were the Panel to reject Korea's arguments in this respect, the separation of sales outlets is a "remaining restriction" within the meaning of Note 6 in Korea's Schedule of Concessions.
CLAIMS UNDER ARTICLE II OF GATT
LPMO tendering opportunities
(See also paragraphs 122-125.)
Australia submitted that the tendering process adopted by the LPMO for the import of beef results in quantitative restrictions being applied to grass-fed beef, contrary to Article II. Furthermore, LPMO imposes a quality distinction between grass-fed and grain-fed beef which further discriminates against grass-fed product and limits the sales of high quality grass-fed beef in the Korean market. The Korean tender mix system has the effect of imposing limits on the volume of the grass-fed beef that Australia is permitted to export to Korea. This is less favourable treatment of Australia than that provided for in Korea's Schedule contrary to Article II. Australia noted that Korea's Schedule of Concessions includes tariff bindings on all beef imported within the tariff quota of 43.6 per cent, reducing to 41.6 per cent by 2000. The tariff currently applied to imports of beef is 42 per cent. Korea has made no qualification in its schedules under column 7 "other terms and conditions" and no reference to either grain-fed or grass-fed beef.
In allocating the LPMO quota between grain-fed and grass-fed beef, Korea is, according to Australia, imposing a condition that within the quota individual limits apply to grass- and grain-fed beef, respectively. Under Article II, any other "terms, conditions or qualifications" with respect to the
151 US - Gasoline (AB), page 22; US – Shrimp (AB), paragraph 118.
WT/DS161/R WT/DS169/R
Page 69
quota must be set forth in Korea's Schedule. Given that Korea made no such qualification, the administration of the LPMO quota is less favourable than that provided for in its Schedule. Further, by imposing a quality differential between the two, the tendering system undermines the concession for beef provided in Korea's Schedule.
Panels have interpreted Article II as not only requiring no less favourable treatment in the Schedule, but also no less favourable treatment for each exporting country. The 1981 panel report on EEC - Beef examined the EEC's tariff quota for high quality grain-fed beef. A footnote to the concession provided that "entry under this subheading is subject to conditions to be determined by the competent authorities". Its administration was through certificates of authenticity. The sole issuing authority for such certificates was the US Department of Agriculture. The panel found:
"The words, 'terms, conditions or qualifications' in paragraph 1(b) of Article II could not be interpreted to mean that countries could explicitly or by the manner in which a concession was administered actually limit a given concession to the products of a particular country. The Panel further found that the fact that in Annex II there was only one certifying agency for the meat in question and that this agency only certified meat of United States origin in effect prevented access of high quality meat from other countries." [Emphasis added.]
"Consequently, the Panel concluded that the manner in which the EEC concession on high quality beef was implemented accorded less favourable treatment to Canada than that provided for in the relevant EEC Schedule, thus being inconsistent with the provisions of paragraph 1 of Article II of the General Agreement." [Emphasis added.]152
Australia rejected the evidence provided by Korea which shows an increase in grass-fed imports by LPMO in 1999 (see paragraph 323). Australia considered that those figures are incorrect. Australia can show, based on information provided by the LPMO in the last three years, that total purchases of grass-fed beef by the LPMO in 1999 have fallen to approximately 15,000 tonnes, down from 44,000 tonnes in 1997 because information for 1999 was based on customs-cleared, not purchase data and because for all years Korea attributed purchases to the LPMO which had actually been made by both the LPMO and super-groups. This is a drop of nearly 60 per cent. As a consequence of LPMO discrimination against grass-fed beef, Australia has seen its share of LPMO tenders fall from 47.7 per cent in 1998 to 20.4 per cent in 1999, a fall of more than half. On the other hand, in the SBS sector of the market, where a range of cuts and grades of grass-fed beef are purchased, Australia's market share has risen.
Korea has not rebutted Australia's claim that the distinction imposed by Korea between grass- fed and grain-fed beef provides less favourable treatment than that contained in its Schedule, contrary to Article II. Australia assumes that Korea therefore accepts those claims. Moreover, Korea has not rebutted Australia' claim in paragraph 287. Origin neutrality is not at issue since Australia is not claiming a violation of Article I. Furthermore, the grass-fed / grain-fed distinction is not a measure of customer demand but a distortion imposed by the Korean government contrary to its Schedule commitments.
Korea submitted that the LPMO operates its tendering procedures on the basis of commercial considerations. The LPMO consistently purchases its full quota amount, according to an open bidding procedure and according to origin-neutral criteria. The LPMO purchases on the basis of consumer demands and preferences and Korea applies no regulatory measure which discriminates against grass-fed beef. Korea is under no obligation to affect its purchases of beef according to sub- groupings of various beef types. Therefore, for the purposes of the present dispute, the distinction
152 EEC - Beef , at page 99, paragraphs 4.5-4.6.
WT/DS161/R WT/DS169/R
Page 70
between grass-fed and grain-fed beef is artificial and the question of discriminatory or less favorable treatment with respect to grass-fed beef does not arise.
2. Application of a mark-up on SBS imports
Australia submitted that Korea applies a mark-up on beef imported under the SBS system which is not included in its Schedule of Concessions or applied to domestic beef, and hence no "qualification or reservation" which would permit Korea to impose the mark-up. The mark-up constitutes "other duties or charges of any kind imposed on or in connection with the importation" of beef. That Korea has no Schedule coverage for the imposition of the mark-up on imported beef is indicated by the fact that a mark-up on other products is shown in the Korean Schedule. The imposition of the mark-up on beef imported through the SBS system, therefore, constitutes less favourable treatment than that provided in the Korean Schedule and is inconsistent with Article II:1(a) and (b). Korea cannot claim a justification for the mark-up on the basis of a Record of Understanding with Australia that expired in 1995, or a Record of Understanding with the United States to which Australia is not a signatory, nor on the basis of a schedule which contains neither reference to the mark-up, or indeed to any of the Record's of Understanding. Australia also noted that Korea appears to have introduced a mark-up on purchases of the LPMO quota in 2000, which the Korean government is proposing to auction. The mark-up is an unspecified amount and is payable to the Livestock Development Fund.
The United States submitted that Korea collects a mark-up on beef imported both through the SBS system and by the LPMO. In the opinion of the United States, these mark-ups are in each instance inconsistent with Korea's obligations under Article II:1. One of the fundamental objectives of the GATT 1994 is "the substantial reduction of tariffs."153 To ensure that tariff concessions, once made, have the full force and effect intended, Article II directs that the duty rates set forth in bindings are maximum limits that may not be exceeded. Specifically, Article II:1(a) requires that "[e]ach contracting party shall accord to the commerce of other contracting parties treatment no less favorable than that provided in … the appropriate Schedule." Moreover, Article II:1(b) provides that products subject to a schedule of concessions are "exempt from ordinary customs duties in excess of those set forth and provided for therein." Similarly, Article II:1(b) directs in pertinent part that "Such products shall also be exempt from all other duties or charges of any kind imposed on or in connection with importation in excess of those imposed at the time of this Agreement". The United States also referred to the Appellate Body's interpretation of the requirements of the first sentence of Article II:1(b) in its report in Argentine - Textiles as pertinent to the construction of the second sentence.
Article 31 of the Vienna Convention, the United States continued, provides that treaty terms are to be given their ordinary meaning in their context and in light of the object and purpose of the treaty. The mark-up is certainly a "charge" within the meaning of Article II:1(b), particularly as Article II:1(b) expressly includes "charges of any kind". Korea's mark-up is a liability to pay money to Korea's Livestock Development Fund. Furthermore, the mark-up is a charge imposed at the time of importation. Indeed, entries of imported beef may not leave Korean Customs until the mark-up is paid.154 Korea's Schedule makes no provision for the imposition of any duty or charge on imports of beef other than the bound rate of duty, which is currently 42 per cent and will decline to 40 per cent on 1 January 2004. The mark-ups levied since 1993 have been applied in addition to the bound rates in Korea's Schedule.155 As Korea did not identify any other charges or other duties in its Schedule as
153 Preamble to the GATT 1994, paragraph 3. Panels should address issues in light of the underlying purposes of the GATT 1994. See US – Sugar Head Note, paragraph 5.2-5.3.
154 Operational Guidelines for Imported Beef Under the SBS System, 26 December 1997, Article 9; Guidelines for Handling Imported Beef, 1 October 1999, Article 25 .
155 Korea had bound the rate for beef at 20 per cent in the Tokyo Round of Negotiations.
WT/DS161/R WT/DS169/R
Page 71
applicable to imported beef, there is no justification for the mark-up. By collecting a mark-up on all imported beef in addition to the ordinary duty provided for in its Schedule, Korea violates Article II:1 by imposing "other duties or charges" that exceed its bound tariff rate.
A tariff binding in a Member's Schedule provides an upper limit on the amount of duty that may be imposed. The application of customs duties or other charges in excess of those provided for in a Member's Schedule, inconsistent with the second sentence of Article II:1(b), constitutes "less favorable" treatment under the provisions of Article II:1(a). As the Appellate Body has concluded, "[a] basic object and purpose of the GATT 1994, as reflected in Article II, is to preserve the value of tariff concessions negotiated by a Member with its trading partners, and bound in that Member's Schedule. Once a tariff concession is agreed and bound in a Member's Schedule, a reduction in its value by the imposition of duties in excess of the bound tariff rate would upset the balance of concessions among Members.156 This conclusion is no less valid with respect to "other charges" and the commitment set forth in the second sentence of Article II:1(b).
In this connection it is also relevant that the WTO Understanding on the Interpretation of Article II:1(b) of the General Agreement on Tariffs and Trade 1994 provides that:
the nature and level of any "other duties or charges" levied on bound tariff items, as referred to in that provision, shall be recorded in the Schedules of concessions annexed to GATT 1994 against the tariff item to which they apply.
Since Korea did not reflect the mark-up charged on imported beef in its Schedule as either an other duty or charge, its imposition is contrary to Article II:1(b).
Korea replied that 'Schedule LX-Republic of Korea NOTE to PART I: MOST FAVOURED NATION TARIFF Section I: Agricultural Products' contains an item 6 which provides: 'According to the results of the 1989 consultation with GATT/BOP Committee and the Uruguay Round multilateral trade negotiation, the remaining restrictions on the items marked as '*Note 6(a)', '*Note 6(b)', '*Note 6(c)', '*Note 6(d)', or '*Note 6(e)' in column 5 of Section I-A of Part I of this schedule shall be eliminated or brought into conformity with GATT provisions from the dates specified as follows: *Note 6(a): 1995; *Note 6(b): 1 Jan. 1996; *Note 6(c): 1 Jul 1996; *Note 6(d): 1 Jul. 1997; *Note 6(e): 1 Jan. 2001.'
Korea explained that the products at issue in the current dispute (02.01 and 02.02) are marked with the Note 6(e), thus meaning that the "remaining restrictions" shall be eliminated or be brought into conformity with GATT provisions from 1 January 2001. Item 6 of the Note, Korea continued, does not enumerate which "remaining restrictions" are meant. However, the plain meaning of the words suggests that the "remaining restrictions" at issue are not necessarily in conformity with the provisions of the GATT. Otherwise there would be no need to provide that they should be eliminated or be brought into conformity with GATT provisions by 1 January 2001.
It is not disputed by the Complainants, Korea continued, that at the time of conclusion of the Uruguay Round, a mark-up on imported beef of 95 per cent was applied in 1994. Hence, this mark-up was at that time a 'remaining restriction'. Korea, therefore, submitted that this mark-up would only need to be eliminated or be brought of into conformity with GATT provisions by 1 January 2001 for the products at issue in the current dispute. Consequently, Korea submitted, its Schedule LX clearly allowed it to maintain "remaining restrictions" on beef until 1 January 2001. Maintaining the mark-up (which was phased out on 1 January 2000) cannot be considered a violation of its obligations under Article II. In addition, "Note 6(e)" is clearly indicated in Korea's Schedule with regard to tariff item numbers 0201 and 0202 subject to this dispute.
156 Argentina – Textiles (AB), paragraph 47.
WT/DS161/R WT/DS169/R
Page 72
This, Korea submitted, thus clarifies that, among others, the "mark-up" is one of the "remaining" restrictions referred to in Note 6 of Korea's Schedule which existed at the time of conclusion of the Uruguay Round. This Annex also clarifies that the United States was very well aware of the existence of this mark-up and its intended phase-out schedule at the time of negotiation of the Uruguay Round. At the same time, it should be noted that nothing in this Annex suggests that it intends to exhaustively list all remaining restrictions in existence at the time of conclusion of the Uruguay Round. Korea considered that it has strictly observed the phase-out schedule of the mark-up as agreed in the December 1993 Record of Understanding with the United States, according to which Korea have until 1 January 2001 to eliminate or bring into conformity with GATT the remaining restrictions. Accordingly, Korea is not in violation of its obligations under Article II:1. Furthermore, Korea submitted, the claims brought by the United States and Australia with regard to this issue are contrary to Article 26 of the Vienna Convention (see paragraph 108).
For the sake of argument, Korea continued, to demonstrate that the mark-up was one of the "remaining restrictions" existing at the time of the conclusion of the Uruguay Round, should the Panel consider that this issue is not clear and further interpretation is necessary, Korea referred to Japan - Alcoholic Beverages (AB), in which case the Appellate Body held that there can be no doubt that Article 32 of the Vienna Convention has attained the status of customary rules of interpretation of public international law157 and can be applied according to Article 3.2 of the DSU. Article 32 of the Vienna Convention stipulates that recourse may be had to supplementary means of interpretation, including the preparatory work of a treaty and the circumstances of its conclusion, in order to confirm the meaning resulting from the application of Article 31, or to determine the meaning when the interpretation according to Article 31 (a) leaves the meaning ambiguous or obscure; or (b) leads to a result which is manifestly absurd or unreasonable.
Korea submitted that the preparatory works of the treaty and the circumstances of its conclusion with regard to Note 6 of Part I of Schedule LX can be found in two Records of Understanding between the United States and Korea158 The December 1993 Record of Understanding contains an Annex entitled "Beef" which states that: "The current July 15, 1993 Record of Understanding (L/7270) shall continue to apply except as modified to incorporate the provisions of the new understanding." The United States seems to acknowledge the amendment of the 15 July 1993 Record of Understanding by the Annex in the December 1993 Record of Understanding containing the new timetable. The United States further seems to acknowledge that: " This timetable was ultimately made a part of Korea's WTO Schedule of Concessions". The United States therefore seems to accept the existence of a certain linkage between the Annex attached to the December 1993 Record of Understanding and Korea's WTO Schedule of Concessions.
The schedule for the phase-out of the mark-up on beef in the Annex to the December 1993 Record of Understanding is as follows:
1993 – 100; 1994 – 95; 1995 – 70; 1996 – 60; 1997 – 40; 1998 – 20; 1999 – 10; 2000 – 0.
Korea has submitted a document provided by the official of the United States Department of Agriculture on 24 February 1994 which leaves no doubt that there was a clear agreement on the application of a mark-up on beef by Korea in the Uruguay Round159. The application of a mark-up was, therefore, consistent with Korea's obligations under Article II:1 and not contrary to Article III:2.
157 Japan - Alcoholic Beverages (AB), at 10.
158 Record of Understanding between the Government of the Republic of Korea and the Government of the United States of America on market access for beef initialed on 26 June 1993; and Record of
Understanding between Korea and the United States on agricultural market access in the Uruguay Round initialed on 13 December 1993.
159 "Talking Points", annexed to Korea's oral statement at first Panel meeting in December 1999.
WT/DS161/R WT/DS169/R
Page 73
Furthermore, Korea implemented its December 1993 Record of Understanding obligations in good faith and has since 1 January 2000 eliminated the mark-up in accordance with the schedule agreed in the December 1993 Record of Understanding.
The United States retorted that the parties to the Records of Understanding expressly preserved all of their WTO rights, which includes the right conferred by Article II to be free from additional charges not provided for in the importing country's schedule. Korea never provided for the mark-up in its Schedule; nor did Korea refer to the Records of Understanding therein. Second, the bilateral agreement is not one of the Agreements annexed to the Marrakesh Protocol to the General Agreement on Tariffs and Trade 1994, is not otherwise annexed to the WTO Agreement, and is not a "covered agreement" listed in Appendix 1 of the Dispute Settlement Understanding. Thus, it does not create rights or obligations under the WTO; nor is it enforceable either by the United States or Korea in proceedings under the DSU.
In response to Korea's arguments in paragraph 306, the United States submitted that the "talking points" annexed to Korea's 13 December 1999 oral statement underscore that the mark-up on beef was viewed as a quid pro quo granted to Korea in the 1993 Record of Understanding in exchange for market opening undertakings, including a minimum access commitment. The mark-up was scheduled to end as specified in the Record of Understanding on 31 December 1999, unlike the "remaining restrictions" referenced in Korea's Schedule which must be terminated by 1 January 2001. Consistent with the US position, the penultimate "talking point" questions whether mark-ups are consistent with Korea's bilateral and multilateral obligations and suggests that Korea review this subject before submitting its country Schedule.
CLAIMS UNDER ARTICLE III:2 OF GATT
Australia contended that alternatively to being inconsistent with Article II (see paragraph 293 above), the mark-up constitutes an internal tax or other internal charge on SBS imported beef. Given that domestic beef is not subject to a similar charge, the mark-up infringes Article III:2. Australia referred to the report of the Appellate Body in Japan - Alcoholic Beverages (AB) as providing guidance on the interpretation of Article III:2, first sentence. The words of the first sentence require an examination of the conformity of an internal tax measure with Article III by determining, first, whether the taxed imported and domestic products are "like" and, second, whether the taxes applied to the imported product are "in excess of " those applied to the like domestic products. If the answer is "yes" to both questions, then the measure is inconsistent with Article III:2, first sentence. In accordance with Article 3.8 of the DSU, such a violation is prima facie presumed to nullify or impair benefits under Article XXIII.160 Australia submitted that it has already been established that domestic and imported beef are like products (see paragraphs 168-170).
Australia claimed that the mark-up imposed on SBS imports constitutes an internal charge for the purposes of Article III:2. The question of the applicability of Article III to mark-ups was considered by the panel in Canada - Marketing Agencies. The panel was of the view that Article III:2 applied to mark-ups levied by Canadian Provincial Liquor Boards because they constituted internal governmental charges borne by products.161 Australia observed that no mark-up or any equivalent charge is applied to domestic beef. This fact was confirmed by Korea in its consultations with Australia on 28 May 1999.
Korea reiterated that since in accordance with its Schedule of Concessions agreed to by the United States and Australia, Korea benefits from a transition phase until 1 January 2001 to eliminate or bring into conformity all remaining restrictions with regard to beef, which includes the mark-up,
160 Page 19.
161 Paragraph 5.24.
WT/DS161/R WT/DS169/R
Page 74
there can be no violation of Article III:2 as argued by Australia. If the DSB were to rule that the mark-up violates Article III:2 and it would need to be eliminated or brought into conformity with GATT provisions before 1 January 2001, the DSB would impose upon Korea an additional obligation beyond its obligations under Article II:1, reducing its rights to a transition phase as provided for in its Schedule of Concessions. Such a DSB ruling would violate Article 3.2 of the DSU which provides in relevant part that: "Recommendations and rulings of the DSB cannot add to or diminish the rights and obligations provided in the covered agreements" (see also paragraphs 299-302).
CLAIMS UNDER ARTICLE XVII OF GATT
LPMO tendering opportunities
(For arguments under this section, see paragraphs122-125. (Cf. also 287-289.)
Measures with respect to the allocation of imported beef in the wholesale market
Australia submitted that the tender process operated by LPMO, as well as the discharge procedures operated by LPMO and NLCF, are contrary to Article XVII. A claim of infringement under Article XVII:1(a) and (b) requires proving two elements: (1) the body or organization falls within the definition of a state trading enterprise; (2) it acts in a manner inconsistent with the general principles of non-discriminatory treatment. Article XVII:1(c) requires evidence that an enterprise has been prevented from acting in accordance with the principles of non-discrimination, including behaving in accordance with commercial considerations.
Australia submitted further that manipulation of the kind described in paragraphs 205-206 above is also contrary to the obligation contained in Article XVII:1(a) which requires LPMO and NLCF to conduct their business in a non-discriminatory fashion, on the basis of normal commercial considerations. The fact that these measures are required by law to be carried out by LPMO and NLCF also results in a breach of Korea's obligations under Article XVII:1(c). Australia argued that LPMO has favoured some supplier countries over others, and domestic producers over producers of imported products on the basis of beef production methods and an arbitrary quality distinction between grain-fed and grass-fed beef. It has done so as part of its beef stabilization policies. Such policies are inconsistent with the application of commercial considerations required by Article XVII:1(a).
Article XVII:1(a) applies to a "State enterprise", or "any enterprise" that has been granted "formally or in effect, exclusive or special privileges". The Interpretative note to paragraph 1 extends this to "Marketing Boards" which are engaged in purchasing or selling. The 1960 final report of the panel on Notification of State Trading Enterprises, (paragraph 8 of L/1146, dated 24 May 1960) considered that Article XVII and the Interpretative Notes provided sufficient guidance on which enterprises were covered. Australia pointed out that both the LPMO and the NLCF are notified as state trading enterprises. The LPMO is notified as a state trading enterprise in relation to beef. Its purpose is stated as to stabilize domestic livestock markets. Its exclusive rights or privileges are stated to be: "authorization to purchase foreign beef used to stabilize domestic beef market, and conduct the tasks of approval and post-import management of the beef quota purchase allocated to private companies under the SBS system".162 The NLCF has been granted exclusive or special privileges to control the discharge of beef on behalf of the LPMO, including establishment and implementation of regional and purchaser-based sales plans, discretion to decide daily discharging
162 G/STR/N/4/KOR, Working Party on State Enterprises, 10 December 1998, page 6.
WT/DS161/R WT/DS169/R
Page 75
volumes, and to adjust auction volumes in consideration of price movements of domestic beef/cattle.163
Furthermore, Australia continued, Article XVII:1(a) requires a state trading enterprise to act in a manner consistent with the "general principles of non-discriminatory treatment". What constitutes "non-discriminatory treatment" is not defined. Article 3.2 of the DSU stipulates that provisions of the covered agreements be interpreted in accordance with the customary rules of interpretation of public international law. The Appellate Body in the US – Gasoline (AB) case took this to mean that the WTO Agreements, including Article XVII , are to be interpreted in accordance with Articles 31 and 32 of the Vienna Convention. 164
Australia submitted that the purpose and object of the GATT is increasing freedom in trade through the removal of barriers to trade as expressed in the preamble. The "elimination of discriminatory treatment in international commerce" refers to the GATT's fundamental principle of non-discrimination.165 Hence, Article XVII must be read according to this object and purpose. Under Article XVII, each Member undertakes that its state trading enterprises shall, with respect to its purchases or sales involving either imports or exports, act in a non-discriminatory manner and make such purchases or sales solely in accordance with commercial considerations. Article XVII recognises that state trading enterprises have the potential for distorting international trade through explicit or implicit subsidy policies or artificial pricing strategies. Australia referred to the panel in the Japan - Film case which acknowledged "a risk that WTO obligations could be evaded through a Member's delegation of quasi-governmental authority to private bodies."166
This also goes towards the security and predictability of concessions under the WTO system. In this context, Australia also referred to EC - Computer Equipment (AB) which agreed with the panel that the security and predictability of "the reciprocal and mutually advantageous arrangements directed to the substantial reduction of tariffs and other barriers to trade" is an object and purpose of the WTO Agreement, generally, as well as of the GATT 1994.167 The value of concessions would be undermined if countries could avoid the national treatment requirement of Article III through the activities of state trading enterprises,.
Finally, the interpretative note provides: "Throughout Articles XI, XII, XIII, XIV and XVIII, the terms "import restrictions" or "export restrictions" include restrictions made effective through state-trading operations." This indicates, in the opinion of Australia, that the prescriptions applying to state trading enterprises are not limited to the MFN treatment in Article I. As concerns the "general principles of non-discriminatory treatment" in Article XVII:1(a), Australia submitted that the term must be read in the context of paragraph 1 of the Understanding on the Interpretation of Article XVII. This provides a working definition of state trading enterprises as:
"Governmental and non-governmental enterprises, including marketing boards, which have been granted exclusive or special rights or privileges, including statutory or constitutional powers, in the exercise of which they influence through their purchases or sales the level or direction of imports or exports."
This working definition captures the object and purpose of the provisions on state trading enterprises, i.e. regulate their activities where they influence the level or direction of imports or
163 Regulations Concerning Imported Beef, Articles 4, 6(1), 6(2), 9(2).
164 Page 17.
165 In The Regulation of International Trade, Rutledge, 1995, page 26, Trebilcock and Howse states this principle as embracing both MFN and national treatment.
166 Paragraph 10.328.
167Paragraph 82.
WT/DS161/R WT/DS169/R
Page 76
exports. Discriminating between different exporting countries is only one way in which the level or direction of imports is influenced. Composition and levels of imports can also be influenced by discrimination between imported and domestic goods. Excluding national treatment would void Article XVII of much of its scope as revealed in the working definition. The term must also be read in the context of Article XVII:1(b). This refers inter alia to affording the enterprises of other Members adequate opportunity, in accordance with customary business practice, to compete for participation in such purchases or sales. Such opportunity would be rendered illusory where state trading enterprises discriminate against imported goods in a way which restricts imports eg. by imposing restrictions on cuts and types of beef permitted to enter the market. Moreover, "having due regard to the other provisions of this Agreement" implies that Article III is relevant to an Article XVII:1(a) examination.
Paragraph (b), Australia continued, provides that the provisions of (a) "shall be understood to require" inter alia commercial considerations. Paragraph (b) therefore defines the application of (a). The wording "shall be understood to require" supports this. An entity infringes the general principles of non-discriminatory treatment where it fails to act on commercial considerations, or afford importers adequate opportunity to compete. Infringement of MFN occurs, in the opinion of Australia, when the LPMO favours the imports of one member over those of another on the basis of an arbitrary distinction applied between the types of beef produced by different members. The statement "having due regard to the other provisions of this Agreement" suggests that the requirements are not limited to those specified in paragraph (b). State trading enterprises must also comply with the other provisions of GATT, for example Article III. Likewise, infringement of non-discrimination can be implied when requirements are imposed on imported product that are not imposed on domestic product and are applied for reasons inconsistent with commercial considerations. Article XVII does not provide a definition of "commercial considerations but essentially, Australia contended, "commercial" connotes buying and selling for financial gain or profit.
Referring to Article XVII, Australia considered further that by creating a distinction between grass-fed and grain-fed beef and by excluding grass-fed beef from the three tenders in 1999, the LPMO has limited the supply of imported grass-fed beef at a time when sales of grass-fed beef were growing significantly. The basis of the distinction is the policy of using imported beef to assist in the stabilization of the prices of domestic cattle and beef. Both the LPMO and the NLCF have acted to withhold release of beef imported by the LPMO onto the wholesale market, either by supplying under demand or by setting minimum prices for imports. This has the effect of artificially restricting the supply of imported beef. Article 1 of the Regulations Concerning Sales of Imported Beef refer to the stabilization of the prices of cattle and beef in Korea. By engaging in beef price stabilization, neither the NLCF nor the LPMO are operating on the basis of commercial considerations.
In conclusion and referring to Article XVII:1(c) , Australia submitted that the actions by the LPMO/NLCF are governed by laws imposed by the Government of Korea, as part of its polices to protect domestic beef. The discharge procedures adopted by LPMO and NLCF are in accordance with the requirements imposed by the Regulation Concerning Sales of Imported Beef, pursuant to the Minister of Agriculture and Forestry's powers under Article 25 of the Livestock Act. The regulations impose upon both the LPMO and the NLCF the obligation of acting to stabilize the prices of domestic beef. In doing so, both organizations are therefore required by the Government of Korea to take measures which are discriminatory towards imported beef and are inconsistent with commercial considerations.
Referring in particular to paragraph 321 above, Korea replied that the distinction between grass-fed and grain-fed beef does not by itself constitute discriminatory treatment or an infringement of MFN principles. Korea explained that all tenders are open to all supplying countries and perfectly origin neutral. Australian exporters are free to participate both in tenders for grass-fed and grain-fed beef and Australia has not adduced any evidence that Australian products have been discriminated
WT/DS161/R WT/DS169/R
Page 77
against based on their origin. If Australia's producers are operating on a commercial basis, they can be expected to adjust to the customers' demand, rather than expecting the customer to change its demand based on their supply. Second, Korea continued, Australia's allegation that in excluding grass-fed beef from the three tenders in 1999, LPMO has constricted the supply of imported grass-fed beef at a time when sales of such beef were growing significantly, appears unfounded. Korea referred to the following purchase figures (customs cleared) by the LPMO
Year | Australia | Canada | New Zealand | United States | Total | |||||
MT | % | MT | % | MT | % | MT | % | MT | % | |
1997 | 50,567 | 33.3 | 5,097 | 3.3 | 13,093 | 8.6 | 83,232 | 54.8 | 151,989 | 100 |
1998 | 21,209 | 30 | 3,391 | 5 | 2,185 | 3 | 43,160 | 62 | 69,945 | 100 |
1999* | 33,152 | 44 | 2,827 | 3,7 | 3,770 | 5 | 35,535 | 47,2 | 75,284 | 100 |
*first 6 months
Korea reiterated that it was clear from the above data that total purchases from Australia in the first 6 months of 1999 represented a 44 per cent share of all purchases which is much higher than their previous shares of 33.3 per cent in 1997 and of 30 per cent in 1998. Therefore, these data do not suggest any de facto discrimination of Australian products. (Cf paragraph 123.)
Furthermore, Korea considered that Australia's allegation that by engaging in beef price stabilization, LPMO is not operating on the basis of commercial considerations and that price stabilization and stability for consumers/producers is an extraneous consideration that goes beyond engaging in buying and selling for financial gain is not substantiated by any prima facie evidence demonstrating the alleged inherent conflict between price stabilization and commercial considerations in the LPMO operations. Korea is of the opinion that the two policies are not inherently contradictory. Indeed, it makes perfect commercial sense to sell more products when there is a shortage and market prices are high, while selling less products at a moment when there is oversupply and prices are low. This is obviously a marketing strategy to maximize profits which at the same time can have the effect of stabilizing prices (see also paragraph 207).
Australia submitted that Article XVII incorporates an obligation for state trading enterprises to abide by the national treatment principle. In creating a distinction between grass-fed and grain-fed beef for imported product, but not for domestic product, this principle has been breached by the LPMO in its tendering processes. The quality differential applied between the two for the purposes of stabilising domestic beef prices is also contrary to commercial principles.
Korea has not addressed the Article XVII claims made by Australia in respect of these measures (minimum prices, withholding beef from market by NLCF) except to claim that LPMO's policies of stabilising domestic beef prices is not inherently in conflict with commercial consideration. Australia rejected this argument. When imported beef is priced, not on the basis of profitability, but with the aim of protecting domestic beef prices, which may or may not be a profitable exercise, the requirements of Article XVII have been breached. Australia also rejected Korea's claim that the pricing of imported product in reference to the price of domestic product is evidence of normal commercial behaviour. It is not normal commercial behaviour to artificially raise the price of imported product to improve the sale potential of competing domestic product. The reverse is true. Australia referred the Panel to the findings of the panel on Canada - Marketing Agencies. (See also arguments in paragraph 292.)
CLAIMS UNDER THE AGREEMENT ON LICENSING PROCEDURES
Korea's import licensing regime for imported beef is based on the issuance of import recommendations by the LPMO, and is, in the view of the United States, totally discretionary and,
WT/DS161/R WT/DS169/R
Page 78
therefore, constitutes a non-automatic licensing procedure for purposes of the Licensing Agreement. Approval is not granted in all cases; no import recommendation is accorded by right. Indeed, Article 24 of the Final Livestock Act provides that the criteria for import recommendations, i.e. import licences, shall be established by the MAF. The Act specifies no criteria for issuing licences. Moreover, the licensing procedures are administered in such a manner as to have restrictive effects on the imports in question. Only the LPMO and the super-groups are eligible to apply for import recommendations.168 No actual user or reseller of imported beef, unless a super-group, is permitted to import beef directly or to obtain an import approval.
These restrictions are in addition to the resale and use limitations that apply to customers and end-users of the respective super-groups. The United States submitted further that the LPMO, as administrator of the licence approval and SBS system, has delayed quota allocations, postponed the invitation of tenders, and discouraged licence approval requests which have resulted in additional impediments to the entry and sale of imported beef. Each of these licensing procedures is inconsistent with the requirements contained in the Licensing Agreement.169 Specifically, Article 3.2 provides that "Non-automatic licensing shall not have trade-restrictive or –distortive effects on imports additional to those caused by the imposition of the restrictions."
Article 3.1 defines non-automatic import licensing procedures as import licensing not falling within the definition contained in Article 2.1. Article 2.1 in turn defines "automatic import licensing" as "import licensing where approval of the application is granted in all cases, and which is in accordance with the requirements of paragraph 2(a)." In the case of Korea, no party can automatically import beef. Moreover, only the LPMO and the super-groups can import beef through discretionary licensing. From the foregoing, the United States argued, it follows that Korea's regime is a non- automatic licensing system and that, therefore, it is subject to the obligations contained in Article 3 of the Licensing Agreement. The obligation encompassed in Article 3.2 reflects the Licensing Agreement's objectives that the flow of international trade not be "impeded by the inappropriate use of import licensing procedures" and that "licensing procedures should be no more administratively burdensome than absolutely necessary to administer the relevant measure."170
The United States considered that Korea's discretionary licensing approval regime has trade restrictive effects additional to those created by the approval regime itself, by inter alia imposing severe limitations on the scope of importers' business activities, i.e. confining an individual super- groups' import authority to importation on behalf of a designated set of customers, as well as restrictions on the use and resale of imported beef by the importers' customers.171 The effect of these restrictions can be seen in the substantial decline in the volume of beef imported during 1998. Korea's imports of beef fell from 166,092 to 92,026 metric tonnes (product weight basis) between 1997 and 1998. Thus, just 49 per cent of the available quota was imported in 1998, whereas such imports had comprised fully 99 per cent in 1997. Imports of beef declined vis-Ã -vis Korean beef both in terms of relative quantities shipped and market share as a result of the LPMO's administrative procedures. Thus, whereas production of Korean beef increased by 12 per cent from 236,527 to 264,074 metric tonnes (boneless weight basis) between 1997 and 1998, imports of beef declined by 45 per cent from 166,092 to 92,026 metric tonnes (product weight basis). As a percentage of Korean consumption, imported beef also decreased from 46 to 27 per cent over the same period, while Korean producers increased their market share from 54 to 73 per cent of domestic consumption.
168 Guidelines for Handling Imported Beef, Articles 2.3, 11, 26 December 1999.
169 The Appellate Body found in EC - Bananas III(AB) (paragraphs 193-194) that import licensing
procedures for the administration of tariff quotas are subject to the Licensing Agreement and to the obligations thereby established.
170 Preamble, Licensing Agreement, paragraphs 8 and 9.
171 Operational Guidelines for Imported Beef under the SBS System, Article 12; Guidelines for Handling Imported Beef, 1 October 1999, Article 27.
WT/DS161/R WT/DS169/R
Page 79
The United States submitted that the low volume of beef imported by the LPMO during the first five months of 1999, less than 10 per cent of its quota,172 suggests that the LPMO was again refraining from inviting tenders for beef. In addition, the LPMO withheld over 32,000 metric tonnes, or approximately 22 per cent, of the SBS quota, refusing to allocate it until well into the second calendar quarter of 1999. This action meant that no import licences could be sought for that quota amount, a situation compounded by what the United States understood was active interference in the import approval process. Trade sources reported that the LPMO requested and obtained a reduction of 30 per cent in the import recommendation requests that were made by the super-groups in January 1999. These trade disruptive licensing procedures, viewed cumulatively, had precisely the trade restrictive effect that Article 3.2 of the Licensing Agreement is intended to forestall. The LPMO's licensing procedures during 1998 and 1999, thus, constitute a violation of Article 3.2 of the Agreement.
While the financial crisis that affected much of Asia, including Korea, during 1998 contributed to this decline, the United States was of the view that a substantial portion of this decrease can be attributed to the LPMO operating procedures during 1998 and the first half of 1999, and the restrictions on access to import licences under Korea's regime for importation of beef. Because the LPMO in 1998 still directly controlled 40 per cent of the import quota for beef, its failure to initiate tenders for imported beef until approximately mid-year altogether precluded any possibility that its portion of the quota would be filled that year. Because of the LPMO's role as both importer and administrator of Korea's licensing system, its failure to initiate tenders for imports of beef is, in the opinion of the United States, the equivalent of a refusal to issue import licences, as no import approval for beef within the LPMO's quota share can occur without an invitation for tenders for beef imports.
.In addition, by refusing to reallocate quota share among the super-groups, or to qualify any other entities as super-groups eligible to import beef, the LPMO also reduced the ability of the private sector to utilize its quota share.
Replying to the United States arguments in paragraphs 328-333 above, Korea submitted that it does not operate a 'discretionary licensing system' contrary to the Licensing Agreement. The cases cited by the United States in support of its allegations are, according to Korea, not relevant in the present situation since in all of the cases cited, without exception, there was no legally valid quota or quantitative restriction in place in the importing Member country. The Korean licensing procedures have not had "trade-distortive effects on imports additional to those caused by the imposition of the restriction." Korea reiterated that it applies and administers a quota on beef products, the legality of which is not in dispute. To this end, Korea maintains an import licensing regime which is designed to enable full allocation of the quota and which is in full compliance with Article 3, including Article 3.2. Article 3 recognizes the necessity of non-automatic import licensing procedures as a means of administering restrictions such as quotas and, subject to compliance with the provisions of Article 3 (as well as those of Article 1), recognizes the legality of such procedures. Korea submitted that both the legal and factual arguments advanced by the United States are fundamentally flawed and seriously mischaracterize the import system maintained by Korea. The first mistake in the United States' reasoning is that it appears to equate the mere existence of a non-automatic licensing regime with a violation of Article XI:1. This implication is erroneous. Article 3 expressly recognizes the legality of discretionary licensing systems, subject to compliance with the applicable provisions of that Agreement.
Article 3.2, Korea continued, foresees and sanctions the use of non-automatic licensing procedures in the context of administering an otherwise WTO-consistent restriction. As regards Article XI:1 of GATT, the question of whether Korea's licensing system with respect to enforcing the
172 No other qualified importer, other than the producer-dominated NLCF, entered a comparatively small percentage of its quota share. Many of the super-groups had entered a third or more of their allocation by May 1999.
WT/DS161/R WT/DS169/R
Page 80
beef quota may be termed discretionary is entirely irrelevant, to the extent that the Complainants cannot establish that the licensing system operates as a separate restriction on the importation of beef products additional to the legal quota, and acts to intensify the quota effect. In the opinion of Korea, neither of the Complainants has furnished any evidence that this is the case. In particular, contrary to the assertion by the United States that import approval by the LPMO is "not granted in all cases,"(see paragraph 328) the LPMO has never refused to issue an import recommendation.
Moreover, the assertion by the United States that "[t]he licensing procedures are indeed administered in such a manner as to have restrictive effects on the imports in question" (see paragraph
328) is inaccurate. The so-called restriction of eligibility to apply for import recommendations to the LPMO and super-groups is designed to ensure an efficient and transparent allocation of the available quota and in no way constitutes a restriction within the meaning of Article XI:1 of GATT additional to the restriction imposed in the form of the legal quantitative restriction. The LPMO has consistently purchased its entire allocated quota amount, including during the height of the financial crisis in 1998. With respect to imports of allocated quota share through the SBS system, these imports are effected on the basis of market factors and the import demands of the members of the various super-groups. The import licensing system applied by Korea does not, therefore, in any way constitute a restriction on importation in addition to the legal quantitative restriction applied by Korea.
Furthermore, Korea considered that the United States has not established any causal link between Korean licensing procedures and US loss of market share. The restrictions cited by the United States relate to measures which implement the quota. However, the alleged restrictions do not fall within the scope of the Licensing Agreement. Korea referred to the EC - Poultry case, in which it was clearly established that the complaining party must demonstrate not only trade distortive effects beyond those caused by the imposition of the restriction within the meaning of Article 3.2, but also a clear causal relationship between import licensing procedures maintained by a Member and any injury suffered by the complaining Member. The panel in the EC - Poultry case held that the complaining party had failed to establish that its fall in market share could be attributed to trade-distortive import licensing procedures maintained by the respondent.173
Similarly, the United States seeks to demonstrate the alleged trade distortive effects by reference to the fall in overall import share during 1998 (see paragraph 331). Korea reiterated that this argument substantially underplays the crucial significance of the market conditions prevailing at that time in the context of the Asian crisis. Indeed, the decisive nature of this factor in leading to an overall decreased import share can conclusively be demonstrated by the fact that, while Korea has operated the same or similar licensing procedures for several years, a system which is recognized in the US/Korea Record of Understanding, the quota has, with few exceptions, been fully utilized. In the view of Korea, and referring to the EC - Poultry case, the United States has not established a causal link between import licensing procedures maintained by Korea and a fall in beef imports in 1998.
Furthermore, Korea submitted, the US allegations does not establish that the Korean licensing regime has had "trade-restrictive or distortive effects on imports additional to those caused by the imposition of the restriction" within the meaning of Article 3.2 of the Agreement. In the view of Korea, the United States fails to recognize the distinction between import licensing rules on the one hand, and import licensing procedures on the other hand. While the latter is subject to the disciplines of the Licensing Agreement, the former has consistently been held not to fall within the scope of the Licensing Agreement. Korea referred to EC - Bananas III(AB), in which case the Appellate Body stated that the Licensing Agreement was concerned with the application and administration of import
173 At paragraph 249.
WT/DS161/R WT/DS169/R
Page 81
licensing procedures, and required that this application and administration be "neutral […] fair and equitable."174 The Appellate Body went on to state that:
"As a matter of fact, none of the provisions of the Licensing Agreement concerns import licensing rules, per se. As is made clear by the title of the Licensing Agreement, it concerns import licensing procedures. The preamble of the Licensing Agreement indicates clearly that this agreement relates to import licensing procedures and their administration, not to import licensing rules. Article 1.1 of the Licensing Agreement defines its scope as the administrative procedures used for the operation of import licensing regimes".175
Applying this principle to Article 1.3, the Appellate Body considered the question of whether the imposition of different licensing systems on like products when imported from different Members was prohibited under the Agreement. The Appellate Body (overruling the panel) determined that such a system was related to import licensing rules and not to procedures. It was, therefore, concluded that such a system was not precluded by the Licensing Agreement. This principle was also applied in the EC - Poultry case where, the panel examined claims by Brazil that the EC allocated import licences on the basis of, among others, export performance. The panel, quoting from the EC - Bananas III (AB) Appellate Body report and applying the distinction between import rules and import procedures in the context of Article 1.3, stated that:
"By its very terms, Article 1.3 of the Licensing Agreement clearly applies to the application and administration of import licensing procedures, and requires that this application and administration be 'neutral … fair and equitable'. Article 1.3 of the Licensing Agreement does not require the import licensing rules, as such, to be neutral, fair and equitable. Furthermore, the context of Article 1.3 – including the preamble, Article 1.1 and, in particular, Article 1.2 of the Licensing Agreement – supports the conclusion that Article 1.3 does not apply to import licensing rules."176
With respect to the requirement under consideration in that case, the panel concluded that:
"In our view, the issue of licence entitlement based on export performance is clearly that of rules, not that of application or administration of import licensing procedures. Thus, Article 1.3 is not applicable to this specific issue."177
The general provisions of Article 1 of the Licensing Agreement, Korea continued, shed light on the type of procedures and administrative issues with which the Agreement is concerned. These include the requirement to notify information concerning procedures for the submission of applications, eligibility, the administrative bodies to be approached and the list of products subject to the licensing requirement in order that traders and governments can become familiar with them (Article 1.4(a)); the requirement that application forms or renewal forms should be as simple as possible (Article 1.5); requirements on the minimum time for submitting applications (Article 1.6); the requirement that applications shall not be refused in cases where minor documentation errors have occurred (Article 1.7), etc.
In light of the cases cited above (paragraphs 339-340), Korea submitted that the only issue before the Panel in this case is whether Korea's licensing regime for the quota complied with the administrative procedures set out in the Licensing Agreement. In this regard, the United States has not identified any procedures or administrative elements of Korea's licensing regime that are in any way
174Paragraph 197.
175Ibid.
176 Op.cit. paragraph 197.
177 Paragraph 254.
WT/DS161/R WT/DS169/R
Page 82
contrary to Article 3.2. Moreover, the United States has not established that any of the alleged measures or practices complained of constitute import licensing procedures within the meaning of the Agreement, as opposed to, at most, import licensing rules. Specifically, the system under which licence entitlement occurs in the context of SBS super-groups and the LPMO clearly relates to import licensing rules and not procedures. This element is, therefore, not subject to challenge under the Licensing Agreement. Similarly, the United States has not established how its allegations that constraints are placed on the class of entities which can conduct business with each super-group relate to import licensing procedures covered under the Agreement, or how such alleged procedures are inconsistent with Article 3.2.
In addition, the United States provides an inaccurate characterization of the conduct and role of the LPMO. With regard to the allegation that the LPMO has delayed quota allocations and postponed invitations of tenders (paragraph 333 above), Korea noted that the LPMO has consistently procured the share of the quota attributable to the LPMO, even in the difficult circumstances surrounding the Asian crisis and despite the very considerable foreign exchange losses incurred by the LPMO. While, at the height of this crisis, some unavoidable delays occurred due to collapsing demand and the inability to contain the build-up of beef stocks, this cannot be attributed to import licensing procedures maintained by Korea.
The allegation by the United States that the LPMO discouraged licence approval requests (paragraph 331 above), Korea continued, misrepresents the actual facts. In the Records of Understanding concluded with the United States, Korea has undertaken to progressively expand the role of the SBS system by further increasing the number of super-groups under the system. This was done at the specific request of the United States. It was in furtherance of this objective that the LPMO requested that the super-groups make appropriate adjustments to their import demands, so as to be able to expand the number of participating super-groups. Far from constituting an import licensing procedure having additional trade-restrictive or distortive effects on imports, these actions were undertaken with the specific objective of further liberalizing trade with respect to imported beef. For these reasons, the arguments that Korea violated the Licensing Agreement must be rejected.
The United States retorted that Korea has not substantiated its contention that Korea's licensing authority's delays in tendering for imports and allocation of quota share do not constitute procedures under the Licensing Agreement. The LPMO's decision not to tender for imported beef for the six month period from November 1997 through April 1998 constitutes, in the opinion of the United States, a procedure as that term is commonly construed.178 On the same basis, the withholding of quota allocation for four months at the beginning of 1999 is also a licensing procedure for purposes of the Licensing Agreement. Korea's assertion that there is no causal link between these LPMO procedures and the resulting distortion to trade (see paragraph 337 above) is likewise erroneous. The withholding of quota allocations for new super-groups when several of the super-groups already possessing quota share were on track to fully utilize their distributed shares meant that the new super- groups were denied an opportunity to participate in the market during a period when commercial activity was recovering. The delay in allocation meant that for the period of the delay Korea, in essence, was maintaining the quota at the level set for earlier years despite its Schedule commitment to enlarge the quota on an annual basis. This, according to the United States, resulted in trade restrictions beyond those associated with the quota.
The delay in tendering, the United States continued, kept imports of beef out of the Korean market until tenders resumed in May 1998. It explains in part why the LPMO filled a far smaller percentage of its quota share than some of the super-groups operating under the SBS system. Three of the super-groups, KMIA, LCTM, and KMPA, filled virtually 100 per cent of their quota in 1998. In comparison, the LPMO's late tenders meant that, while the LPMO ultimately tendered for 100 per
178 Cf. The New Shorter Oxford English Dictionary (1993 ed.).
WT/DS161/R WT/DS169/R
Page 83
cent of its allotted quota during 1998, over 30 per cent of the beef for which tenders were invited did not enter Korea until sometime in 1999. The United States submitted that the LPMO's tendering procedures deteriorated further in 1999. Thus, while it's quota share in 1999 is 61,800 MT, LPMO did not tender for 30,000 MT of that total until late in November 1999, ensuring that most of those imports would not enter Korea until sometime in 2000. The LPMO's delayed tendering cannot be attributed to lack of market demand for beef imports since several of the super-groups will fill their 1999 quotas.
Korea's suggestion that the situation of beef imports in the Korean market is similar to the circumstances prevailing in the EC - Poultry case (see paragraph 340), is also unfounded in the opinion of the United States. Whereas imported beef entering Korea declined both in absolute terms and as a percentage of total Korean beef consumption between 1997 and 1998, in the EC - Poultry case Brazil's exports to the EC had remained stable as a percentage of the TRQ and had increased overall. Perhaps more importantly, the EC poultry TRQ was being fully filled. In contrast, imports of beef were held to just 45 per cent of the Korean quota in 1998. Thus, there is no basis for a determination here that trade in imported beef is not distorted within the meaning of Article 3.2 by Korea's procedures in administering its beef quota.
Korea responded that in the EC - Poultry case, Brazil made several claims with regard to import licensing procedures maintained by the EC, including the failure to notify relevant procedures to the Licensing Committee, frequent changes in licensing rules which allegedly made it difficult for traders and governments to become familiar with such procedures, overall lack of transparency and the issuance of licences in economic quantities. Brazil argued that its market share had dropped in recent years and alleged that this was due to the trade-distortive effects of the EC's import licensing procedures, including those mentioned above.
The panel concluded that Brazil had failed to establish that its fall in market share could be attributed to any trade-distortive import licensing procedures maintained by the EC. The Panel noted that:
"[T]he licenses issued to imports from Brazil are fully utilized, which strongly suggests that any trade-distortive effects of the operation of the licensing rules have been overcome by exporters. […] Therefore, we fail to understand the relevance of the decline in the percentage share in total trade to a violation of the Licensing Agreement."179
The panel's findings in the EC - Poultry case on this point were upheld by the Appellate Body.
With reference to the United States arguments in paragraph 346, Korea submitted that these substantially downplay the crucial significance of the market conditions prevailing at that time. Korea stressed again that, while it has operated the same or similar licensing procedures for several years, the quota has, with few exceptions, been fully utilized. The fall in the import share in 1998 is clearly attributable to the severe economic crisis affecting Korea during this period. In the opinion of Korea, the United States has not established that any of the alleged measures or practices complained of constitute import licensing procedures within the meaning of the Agreement, as opposed to import licensing rules. Korea reiterated that the system governing licence eligibility in the context of SBS super-groups and the LPMO clearly relates to import licensing rules and not procedures. As such, they are not subject to challenge under the Licensing Agreement. For these reasons, the arguments that Korea violated the Licensing Agreement must be rejected.
179 EC - Poultry, at paragraph 249.
WT/DS161/R WT/DS169/R
Page 84
CLAIMS UNDER THE AGREEMENT ON AGRICULTURE180
Article 4.2 of the Agreement on Agriculture
Australia noted that Article 4.2 of the Agreement on Agriculture181 has not been the subject of a detailed examination by a WTO panel or the Appellate Body. However, in India - Quantitative Restrictions, the panel found that a range of Indian measures were quantitative restrictions which violated Article XI:1 and Article 4.2 of the Agreement on Agriculture.182 The Appellate Body in EC - Bananas III(AB) also made some comments on the relationship between Article 4.2 and the provisions of other multilateral trade agreements in Annex 1A to the WTO Agreement.183 The panel found that the Agreement on Agriculture does not permit measures which are contrary to the obligations imposed by GATT 1994, except where specifically provided. The relationship between the provisions of the GATT 1994 and of the Agreement on Agriculture is set out in Article 21.1 of the Agreement on Agriculture.184
Article 4.2 expressly prohibits the maintenance, reversion or resort to measures of the kind required to be converted to ordinary customs duties. Footnote 1 of Article 4.2 provides an indicative list of the kinds of measures required to be converted into ordinary customs duties. These include quantitative import restrictions, variable import levies, minimum import prices, discretionary import licensing, non-tariff measures maintained through state-trading enterprises, voluntary export restraints, and similar border measures other than ordinary customs duties.
The provisions of the GATT 1994 apply to market access commitments concerning agricultural products, except to the extent that the Agreement on Agriculture contains specific provisions dealing with the same matter. Therefore, Australia argued, if a measure is a quantitative restriction for the purposes of Article XI:1, then it is also a quantitative restriction in violation of Article 4.2. The approach of the panel in India - Quantitative Restrictions reflects this view. As argued below (paragraph 354), the discharge system for beef imported by the LPMO is a quantitative import restriction and is therefore in violation of Article 4.2 of the Agreement on Agriculture.
Footnote 1 of Article 4.2 also lists non-tariff measures maintained through state trading enterprises as measures of the kind prohibited under Article 4.2. In the view of Australia, the discharge system for beef imported by the LPMO is also a non-tariff measure maintained through state trading enterprises. Furthermore, the maintenance of minimum wholesale prices for LPMO imports and withholding of stocks from sale are non-tariff measures maintained by the LPMO and the NLCF which artificially constrict the supply of imported beef into the market and, as a consequence, restricts imports through delays in holding tenders and deferred shipping dates. Australia added that the measures referred to in paragraph 128 above are also contrary to Article 4.2 of the Agreement on Agriculture since they constitute both quantitative restrictions and non-tariff measures maintained by state trading enterprises and are, therefore, measures of the kind expressly prohibited by Footnote 1 of Article 4.2.
The Complainants noted that during the negotiation of the WTO Agreement on Agriculture, the participants in the Uruguay Round agreed to eliminate their non-tariff barriers to trade in
180 Note: when not otherwise stated, article numbers in this section refer to those of the Agreement on Agriculture.
181 "Members shall not maintain, resort to, or revert to any measures of the kind which have been required to be converted into ordinary customs duties, except as otherwise provided for in Article 5 and Annex 4".
182 Paragraph 5.241.
183 Paragraphs 154-157.
184 "The provisions of GATT 1994 and of other Multilateral Trade Agreements in Annex 1A to the WTO Agreement shall apply subject to the provisions of this Agreement".
WT/DS161/R WT/DS169/R
Page 85
agricultural products and to replace them with tariffs, which would be subject to reduction over time. The Complainants submitted further that Korea has kept in place a number of non-tariff measures that by virtue of the footnote to Article 4.2 should have been eliminated. These measures include Korea's discretionary import approval system, its maintenance of other import restrictions including, but not limited to, the LPMO's establishment of minimum bid prices for imported beef and MAF's prohibitions on the sale and distribution of imported beef outside of the rigid channels of the SBS system. The United States was of the view that Korea's continued maintenance of such measures is inconsistent with Korea's obligations under Article 4.2 of the Agreement on Agriculture.
Korea replied that the Complainants' arguments with respect to Article 4.2 of the Agreement on Agriculture contain the same mistakes presented in their arguments under Article XI:1 of GATT 1994. For the reasons outlined above (see paragraphs 146-156 and 150-153) no prima facie case of violation has been established since no causality was demonstrated between the alleged additional restrictions and the restrictions ensuing from the legal quota itself. Korea submitted that Article 4.2 should be read in conjunction with Article 4.1 which recognizes explicitly that in the Schedules there may be "other market access commitments as specified therein". Korea reiterated that its Schedule LX contains a note 6(e) for beef which provides that Korea benefits from a transition period and is required to eliminate or bring into conformity all remaining restrictions on beef only by 1 January, 2001.
2. Article 6 of the Agreement on Agriculture
De Minimis
Australia submitted that in 1997, Korea provided domestic support to its beef industry which exceeded the de minimis levels and which therefore were required to be included in its calculations of its Current Total Aggregate Measure of Support (AMS). This resulted in Korea's Current Total AMS for 1997 being in excess of its reduction commitments for that year, contrary to Articles 3, 6 and 7 of the Agreement on Agriculture.
The United States argued that Korea's determination that the support it provided to its domestic cattle industry in 1997 and 1998 was de minimis is not consistent with the provisions of Article 6.4.(a)(i) of the Agreement on Agriculture. Korea's failure to include that support in its Current Total AMS for 1997 and 1998 violated the requirements of Article 7.2.(a) of the Agreement on Agriculture. Finally, adding the amount of support Korea provided to the cattle industry into its Current Total AMS for 1997 and 1998, Korea has exceeded its domestic support commitments under the Agreement on Agriculture.
1997
Australia noted that Article 6.4 of the Agreement of Agriculture provides that "A member shall not be required to include in the calculation of its Current Total AMS … product specific domestic support which would otherwise be required to be included in a Member's calculation of its Current AMS where such support does not exceed 5 per cent of that Member's total value of production of a basic agricultural product during the relevant year" and that for developing country members the de minimis percentage under this paragraph shall be 10 per cent.
Australia submitted that in each year that Korea has made domestic support notifications to the WTO, it has claimed that product-specific support for beef was de minimis,185 i.e. not exceeding
185 Article 6.3 provides: "A Member shall be in compliance with its domestic support reduction commitments in any year in which its domestic support in favour of agricultural producers expressed in terms of
WT/DS161/R WT/DS169/R
Page 86
10 per cent of the total value of beef production for that year, even though the notified level of support for beef has increased substantially from 1.12 billion won in 1995 to 195.27 billion won in 1997 and
183.06 billion won in 1998. For this reason, domestic support for beef has not been included in calculations of the Current Total AMS. However, calculations based on figures published by the OECD and the MAF show that for 1997, Korea's domestic support for beef was above the de minimis level and should have been calculated as part of Korea's Total AMS.
Australia noted that Article 1 of the Agreement on Agriculture defines "Aggregate Measurement of Support" and " AMS" as the annual level of support, expressed in monetary terms, provided for an agricultural product in favour of producers of the basic agricultural product or non- product-specific support provided in favour of agricultural producers in general, other than support provided under programmes that qualify as exempt from reduction under Annex 2 to this Agreement, which is:
"with respect to support provided during the base period, specified in the relevant tables of supporting material incorporated by reference in Part IV of a Member's Schedule, and
with respect to support provided during any year of the implementation period and thereafter, calculated in accordance with the provisions of Annex 3 of this Agreement and taking into account the constituent data and methodology used in the tables of supporting material incorporated by reference in Part IV of the Member's Schedule".
With respect to (i) above, Korea has specified no product-specific support for beef in its tables of supporting materials contained in G/AG/AGST/KOR. In relation to (ii) above, product specific support in favour of producers of beef provided in 1997 must be calculated in accordance with the provisions of Annex 3 which presents the methodology for calculating the AMS. The AMS is required to be calculated on a product-specific basis for each basic agricultural product receiving market price support, non-exempt direct payments or any other subsidy not exempted from the reduction commitment. Market price support, such as that provided by Korea to its domestic beef industry, Australia submitted, is to be calculated using the gap between a fixed external reference price and the applied administered price multiplied by the quantity of production eligible to receive the applied administrative price.186 (Cf. paragraph. 420.)
Eligible production
Australia submitted that in its Notification to the Committee on Agriculture for 1997, Korea indicates that eligible production for price support measures for beef was 35,127 tonnes. However, on
Current Total AMS does not exceed the corresponding annual or final bound commitment level specified in Part IV of the Member's Schedule."
Article 6.4 provides:
"A Member shall not be required to include in the calculation of its Current total AMS and shall not be required to reduce:
product-specific domestic support which would otherwise be required to be included in a Member's calculations of its current AMS where such support does not exceed 5 per cent of that Member's total value of production of a basic agricultural product during the relevant year; and
non-product specific domestic support which would otherwise be required to be included in a Member's calculation of its current AMS where such support does not exceed 5 per cent of the value of that Member's total agricultural production.
For developing country Members, the de minimis percentage under this paragraph shall be 10 per cent."
186 Annex 3.8, Agreement on Agriculture.
WT/DS161/R WT/DS169/R
Page 87
the basis of Korea's own conversion rates, Australia submitted that eligible production was in fact 56,615 tonnes of beef based on the eligibility for support of 170,000 cattle in 1997.
Australia considered that Annex 3.8 of the Agreement on Agriculture is unambiguous in its reference to "eligible production" being the basis upon which to calculate levels of domestic support. The definition of "eligible" is "fit, suitable or qualified".187 The calculation of the level of market price support on actual purchases is clearly inconsistent with this requirement and results in a lower level of support for beef than if all production "eligible" for the payment were included. Thus, the eligible production figure used by Korea in its notification should show the number of cattle (or tonnage of beef) that was qualified and could possibly have been purchased under its support programme for 1997. It is not sufficient to show only what was actually purchased in that period. On this basis Australia continued, market price support for beef in 1997 was 281.9 billion won, rather than the 194.2 billion won notified by Korea. Adding the 1.09 billion won in other budgetary outlays for beef notified by Korea in G/AG/N/KOR/18, this pushes Korea's total AMS for beef in 1997 to
282.9 billion won rather than the 195.27 billion won notified.
Australia and the United States noted that in 1997, the domestic support programme for beef began on 26 January when the Korean government started to purchase cattle to prevent the falling of cattle prices. The programme continued throughout 1997 (340 days) with 500 head of 500 kg. Hanwoo steers (cattle) at 2,400 thousand won per head, per day, eligible to be purchased by NLCF and KCSC. Under the most conservative approach, therefore, eligible production should be no less than the quantities announced by MAF as eligible for daily procurement, which in this case would be 170,000 head of Hanwoo steers (500 head per day x 340 days). This quantity, [170,000 head of 500 kg. steers,] would yield 52.615 thousand tonnes of beef, carcass basis, and not the 35,127 tonnes announced by Korea in its notification to the Committee on Agriculture for 1997.188 Therefore, Korea's 1997 market price support should have been calculated as follows:
AAP (1,000 won/tonnne) | FERP (1,000 won/tonnne) | EP (1,000 tonnes) | Market Price Support (billion won) | Quality Incentive Programme (billion won) | TOTAL Support for Beef (billion won) |
7,754 | 1,823 | 52.615 | 312.082 | 1.09 | 313.173 |
Australia submitted that it cannot agree with Korea's claim that the words "quantity of production eligible to receive the applied administered price'' in Annex 3:8 can be interpreted to mean actual procurement. Presumably, if the drafters of the Agreement had intended actual procurement rather than eligible production, they would have chosen those words instead, since the words eligible and actual have clearly different meanings. Australia noted Korea's statement in paragraph 384 that its market price support also extended to dairy and hybrid cattle. Australia, therefore, assumed that production eligible for support is even higher than that shown by Australia. Nor does Australia accept Korea's claim that its determination of eligible production is consistent with the methodology applied in its tables of supporting materials incorporated by reference in Part IV of its Schedule. The fact remains, that domestic support programmes for beef do not appear in Korea 's supporting materials. This being the case, the methodology provided in Annex 3 of the Agreement on Agriculture must apply.
Furthermore, the Complainants concurred with the analysis provided by New Zealand on the concept of eligible production in paragraph 479.
187 Collins Concise Dictionary, William Collins and Son, page 403.
188 (170,000 x 500 kg. = 85 million kg. beef live basis, multiplied by 61.9 per cent = 52,615,000 kg. or 52.615 thousand tonnes beef.)
WT/DS161/R WT/DS169/R
Page 88
In the opinion of Australia, Korea has not substantively rebutted the definition of "eligible production" claimed by Australia. Eligible production is not actual production as claimed by Korea. Korea has failed to provide any alternative definition of the term "eligible production". The fact that Korea has always used actual production figures to calculating the base AMS is irrelevant given the specific requirements of the Agreement on Agriculture. Australia noted that Korea did not provide product specific support for beef in the base period and consequently it can not be claimed that the way that beef is calculated is consistent with the approach to base period calculations. Australia supported the views expressed by New Zealand that, in the absence of a calculation for product specific support for beef in the base period, there is no "constituent data and methodology" for beef contained in Korea's Schedule. Hence, Annex 3 of the Agreement on Agriculture needs to be the starting point for determining the appropriate calculation method of the support level for beef.
The United States submitted that Korea also has disregarded the prescriptions contained in Annex 3 of the Agreement regarding the manner of calculation of current total AMS for beef. Despite the mandatory direction in paragraph 8 of Annex 3 that the calculation of domestic support be based on total eligible production, Korea instead computed domestic support for beef based on actual procurement. Korea's approach, thus, also contravenes Annex 3. Korea offers no reasons to justify its substantial departure from the methodology set forth in Annex 3 of the Agreement.
Eligible production means, the United States continued, either total production or, in those situations where a specific quantity is identified as subject to support, the entire amount so designated, regardless of the quantity actually purchased. This computational method is necessary because market price support is meant to measure the effect of government policy on agricultural producers, rather than the cost of the measure to government. This method of calculating a subsidy's effect, moreover, is consistent with the Appellate Body's finding under the Subsidies Agreement in the Aircraft dispute where the Appellate Body concluded that the existence of a subsidy benefit is determined based on the benefit to the recipient, not the cost to the government.
Referring to the arguments in paragraph 363, 368 and 369, Korea noted that the distinction between "eligible" and "actual" production is somewhat imaginary in the case of Korea's measures. The production which is "eligible" is the production for which there is "actually" money available to receive the applied administered price. Production which cannot "actually" receive the administered price is, in Korea's view, also not "eligible" to receive the administered price. In simple terms, [for example,] if Korea has a budgetary outlay which allows it to actually purchase 1,000 heads of live cattle, it seems logical to conclude that 1,000 heads of live cattle were actually eligible. It would be absurd to hold that Korea should have reported all heads of live cattle in Korea in this calculation as the eligible production on the basis of the fact that any cow in Korea could have been among those 1,000 heads of live cattle which could be actually purchased and, therefore, was theoretically "eligible". This would contravene the language in paragraph 8 of Annex 3 that it should be the "quantity of production eligible to receive the applied administered price", because not all live cattle in Korea could actually receive the administered price. The quantity of production which actually received the applied administered price was obviously also the quantity of production which was actually "eligible". The term "applied administered price" also indicates that it refers to money actually spent and prices actually applied. This is further confirmed by the material produced by the GATT Secretariat during the Uruguay Round, quoted in the submission by New Zealand as: "For an open-ended intervention or buy-in scheme, this [eligible production] may be total production. If the scope of the measure is limited to a particular quantity, it is this limited quantity that should be used."189 Due to its limited budget, Korea continued, Korea does not apply an open-ended intervention or buy-in scheme, but the scope of the measure is limited to particular quantities in accordance with the limited budget available. Accordingly, it is appropriate to refer to the limited quantity which is actually eligible to receive the applied administered price.
189 See paragraph 479.
WT/DS161/R WT/DS169/R
Page 89
Australia submitted that the calculation of whether an amount of product specific domestic support is de minimis is done by calculating the ratio of support to the total value of production of that commodity. While the total value of production for beef in 1997 is not shown by Korea in its notifications, a 1997 figure is available from the OECD, which calculates the total value of domestic beef production for that year at 1,886 billion won.190 The OECD calculation is based on the carcass weight equivalents for domestic beef production and farm gate prices, using MAF and NLCF information.
Australia further submitted that the data used by Australia was sourced from the OECD. The OECD data is publicly available and is a transparent calculation of the value of production. It should also be noted that the OECD calculation is based on data provided by Korea to the OECD. Korea indicates that the total value of production is "calculated based on actual sales prices of the live cattle sold by the producers at 80 livestock markets in producing areas" (see paragraph 387). However, Korea has not provided either the methodology or any raw data to show how it reached this alternative figure. Korea further indicates that the "government official statistical data is calculated through a precise statistical technique" (see paragraph 388). Australia believes there is a clear burden of proof on Korea to demonstrate why the data used by Australia and the United States is not the appropriate method to calculate the total value of production.
Referring to Korea's claims that there is no requirement to include the total value of production in the Committee on Agriculture notifications (G/AG/2)( see paragraph 387), Australia contended that the notification requirements under the Committee on Agriculture do not stem from the binding obligations under the Agreement on Agriculture. Rather, these notification requirements were agreed to assist the Committee to undertake the review of implementation of commitments set out in Article 18 of the Agreement on Agriculture. Whether the notification requirements require total value of production data to be included is not relevant. Article 6.4 of the Agreement on Agriculture provides for Members to be able to exclude from the AMS calculation support which is below de minimis levels. In the case of Korea, a developing country, the de minimis level is set at ten per cent of the total value of production of a basic agricultural product for product specific support. The right of Members to claim that support is de minimis is not disputed, this is clearly the intention of Article 6.4. If, however, a Member claims that the support level is de minimis, there is a clear obligation that the Member is required to provide the necessary data to substantiate the claim. Without this information other Members have no way of assessing the validity of claim.
The total value of beef production used in Korea's notification to the OECD for the calculation of the producer subsidy equivalent (PSE) for beef is, in the opinion of the United States, a more accurate measure for determining de minimis status. The value of production used by the OECD is carcass weight equivalent at the farm gate level. The OECD method is a well-established and universally accepted method for calculation of total production value. According to the OECD data, Korea's 1997 value of beef and veal production was 1.886 billion won. Using the formula in Article 6.4.(a)(i) of the Agreement on Agriculture, dividing 1.886 billion won value of 1997 beef production into the 313.173 billion won of support for beef results in a quotient of 16.61 per cent (cf. paragraph 372). Accordingly, had Korea implemented the provisions of Article 6.4.(a)(i) of the Agreement on Agriculture, it would have determined that the support it provided to the cattle industry in 1997 was not de minimis.191 Under Article 7.2.(a) of the Agreement on Agriculture, that support
190 OECD Review of Agricultural Policies in Korea, 1999, pages 146, 148.
191 On a live animal basis, the calculation used to determine whether the support was de minimis would be as follows:
2.4 million won/head (AAP) - 543,456 won/head (FERP) x 170,000 head (EP) = 315.6 billion won (Market Price Support for Live Cattle) + 1.90 billion won Quality Incentive Program =
316.7 billion won total support for cattle. 316.7 billion won divided into 1.886 billion won (value of production) = 16.79 per cent
WT/DS161/R WT/DS169/R
Page 90
should have been included in Korea's Current Total AMS calculations for that year, which would have resulted in Korea failing to meet its reduction commitment for 1997.
The United States considered that Korea had not included the total value of beef production in its 1997 notifications. The value of 2.105 billion won was eventually provided at the request of the United States and other countries. However, this was the value for 1996 production.192 It appears likely that it is based on the average wholesale carcass price for beef. Since Korea's price support programme actually supports the price of live cattle, the appropriate total value of production should be the farm gate price for cattle. Use of carcass price at wholesale markets would overstate the value by incorporating costs of slaughter, as well as any other value added.
Using its alternative figure for eligible production and the OECD figure for the total value of production, Australia submitted that domestic support for beef in 1997 was 15.47 per cent of the total value of production. For this reason, domestic support for beef should have been included in Korea's calculations of its AMS for that year. Australia noted that even using Korea's own figures for eligible production and the OECD figure for the total value of production, domestic support for beef was
10.35 per cent of the value of total production and should likewise have been included in Korea's Current Total AMS calculation for 1997.
As concerns the total value of production, Australia contended that it used the OECD figure because the methodology is clear and is based on data provided by the Korean government itself. Australia also used the OECD calculation in the absence of a reference to the total value of production in Korea's domestic support notification to the WTO for 1997. Australia acknowledges that Korea has now supplied a figure which it considers represents the total value of production. However, Korea has not provided either the methodology or any raw data to show how it reached this alternative figure.
Australia contended that Korea's 1997 market price support should have been calculated as follows:
1997 Calculation of Market Price Support for Beef | |||||||
A | B | C | D | E | F | G | |
AAP (1) (000 on/MT) | FERP (2) (000 won/MT) | EP (3) (000 MT) | MPS (A-B)*C billion won | Other Support (4) billion won | Value of Production (5) billion won | Support as a % of production | |
Beef | 7351.1 | 1,823.0 | 52,615 s | 290.9 | 1.09 | 1,886.5 | 15.47 |
Notified by Korea | 7,351.1 | 1,823.0 | 35,127 | 194.18 | 1.09 | 1,886.5 | 10.35 |
Source: G/AG/N/KOR/18, supporting table DS:5.
MT = metric tonne.
Programme operated from 26 January to 31 December, 1997 with authority to purchase 500 head per day. (340 days x 500 head per day = 170,000 head). Converted to beef tonnage using carcass conversion rate of 61.9 per cent.
Source: G/AG/N/KOR/18, supporting table DS:7.
OECD Review of Agricultural Policies in Korea1999; Annex 7, pages 146-148.
minimis.
Under Article 6.4(a)(i) of the Agreement, any quotient of 10 per cent or higher would not be de
192 See 25 January 1999, Summary report, Meeting of 17 November 1998.
WT/DS161/R WT/DS169/R
Page 91
Applied administered price and fixed external reference price
Australia contended that it's calculations did not factor in anomalies relating to Korea's calculations of the applied administered price or the fixed external reference price raised by the United States and New Zealand. This is because the correction of these anomalies did not in Australia's opinion materially affect the outcome - that Korea has exceeded de minimis levels of support for beef. However, Australia considered that these are important issues for determination by the Panel in its deliberations on the methodology that Korea is required to use to calculate its domestic support for beef. Australia considered that the Agreement on Agriculture, in particular Annex 3 of that Agreement, provides the methodology which must be followed by Korea. The result of Korea's failure to calculate domestic support for beef correctly resulted in its subsequent failure to include this support in its calculation of its total AMS for 1997. When beef is included, Australia has shown that Korea exceeded its total permitted support levels for 1997 by 191.2 billion Won.
The United States submitted that when the beef AMS for 1997 (based on beef, not live cattle) is included in Korea's Current Total AMS for that year, Korea exceeds the level of domestic support contained in its Schedule (those identified in both data series in Column 2 of its Schedule). As explained in paragraph 420, the United States continued, Korea posited two distinct AMS amounts for 1997: 2,028.65 billion won and 1,650.03 billion won.193 Korea's Current Total AMS for 1997 was 1,936.95 billion won.194 Adding the 1997 beef AMS (313.17 billion won), which Korea omitted as de minimis to Korea's Current Total AMS for 1997, increases the latter to 2,250.12 billion won, significantly more than either of the AMS figures set forth in Korea's Schedule for 1997. Accordingly, Korea exceeded the level of domestic support provided for in its reduction commitments for 1997 and, thus, violated Articles 3.2. and 6.3 of the Agreement on Agriculture.
Korea did not use the 1986 to 1988 base years to calculate the FERP as required by Annex 3.11 of the Agreement on Agriculture, the United States continued. Further, Korea did not use the 1986 to 1988 base period for calculating the AAP. The United States submitted further that Korea's calculations are incorrect for several reasons including the use of values for beef production rather than cattle production and an erroneous amount for eligible production. With regard to 1997, in calculating the AAP of 7,351.10 thousand won per tonne of beef (presumably carcass basis), Korea uses an average price per kilogram based on actual purchases. Korea's programme called for the purchase of live cattle at a price of 2,400 thousand won per head for a 500 kg. steer. However, Annex 3, paragraph 7, of the Agreement on Agriculture specifies that "The AMS shall be calculated as close as practicable to the point of first sale of the basic agricultural product concerned." Even if we were to accept Korea's conversion of the live cattle procurement to a beef basis, the calculation is still flawed, the United States continued. According to MAF data, the conversion of live weight to carcass basis for steers is 61.9 per cent.195 Therefore, the AAP for 1997 should have been 7,754.4 thousand won per tonne.
The United States submitted that Korea's 1997 market price support should have been calculated as follows:
193 Schedule LX, Part IV, Section I at I-1 and Korea's notification, Table DS:1 at 1 (G/AG/N/KOR/18) 16 September 1998.
194 Korea’s notification, Table DS:1 at 3 (G/AG/N/KOR/18).
195 Conversion rate per "Major Statistics for Agriculture and Forestry", Republic of Korea Ministry of Agriculture and Forestry, 1999, page 328. (2,400 thousand won/500 kg. steer = 4,800 thousand won per tonne live basis; divided by 61.9 per cent = 7,754.4 thousand won per tonne carcass basis.)
WT/DS161/R WT/DS169/R
Page 92
AAP (1,000 won/tonne) | FERP (1,000 won/tonne) | EP (1,000 tonnes) | Market Price Support (billion won) | Quality Incentive Programme (billion won) | TOTAL Support for Beef (billion won) |
7,754 | 1,823 | 52.615 | 312.082 | 1.09 | 313.173 |
Concerning the Complainants arguments in paragraph 360 et sequitur that Korea's domestic support for beef in 1997 was not de minimis, Korea submitted that it's calculation of the AMS for the domestic cattle purchase programme for 1997 was correct. Korea explained that it's cattle purchase programme was based on actual purchases at the standard price of 2,400 thousand won per head for a 500 kg. steer. The said programme was implemented not only for the Hanwoo but also for dairy cattle and hybrid cattle of Cheju Island and an amount different from that for Hanwoo beef was applied as well. To calculate the market price support, the AAP and the FERP are computed on the basis of carcass weight even though live cattle is purchased. Korea's live cattle purchase programme in 1997 was implemented as follows:
Domestic cattle (live cattle):
88,891 head multiplied by average weight 564.1 kg. multiplied by 61.91 per cent (the conversion of live weight to carcass basis for Hanwoo steers) = 31,043,528 kg.
Dairy cattle (carcass):
9,150 head multiplied by average weight 385.5 kg. = 3,527,838 kg.
Hybrid cattle of Cheju Island (live cattle):
1,500 head multiplied by average weight 639.4 kg. multiplied by 57.9 per cent (the conversion of live weight to carcass) = 555,359 kg.
(i) plus (ii) plus (iii) equals 35,127 tonnes.
Korea accordingly purchased Hanwoo steers at a price of 4,800 thousand won per head, dairy cattle at market prices and Cheju Island hybrid cattle at a price of 3,800 thousand won per head. The total amount required for the purchase programme was 258,221,547 thousand won.
Hence, the AAP is calculated as follows:
258,221,547 thousand won divided by 35,127 tonnes equals 7,351.1 thousand won/ton.
The external reference price of beef is 1,823 thousand won/ton and, therefore, the market price support is calculated as follows:
(7,351.1 thousand won/ton-1,823 thousand won/ton) X 35,127 tonnes = 194.18 billion won.
If the 1.09 billion won for the Quality Improvement Programme is included, the AMS for cattle is
195.27 billion won.
As pointed out by the Complainants, Korea has been using actual purchase quantities, or the actual eligible quantities, as eligible production for calculation of the market price support amount. Korea noted that it also computed its Base AMS and annual reduction level, by using actual purchase quantities in preparing Part IV of the Uruguay Round Schedule LX. This Schedule has been reviewed
WT/DS161/R WT/DS169/R
Page 93
by the Member countries. Referring to Article 1(a)(ii) of the Agreement on Agriculture which specifies that the AMS shall be calculated in consideration of the "constituent data and methodology used in the tables of supporting material incorporated by reference in Part IV of the Member's Schedule", Korea was of the view that it has adequately implemented its reduction commitment since a method identical with that of the Schedule LX has been used.
With regard to the support amount, Korea continued, the WTO notification form did not provide for the inclusion of the total value of production Furthermore, Korea pointed out that the total value of production is not calculated on the basis of the wholesale carcass price for beef, as the Complainants argued (see paragraph (iii)376), but on the basis of the actual sales price of live cattle sold by the producers at 80 livestock markets in producing areas.
Referring to the OECD figures presented by the Complainants (paragraphs 372 and 375 ), according to which the 1997 value of Korean beef and veal production was 1,886 billion won, Korea replied that the OECD values are provisionally estimated values. In calculating the OECD values, the production quantity was based on the weighted average of the carcasses of locally produced beef. The production price was the amount adjusted to convert the average price of beef traded in three wholesale markets in Seoul to the price at the farm gate. Accordingly, estimated values computed on the basis of such assumptions are not as accurate as the government's official statistical data calculated through a precise statistical technique. Korea submitted that its 1997 value of cattle was 2,107 billion won. Hence, the AMS for cattle in 1997 did not exceed 10 per cent of the total value of cattle production and Korea's 1997 Current Total AMS did not exceed its reduction commitment level specified in Schedule LX.
Another argument, Korea contended, set forth in particular by New Zealand196, is that Korea should have based the fixed external reference price for beef on 1986 to 1988 c.i.f. unit values. Korea has based the fixed external reference price on the average c.i.f. unit values for beef imported in the period 1989-1991, because Korea has used the 1989 to 1991 base period in its Schedule (with the exception of rice for which 1993 has been used as the base period). Again, in accordance with its obligations under Article 1 (a)(ii) of the Agreement on Agriculture, Korea has taken into account the methodology and data used in its Schedule to calculate its support in 1997 and 1998 on a comparable and consistent basis. Further, Korea pointed out that since beef imports were prohibited for most of the period 1986-1988 in Korea, no foreign beef was imported during that period. Accordingly, it is impossible for Korea to calculate the fixed external reference price on reliable and representative data on c.i.f. unit values for the period 1986-1988. Finally, because the applied administered price under Korea's cattle purchase programme is calculated by converting live cattle to carcass, the administered price and fixed external reference price are at the same stage of processing and it is not necessary to convert the fixed external reference price to live cattle as argued by New Zealand.197
(v) 1998
Furthermore, Korea's Total AMS commitment for 1998, the United States submitted, appears to be 1,951.70 billion won.198 Korea notified the Current Total AMS for 1998 as 1,562.77 billion won.199 Adding the correct amount of 919.2 billion won of beef support for 1998, because, in the opinion of the United States, it is not de minimis, results in a Current Total AMS of 2,481.97 billion won. In addition, Korea incorrectly calculated its rice AMS for 1998, understating
196 See paragraphs 472-476.
197 See paragraph 476. (It is also not clear to Korea why necessarily Korean slaughtering costs, rather than slaughtering costs in the country of origin of the beef for which c.i.f. unit values are determined should be
used in this exercise by New Zealand).
198 1998 notification at Table DS:1, column 1.
199 Ibid at column 3.
WT/DS161/R WT/DS169/R
Page 94
the rice AMS by approximately 280 billion won meaning that its Current Total AMS for 1998 should be 2,761.97 billion won. As in 1997, Korea's correct Current Total AMS for 1998 exceeds both of the AMS reduction levels reflected in Schedule LX, Part IV. Thus, for 1998, Korea violated the domestic support reduction commitments contained in Articles 3.2 and 6.3 of the Agreement on Agriculture, as well.
As concerns the year 1998, the United States argued that the price and animal eligibility criteria for Korea's cattle procurement programme appear to have changed as follows:
July 8: The procurement price is lowered to 1,900 thousand won per 500 kg. steer, and size parameters changed to include medium size (300-399 kg.) steers.
July 16: Procurement price is reduced to 1,800 thousand won per 500 kg. steer.
July 19: Eligibility is limited to "small-medium" (200-399 kg.) Hanwoo steers.
July 27: Eligibility is increased to 600 head per day of which 250 would be "half- grown" animals (200-350 kg.), and 350 would be small-medium steers.
Under these parameters, 125,000 head of various size Hanwoo steers were eligible for Korea's domestic support programme in 1998. Market circumstances and Korea's modifications to the programme suggest that actual procurement may have been near the maximum eligible.
Moreover, the United States noted that Korea does not include in its notification of Current AMS for 1998 several other beef support programmes that were implemented in that year.200 These programmes include a Calf Production Stabilization Programme implemented in certain parts of the country in June of 1998, and expanded to the entire country in August of 1998; the purchase of breeding cows on Cheju Island, and support provided through the delay of loan repayments for up to three years.201 Up to 5,000 head of breeding cows were to be purchased on Cheju Island for 3,000 won per kilogramme, 570 billion won was spent for loan extensions, and 150 billion won was spent for a supplemental livestock management fund.202 In addition, the United States continued, according to the 1998 "Korea Livestock Yearbook" published by the Agriculture, Fisheries and Livestock News, 8.6 billion won was budgeted for the calf production stabilization programme. Though these may be incorrectly included in the "non-product specific support" supporting table of Korea's 1998 notification, the extent of these programmes based on this information appears to be in excess of what was reported.203 The United States considered, therefore, that the 183.06 billion won that Korea notified to the WTO as domestic beef support in 1998 understates the actual value of support provided. An additional 737.5 billion won should have been reported, bringing total beef support to at least 919.2 billion won to account for the programmes listed above.
Furthermore, the United States continued, Korea did not include the total value of beef production for 1998 in its domestic support notification. Upon questioning by WTO Members, Korea provided a value of production that Korea claimed to represent the 1997 value of production. However, as with the previous year, the United States was of the opinion that this value is not for the
200 These other programmes consisted of the following: Quality Improvement Subsidy (as notified):
1.4 billion won; Purchases of Cheju Island breeding cows: 7.5 billion won; Calf production stabilization programme: 8.6 billion won; loan extensions: 570.0 billion won; Supplementary Livestock Management Fund:
150.0 billion won. These additional programmes involved support equal to a total of 737.5 billion won.
201 See, "Calf Production Stabilization System to be in place on a trial basis", 30 June 1998, in "Agriculture, Livestock and Fishery News", and "Government to compensate the Difference if the Price of Calves Falls below 700,000 Korean won," Chosun Ilbo (12 August 1998), and MAF June 1998 Press Release. June 1998 Press Release, News Articles dated 2 February 1998, 30 June 1998, and 2 August 1998.
202 The loan deferment and supplemental livestock management fund probably also applied to livestock
other than cattle, so the cattle numbers may be overstated. Until the Korean government is responsive to request for specific information, the amounts dedicated to cattle only remains unknown.
203 See 1998 notification at Supporting Table DS:9.
WT/DS161/R WT/DS169/R
Page 95
correct time period, nor is it calculated correctly. No OECD data for purposes of calculating Korea's PSE for beef is as yet available for 1998. The only known published value of Korean beef production for 1998 was provided in a seminar sponsored by the Korean Meat Industry Association's Meat Journal on 2 April 1999. According to materials provided at the seminar, the value of Korean beef production in 1998 was 1.8106 billion won.204 Using the formula in Article 6.4 (a)(i) of the Agreement on Agriculture, dividing the 919.2 billion won of support for beef by the 1.8106 billion won value of 1998 beef205 production results in a quotient of 50.77 per cent or
51.92 per cent on a live cattle basis. Therefore, (on the basis of the data provided at the Meat Journal seminar), it appears that Korea's support to the beef industry was not de minimis in 1998, either. Hence, Korea failed to meet its reduction commitment for domestic support for 1998. The level of support provided is thus inconsistent with Korea's obligations under the Agreement on Agriculture.
Korea's cattle purchase programme was implemented again in 1998 for Hanwoo, dairy cattle and hybrid cattle of Cheju Island. However, there were several changes in the cattle purchase programme, as mentioned by the United States above (paragraph 391) Until completion of the cattle purchase programme on 31 August, 1998, Korea's cattle purchase programme in 1998 was implemented as follows:
Total purchase quantity:112,774 head or 35,899,193 kg.
(1) | Hanwoo (live cattle): | 98,941 head or 31,444,756 kg. |
- Large steer: | 70,565 head multiplied by 589.29 kg./head multiplied by 61.9 per | |
cent (carcass rate) = 25,740,031 kg. | ||
- Medium steer: | 19,925 head multiplied by 362.97 kg./head multiplied by 58.6 per | |
cent (carcass rate) = 4,238,056 kg. | ||
- Medium cow: | 8,451 head multiplied by 296.16 kg./head multiplied by 58.6 per cent | |
(carcass rate) = 1,466,669 kg. | ||
(2) | Hanwoo (carcass): | 9,601 head multiplied by 335.97 kg./head = 3,225,648 kg. |
(3) | Dairy steer (carcass): | 668 head multiplied by 308.84 kg./head = 202,965 kg. |
(4) | Hybrid cow: | 3,564 head multiplied by 481.32 kg./head multiplied by 59.8 per cent |
(carcass rate) = 025,824 kg. |
Total purchase amount: 247,098,680 thousand won.
Accordingly, Korea submitted, the AAP is 6,883.2 thousand won/ton. Therefore, the market price support is calculated as follows: (6,883.2 thousand won/ton minus 1,823 thousand won/ton) multiplied by 35,899 tonnes = 181.66 billion won.
Replying to the United States argument concerning the Calf Production Stabilization Programme in 1998 (paragraph 392), Korea explained that 3 billion won was budgeted for that programme in 1998 but the actual payments under the programme to individual farmers started only in January 1999. Therefore, in Korea's view, this programme should not be included in the notification of 1998. As concerns the United States argument in respect of the Cheju Island breeding cow procurement programme (paragraph 392), Korea asserted that such a programme was never implemented in Korea. The United States possibly mistook the purchase of the hybrid cattle of Cheju Island in the above mentioned purchase programme as the breeding cow purchase programme. Korea has included the purchase of the hybrid cattle of Cheju Island in its AMS for cattle.
204 The Meat Journal is published by Choon-Shil Hwang and was registered as a magazine on 3 December 1991. The Journal’s address is: Meat Journal Building, fourth floor, 221-31, Soongnap-dong, Songpah-ku, Seoul. Home page: HTTP:/www.meat.co.kr.
205 This calculation uses the same value of beef production for both 1997 and 1998.
WT/DS161/R WT/DS169/R
Page 96
As concerns the delay in loan repayments mentioned in paragraph 392, Korea stated that this was only planned. The actual amount of loan extensions for the purpose of relieving economic hardships facing livestock farmers totaled 435.6 billion won out of the originally planned 570 billion won. The amount was 68 billion won under the Livestock Development Fund, 41.2 billion won under the special account fund for rural development and 326.4 billion won under livestock management funds. Since they were all loans, Korea included these in its AMS notification for 1998. The calculation of the AMS for the loans is (market interest rate on loan minus average interest rate on loan) multiplied by loan amount multiplied by average loan period, and the result is 19.3 billion won. Of the total loan extension amount, 14.5 billion won under the livestock management fund was included as a non-product specific support in the notification.206 The remaining 4.8 billion won under the livestock development fund and special account fund for rural development was included as a Green Box support in the same notification.207 Of the total amount of 150 billion won which was originally planned to be spent by the Livestock Management Fund, 146 billion won was spent. Moreover, this amount was for loan interest subsidy for livestock farming and this corresponded virtually to loan extensions. Therefore, the AMS for the loan is 6.5 billion won208, and is included as a non-product specific support in the same notification.209 Finally, including the 1.4 billion won of the Quality Incentive Programme in 1998, the AMS for cattle was 183.06 billion won. Korea's 1998 total value of cattle production is 1,836 billion won. Accordingly, Korea's 1998 AMS for cattle represents 9.97 per cent which is de minimis.
The 183,06 billion won that Korea notified to the WTO, Korea continued, was the exact amount and the argument of the United States that an additional 737.5 billion won should have been reported is erroneous. Further, referring to the arguments in paragraph 393, Korea explained that the reason for Korea to provide 1997 data is because Korea's official statistics for total value of cattle production require some time to be computed and the calculation method is based on accurate data calculated on the basis of actual sales price of live cattle realized at the cattle source markets throughout the country. The data presented at the seminar mentioned by the United States is nothing but an estimated value for reference announced by an individual.
In conclusion, Korea's 1998 AMS for cattle is 183.06 billion won which represents 9.97 per cent of 1,836.1 billion won being the total value of cattle production for 1998 and such value is de minimis. Accordingly, Korea's 1998 Current Total AMS of 1,562.77 billion won does not exceed 1,951.7 billion won being the commitment level as provided in Schedule LX.
Regarding the issue of total value of production as a basis for compliance with the de minimis percentage, Korea recalled the United States assertion that it derived the total value from information contained in the OECD data. However, as Korea explained in paragraph 388, the data provided by Korea on its total value of production come from the official statistics which Korea's statistical authority has produced on the basis of farm gate prices identified with respect to 80 livestock markets in producing areas across the country. In contrast, Korea wishes to highlight that the OECD data are only estimates that had been produced based on the prices prevailing in a limited number of wholesale markets in Seoul.
206 Loan interest subsidy for livestock farming in Supporting Table DS:9, G/AG/N/KOR/24.
207 Infrastructural services and structural adjustment assistance provided through investment aid in supporting table DS:1.
208 Market interest rate on loan-average concessional interest rate on loan) x loan amount x average loan period.
209 Loan interest subsidy for Livestock Farming in Supporting Table DS:9.
WT/DS161/R WT/DS169/R
Page 97
Annex 3 of the Agreement on Agriculture
The United States submitted that Korea attempts to justify its violation of its reduction commitments by arguing that its inclusion of an erroneous approach in its Schedule removes it from challenge is untenable in light of paragraph 3 of the Marrakesh Protocol which provides:
The implementation of the concessions and commitments contained in the schedules annexed to this Protocol shall, upon request, be subject to multilateral examination by the Members. This would be without prejudice to the rights and obligations of Members under Agreements in Annex 1A of the WTO Agreement. (emphasis added)
The Agreement on Agriculture is one of the listed Agreements. Korea's inclusion of an erroneous methodology in its Schedule and supporting material cannot nullify the rights of other Members under the Agreement or diminish Korea's obligations under the Agreement.
Furthermore, the United States was of the opinion that Korea exceeded the commitment level for 1997, regardless of which base computation is used. Based on the data supplied by Korea, it appears that the eligible production for 1998 may be higher than reflected in the calculations the United States has provided (see paragraphs 390-393). The United States at that time had believed that actual and eligible production for that year may have been the same. Now it appears that dairy steer and hybrid cows may have also been eligible for the support, which would increase the current total AMS for beef. Also, Korea has incorrectly computed the fixed external reference price by relying on a price that is not specified at an equivalent stage of processing as that used for establishing the applied administered price. The resulting apples to oranges comparison distorts the result. The United States referred the Panel to the discussion of this issue made by New Zealand.210
Korea, referring to the United States' arguments in 358, submitted that those does not really contradict Korea's position. Indeed, it is precisely the Agreement on Agriculture itself which clearly provides in Article 6.3 and Article 3.2 that compliance should be judged by reference to the commitment levels specified in Part IV of a Member's Schedule, rather than the general calculation methods set forth in Annex 3 of the Agreement on Agriculture. As concerns the arguments in paragraph 425, Korea submitted further that it is the United States rather than Korea which negates the provisions of the Agreement on Agriculture. Article 1(a) of the Agreement on Agriculture explicitly defines, first, that for the base period it is the support "specified in the relevant tables of supporting material incorporated by reference in Part IV of a Member's Schedule" which is decisive. It is not disputed that the base periods used by Korea are clearly identified in the supporting Table 6 of Part IV of Korea's Schedule.
Second, Korea continued, with regard to the "support provided during any year", Article 1(a)(ii) clearly contradicts the arguments by the Complainants that these should be based exclusively on the Annex 3 methodology, but specifies that in addition to the provisions of Annex 3, one should also take into account "the constituent data and methodology used in the tables of supporting material incorporated by reference in Part IV of the Member's Schedule." If the Agreement on Agriculture intended to provide that only the methodology set forth in Annex 3 could be considered and used, it would be inappropriate and superfluous to define in Article 1(a)(ii) the need to take into account in addition the data and methodology used in the supporting tables. Nor would Annex 4 to the Agreement on Agriculture exist which provides for alternative calculation methods "where market price support as defined in Annex 3 exists but for which calculation of this component of the AMS is not practicable." Korea submitted that the Agreement on Agriculture also explicitly recognizes the possibility of "differential and more favourable treatment" for developing country
210 See paragraphs 468-476.
WT/DS161/R WT/DS169/R
Page 98
Members as embodied in their Schedule of Concessions, as well as the fact that there is scope for
"flexibility" to implement reduction commitments over a period of up to ten years.
Furthermore, the methodologies in Annex 3 are not the only methodologies to take into account under the Agreement on Agriculture because Article 1(a)(ii) mandates the need to take into account in addition the data and methodology used in the supporting tables in a Member's Schedule. As a matter of data and methodology, Korea also used actual quantities of production in the supporting tables in its Schedule. Therefore, in accordance with its obligations under Article 1(a)(ii) of the Agreement on Agriculture with respect to calculation of support provided during any year of the implementation period of its AMS reduction commitments, Korea takes into account the data and methodology in its supporting tables by also using actual production figures. Needless to say, to fairly gauge compliance of Korea with its commitments, one should compare like with like and the reduction of total AMS based on actual quantities in Korea's Schedule should be judged with annual AMS calculations based on the same use of actual quantities. The arguments by the Complainants that higher eligible quantities - potentially total beef production in Korea211- should be used as eligible quantities and then be compared with data based on actual quantities used in the Schedule of Korea, must be rejected because it would result in an illogical and manifestly unfair comparison (see also arguments in paragraph (iv)389).
In conclusion, Korea submitted that the calculations for the annual support of beef in 1997 and 1998 have been made taking into account the data and methodology used in its Schedule of Concessions in accordance with Article 1(a)(ii) of the Agreement on Agriculture. As already shown in detail elsewhere, the support amounts for beef in 1997 and 1998 were de minimis and therefore were not required to be included in the total AMS calculation in accordance with Article 6 (4)(b) of the Agreement on Agriculture. The alternative estimated calculations presented by New Zealand fail to take into account the data and methodologies used in Korea's Schedule of Concessions, in violation of Article 1(a)(ii) of the Agreement on Agriculture. The comparison provided by New Zealand of the annual AMS in 1997 and 1998 with the reduction commitments in Korea's Schedule212 is manifestly inaccurate and unfair, because the 1997 and 1998 annual data have been calculated using completely different data and methodologies from those used to determine the Base AMS amount from which Korea's reduction commitments have been derived.
Australia submitted that Korea's claim that the reference to "constituent data and methodology" in Article 1 of the Agreement on Agriculture provides the justification for an alternative methodology to that in Annex 3 was inconsistent with the rules of interpretation of public international law. According to Australia, Article 1 of the Agreement on Agriculture is clear and unambiguous that support in any given year shall be calculated in accordance with Annex 3, taking into account the constituent data and methodology. The reference to constituent data and methodology does not remove the obligation to calculate support in accordance with Annex 3.
Australia submitted that the terms of Article 1 make sense if one understands that the calculations of AMS are product specific. In this respect, "constituent data and methodology" has an important role to play in ensuring that the calculation of support on any given commodity is calculated in subsequent years consistently with support calculated in the base period. For products where no support was included in the base period calculation, there is no constituent data or methodology in the tables of supporting material to a Member's Schedule. Annex 3 calculations are therefore mandatory.
The United States submitted that the language from the definition of AMS in Article 1 of the
Agreement on Agriculture refutes Korea's contention that it is bound only by the AMS computation
211 See paragraph 481.
212 See paragraph 483-485.
WT/DS161/R WT/DS169/R
Page 99
reflected in its Schedule and the methodology contained in the supporting material referenced in the Schedule. Korea's construction of the Agreement on Agriculture's AMS provisions would render substantial portions of the text of the Agreement on Agriculture meaningless. As a consequence, Korea's interpretative approach is contrary to customary rules of treaty interpretation and must be rejected.
Consideration of the specific language used in Article 1(a)(ii) requires, in the opinion of the United States, the rejection of Korea's interpretation. The provision explicitly directs that the AMS calculation be made in the manner prescribed in Annex 3; no conditions or exceptions are provided for. The only additional guidance set forth is that the calculation also take into account the data and methodology contained in the supporting tables. This guidance cannot be construed to nullify the express requirement that the AMS calculation be performed in accordance with the provisions of Annex 3. Similarly, Korea's reliance on Article 1(a)(1) is, in the view of the United States, misplaced. Again, Korea suggests that the language there set forth referencing the tables of supporting material incorporated by reference in a Member's Schedule should be construed in isolation from the remainder of the Agreement on Agriculture. However, the customary rules of interpretation of public international law as reflected in the Vienna Convention require that treaty terms be given their ordinary meaning in their context and in light of the object and purpose of the treaty. The other provisions of the Agreement on Agriculture pertinent to the AMS computation are part of the context of paragraph (a) of Article 1.
Since the term "base period" is not defined in Article 1(a)(i), and its ordinary meaning does not assist in determining the specific period that is intended to be captured, it is necessary to expand the inquiry to consider other provisions in the Agreement on Agriculture that provide the context for the term. The most pertinent provision in this regard is paragraph 5 of Annex 3 which directs that the "AMS calculated as below for the base period shall constitute the base level for the implementation of the reduction commitment on domestic support". Paragraph 5 is important as it provides guidance not only as to how the AMS base level will be computed, but also indicates what the relevant base period is. Thus, it is clear why Korea argues so strenuously for the Panel to disregard Annex 3.
Paragraphs 9 and 11 of the Annex specify, respectively, the United States continued, that the base period to be used for the computation of the fixed external reference price and the fixed reference price consists of the years 1986 to 1988. As the United States explained in response to a Panel question, it would be inappropriate to use a different base period for establishing the other elements of the calculation of market price support. Moreover, the historical background to this provision, as contained in the Modalities, supports the US proposition that the base period for fixing the applied administered price and eligible production must also be the years 1986-1988.
Korea's argument that it was free to select the base period that would provide the highest level of domestic support throughout the implementation period, thus, flies in the face of the pertinent provisions of the Agreement on Agriculture, interpreted in their context, and in light of the object of the treaty. Indeed, if the domestic support reduction commitments, a core aspect of the Agreement on Agriculture, are not to be undermined, a common base period must be used by the Members. Clearly, a construction of the obligation that permitted Members to elect a base period that represents the highest level of domestic support would defeat, in part, the purpose of those very reduction commitments.
The third party submission of New Zealand provides, in the view of the Complainants, a well reasoned explanation of issues associated with the calculation methodology and the consistency of this methodology with Annex 3 of the Agreement on Agriculture. The Complainants agreed with the New Zealand views and believed these views are a useful adjunct to the points raised by Australia and the United States. The New Zealand submission also provides some alternative calculations which provide a useful guide to the Panel as to the AMS level if an alternative calculation were used.
WT/DS161/R WT/DS169/R
Page 100
Total AMS-Current Total AMS
Australia considered that Korea cannot exclude support for beef either on the basis that it is justified under Annex 2 or that support levels are 10 per cent or less of the total value of production as permitted under Article 6. For this reason, and consistent with Article 7.2(a) of the Agreement on Agriculture, the domestic support for beef provided by Korea in 1997 must be included in its calculation of its Current Total AMS for that year. Australia noted that Korea's Total AMS Commitment for 1997 was 2,028.65 billion won. Its notified Current Total AMS for that year was 1,936.95 billion won. Korea's Current Total AMS figures for 1997 include support for barley, maize, rapeseed, rice and silk-worm. For the reasons stated in paragraph 372, the support for beef must also be included. Australia submitted that the calculation of Korea's Current Total AMS for 1997 therefore should be as follows:
Commodity | Current Total AMS (billion Won) |
Rice | 1884.34 |
Barley | 46.02 |
Maize | 5.67 |
Rapeseed | 0.91 |
Silk-worm | 0.01 |
Beef | 282.9 |
Total | 2219.85 |
The United States noted that Korea's most recent notifications with respect to its Current Total AMS were G/AG/N/KOR/18 (16 September 1998) for 1997 and G/AG/N/KOR/24 (25 August 1999) for 1998 in which it classified, incorrectly in the opinion of the United States, the support provided to its cattle industry as de minimis, i.e. it did not exceed 10 per cent of the total value of cattle or beef production. However, the United States argued, an accurate accounting, which would include the amount of support provided to the cattle industry, shows that in 1997 and 1998, Korea failed to meet its commitments for reducing domestic subsidies. In its 1997 and 1998 notifications213, Korea apparently used a formula based on the one in Annex 3.8. to the Agreement on Agriculture to calculate market price support.214 Hence, the 1997 and 1998 AMS for beef was reportedly
195.27 billion won and 183.06 billion won, respectively.215
The Complainants submitted that it is not for Korea to determine its reduction commitments under the Agreement on Agriculture by unilaterally determining a different calculation to that required explicitly by the Agreement on Agriculture. Korea adopted a different methodology to that adopted by other WTO Members in calculating an alternative commitment level for domestic support, reflected in the column in parenthesis in Part IV, Section I of the Korean Schedule. Korea cannot rely on this error to justify the consistency with the Agreement on Agriculture of its later calculations and its failure to meet its commitments. The Complainants submitted further that the approach adopted by Korea results in a lower level of AMS commitment, and in effect the AMS level for the years
213 See Korea's 1997 and 1998 Notifications at Table DS:4 where beef is identified as de minimis.
214 Applied Administered Price (AAP) minus Fixed External Reference Price (FERP) multiplied by Quantity of Production Eligible for Support (EP) equals Total Market Price Support for Beef.
215
AAP(1) | FERP(1) | EP(2) | Market Price Support (3) | Quality Incentive Program (3) | TOTAL Support for Beef(3) | |
1997 | 7,351.1 6,883.2 | 1,823 1,823 | 35.127 35.90 | 194.18 181.66 | 1.09 1.4 | 195.27 183.06 |
1998 |
(1) 1000 won/tonne; (2) 1000 tonnes; (3) billion won.
WT/DS161/R WT/DS169/R
Page 101
concerned is higher than for the base period used by Korea. The base used by Korea is 1989-1991, not the 1986-1988 period provided for in the Uruguay Round, reflected in the use of 1986-1988 in Annex 3, paragraph 11 of the Agreement on Agriculture.
Korea submitted that it is not correct that Korea's Schedule LX does not identify which of the two sets of figures constitutes Korea's binding obligation. Korea's Schedule LX clearly contains a Note 1 stating that: "Refer to Note 1 of Supporting Table 6 about the numbers in parentheses." It seems clear that the purpose of the supporting tables is to contain supporting material relating to commitments on agricultural products contained in Schedule LX-Korea (as explicitly stated below). Supporting Table 6 again contains a Note 1 which states:
"The AMS for rice has been calculated based on 1993 market price support instead of 1989- 1991 average. The Final Bound Commitment level in 2004, however, is the level reduced by 13.3% from the 1989-1991 average Base Total AMS."
In the supporting table, the calculation method of the AMS reduction commitments, by use of the 1993 market price support for rice, is explicitly explained and it is noted that the end-result of the Final Bound Commitment level in 2004 results in the same level reduced by 13.3 per cent from the 1989-1991 average Base Total AMS. The reference to this calculation method would be wholly meaningless if it was not clearly intended to base Korea's commitments on that basis.
Furthermore, Korea contended that the said calculation methods and annual commitment levels of AMS had been reviewed and agreed upon by the Member countries in March 1994. Article 6.3 very clearly refers to the commitment level specified in Part IV of a Member's schedule as a basis for judging compliance, rather than the general calculation methods set forth in Annex 3 as the United States argued. Article 3.2 of the Agreement on Agriculture confirms this point. The US argument on this point must therefore be rejected.
The United States submitted that Article 6.3 of the Agreement on Agriculture specifies when a Member shall be considered in compliance with its domestic support obligations. The commitment levels in Member's Schedules were established in accordance with a Base Total AMS which, except for support that is exempt, is the total amount of support (Total AMS) provided by a WTO Member to its domestic agricultural producers from 1986 through 1988.216 (For definition of "AMS" see paragraph 361).217 Annex 3 of the Agreement on Agriculture provides the methodology for calculating the AMS, which is required to be computed on a product-specific basis for each basic agricultural product receiving market price support, non-exempt direct payments or any other subsidy not exempted from the reduction commitment. Once the AMS was established, Members included in their Schedules corresponding domestic support ceilings for each year of the implementation period, calculated on the applicable reduction formula for each Member. Developing countries agreed to reduce their domestic support in annual steps by 13 per cent.
Moreover, the United States noted that Korea provides, in Part IV of its Schedule, two separate numbers with respect to the total current AMS for each year of the implementation period (1995-2004). These figures are set forth in two separate columns, the second of which is set off by parentheses. An examination of the respective columns of expenditure amounts reveals, in the opinion of the United States, that the first column approached conformity with the formulae contained
216 See Annex 3 to the Agreement on Agriculture.
217 Support which is exempt from the base AMS includes support which (i) satisfies the requirements of Annex 2 to the Agreement ("Green Box") because it has no or minimal trade-distorting effects or because it limits domestic production ("Blue Box") or (ii) is exempt from reduction by an Agreement on Agriculture provision. See Articles 1 (h) and 7.2.(a), Agreement on Agriculture.
WT/DS161/R WT/DS169/R
Page 102
in Annex 3 to the Agreement on Agriculture,218 whereas the expenditure ceilings in the second column did not. In the second column, Korea has inflated the amount of the annual Current Total AMS by basing the largest component of Korea's total AMS, that for rice, on a 1993 base year when domestic support for rice peaked.219 Korea's methodology resulted in a Current Total AMS in 1995 that is 28 per cent higher than it would be using the procedure provided for in the Agreement on Agriculture. This distortion is then carried throughout the implementation period in each succeeding year. Korea attempts to justify this approach, the United States continued, by suggesting that the final current total AMS in the last year of the implementation period, 2004, is the same as if calculated consistently with the Agreement on Agriculture (see paragraph 426).220 Korea's alternative reduction commitment, which is not in accordance with the requirements of Annex 3 of the Agreement on Agriculture, must be rejected as inconsistent with Korea's obligations.
The untenable nature of Korea's AMS commitment, the United States argued, is underlined by a comparison of Korea's Base Total AMS and the Current Total AMS reported by Korea in its Schedule as an alternative approach. Korea's Base Total AMS221 is 1,718.6 billion won. This is less than the expenditure level that Korea includes in the amounts in parentheses in column 2 of Korea's Schedule for 1997 (2,028.65 billion won) and for 1998 (1,951.70 billion won). Based on its notifications to the Committee on Agriculture for 1997 and 1998, Korea appears to consider the AMS levels included in the parentheses as its commitments.222
Korea has provided two inconsistent sets of support amounts for Current Total AMS in its Schedule.223 Nowhere in its Schedule does Korea identify which of the sets constitutes Korea's binding obligation. Through its 1997 and 1998 notifications, Korea appears to be following the less onerous "commitments" contained in the second column. If this is indeed the case, Korea would be ignoring the commitments in the first column of its Schedule which more closely coincide with the methodology for establishing the Base Total AMS as reflected in the Agreement on Agriculture. The United States submitted that the parenthetical data in column 2 in Korea's Schedule represents an admission by Korea that it is reducing its support based on criteria not found in the Agreement on Agriculture.
It is a well-founded principle, the United States continued, that Korea is free to incorporate into its Schedule "acts yielding rights", "additional commitments", and qualifications to those additional commitments. However, Korea cannot use its Schedule to "diminish … obligations … [or] reduce … commitments under other provisions of that Agreement."224 Korea cannot avoid its domestic support reduction in this unilateral manner. To accept Korea's position that it should be able to fulfill its reduction commitments by complying with a reduction schedule based on a Base Total AMS that represents a composite of those approaches most favorable to Korea, but none of which is consistent with Annex 3 of the Agreement on Agriculture, would be to permit Korea to evade the disciplines of the Agreement on Agriculture relating to domestic support levels.
The United States argued that by claiming that it possesses the freedom to choose whatever base period best suits its interests, Korea effectively negates the provisions of the Agreement on
218 Even the figures in Korea that most closely approximate the Annex 3 methodology suffer from such defects as reliance on a time period other than the 1986-1988 period specified in paragraph 9 of the Annex.
219 See Note 1 of Supporting Table 6 and statistics provided there.
220 Note 1 to Supporting Table 6 states: :The AMS for rice has been calculated based on 1993 market price support instead of the 1989-1991 average. The Final Bound Commitment level in 2004, however, is the level reduced by 13.3 per cent from the 1989-1991 average Base Total AMS.
221 (column 1, Schedule LX, Part IV, Section I).
222 See, 1997 and 1998 Notifications at Table DS:1, column 1.
223 See, column 2, "Annual and Final bound commitments level: 1995-2004", Schedule LX, Part IV, Section I (Korea Schedule) at I-1.
224 US - Sugar Head Note at 342.
WT/DS161/R WT/DS169/R
Page 103
Agriculture relating to the manner in which the reduction commitments were to be developed, as well as the reduction commitment itself. Korea's approach to the construction of its domestic support commitments leads to the absurd result that for the first seven years of the implementation period (from 1995 through 2001) the annual AMS levels claimed by Korea to be permitted under its Schedule are higher than the base AMS computed using an approximation of the calculation methodology set forth in the Agreement on Agriculture. Korea's construction of its Schedule also makes the first set of reduction commitments contained in its Schedule, and which are generally computed in accordance with the requirements of the Agreement on Agriculture provisions, completely meaningless, contrary to principles of treaty interpretation.
Korea also offers no explanation, the United States continued, for why it based the calculation of the fixed external reference price for beef on a period other than 1986-1988 as paragraph 9 of Annex 3 requires, or failed to compute the fixed external reference price based on the farm-gate price, which would be at an equivalent stage of processing to the cattle prices used by Korea for its applied administered price. Again, by electing a fixed external reference price that is inconsistent with the methodology provided for in the Agreement on Agriculture, Korea distorted the calculation of domestic support. The fixed external price used by Korea is higher than would have resulted using the correct methodology. The effect of Korea's departure from the prescribed methodology is a narrowing of the difference between its applied administered price and the fixed external reference price and, consequently, an understatement of the amount of domestic support.
Referring to the United States' allegations in paragraph 421, Korea submitted that it's Schedule LX contains a Note 1 stating that: "Refer to Note 1 of Supporting Table 6 about the numbers in parentheses." Korea submitted that the purpose of the supporting tables is to contain supporting material relating to commitments on agricultural products contained in Schedule LX-Korea. The note in Supporting Table 6 states: "The AMS for rice has been calculated based on 1993 market price support instead of 1989-1991 average. The Final Bound Commitment level in 2004, however, is the level reduced by 13.3 per cent from the 1989-1991 average Base Total AMS." Therefore, it is evident that the numbers in parentheses constitute Korea's commitment levels on Total AMS reflecting the exceptional calculation method for rice which is based upon the 1993 market price support. In the supporting table, the calculation method of the AMS reduction commitments, by use of the 1993 market price support for rice, is explained and it is noted that the end-result of the final bound commitment level in 2004 results in the same level reduced by 13.3 per cent from the 1989-1991 average Base Total AMS. The reference to this calculation method would be totally meaningless if it was not clearly intended as a basis for Korea's commitments.
Korea, referring to the US - Gasoline case225, noted that the said calculation methods and annual commitment levels of AMS had already been reviewed and agreed upon by the Member countries in March 1994. Moreover, Korea noted that Article 6.3 of the Agreement on Agriculture226 refers to the commitment level specified in Part IV of a Member's schedule as a basis for judging compliance, rather than the general calculation methods set forth in Annex 3, as the United States argues. Korea considered that Article 3.2 of the Agreement on Agriculture confirms this point.227
225 Page 23; see also Japan - Alcoholic Beverages(AB), at pages 12-13.
226 "A Member shall be in compliance with its domestic support reduction commitments in any year in which its domestic support in favour of agricultural producers expressed in terms of Current Total AMS does
not exceed the corresponding annual or final bound commitment level specified in Part IV of the Member's Schedule". (Emphasis added.)
227 "Subject to the provisions of Article 6, a Member shall not provide support in favour of domestic producers in excess of the commitment levels specified in Section I of Part IV of its Schedule." (Emphasis added.)
WT/DS161/R WT/DS169/R
Page 104
SUMMARY OF THE ARGUMENTS PRESENTED BY THIRD PARTIES
ARGUMENTS SUBMITTED BY CANADA
Canada submitted that certain measures undertaken by Korea with respect to the importation of fresh, chilled and frozen beef are inconsistent with Korea's obligations under Articles II, III and XI of GATT 1994 and Article 4 of the Agreement on Agriculture. Amongst these measures are restrictions on the retail sale of beef, the imposition of a mandatory mark-up on imports of beef and certain aspects of Korea's system of distribution of imported beef. In the view of Canada, it is apparent that the common purpose and effect of all of these measures is to provide support and protection to the Korea's domestic beef industry.
1. Article III of GATT
430. Canada claimed that the restriction of retail sales of imported beef to a limited number of separate retail outlets compared to the significantly greater number of retail outlets available to domestic beef is a violation of the national treatment principle, as embodied in Article III:4 of GATT 1994. Previous GATT and WTO panels have interpreted this provision as "establishing the obligation to accord to imported products competitive opportunities no less favourable than those accorded domestic products."228 In this regard, Article III:4 requires that imported products "shall be accorded treatment no less favourable than that accorded to like products of national origin in respect of all laws, regulations and requirements affecting their internal sale, offering for sale, purchase, transportation, distribution or use." Article III:4 applies where the following elements are satisfied:
there must be a law, regulation or requirement; (2) it must affect the internal sale, purchase, transportation, distribution or use of the product; (3) the imported product and the domestic products must be like products. If these elements are satisfied, the measure must accord the imported product treatment no less favourable than the like domestic product in order to comply with Article III:4.
431. First, the Korean measures restricting sales of imported beef to specialized outlets are without question "laws, regulations or restrictions". Second, these measures clearly "affect the internal sale, purchase, transportation, distribution or use" of imported beef. Third, it is equally clear that imported beef and domestic Korean beef are like products. It is also evident that the measures in question accord imported beef treatment that is less favourable than that accorded to the like domestic beef product. By restricting the retail outlets available to imported beef relative to domestic beef, the effect is to deny the imported product "competitive opportunities" that are "no less favourable" than those available to domestic beef. In effect, by restricting the number of retail outlets at which imported beef can be sold, the access to the Korean market available to imported beef is impaired relative to the competing domestic product. This is inconsistent with the obligation to provide "equal conditions of competition" once imported goods have cleared customs.
432. Canada claimed further that, in addition to Korea's limitation on the retail sale of imported beef to specialized retail outlets, a number of other measures and practices also appear to violate the national treatment principles of Article III:4 of GATT 1994:
all beef imported by the LPMO, not sold directly by the LPMO to processors, must be sold through wholesale markets. Wholesale purchasers may then sell to specialized stores for retail purposes. Neither of these restrictions apply to sales of domestic beef;
228 US - Section 337, at paragraph 5.11.
WT/DS161/R WT/DS169/R
Page 105
while regulations contemplate the possibility of sales of LPMO imported beef on a credit basis, this is discretionary, a discretion that has not been exercised. The availability of sales on a credit basis provides greater commercial opportunities in the marketplace. Sales of domestic beef are not similarly restricted to a cash basis;
in order to import beef under the Simultaneous Buy/Sell (SBS) system, end-users must belong to one of a number of designated super-groups. In addition to the resulting imposition of a middleman, such super-group membership also results in increased expenses through membership fees and other additional costs; and
in addition to country of origin requirements that apply to all beef, domestic and imported, Korea has imposed new additional labelling requirements that apply only to imported beef. Boxes of imported beef must also display labels that indicate commodity name, contract number and the super-group importer's name. This requires re-labelling in Korea, resulting in additional costs to imported beef.
433. Canada argued that each of these measures meets the requirements of Article III:4 of GATT 1994 as set out above with respect to retail sales. In each case, obligations are imposed on imported products that are not applicable to the like domestic products. Hence, each measure constitutes a violation of Korea's obligations under GATT 1994.
2. Article II of GATT
434. Canada submitted that Korea's imposition of a mark-up on imports of beef under the SBS system is inconsistent with Korea's obligations under Article II:1 of GATT 1994. In the alternative, it is a violation of Article III:2 of GATT 1994.
435. Korea collects a mandatory mark-up on all beef imported under the SBS system. This mark- up is collected by Korean Customs and the product is not released from customs control until the mark-up is paid. On its face, the collection of this mark-up constitutes the imposition of a charge on beef imports. Article II.1 of GATT 1994 states that on importation, products shall be subject only to those "ordinary customs duties" and "other duties or charges of any kind imposed on or in connection with the importation" specifically provided for in a Member's Schedule. The mark-up imposed by Korean authorities would appear to fall clearly within the plain meaning of the word "charge": i.e. "a pecuniary burden; cost; a liability to pay money laid on a person or estate."229 Its payment appears to operate as a condition of import. There is no reference to this mark-up as a "charge" in Korea 's Schedule.
436. As a result, the imposition of the mark-up upon importation is inconsistent with Korea's obligation under Article II.1(a) to provide "treatment no less favourable" to goods on importation than provided for in Korea's Schedule and in particular to be free of "all other duties or charges of any kind imposed on or in connection with importation", pursuant to Article II.1(b).
437. In the alternative, the mark-up constitutes an "internal tax or other internal charge" as contemplated by Article III:2. If it is an internal tax or charge, then its application only to imported beef and not to the like domestic product would constitute a violation of the national treatment principle and would be inconsistent with Korea's obligations under Article III:2 of GATT 1994.
229 The New Shorter Oxford English Dictionary.
WT/DS161/R WT/DS169/R
Page 106
3. Article XI of GATT and Article 4.2 of the Agreement on Agriculture
Canada submitted further that the following aspects of the Korean imported beef distribution system, individually or taken together, restrict and distort access to the Korean market contrary to Article XI of GATT 1994:
arbitrary limitation of access to imported beef to "super-group" members;
LPMO discourages potential applicants from seeking access to imported beef;
resale of imported beef by end-users is not permitted;
significant delays in invitations to foreign suppliers for LPMO allocation;
inadequate reallocation of unused quota access; and
restrictions on retail sale outlets of imported beef.
In Canada's view, to the extent that any of the measures or practices noted above constitute quantitative restrictions pursuant to Article XI:1 of GATT 1994, it follows that they must also be quantitative restrictions maintained in violation of Article 4.2 of the Agreement on Agriculture.
Canada was concerned that the principles underlying Article XI:1, as they relate to discretionary import licensing, not be misunderstood in their application to the facts of this case. The submissions of the United States and Australia may be read as suggesting that the mere use of a discretionary import licensing system in allocating access to imports within a quota or a tariff quota, by itself, constitutes a "restriction ... on ... importation" contrary to Article XI. Canada believes that the essential thrust of the submissions of the Complainants is that use of particular measures in the operation of a discretionary licensing system can constitute "restrictions" in the context of Article XI:1, where those measures result in a limitation on imports that would not otherwise exist.
Canada submitted that in support of their submissions on these points, both Complainants rely on the recent panel report in India –Industrial Products. The panel in the India case considered the application of Article XI:1 to India's practices in its operation of its discretionary import licensing system.230 The panel found that the import licensing system maintained by India operated "as a restriction on imports within the meaning of Article XI:1".231 In Canada's view, the factual background of this finding is very significant. Under the Indian licensing system, a range of products had been added to a "Negative List of Imports" and such products could only be imported with a licence. These licences were issued on a discretionary basis. There was no other quantitative restriction or tariff quota associated with the licensing system. In the absence of the discretionary licensing system, there would be no restriction on imports.
In these circumstances, the discretionary licensing system was found to be, by itself, a restriction on imports because the imposition of a discretionary licensing system, where licences are issued to some applicants but not to others, will necessarily provide some check on the potential flow of imports where there are no other impediments such as a quota or tariff quota. The result will be a smaller quantum of imports than would otherwise have occurred. (An automatic licensing system would not provide such a check.) On the other hand, where a quota or a tariff quota is in place, the use of discretionary licensing to allocate access within the limits imposed by the quota or tariff quota need not result in any further lessening in the flow of trade already constricted by the imposition of
230 India –Quantitative Restrictions, paragraphs 5.122-142.
231 Ibid., paragraph 5.131.
WT/DS161/R WT/DS169/R
Page 107
the quota or tariff quota. Indeed, in certain circumstances, discretionary licensing may be the most effective means of enforcing other GATT requirements applicable to the administration of otherwise lawful import restrictions (e.g., Article XIII:2).
Where a discretionary licensing system is implemented in conjunction with other restrictions, such as a quota or tariff quota, the manner in which the discretionary licensing system is operated may create additional restrictions to trade independent of those imposed by the quota or tariff quota. Since this issue was not considered in the India case, that case does not provide authority for the proposition that a discretionary licensing system, used in conjunction with a quantitative restriction or a tariff quota, necessarily provides some additional level of restriction over and above the inherent restriction on access created through the imposition of a quantitative restriction or a tariff quota. Indeed, the panel's decision clearly indicates that its conclusion that the Indian discretionary licensing system in question amounted to a "restriction" was reached "in the light of" the factual circumstances of that particular case.232
As suggested above, Canada would also note that the use of discretionary licensing in the allocation of a quota or tariff quota for example, if properly conducted, may be less distorting to trade patterns that the use of another type of licensing system such as "first-come, first-served". A discretionary system should attempt to allocate access to a quota or a tariff quota based on replicating as closely as possible the pattern of trade that would exist in the absence of such a restriction. This reflects the principles found in Article XIII of GATT 1994 with respect to allocation of quantitative restrictions or tariff quotas between exporting countries. In both cases, the purpose is to limit the disruption to trade inherently created by the imposition of the quantitative restriction or the tariff quota.
More relevant to the circumstances of this case, the panel in the India case did go on to find that by restricting issuance of licences to a limited class of ultimate end users ("Actual Users"), and excluding all other potential importers such as wholesalers, traders and other "intermediaries", India had created a restriction as contemplated in Article XI.233 It is this finding that is the principle authority cited by the Complainants in their submissions as support for their arguments that actions by the Korean government in the operation of the Korean discretionary licensing system constitute "restrictions" pursuant to Article XI. Canada argued that the application of this principle in the case of the Korean measures in question is appropriate.
ARGUMENTS SUBMITTED BY NEW ZEALAND
New Zealand was concerned that, despite the progress made to date, Korea continues to rely on GATT-inconsistent trade restrictions to protect its domestic producers from the increased market access for imported beef provided for in Korea's Schedule. Korea has recently consolidated a number of these trade restrictions in new legislation. New Zealand considers that these measures are inconsistent with Korea's obligations under the WTO, including Articles II, III and XVII of GATT 1994. New Zealand's objective in joining in this dispute is to ensure that all illegal non-tariff measures are removed, so that by the year 2001 when the last quantitative restrictions are phased out, Korea's beef market will be fully and effectively liberalized, thereby ensuring that New Zealand's access to the Korean beef market is fair and equitable.
New Zealand was especially concerned over the following measures:
retail restrictions on imported beef imposed by Korea;
232 Ibid., paragraphs 5.130-131.
233 Ibid., paragraphs 5.141-143.
WT/DS161/R WT/DS169/R
Page 108
use of the LPMO tendering and grading system by Korea to discriminate against imported grass-fed beef; and
maintenance by the LPMO of minimum auction prices for imported beef that are contingent on the price of domestic product.
1. Article III of GATT
New Zealand considered that the restrictions imposed by Korea on imported beef at the retail level constitute a violation of Article III:4 of GATT 1994. Korea has in place a number of measures which restrict the retail opportunities for imported beef. These include a requirement that imported beef may only be sold in specialised imported beef stores or in large-scale department stores or supermarkets with separate sales areas for imported beef.234 Imported beef is effectively denied access to the existing retail infrastructure for beef. In order to sell imported beef, a meat retailer must seek permission for, and establish a separate retail facility. In 1998, there were only 5498 retail outlets for imported beef compared with over 45,000 retail outlets for domestically produced beef.
These measures fall within the scope of Article III:4, being "laws, regulations and requirements affecting [the] internal sale, offering for sale, purchase, transportation, distribution or use" of imported beef. The measures are mandatory, with penalties for violations in many cases.235 There can be no doubt that imported beef and domestically-produced beef are "like" products for the purposes of Article III:4.236 Nor does Korea dispute that imported and domestic beef are "like" products.
Korea's retail restrictions treat imported beef less favourably than domestic beef. The phrase "treatment no less favourable" in Article III:4 encapsulates the core intent of this provision of GATT: "to provide equal conditions of competition", or in other words to provide "effective equality of opportunities" between domestic goods and imported goods once they are cleared through customs.237 Korea's retail restrictions do not offer equal conditions of competition or effective equality of opportunities for imported beef. Retail sale of imported beef in Korea is effectively confined to a relatively small number of retail outlets - around one tenth of the number of the existing domestic beef retail outlets. Korea has an extensive existing retail infrastructure for beef. The retail restrictions limit access to that infrastructure to domestic beef only. The only way that imported beef can enter the retail market is if shop-keepers are prepared to establish separate new retail facilities. Only the very largest existing retailers can sell imported beef under the same roof as domestic product, and even then they may do so only if physically separate display units for imported product are set up. The costs associated with the requirement of establishing separate retail facilities for imported beef clearly limit the competitive opportunities vis-Ã -vis domestic product.
Restricting access for imports to fewer points of sale than domestic products was considered in Canada - Marketing Agencies. In that case, the panel concluded that exclusion of imported beer from points of sale where domestic beer could be sold represented a denial of competitive opportunities for imported beer. While in that case the panel did not consider it necessary to make a
234 See Articles 15 and 9.5 of the Management Guideline for Imported Beef. Prior to 1 October 1999, these measures were contained in Articles 5C and 3A of the Guidelines Concerning Registration and Operation of Specialized Imported Beef Stores.
235 See the table entitled "Criteria for Punishment for Violation" at page 15 of the Management Guideline for Imported Beef .
236 Japan - Alcoholic Beverages (AB), at pages 19-22, summarises the approach to any examination of
the question of "like" products under Article III.
237 See Italian Agricultural Machinery, paragraphs 11-13; US - Section 337, paragraphs 5.11-5.13; US
- Gasoline, paragraph 6.10; Japan - Alcoholic Beverages (AB), page 16.
WT/DS161/R WT/DS169/R
Page 109
finding under Article III:4 on this point, the panel nevertheless "saw great force in the argument that the restrictions on access to points of sale were covered by Article III:4".238
Korea's retail restrictions cannot be defended on the basis that they are merely the result of there being a legitimate quantitative restriction in place at the border. The quantitative restrictions in Korea's Schedule allow Korea to limit the quantity of imported beef entering its territory. This cannot be interpreted as an entitlement to then restrict the way in which those imports can be sold in the domestic market. Once imported beef is imported under the quota, there must be no less favourable treatment than that accorded like domestic product.
Likewise, Korea's arguments that when the quota is filled, there can be no breach of Article III are also invalid. Just because the import quota is filled does not mean that imported beef enjoys equally competitive opportunities in the domestic market. Even when imports are at a competitive disadvantage as a result of trade restrictions, they may still sell. But it is the competitive disadvantage itself that is relevant to the consideration of Article III:4. In accordance with Article III:4, imported beef must be allowed to realise its full competitive potential in the domestic market.239
In addition to the measures at the retail level, Korea also maintains other measures throughout the distribution chain which treat imported beef less favourably than domestic product, and which are therefore in breach of Article III:4. These include:
restriction of beef sold through the LPMO system primarily to wholesale markets;240
controls on the marketing of beef imported through the SBS system, including limitations on the range of consumers eligible to make purchases through the system;241 and
reporting, record-keeping, and labelling requirements that are imposed in respect of imported beef.242
None of these restrictions apply to domestic beef. New Zealand considered that such measures limit the competitive opportunities for imported beef to the domestic market. These
238 Canada - Marketing Agencies, paragraphs 5.5-5.6.
239 In this regard, the panel in US - Section 337 (paragraph 5.13) found that treatment no less favourable requires an assessment of the potential impact rather than the actual consequences for competitive opportunities.
240 See Article 5 of the Management Guideline for Imported Beef (previously Article 3 of the Regulations Concerning Sales of Imported Beef).
241 Article 26.4 of the Management Guideline for Imported Beef (formerly Articles 2 and 11 of the
Operational Guidelines for Imported Beef under the SBS System) restricts access to imported beef under the SBS system to a limited range of defined "end users". "End users" are members of the SBS super-groups specified in Article 20 (formerly Article 4 of the Operational Guidelines) . It is, therefore, not possible for purchasers or groups of purchasers who are not "end users" to purchase imported beef through the SBS system. Purchasers of domestic beef do not have to be "end users", nor do they have to be members of super-groups. Article 21 of the Management Guideline (Article 11 of the Operational Guidelines) also provides that "end users" may only use imported beef for the purposes specified in that provision. The same restrictions do not apply to domestic beef.
242 At the wholesale level, Article 17 of the Management Guideline for Imported Beef (and formerly Article 19 of the Regulations Concerning Sales of Imported Beef) require wholesale markets, dealers and sales
agents to keep records for two years. In the SBS system, monthly reporting and two year record keeping requirements are required by Articles 27.3, 27.4 and 28.1 of the Management Guideline (and formerly by Articles 12.3, 13 and 16.1 of the Operational Guidelines for Imported Beef under the SBS System). The supervisory powers of Korean MAF and the LPMO have also been used to apply mandatory and restrictive labelling requirements on imported beef.
WT/DS161/R WT/DS169/R
Page 110
measures deny exporters of beef to Korea the opportunity to choose their preferred method of marketing, and impose additional compliance costs on imports relative to like domestic product. To this end, the measures subject imported beef to treatment that is less favourable than that given to like domestic product. It follows that these measures also are inconsistent with Article III:4 of GATT 1994. Furthermore, like the retail restrictions, New Zealand also contended that these measures cannot be justified under Article XX(d) of GATT 1994.
New Zealand submitted further that under Article 11.1 of the Management Guideline for Imported Beef (and formerly under Article 9.1 of the Regulations Concerning Sales of Imported Beef), the LPMO is required to determine a minimum price for imported beef sold at auction. In practice, the minimum price is set with reference to the price of the competing domestic product, and is used by the LPMO as a means of influencing domestic market prices. Rather than being able to compete freely on the basis of its duty paid price at the border, imported beef prices are manipulated by the LPMO using its minimum price-setting powers.
Domestic beef is not subject to minimum price controls. Within the constraints of the highly managed Korean domestic market, the price of domestic beef is able to respond to changes in supply levels, consumer demand, prices of other competing protein sources, and so on. Conversely, the price of imported beef sold through LPMO auctions is maintained at a controlled minimum, and cannot decrease in response to changes in other market conditions unless the LPMO decides to re-fix a new (lower) minimum price.243 The minimum price auction system means that imported beef cannot enter the Korean market on the basis of normal commercial considerations. The large build-up of stocks of imported beef in LPMO freezers is indicative of the fact that minimum price controls do inhibit the ability of imported beef to respond to market signals.
The minimum price requirement is a law affecting the internal sale or offering for sale of imported beef which accords treatment less favourable to that which is accorded like domestic product, in contravention of Article III:4 of GATT. The inability of imported beef sold through the LPMO to respond to changing market conditions as a result of the operation of the minimum price law means that imported beef does not enjoy "equal conditions of competition"244 vis-Ã -vis domestic beef. LPMO-imported beef is subjected to a competitive constraint which does not apply to domestic beef.
2. Article XX of GATT
459. New Zealand considered further that Korea's retail restrictions cannot be justified as "necessary to secure compliance with laws or regulations [...] relating to [...] the prevention of deceptive practices" in accordance with Article XX(d) of GATT 1994. The burden of proof is on Korea to show that its retail restrictions fall within the scope of Article XX(d).245 New Zealand contends that Korea has failed to discharge this burden.
460. Notwithstanding that Korea has failed to discharge this burden of proof, New Zealand further contended that it is not possible for Korea to do so. The retail restrictions are not measures that fall within the scope of subparagraph (d) of Article XX. The panel in EEC - Parts and Components found that Article XX(d) covers only measures related to the enforcement of obligations under laws or
243 The price data presented by Australia demonstrates that minimum prices set by the LPMO often remain fixed for long periods of time, despite large movements in demand for beef and price levels of domestic beef.
244 See Italian Agricultural Machinery, paragraphs 11-13.
245 The panel in US - Section 337 (paragraph 5.27) found that "...it is up to the contracting party seeking to justify measures under Article XX(d) to demonstrate that those measures are 'necessary' within the meaning of that provision."
WT/DS161/R WT/DS169/R
Page 111
regulations consistent with the General Agreement.246 The regulations relating to separate retail distribution channels do not serve to enforce any Korean laws relating to fair trading or deceptive practices. Even if the retail restrictions are "to secure compliance" with Korea's fair trading laws, they are not "necessary" for this purpose. There are a range of alternative measures that would be less trade restrictive than the maintenance of separate retail channels. Measures such as the maintenance of effective audit trails regarding country of origin, more comprehensive monitoring of the activities of beef retailers, and stricter penalty provisions in Korea's fair trading laws would all be effective measures that would be considerably less trade restrictive than the retail restrictions.
461. Should Korea's retail restrictions be found to fall within the scope of subparagraph (d) of Article XX, contrary to New Zealand's assertion, then New Zealand contends that in any case, the measures do not comply with the chapeau of Article XX. The retail restrictions are applied in a manner which constitutes a means of arbitrary or unjustifiable discrimination between countries where the same conditions prevail, or a disguised restriction on international trade.247 Korea seeks to rely on Article XX in order to "frustrate or defeat" its legal obligations under the substantive rules of the GATT.248 Such reliance is therefore unjustified.
3. Article II of GATT
462. Through its import tendering system, the LPMO maintains an artificial distinction between grain-fed and grass-fed beef. In calling for tenders under the import quota set out in Korea's Schedule of Concessions, the LPMO specifies either grain-fed or grass-fed beef. It has called recently for tenders of grain-fed beef only. This practice effectively divides the import quota into two subcategories, and discriminates against New Zealand, an exporter of grass-fed beef,249 vis-Ã -vis other exporters who produce primarily grain-fed beef. There is no justification for the maintenance of such a distinction.
463. New Zealand contended that the division of Korea's import quota for beef into two sub- categories, and the resulting discrimination against exporters of grass-fed beef in filling the quota represents "treatment less favourable" than that provided for in Korea's Schedule of Concessions, and thus contravenes Article II:1(a) of GATT 1994. Korea's Schedule contains no "other terms or conditions" that allow it to distinguish between grain-fed and grass-fed beef. The maintenance of this distinction has led Korea to administer its concession for beef in a way which grants the benefit of that concession to the products of one group of countries (grain-fed beef exporters), at the expense of others (grass-fed beef exporters, including New Zealand). This has had the effect of preventing access of high quality grass-fed beef from New Zealand to the Korean market under the quota. This restriction also inhibits New Zealand's ability to develop the market for its grass-fed beef in Korea.
4. Article XVII of GATT
464. New Zealand also contended that the LPMO, a state trading enterprise notified to the WTO as such by Korea, has not acted in a manner consistent with the general principles of non-discriminatory treatment prescribed in GATT 1994. Korea has accordingly contravened Article XVII:1(a) of that Agreement.
246 L/6657, adopted on 16 May 1990, 37S/132, 195-197, paragraphs 5.14-5.18.
247 Paragraphs 146 et seq of the Appellate Body Report in US – Shrimp (AB) refer in respect of any examination of the chapeau of Article XX.
248 See US – Gasoline, page 22.
249 New Zealand is an exporter of predominantly grass-fed beef. Only 2 per cent of New Zealand beef exports are grain-fed, and this product is supplied exclusively to niche markets in Japan.
WT/DS161/R WT/DS169/R
Page 112
465. By distinguishing between grass-fed and grain-fed beef in the tendering for imported beef under the quota, the LPMO has made purchases that are not solely in accordance with commercial considerations. The LPMO has favoured some supplier countries over others on the basis of a distinction between beef production methods which is not related to commercial considerations. Such practices are accordingly discriminatory treatment which is not based on commercial considerations, and is a contravention of Article XVII:1(a).
5. Agreement on Agriculture - domestic support
New Zealand submitted that the Korean Government significantly increased the amount of domestic support it provided to its beef producers in 1997 and 1998. While Korea notified increased levels of support for beef to the WTO Committee on Agriculture, the notifications did not account for all the support provided and the calculations were not in conformity with the methodology set out in the Agreement on Agriculture. As a result, Korea incorrectly excluded beef from the calculation of its Current Total Aggregate Measurements of Support (AMS) in 1997 and 1998. Had it included beef support in the Current Total AMS, Korea would have exceeded the annual reduction commitment set out in its Schedule for 1997.
New Zealand was especially concerned over the incorrect calculation of market price support for beef by Korea through the use of incorrect eligible production levels. In the same market price support calculation, New Zealand was also concerned over the use of a fixed external reference price which differs in terms of its stage of processing from that of the applied administered price.
The fixed external reference price for beef
According to paragraph 8 of Annex 3 of the Agreement on Agriculture, the calculation of market price support involves the subtraction of a fixed external reference price from an applied administered price with the result multiplied by eligible production (minus associated fees or levies). Korea's applied administered price for beef was, as set out in the Korean MAF press statement of 27 January 1997, 2,400 thousand won per 500 kg. Hanwoo steer for the remainder of the 1997 calendar year.
It appears, as stated by Korea, that "the said programme was implemented not only for the Hanwoo but also for [dairy] cattle and hybrid cattle of Cheju Island and an amount different from that for Hanwoo beef was applied as well …". As a result, Korea has apparently used a weighted average applied administered price encompassing the different categories.250 In doing so, Korea has also converted the base unit for the calculations from a per head basis to a per kilogram carcass weight basis. While there is a change in measurement unit, it does not affect the stage of processing of the applied administered price. That stage of processing represents live animals for the bulk of the programme.251 This is consistent with paragraph 7 of Annex 3 of the Agreement on Agriculture which specifies that the "AMS shall be calculated as close as practicable to the point of first sale of the basic agricultural product concerned". However, the fixed external reference price Korea has used is not specified at an equivalent stage of processing.
Article 1(a)(ii) of the Agreement on Agriculture is applicable when a Current AMS is being calculated, i.e. an AMS for any year during the implementation of the Agreement on Agriculture and thereafter. It provides that the AMS means "with respect to support provided during any year of the
250 While a weighted average is a logical approach for aggregating a number of different beef categories, New Zealand contends that the weighting should have been calculated on the basis of eligible production rather than actual purchases for the reasons discussed below.
251 Purchases designated "carcass" accounted for only 10 per cent of total purchases in 1997 and 1998 according Korea.
WT/DS161/R WT/DS169/R
Page 113
implementation period and thereafter, [support] calculated in accordance with the provisions of Annex 3 of this Agreement and taking into account the constituent data and methodology used in the tables of supporting material incorporated by reference in Part IV of the Member's Schedule".
However, in the case of Korean beef, as there was no applied administered price used to support beef in the Uruguay Round base period, no market price support calculation was undertaken and consequently no fixed external reference price for beef is included in G/AGST/KOR which is then to be taken account of. Annex 3 of the Agreement on Agriculture must, therefore, be used to determine how the fixed external reference price is derived. Paragraph 9 of Annex 3 provides: "The fixed external reference price shall be based on the years 1986 to 1988 and shall generally be the average f.o.b. unit value for the basic agricultural product concerned in a net exporting country and the average c.i.f. unit value for the basic agricultural product concerned in a net importing country in the base period. The fixed reference price may be adjusted for quality differences as necessary."
Korea is a net beef importing Member thus the c.i.f. unit value represents the correct starting point. New Zealand submits that the reference to "the average c.i.f. unit value for the basic agricultural product concerned …" (emphasis added) requires that the applied administered price and the fixed external reference price must both be for the "basic agricultural product". This is reinforced by Annex 3 paragraph 7, which provides that the AMS "shall be calculated as close as practicable to the point of first sale of the basic agricultural product concerned". Since the AMS is calculated by reference to the applied administered price and the fixed external reference price, both of these calculations must be at the same stage of processing. In other words, the fixed external reference price must be at (or converted to) the same stage in the processing chain as the applied administered price for the basic agricultural product concerned – in this case live animals. As live cattle destined for consumption as meat (as opposed to breeding) are not widely traded, New Zealand contends that the correct approach in this instance would have been for Korea to convert its fixed external reference price to the point of first sale – the level of its applied administered price. Korea failed to do so and has thus over-estimated the fixed external reference price for beef.
The principle of comparing like with like is also made clear in the context of Annex 3 by the WTO Secretariat's technical note for acceding countries which states with reference to the calculation of market price support: "This price [an external reference price, e.g. an estimate of the world price such as the c.i.f. price or f.o.b. price] should be adjusted to a similar stage of processing as the administered price".252 In the sense that there is no "constituent data and methodology"253 provided by Korea on beef in its AGST tables, the Secretariat's advice on Annex 3 for acceding countries is particularly relevant in this case.
In its calculations, Korea is effectively comparing live animals in carcass weight equivalents (the administered price), with meat (the external reference price). In terms of the Harmonised System, this is comparing products in 0102 (live bovine animals) with 0201-0202 (meat of bovine animals, fresh, chilled or frozen).
In order to have a rational calculation of the effect of Korea's beef price support, the fixed external reference price must be converted to the same stage in the processing chain254 as the applied administered price. C.i.f. unit values are generally considered to correspond most closely to domestically produced products at the wholesale level and much of the difference between wholesale
252 Accession to the World Trade Organization: Information to be Provided on Domestic Support and Export Subsidies in Agriculture: Technical Note by the Secretariat, WT/ACC/4, paragraph 15.
253 As provided in Article 1(a)(ii) of the Agreement on Agriculture.
254 The different stages of processing of some agricultural products represent only a minor change in some cases, but for many livestock products such as beef, the products are very different - live animals versus a slaughtered, processed and often further prepared product.
WT/DS161/R WT/DS169/R
Page 114
and the point of first sale (farm gate) prices represents processing costs. In the case of beef, this indicates that slaughtering costs should be deducted from the c.i.f. unit value in order to reflect the same stage of processing as Korea's applied administered price which is measured in carcass weight equivalents of live animals.
New Zealand has calculated the external reference price at the appropriate stage of processing based on Korean slaughtering costs from information from the Korean MAF.255 The fixed external reference price thus calculated is 1,514 won per kilogram carcass weight.
The eligible production of beef
New Zealand submitted further that Korea has also used an incorrect figure for the quantity of eligible production in its calculation of market price support. Market price support can exist through a variety of means, but in all cases it results in transfers from consumers to producers which provide support to those producers. Often state purchases will be used in order to maintain the government- set prices of products, effectively ensuring the transfers from consumers to producers. But the actual quantity of purchases is not relevant in the calculation of market price support. The language of Annex 3 makes it clear that it is the quantity of production which is eligible to receive the applied administered price which is relevant.
In situations where governments only enter the market as "buyers of last resort", i.e. in order to take "excess" product off the market to ensure farmers receive the price set by governments, government purchases may be minimal or even zero. But agricultural producers are "eligible" to receive the government-set price for all of their production because, in order to secure supplies, consumers must be prepared to match or better the government-set price.
255 As the price support measure (applied administered price) was specified at the point of first sale on the basis of carcass weight equivalents of live animals, the fixed external reference price should have been converted to the same basis. This can be achieved by deducting those costs necessary to transform beef from the live animal to a carcass, i.e. the slaughtering costs.
Table 1 - Fixed external reference price for beef at point of first sale
Item Description | Years | Value (won/kg) |
(a) c.i.f. unit values | 1989 | 1,784 |
1990 | 1,828 | |
1991 | 1,858 | |
Average | 1,823 | |
(b) Slaughtering costs | 1989 | 287 |
1990 | 305 | |
1991 | 337 | |
Average | 310 | |
(c) c.i.f. at point of first sale equivalent | 1989 | 1,497 |
1990 | 1,523 | |
1991 | 1,521 | |
Average | 1,514 |
Source:
Answers by Korea in the Committee on Agriculture, G/AG/R/13, page 37.
Korea MAF as reported by OECD in "Electronic Data Product on Producer and Consumer Subsidy Equivalent (PSE/CSE)", Statistics on Diskette, (revised annually), Table 2.7, referred to in OECD, Agricultural Policies in OECD Countries: Monitoring and Evaluation.
The figures in (c) are those in (a) less those in (b), in other words c.i.f. unit values less slaughtering costs. (Slaughtering costs appear to have been estimated as representing a consistent 4.6 per cent of the Korean wholesale price for beef in each year).
WT/DS161/R WT/DS169/R
Page 115
The ordinary meaning of "eligible" is also at odds with Korea's use of actual purchases of beef. The meaning of eligible is "fit, suitable or qualified". It is not related to the more restricted amount implied by actual purchases. This is also confirmed by material produced by the GATT Secretariat during the Uruguay Round in order to assist in the preparation of Uruguay Round participants' initial lists of specific binding commitments.256 These initial lists eventually became the basis for Korea's (and others') domestic support reduction commitments. In that note, the Secretariat clarified that: "For an open-ended intervention or buy-in scheme, this [eligible production] may be total production. If the scope of the measure is limited to a particular quantity, it is this limited quantity that should be used".257 There is no reference in the explanatory note to the actual quantity bought-in – in fact, unless a measure was limited to a particular quantity, it is clear the presumption was that eligible production would equal total production. The note did not "interpret" the text, but gave "further clarification where possible."258
In the case of Korea's beef support, the measure was apparently limited to a particular quantity. In 1997, for example, that quantity was 500 head per day of Hanwoo cattle above 500 kg. within the 27 January to 31 December 1997 period (340 days). A total of 170,000 head of Hanwoo cattle were thus eligible in the 1997 calendar year as used by Korea for its domestic support commitments. In carcass weight terms, this amounts to 52,615 tonnes for Hanwoo cattle alone.259 But, as stated by Korea "the said programme was implemented not only for the Hanwoo but also for [dairy] cattle and hybrid cattle of Cheju Island … as well ."
The fact that Korea notified a total figure of 35,127 tonnes in 1997 is clear evidence that eligible production, and thus market price support, has been underestimated. Indeed, given that the purchase programme covered such a wide category of beef cattle, there would be justification in assuming that, in fact, eligible production should equal total beef production. Consumers had to compete with the government-set price to buy stock – this is what resulted in a transfer from consumers to producers rather than the actual purchases made by the government – and this affected all production. Total beef production in 1997 was around 237,000 tonnes.260
For 1998, the situation was more complex. There were several changes in the cattle purchase programme. Nevertheless, New Zealand has attempted to estimate the 1998 eligible production level for Hanwoo beef (only) on the basis of information provided in Korean press releases.261 The
256 "Explanatory notes on the formats for the establishment of lists of specific binding commitments under the agriculture reform programme", Informal technical note by the [GATT] Secretariat, 27 January, 1992. While the note was prepared in relation to the "Draft Final Act Embodying the Results of the Uruguay Round" (MTN.TNC/W/FA), the language concerning the calculation of market price support is identical in that document and the Agreement on Agriculture.
257 Ibid, page 21.
258 Ibid, paragraph 2. It went on to say "It does not constitute a basis for evaluating or assessing specific binding commitments by any participants".
259 170,000 head at 500 kg.(0.5 tonne) per head multiplied by the conversion coefficient of 61.9 per
cent, i.e. ((170,000*0.5)*.619) = 52,625 tonnes carcass weight equivalent. The conversion coefficient is the one used by Korea.
260 [Korean] MAF, Statistical Yearbook of Agriculture and Forestry (1998) and MAI (1998) as reported in the MAF web site http://152.99.166.2/english/maf_03_12.html.
261 Korea generally specified its price support programme in terms of a maximum number of Hanwoo animals which would be eligible for purchase each day - sometimes in particular weight ranges. By calculating
the number of days each of the variations applied to, it is possible to estimate the total number of Hanwoo animals eligible for purchase and the carcass weight equivalent of those animals. The following tables present this information. The quantities of dairy and hybrid cattle of Cheju Island are not included below because detailed information is not available.
WT/DS161/R WT/DS169/R
Page 116
resultant figure is 35,328 tonnes for Hanwoo beef alone. New Zealand's calculation comes out marginally lower than the total beef figure of 35,899 tonnes given by Korea for 1998. This simply reflects an under-estimation resulting from a lack of data on the eligible number of dairy steers and hybrid cows.
The AMS calculation for beef
On the basis of the adjusted fixed external reference price determined by New Zealand and New Zealand's improved calculation of eligible production levels (but for Hanwoo beef alone), the following table recalculates Korea's beef AMS for 1997 and 1998. The product-specific AMS are then compared to the values of production supplied by Korea for 1997 and 1998:
Table 2 - Eligible production for Hanwoo Beef in 1997
Period | Duration (days) | Head per day | Eligible Production (Total Head) | Carcass weight equivalent (tonnes) |
25.1.97-31.12.97 | 340 | 500 | 170,000 | 56,615 |
Table 3 - Eligible production for Hanwoo Beef in 1998
Period | Duration (days) | Head per day/ (weight kg.) | Eligible Production (Total Head) | Carcass weight equivalent (tonnes) |
1.1.98-15.6.98 | 167 | 500 (500 kg.) | 83,500 | 25,843 |
16.6.98-7.7.98 | 21 | 340 (500 kg.) | 7,140 | 2,210 |
21 | 160 (399 kg.) | 3,360 | 786 | |
8.7.98-15.7.98 | 7 | 340 (500 kg.) | 2,380 | 737 |
7 | 160 (399 kg.) | 1,120 | 262 | |
16.7.98-18.7.98 | 4 | 340 (500 kg.) | 1,360 | 421 |
4 | 160 (399 kg) | 640 | 150 | |
19.7.98-26.7.98 | 7 | 160 (399 kg) | 1,120 | 262 |
27.7.98-31.12.98 | 35 | 350 (399 kg) | 12,250 | 2,864 |
35 | 250 (350 kg) | 8,750 | 1,795 | |
Total | 241 | 121,620 | 35,328 |
Source:
Information provided in various Korea MAF press statements. Carcass weight equivalents reflect the weight of the animal category (top end of the range where a range was given) multiplied by eligible production and the relevant carcass/live-weight ratios. The ratios were 61.9 per cent in 1997 and, in 1998, 61.9 per cent for 500 kg. steers and 58.6 per cent for other (medium) steers.
WT/DS161/R WT/DS169/R
Page 117
Table 4 - Calculation of the product-specific AMS for Hanwoo beef and de minimis calculation
Year | AAP | FERP | EP | MPS | OS | Total AMS | VP | Percentage |
won/kg. | tonnes | billion won | % | |||||
1997 1998 | 7,351.1 6,883.2 | 1,514 1,514 | 52,615 35,328 | 307.1 189.7 | 1.09 1.40 | 308.2 191.1 | 2,107 1,836 | 14.6 10.4 |
Key:
AAP - Applied administered price – Source: Notifications of Korea
FERP - Fixed external reference price - from Table 1
EP - Eligible production - from Tables 3 and 3
MPS - Market price support – Source: ((AAP-FERP)*EP)
OS - Other support – Source: Notifications of Korea
VP - Value of production – supplied by Korea
By simply adding the actual purchases of dairy cattle and hybrid cattle of Cheju Island262 to the eligible Hanwoo production as set out in the previous table, the proportion of the total value of beef production accounted for by the beef product-specific AMS increases to 15.8 per cent and
11.7 per cent in 1997 and 1998 respectively. Of course, including the eligible production of dairy cattle and hybrid cattle of Cheju Island would result in even higher figures. Given the nature of the scheme, eligible production could even be argued to be total beef production.263 Despite the under- estimation resulting from data deficiencies concerning dairy steers and hybrid cows, therefore, Korea's product-specific beef AMS significantly surpassed the 10 per cent de minimis level in both years. Thus the product-specific AMS for beef should have been included in the calculation of Korea's Current Total AMS in both years. With no other changes to Korea's notified Current Total AMS, the correct Totals should therefore be as follows:264
Table 5 - Adjusted Current Total AMS for Korea 1997 and 1998
Year | Current Total AMS as notified by Korea (billion won) | Product Specific AMS for Beef (billion won) | Correct Current Total AMS (billion won) |
1997 | 1,936.95 | 308.2 | 2,245.2 |
1998 | 1,562.77 | 191.1 | 1,753.9 |
In 1997, the correct Current Total AMS for Korea as calculated by New Zealand exceeds the annual commitment level as notified by Korea of 2,028.65 billion won contrary to Article 3.2 of the Agreement on Agriculture. In 1998, the correct Current Total AMS (but including only Hanwoo beef instead of total eligible beef) falls below the notified commitment level of 1,951.70 billion won. New Zealand does not have information at its disposal to assess whether, if all eligible beef production was included, the Current Total AMS would have been surpassed. Nevertheless, Korea
262 Non-Hanwoo purchases amounted to 4,083 tonnes in 1997 and 4,454 tonnes in 1998.
263 According to [Korean] MAF, Statistical Yearbook of Agriculture and Forestry (1998) and MAI
(1998) as reported in the MAF website http://152.99.166.2/english/maf_03_12.html, total Korean beef production (Hanwoo plus other) was 237,000 tonnes in 1997. The use of total production as eligible production yields a Total beef AMS of around 1,300 billion won in that year.
264 As noted above, this still under-estimates the product-specific AMS for beef because of the under- estimation of eligible production.
WT/DS161/R WT/DS169/R
Page 118
still failed in 1998 to include beef in its Current Total AMS contrary to Article 7.2(a) of the
Agreement on Agriculture.265
6. Conclusion
For the reasons cited above, New Zealand requested the Panel to find that:
the restrictions imposed by Korea on the sale and distribution of imported beef constitute a violation of Article III:4 of GATT 1994;
the tendering process adopted by the LPMO for the import of beef results in treatment less favourable than that provided for in Korea's Schedule of Concessions, in breach of Article II:1(a) of GATT 1994, and constitutes conduct by the LPMO that is in breach of the non-discriminatory treatment requirement in Article XVII:1(a) of GATT 1994; and
the maintenance by the LPMO of minimum auction prices accords to imported beef treatment less favourable than that accorded to domestic beef, in contravention of Article III:4 of GATT 1994.
Concerning domestic support, New Zealand submitted that, through incorrectly applying Annex 3 of the Agreement on Agriculture in calculating product-specific support for beef producers, Korea has erroneously excluded support to beef producers from the calculation of its Current Total AMS in 1997 and 1998 in violation of Article 7 of the Agreement on Agriculture. Had Korea correctly included support for beef producers in its Current Total AMS in 1997, the commitment level specified in Section I of Part IV of its Schedule would have been exceeded, thus Korea was also in violation of Article 3.2 of the Agreement on Agriculture in that year. New Zealand requested that the Panel recommend to the DSB that Korea bring these measures into conformity with the provisions of GATT 1994 and the Agreement on Agriculture.
265 Article 7.2(a) provides: "Any domestic support measure in favour of agricultural producers, including any modification to such measure, and any measure that is subsequently introduced that cannot be shown to satisfy the criteria in Annex 2 to this Agreement or to be exempt from reduction by reason of any other provision of this Agreement shall be included in the Member's calculation of its Current Total AMS".
WT/DS161/R WT/DS169/R
Page 119
INTERIM REVIEW266
On 24 May 2000, the United States and Korea requested the Panel to review sections of the Interim Panel Report which had been issued to the parties on 10 May 2000. None of the parties requested an additional meeting with the Panel. Invoking WTO panel practice, the parties reserved the right to respond to other parties' comments on the Interim Panel Report. On 24 May the Panel invited the three parties, should they so wish, to respond to each others' comments by 12 noon on Tuesday, 30 May 2000. On 30 May the three parties sent responses to each others' comments.
It is mainly Korea that has submitted review comments on various aspects of the interim report including those relating to the legal tests under Article III:4 of GATT, the consequence of Korea's legal beef import quota on the Article III:4 claims, the Panel's refusal to consider that the dual retail system is a measure necessary to secure compliance with Korea's Unfair Competition Act, the Panel assessment of the LPMO's practices between the end of October 1998 and the end of May 1999, the Panel's considerations of the Complaining parties claims pursuant to Articles 3,4,6 and 7 of the Agreement on Agriculture and the Panel's use of the provisions of Annex 3 as well as the Panel's consideration that its first duty, in light of the Complaining parties claim that Korea exceeded its scheduled commitments with respect to domestic support, was to identify such commitments in Korea's Schedule. The United States requested the Panel mainly to review some of its legal analysis under Article XX(d).
In addition, Korea pointed the Panel to factual errors in the data used by the Panel and initially provided by the United States. Since all parties agree on these mistakes and since the correction of these errors does not affect the reasoning developed in the panel report, the Panel has decided to revise such data accordingly. Parties have also pointed to some linguistic and typographical mistakes which the Panel has taken into account when revising its findings.
On a few occasions, Korea claimed that in its findings, the Panel did not fully reflect Korea's arguments or refused to take them into account. The Panel would like to insist that it has always taken into account all Korea's arguments but the Panel has summarized only those arguments which it considered particularly relevant to its legal analysis. The Panel recalls that Korea was given ample opportunity to comment on the descriptive part of this Panel report. To ensure full transparency and due process, the Panel agrees to revise the descriptive part of its report with a view to reassuring Korea that all its arguments are fully reflected in the Panel report.
The Panel would like to add the following comments on the parties' review requests and responses: Korea argues that the Panel is inconsistent in its findings that there is no "trade effect" test required to prove a violation of Article III:4 of GATT. The Panel would like to reiterate that the GATT/WTO jurisprudence has clearly established that when establishing a violation of Article III:4, the Complaining parties do not need to demonstrate any actual or future specific trade effects caused by the measure challenged. This does not limit the obligation for the Panel to discuss whether the said measure is treating imported products less favourably than domestic products. This is why the Panel's discussion is focussed rather on the main features of the dual retail system and the "architecture"267 of the measure challenged rather than the factual or economic context of the Korean market, including the effect of its beef import quota, its financial crisis or the health scares.
266 Pursuant to Article 15.3 of the DSU, the findings of the panel report shall include a discussion of the arguments made at the interim review stage. Consequently the following section entitled Interim Review is part of the Findings of this Panel report.
267 See for instance in the context of an Article III:2 analysis, Japan – Alcoholic Beverages, page 31 : "Although it is true that the aim of a measure may not be easily ascertained, nevertheless its protective application can most often be discerned from the design, the architecture, and the revealing structure of a measure" (emphasis added).
WT/DS161/R WT/DS169/R
Page 120
Korea submits that the Panel did not properly reflect its arguments with regard to the fact that it had filled its import quota. The Panel has revised its findings to use the very wording of Korea. The Panel would like to reiterate three points. First, the Panel considers that Korea was under no obligation to import any amount of beef but rather, pursuant to its annual import quota, Korea had a right to limit importation to the level of its scheduled quota. Second, the Panel considers that in 1997 and 1998 imports of beef into Korea were below its quota limits. Third, the existence of such scheduled beef import quota does not affect the legal assessment of the WTO compatibility of Korea's dual retail system for beef. It is always for the Complaining parties to bear the burden of proof that Korea's dual retail system, in segregating imported and domestic beef, is violating the WTO national treatment obligation. There was no need to further address the actual trade effects of such dual retail system or whether the low level of imported beef was rather the consequence of the import quota or the financial crisis or the health scares. There was no need to examine whether there was a correlation between the level of imported beef and the dual retail system since the level of imports and the actual commercial impact of the dual retail system need not be demonstrated in an Article III:4 analysis. As such, the dual retail system is inconsistent with Article III:4 of GATT and the existence of Korea's import quota does not alter the normal GATT evidentiary rules or those relating to the burden of proof. Finally, the Panel did not conclude that the number of imported beef stores was in any manner "the reliable indicator of the effect of the dual retail system on imported beef" as the Panel was, and still is, of the view that it was under no obligation to assess the trade effects of the dual retail system.
Korea claims that it never agreed that its dual retail system "affects" trade since Korea is of the view that its dual retail system is not discriminatory. Korea is misquoting the Panel findings and confusing two concepts, i.e. (1) whether the measure at issue is an internal regulation – a regulation or a requirement affecting the internal sale, offering for sale, purchase or distribution of imported and/or domestic products – and (2) whether such internal regulation is discriminatory against imported products. Clearly, the dual retail system for beef affects the sale, offering for sale and distribution of beef in the Korean market. In addition, and in a separate analysis, the Panel reached the conclusion that such dual retail system was indeed discriminatory by treating imported beef less favourably than domestic beef.
Korea submits that it does not understand the Panel's discussion on national treatment in paragraphs 611 to 614 of the Interim Panel report. The Panel would like to reiterate that the object of the national treatment obligation is to ensure that imported products are not treated less favourably than domestic products. In this sense, Article III:4 is not concerned with the treatment (or mistreatment) that WTO Members may impose on their domestic products but rather whether, through the application of an internal mandatory regulation, imported products are treated less favourably than domestic products. In this context the Panel is of the view that segregation of imported products in the Korean domestic market is inherently less favourable to imported products which are excluded from the normal domestic distribution system, limiting thereby consumers choices as further developed in the Panel's findings. This conclusion is independent from the effect of the Korea's beef import quota which also reduces the availability of imported beef. Again, the Panel reiterates that when assessing the compatibility of the dual retail system with the national treatment obligation of Article III:4 of GATT, the Panel is under no obligation to assess the actual trade effects of the quota on the availability of imported beef or the trade effects of the dual retail system. In such a determination, the Panel is not required to examine any specific data and is authorized to discuss the potential consequences of such a system on the imported products relying on hypothetical situations268, always with a view to better understand the functioning of the Korean dual retail system and the less favourable treatment to imported products caused by the segregation of imported products into the Korean domestic market. Finally, basic economic principles suggest that the segregation of imported products into the Korean market is certainly one of the factors that facilitate the maintenance
268 See for instance what was done by the panel in Canada – Periodicals, upheld by the Appellate Body report, page 23. See also the Panel report on Indonesia - Automobiles, at paragraph 14.113.
WT/DS161/R WT/DS169/R
Page 121
of the price differential between imported and domestic beef. In any case, with a view to ensuring clarity, the Panel has slightly revised the wording of its findings accordingly.
Korea submits that, in its discussion on the applicability of Article XX(d), the Panel did not reflect fully Korea's arguments relating to the "primitive" state of Korea's beef retail stores which would make it difficult for Korea to effectively prosecute the perpetrators of fraud. The United States argues that the dual retail system and the Korean Unfair Competition Act had been found only to share similar objectives and that the Panel should have concluded that the Korean dual retail system was not adopted to secure compliance with the Unfair Competition Act, pursuant to Article XX(d) of GATT. The Panel is of the view that although not necessary, and disproportionate, the Korean dual retail system does more than simply share the same objectives as the Unfair Competition Act, to the extent that it reduces the opportunities and thus the temptations for butchers to misrepresent foreign beef for domestic beef. In this sense, the dual retail system ensures compliance with the prohibition against misrepresentation as to the origin of beef pursuant to the Unfair Competition Act. With a view to ensuring clarity, the Panel has slightly revised the wording of its findings accordingly.
With reference to the Panel's discussion that no dual retail system is in place in other sectors of the Korean economy, Korea has pointed to factual errors as to the level of imported beef in 1990 and the proportion between dairy cow meat and imported beef during the same period. The United States admits the errors. Under the circumstances (in light of the agreement of all parties) the wording the findings has been slightly revised accordingly.
Korea also submits that the Panel does not understand the background material it provided or misrepresents the fact when the Panel states that the December 1989 report for the National Assembly can be used to substantiate that there are alternatives available to Korea to combat fraud. Korea adds that this 1989 report was submitted in the process of a one-time, special investigation of fraudulent practices. Korea submits that its main argument relates to the cost of continuous policing. The Complaining parties agree with the findings and note Korea's admission that it has the capacity to investigate fraud. First, the Panel would like to insist that it had clearly understood that the December 1989 report was the result of a special investigation. Korea had thus demonstrated that it has the capacity to investigate. As to the related costs, the Panel has addressed this matter separately and concluded that compliance with the WTO Agreement may sometimes require demanding and even costly adjustments, as the WTO Agreement is a bargain. As stated by the Appellate Body in its report on Japan – Alcoholic Beverages:
"The WTO Agreement is a treaty -- the international equivalent of a contract. It is self- evident that in an exercise of their sovereignty, and in pursuit of their own respective national interests, the Members of the WTO have made a bargain. In exchange for the benefits they expect to derive as Members of the WTO, they have agreed to exercise their sovereignty according to the commitments they have made in the WTO Agreement."269 (Emphasis added.)
The Panel has deleted what was paragraph 654 of the Interim Panel report.
With reference to the Panel's discussion on the LPMO's tender practice to make a distinction between grass-fed and grain-fed imported beef, Korea submits that the Panel seems to imply that the fact that the LPMO failed to purchase grass-fed beef on one or two occasions would constitute an import restriction. The Panel would like to reiterate that WTO Members are not obliged to import any amount of foreign products, but they are prohibited, as a general principle, from interfering with any import-export flows and from imposing any discriminatory distinctions between like imports. To the extent that Korea imposes import conditions, not otherwise contained in its Schedule, such import
269 See the Appellate Body report in Japan – Alcoholic Beverages, page 15.
WT/DS161/R WT/DS169/R
Page 122
conditions do necessarily constitute import restrictions for grass-fed beef contrary to Articles XI and II of GATT. The LPMO, a state-trading enterprise, was under no obligation to import grass-fed beef, but it is prohibited from making any discrimination against grass-fed beef. To the extent that such grass-fed/grain-fed distinction was never negotiated as a condition to its Schedule, Korea, through its state-trading enterprise, is prohibited from introducing such discrimination. WTO Members cannot avoid their tariff and other scheduled obligations through the use of a state-trading enterprise.
With reference to the fact that the LPMO did not call for tenders and did not discharge its beef imports between the end of October 1998 and the end of May 1999, Korea submits that the Panel should have taken into account the fact that if it would not have been commercially reasonable for Korea to discharge its stocks at a time when replacement purchases would have needed to be made at very high prices, owing to the currency devaluation. The Panel would like to insist that during that same period the level of beef stocks was very high and not commercially reasonable. There was therefore no need for Korea to "replace" all such stocks. Moreover, in not inviting tenders, the LPMO had no way of knowing whether imported beef was available at prices that would permit the LPMO to import without incurring any financial losses. In not inviting tenders the LPMO effectively closed the Korean market to imported beef to the extent of LPMO’s allocated quota share. Korea also claims that the Panel ignored the fact that there were health scares during the same period. The Panel would like to add that Korea did not offer any evidence, other than newspapers clippings, that the cited health scares had any impact on import levels during the relevant period or that they affected the prices of imports or the prices Korean consumers were willing to pay for imported beef.270 With a view to ensure clarity the Panel has slightly revised the wording of its findings accordingly.
Concerning the claims relating to Korea's domestic support to its beef industry, Korea submits that the Panel misrepresented Korea's argument that it was suffering prejudice from the fact that the Complaining parties had not listed Annex 3 in their request for establishment of a panel, although they referred to Annex 3 in their submissions and arguments. The Panel would like to add that although Korea did submit generally that it could not adequately prepare its defense, the precise point made by the Panel is that Korea never claimed nor argued that it had ever been uncertain about the nature of the Complaining parties' claims regarding Korea's domestic support obligations. In fact, Korea in its first submission submitted detailed explanations on how it had calculated its aggregate measurement of support for beef. In addition the Panel recalls that in the recent report on US - FISC the Appellate Body insisted that "good faith"271 was a necessary component of any challenge of a panel's terms of reference. This implies that a party's claim that it has misunderstood a request for consultation or a request for a panel should be raised as soon as possible. In the present dispute, Korea alluded to this point only in its rebuttals and made a formal request one day before the second meeting of the Panel with the parties. With a view to ensuring clarity, the Panel has slightly revised its findings accordingly.
Moreover, the Panel would like to reiterate that it considers that a claim that the level of aggregate measurement of support was greater than that provided for in Korea’s Schedule necessitates a calculation of the current support using the methodology prescribed in the Agreement on Agriculture. Annex 3 contains one of those methodologies which is applicable in the present dispute for the reasons set out in Section I hereafter.
270 The Panel cannot see any link with an alleged health scare of September 1997 or June 1999 and the period of the end of October 1998 and the end of May 1999.
271 See the US – FISC, paragraph 166: "The same principle of good faith [Article 3.10] requires that responding Members seasonably and promptly bring claimed procedural deficiencies to the attention of the complaining Member, and to the DSB or the Panel, so that corrections, if needed, can be made to resolve disputes. The procedural rules of WTO dispute settlement are designed to promote, not the development of litigation techniques, but simply the fair, prompt and effective resolution of trade disputes."
WT/DS161/R WT/DS169/R
Page 123
Korea submits that the Panel should not have decided which of the two columns of figures set out in its Schedule constituted Korea's committed levels of domestic support. Korea even claims that none of the Complaining parties have argued the relevance of the unbracketted numbers. The Panel would like to insist that the United States, throughout its submissions, has always referred to the unbracketted column, as containing the proper list of commitment levels. But more importantly, the Panel considers that it was obliged to determine first which were Korea's scheduled commitments in order to comply with its mandate to determine whether Korea exceeded such commitments. The Complaining parties have claimed that Korea violated Article 3 of the Agreement on Agriculture which states that a Member shall not provide domestic support in excess of the commitment levels contained in its Schedule. Therefore, the first obligation of this Panel was to identify which were the commitment levels contained in Korea's Schedule. Since Korea's Schedule contained two columns, only one of them was to be identified as the right one. Korea's reference to footnote 1 of its Schedule only explains the different base year used for each column Korea's statement to the Committee on Agriculture mentioned in footnote 410 of the Interim Panel Report (footnote 428 of this Panel report) does not help Korea: statements to the Committee on Agriculture do not "legalize" measures otherwise incompatible with the WTO. Moreover, the document entitled "Notification Requirements and Formats" provides clearly that the "Information submitted under these formats is without prejudice to the consistency of the arrangements notified with the relevant provisions of the WTO".272
On this matter, the Panel would like to insist that it is not expanding its terms of reference; it is only complying with its mandate. Korea submits that the Panel is inconsistent when it decided not to examine the Base Total AMS itself or the related data and methods of calculation used by Korea. The Panel indeed refused to re-open the calculation of Korea's scheduled commitments. The Panel has not examined how Korea arrived at those two sets of numbers. However, the Panel was under the obligation to identify which was Korea's set of commitment levels in order to determine whether Korea has exceeded them. The Panel decided that the unbracketted set of numbers was the only set of commitment levels that bore any relation to the initial Base Total AMS.
Korea also submits that it should be allowed to follow the commitment levels contained in its bracketted column because the commitment level for year 2004 is the same for both sets of numbers. The Panel would like to reiterate that where the drafters of the Agreement on Agriculture intended to allow for flexibility in the amount of an annual reduction commitment, they made specific provision for it, such as in Article 9.2(b) relating to export subsidy commitments. No similar provision exists in respect of domestic support.
Finally, the Panel would also like to stress that, of course, it is not questioning Korea's good faith attempt to comply with its notification commitments.
272 See Document G/AG/2 adopted by the Committee on Agriculture on 8 June 1995.
WT/DS161/R WT/DS169/R
Page 124
FINDINGS
GENERAL CONSIDERATIONS273
Brief description of the beef import regime in Korea
507. Korea's import regime for beef has a long history. In 1989 Australia, the United States and New Zealand requested that a GATT Panel be established to examine Korea's import regime for beef, claiming that the Korean restrictions could no longer be justified for reasons relating to the protection of Korea's balance-of-payments and were otherwise GATT inconsistent. Prior to this panel request, there had been no commercial imports of beef into Korea between 1985 and 1988.
508. The 1989 panel findings274 called on Korea to bring into consistency with the GATT 1947 a number of specific measures taken in 1984 and 1985, and to enter into consultations with Australia, New Zealand and the United States with a view to establishing a timetable for the elimination of the remaining import restrictions on beef.
509. Consultations between Korea, Australia, New Zealand and the United States resulted in the conclusion of separate and parallel bilateral "Records of Understanding" (ROUs) in 1990 and 1993 intended to implement the findings of the 1989 panel and the consultations undertaken by Korea in the GATT Committee on Balance-of-Payments Restrictions (hereafter called the "Committee on Balance-of-Payments") in 1989.
510. The 1990 ROUs established a system of annual quotas for the period 1990 to 1992 and a "Simultaneous Buy/Sell" (SBS) mechanism intended to distribute a proportion of the annual quotas to entities other than the LPMO, the public body established by Korea in 1988 to administer the importation of beef. Additional ROUs, which entered into force in July 1993, continued the system of annual quotas to the end of 1995 and significantly expanded the scope of, and participation in, the SBS system. Korea and the United States entered into another ROU in December 1993. Following the ROUs, import authority within the quota was divided between the LPMO and the SBS system, with the amounts allocated to LPMO decreasing annually. The SBS system was meant to furnish foreign beef suppliers with the opportunity to sell directly to end users and customers through super- groups representing different sectors of Korea's industry.
2. Brief description of the claims
511. The United States and Australia submit claims with reference to seven main measures,275 including some more specific measures. In general terms, the Complaining parties have claims against: (i) the dual retail system for beef; (ii) the alleged restrictions and less favourable treatment imposed by the LPMO on the importation and distribution of foreign beef; (iii) the alleged restrictions and less favourable treatment imposed by the functioning of the SBS system; (iv) the LPMO's minimum auction prices and other discharge and tendering practices as well as the LPMO's alleged refusal to import. In addition, Australia claims that (v) the grass-fed/grain-fed distinction imposed by the LPMO in its importation of beef is incompatible with various provisions of the WTO Agreement.
273 The Panel has taken into account and considered all arguments submitted by the parties. However, throughout these findings, only the parties' arguments particularly relevant to the Panel's legal analysis have been summarized. A more exhaustive description of the parties arguments is contained in the previous sections of this Panel report.
274 The 1989 panel reports on Korea – Beef, complaint by Australia and complaint by the United States are hereinafter referred to as the "1989 Panel reports". There was also a similar panel report involving New Zealand.
275 See for instance, paragraphs 49 and 51 of this Panel report.
WT/DS161/R WT/DS169/R
Page 125
The United States also has a general claim that, (vi) Korea's import licensing system constitutes a restriction which is inconsistent with WTO provisions. Finally, the Complaining parties have also submitted claims, (vii) regarding Korea's domestic support to its bovine industry.
512. Korea challenges the general and more specific claims. In addition to its various specific defences, Korea submits, as a general defence, that pursuant to its Schedule of Concessions, many, if not all, of the 17 measures276 challenged by the Complaining parties, constitute "remaining restrictions" which benefit from a "transition period" and are required to be eliminated only by 1 January 2001.
3. Methodology followed by the Panel
513. In view of the nature of the general defence submitted by Korea, which requires this Panel to interpret the WTO obligations of Korea in the light of the term "the remaining restrictions" contained in Korea's Schedule, taking into account the historical context surrounding the inclusion of this term, the Panel shall proceed in the following way. The Panel will start by analysing the meaning and scope of the terms of Korea's Schedule which provides that "the remaining restrictions shall be eliminated or brought into conformity with GATT from 1 January 2001". This will allow the Panel to identify which of the disputed measures, if any, can be considered as "covered" by these words and hence benefit from a "transition period".
514. Measures that do not benefit from such a transition period will then be examined by the Panel for a determination on their consistency with various provisions of the WTO according to the following sequence. The first set of measures that the Panel examines are those relating to the dual retail system for beef. All parties have emphasised the importance of such measures. Moreover, the effect of the dual retail system will be further amplified once the beef import quota is phased out. The Panel thereafter examines claims relating to specific aspects of the SBS system and the LPMO rules. The WTO compatibility of certain import and distribution practices by the LPMO/NFCL, in 1997 and 1998 - namely the refusal to discharge imported beef into the Korean market and the refusal to call for tenders – and the grain-fed and grass-fed distinction practiced by the LPMO when it calls for tenders, is then determined. Finally, claims relating to the alleged excessive domestic support provided to the Korean beef industry are assessed.
515. The Panel notes that this single panel was mandated by the DSB to examine both the requests of the United States and Australia277. On occasion, the Complaining parties have differed in their description of the Korean measures they challenge and they have sometimes submitted different claims on the same measures. In view of the provisions of Article 9.2 of the DSU, the Panel has ensured that the "rights which the parties to the dispute would have enjoyed had separate panels examined the complaints are in no way impaired".
KOREA'S DEFENCE THAT "THE REMAINING RESTRICTIONS" SHOULD BENEFIT FROM A TRANSITION PERIOD AS ESTABLISHED IN ITS SCHEDULE LX
516. The Panel first examines the status and the scope of the term, "the remaining restrictions".
industry.
276 Except the measures covered by the claims relating to the domestic support provided to Korea's beef
277 See paragraph 3 of this Panel report.
WT/DS161/R WT/DS169/R
Page 126
1. Legal Status of Note 6(e) to Korea's Schedule LX
Arguments of the Parties
In support of its claim that its Schedule of Concessions provides for a transition period until 1 January 2001 to eliminate or bring into conformity with the WTO all "the remaining restrictions" on beef imports, Korea relies on Note 6(e) in its Schedule which reads:
"According to the results of the 1989 consultation with GATT/BOP Committee and the Uruguay Round multilateral trade negotiation, the remaining restrictions on the items marked as "* Note 6(a)", "* Note 6(b)", "* Note 6(c)", "* Note 6(d)", or "* Note 6(e)" in column 5 of Section I-A of Part I of this schedule shall be eliminated or be brought into conformity with GATT provisions from the dates specified as follows: * Note 6(a): 1995; * Note 6(b): Jan. 1, 1996; * Note 6(c): Jul. 1, 1996; * Note 6(d): Jul. 1, 1997; and * Note 6(e): Jan. 1, 2001." (emphasis added)
According to Korea, Note 6(e), which specifically covers beef products - the subject of this dispute - defines the extent of its WTO commitments on the liberalization of its market for imports of the beef products in question. In support of this contention, Korea refers to Article II:1 of the GATT which provides that WTO Members shall accord to the commerce of other Members treatment no less favourable than that provided for in the appropriate part of the appropriate Schedule annexed to this Agreement.
Korea argues that the reference to "the remaining restrictions" in Note 6(e) can only possibly be interpreted as meaning that "all limitations placed on actions which continue to exist at the time of conclusion of the treaty (the Uruguay Round) and which are not in conformity with GATT should be eliminated or brought into conformity with GATT by January 1, 2001." Korea submits that almost all of the measures challenged by the Complaining parties were already in existence at the time of the Uruguay Round, implying that the measures in dispute are "remaining restrictions" within the ambit of Note 6(e).278
The Complaining parties submit that Members' schedules annexed to the Marrakesh Protocol to the General Agreement on Tariffs and Trade 1994 are integral parts of the GATT 1994.279 However, both Complaining parties reject Korea's claim that its commitments under Note 6(e) of its Schedule provide a transition period until 1 January 2001 for the measures at issue in this dispute to be brought into conformity with GATT/WTO.280
In Australia's view, the significance of the Note is limited, not only to GATT-inconsistent measures, but also to restrictions which are quantitative in nature, which were in existence at the time of the 1989 report of the GATT Committee on Balance-of-Payments281 and the 1989 GATT panel reports282, and which are specified in Korea's Schedule. Australia contends that the Uruguay Round negotiations only lengthened the transition period for these measures, but did not permit the maintenance of new, post-1989, GATT-inconsistent, measures.283 Australia also argues that the Panel
278 Paragraphs 54 and 105 of this Panel report.
279 Paragraph 60 of this Panel report.
280 Paragraphs 63 and 66, for instance, of this Panel report.
281 BOP/R/183.1, 27 October 1989.
282 Panel reports Korea – Beef, complaint by Australia; and complaint by the United States. (A similar panel exists with New Zealand. All three of which were adopted on 7 November 1989.)
283 Paragraph 77 of this Panel report.
WT/DS161/R WT/DS169/R
Page 127
should first determine whether the measures at issue in the present dispute are prima facie inconsistent with the WTO Agreement and then examine Korea's claim based on this so-called transition period.284
The United States argues that the term "remaining restrictions" interpreted in accordance with Article 31 of the Vienna Convention on the Law of Treaties ("Vienna Convention") leaves enough ambiguity to justify recourse to supplementary means of interpretation in accordance with Article 32 of the Vienna Convention. In this regard, the United States submits that in order to establish the true meaning of "remaining restrictions", the 1987 report of the GATT Committee on Balance-of- Payments, the 1989 GATT panel report, the 1989 report of the GATT Committee on Balance-of- Payments with respect to Korea's balance-of-payment measures, and the 1990 and 1993 Records of Understanding (ROUs) between the United States and Australia on the one hand and Korea on the other hand should all be examined as documents forming the historical background to the use of the words "remaining restrictions" in the Note to the Schedule. For the United States, the term "remaining restrictions" covers only restrictions that existed at the time of the balance-of-payment consultations and that have continued until the end of the Uruguay Round.285 For the United States, Korea's assertion of a transition period is in effect a unilateral reduction in its obligations under the WTO. According to the United States, Korea may not exempt itself from specific GATT obligations and to do so through reliance on a Note to its Schedule of Concessions would be inconsistent with the US - Sugar Head Note286 and EC - Bananas III287 cases in 1993.
Relevant jurisprudence on the WTO Schedules
The legal status of a Member's Schedule of Concessions was addressed by the Appellate Body in EC – Computer Equipment, where it was held that:
"…A Schedule is … an integral part of the GATT 1994 … Therefore, the concessions provided for in that Schedule are part of the terms of the treaty. As such, the only rules which may be applied in interpreting the meaning of a concession are the general rules of treaty interpretation set out in the Vienna Convention."288
In the Canada – Dairy dispute, which was concerned with the interpretation of a schedule in the area of agriculture (where schedules are of particular relevance), the Appellate Body confirmed that the provisions of schedules are terms of the treaty and should be interpreted together with the other relevant WTO treaty provisions. The Appellate Body also recognized that "although Canada's commitment on fluid milk was made unilaterally, both Canada and the United States understood that this commitment represented a continuation by Canada of current access opportunities …".289
More recently, the Appellate Body in Korea – Safeguards insisted on the fact that the WTO is "one treaty" and therefore all provisions (including Schedules) ought to be interpreted harmoniously, in an effective manner, in order to ensure that no clause or provision is reduced to "inutility".290
The Panel's assessment
The Panel considers that Note 6(e), as it relates to the beef products in question, is a specific elaboration of Korea's Schedule of concessions for the liberalization of its market for agricultural products. Therefore, Note 6(e) of Korea's Schedule must be read together with the other WTO
284 Australia, Rebut. paragraphs 1.4-1.5.
285 Paragraphs 69 -70 of this Panel report.
286 Panel report on US – Sugar Headnote, paragraphs 5.2-5.3.
287 Appellate Body report on EC – Bananas III, paragraphs 154-158.
288 Appellate Body report on Canada – Dairy, paragraph 131.
289 Ibid., paragraph 139.
290Appellate Body report on Korea – Safeguards, paragraph 81.
WT/DS161/R WT/DS169/R
Page 128
obligations. The Panel cannot ignore Note 6(e) and cannot reduce its "utility". The Panel therefore does not agree with Australia's interpretation that the term "remaining restrictions" refers only to the quotas already listed in Korea's Schedule. To interpret "remaining restrictions" to cover the restrictions already agreed upon and reflected in Korea's Schedule would reduce Note 6(e) to inutility.
The Panel does not agree with Australia's contention that the Panel should first determine whether the measures at issue are prima facie inconsistent with the WTO Agreement and then examine Korea's claim based on the transition period. As noted above, Note 6(e) must be read together with the other WTO obligations which the Complaining parties claim have been violated. The Panel needs to proceed to a determination of the obligations of Korea under "the WTO Agreement as a whole" with regard to each measure. Korea's Schedule does not constitute an exception to other GATT provisions, but rather qualifies Korea's obligations under the WTO Agreement. The Panel considers, therefore, that it is more appropriate to determine first the scope of the term "remaining restrictions". It would be a waste of its judicial function to assess the WTO compatibility of measures which will be phased out or otherwise brought into conformity with the WTO by 2001.
In this regard, the Panel notes that, in response to its questions, Korea stated that the coverage of remaining restrictions under Note 6(e) is "limited to all GATT-inconsistent measures that existed at the conclusion of the Uruguay Round". In the same answer, Korea also stated that if there are any remaining restrictions which have not yet been eliminated or brought into conformity with GATT, Korea still has one full year of time remaining to do so.291 Read together, these responses imply a recognition by Korea that all the measures characterized as "remaining restrictions" under Note 6(e) are GATT-inconsistent and are to be eliminated or brought into conformity with the WTO Agreement by 1 January 2001.
The Panel shall therefore first analyse the meaning and the scope of the terms of Korea's Note 6(e), and then identify which of the measures challenged in the present dispute are "covered" by the provisions of Note 6(e) and, therefore, benefit from a transition period until 1 January 2001, by which date they shall be eliminated or otherwise brought into conformity with the WTO Agreement.
2. Scope and interpretation of the term "the remaining restrictions"
At the outset, the Panel would like to emphasize that this dispute deals with issues arising out of a case from the past, in other words, the consequences of a dispute over alleged balance-of- payment problems that took place before the entry into force of the GATT 1994 Understanding on Balance-of-Payments Provisions (hereafter called the "GATT 1994 Understanding on Balance-of- Payments"). As mentioned by the Panel in India – Quantitative Restrictions292, prior to the WTO and the GATT 1994 Understanding on the Balance-of-Payments, the GATT Committee on Balance-of- Payments would often grant to a contracting party disinvoking Articles XII or XVIII:B of GATT, long periods for the phasing out of balance-of-payments restrictions, during which period the legal status of these remaining import restrictions was not altogether clear.293 Paragraph 13 of the GATT 1994 Understanding on Balance-of-Payments now clearly provides that:
"In those cases in which a time-schedule has been presented for the removal of restrictive measures taken for balance-of-payments purposes, the General Council may
291 Paragraph 59 of this Panel report.
292 Panel report on India – Quantitative Restrictions, paragraphs 5.28 to 5.53.
293 See for instance paragraph 13 of the Balance of Payments Report (BOP/R/183/Add.1): "The Committee understood that, on the basis of the implementation of these undertakings by Korea, other contracting parties will exercise due restraint in the application of their rights under the General Agreement in relation to products included in the programmes of liberalization".
WT/DS161/R WT/DS169/R
Page 129
recommend that, in adhering to such a time-schedule, a Member shall be deemed to be in compliance with its GATT 1994 obligations."
In the present dispute, as will be further explained below, the 1989 report of the GATT Committee on Balance-of-Payments concluded that Korea, after disinvoking Article XVIII:B of GATT294, had until 1 July 1997 to remove its remaining restrictions. The report recommended that Korea, Australia, New Zealand and the United States consult with a view to developing an orderly programme of liberalization which would phase out the remaining restrictions. The 1989 Panel report also recommended that "Korea hold consultations with the United States, Australia and New Zealand to work out a timetable for the removal of import restrictions on beef justified since 1967 by Korea for balance-of-payments reasons …"295 This led to the negotiation of various Records of Understandings (ROUs). Before the expiry of the transition period envisaged in the ROUs, the WTO Agreement was concluded in which Korea's "remaining restrictions" are again referred to in Note 6(e) to Korea's Schedule which provides that the remaining restrictions shall be eliminated by 2001. This is the context to which the Panel needs to refer in order to determine the scope of the term "the remaining restrictions".
The Panel must determine the meaning of the term "the remaining restrictions" in accordance with Article 3.1 of the DSU - which provides that: "Members affirm their adherence to the principles for the management of disputes heretofore applied under Articles XXII and XXIII of GATT 1947, and the rules and procedures as further elaborated and modified herein" - and with Article XVI:1 of the Agreement Establishing the WTO, which provides that: "…the WTO shall be guided by the decisions, procedures and customary practices followed by CONTRACTING PARTIES to GATT 1947 and the bodies established in the framework of GATT 1947." In addition, the Panel should be guided by Article 3.2 of the DSU, by applying customary rules of interpretation of public international law, including the provisions of Articles 31 of the Vienna Convention referring to the ordinary meaning of the terms, and those of Article 32 of the same convention referring to the preparatory work and the circumstances surrounding the conclusion of the Note 6(e) to Korea's Schedule.
Referring to the wording of Note 6(e) quoted above, the Panel notes that a "restriction" means "a thing which restricts someone or something, a limitation on action, a limiting condition or regulation".296 Korea's Schedule refers to "restrictions on the items marked…" in plural, so it clearly contemplates having application to more than one "limiting condition or regulation". This must be read together with the use of the term "the" in "the remaining restrictions on the items marked". Note 6(e) does not refer to "any" restrictions existing at the end of the Uruguay Round but only to "the" remaining restrictions. The use of the term "the" implies identified and specified restrictions. Korea admits that the remaining restrictions are not an unspecified range of measures..297 The term "remaining restrictions" can, therefore, only be interpreted to mean "restrictions" other than the import quota that is set forth in the Schedule. To equate the term "the remaining restrictions" with the import quota identified in the Schedule would leave the Note meaningless. If the Note referred to "these" or "those" remaining restrictions, such terms could have been interpreted to mean the restrictions mentioned in the Schedule, but the deliberate choice of the term "the" implies restrictions other than those already listed in Korea's Schedule.
294 See paragraph 7 of the 1989 BOP report: "Members of the Committee welcomed Korea's commitment to disinvoke Article XVIII:B."
295 Panel report on Korea – Beef (Australia) at paragraph 109, and Korea – Beef (US) paragraph 131.
296 The New Shorter Oxford English Dictionary.
297 See paragraph 65 of this Panel report.
WT/DS161/R WT/DS169/R
Page 130
The "restrictions" envisaged under the Schedule must be "remaining restrictions".298 What amounts to a remaining restriction must therefore be determined with reference to a specific point in time. There are two points in time referred to by Note 6(e): the results of the balance-of-payments consultations; and the results of the Uruguay Round. The Panel notes that all parties to the present dispute have identified these two events as the relevant temporal periods for determining what amounts to a "remaining restriction" and must be determined with reference to a specific point in time.
Note 6(e) refers to "the results of the 1989 consultation with BOP Committee and the Uruguay Round of multilateral trade negotiations" as the basis for eliminating or bringing the "remaining restrictions" into conformity with the GATT. The Schedule thus creates a relationship between the elimination of the "restrictions" and the "results" of two events - the 1989 consultation in the GATT/BOP Committee and the Uruguay Round negotiations. "According to" relates to both parts of the sentence, i.e. the BOP consultations AND the Uruguay Round (i.e. the use of a conjunction between the BOP consultations and the Uruguay Round). If the remaining restrictions had no link with the BOP consultations the words "according to" and "and" would be meaningless. Therefore a remaining restriction must at least bear a relation to the results of the BOP consultations and still be in place when the Schedule was finalized as the result of the Uruguay Round.
A "result"299 is "the effect, consequence, issue, or outcome of some action, process, or design". The "results" envisaged in the Note may, therefore, be characterized as the "effects, consequences or outcomes" of the 1989 consultations and the Uruguay Round. It follows that "remaining restrictions" should be interpreted as meaning "restrictions" envisaged or at least bearing a relation to the "results" of the 1989 consultations and the "results" of the Uruguay Round, and therefore still in place in March 1994 when the Uruguay Round schedules were filed with the Secretariat.
The interpretation of Note 6(e) in accordance with Article 3.1 of the DSU and Article 31 of the Vienna Convention does not allow the Panel to come to a definitive finding on the list of "the remaining restrictions", identified by Korea as benefiting from a "grace period" until 1 January 2001.
Article 32 of the Vienna Convention allows the Panel to have recourse to "supplementary means of interpretation" when the interpretation according to Article 31 leaves the meaning of a treaty provision ambiguous or obscure.300 In the present case, it is evident that in order to come to a more precise definition of the term "remaining restrictions", it will be necessary to determine what is meant by the "results" or "effects, consequences or outcomes" of the 1989 balance-of-payments consultations and the Uruguay Round. To the extent necessary to make an objective assessment of the matter before the Panel301, it needs to ascertain the meaning of the term used in the various legal instruments mentioned above where the term "the remaining restrictions" appeared before and until the conclusion of the Uruguay Round.
In EC - Banana III, the Appellate Body upheld the panel's statement that it "had no alternative but to examine the provisions" of a non-WTO agreement "in so far as it is necessary" to interpret the
298 The New Shorter Oxford English Dictionary defines "remain" as meaning "to be left behind or over after others or other parts have gone or been removed, used, or dealt with; be in the same place or condition during further time; continue to stay or exist".
299 According to the New Shorter Oxford English Dictionary.
300 See Appellate Body report on Canada – Dairy, paragraph 138: "In our view, the language in the notation in Canada's Schedule is not clear on its face. … For this reason, it is appropriate, indeed necessary, in this case, to turn to 'supplementary means of interpretation' pursuant to Article 32 of the Vienna Convention".
301 Article 11 of the DSU.
WT/DS161/R WT/DS169/R
Page 131
WTO rules (the Lomé waiver referred to the Lomé Convention).302 The Panel shall therefore proceed along the same line as in EC - Bananas III. In this respect, the Panel emphasizes that its role is limited to interpreting the term "the remaining restrictions" as used in Korea's Schedule, to find the objective meaning of the terms of Note 6(e), the inclusion of which was agreed to by Members by the end of the Uruguay Round. The Panel recalls that in EC – Poultry, the Appellate Body concluded that the bilateral agreement between the European Communities and Brazil could be examined when interpreting the provisions of the EC Schedule.303 In EC – Computer Equipment, reference was made to the practice of one state to interpret the provision of a Member's schedule.304 In US – Shrimp, reference was made to treaties not even ratified by the parties in dispute in order to interpret provisions of Article XX.305 In addition to the 1989 Panel reports and the GATT Committee on Balance-of-Payments reports, the various bilateral agreements between Korea and the disputing parties, the ROUs, will thus be examined, not with a view to "enforcing" the content of these bilateral agreements, but strictly for the purpose of interpreting an ambiguous WTO provision, i.e. Note 6(e) to Korea's Schedule.
Negotiating history and circumstances that led to the inclusion of the words "According to the results of the 1989 consultation with BOP Committee and the Uruguay Round multilateral trade negotiation, the remaining restrictions" in Note 6(e) of Korea's Schedule.
The Panel now proceeds to a detailed examination of the legal documents referred to above.
The 1989 GATT Committee on Balance-of-Payments Restrictions Consultations
The 1989 BOP Committee undertook consultations with Korea to review import restrictions imposed by Korea for the purpose of protecting its balance-of-payments position.306 These consultations followed an earlier set of consultations undertaken in 1987 between the BOP Committee and Korea on the same issue, which found that improvements in Korea's balance-of-payments position were such that "import restrictions could no longer be justified under Article XVIII:B" of the GATT. In reaching this conclusion, the 1987 Committee expected that Korea would "establish a timetable for phasing out balance-of-payments restrictions, and … consider alternative GATT justifications for any remaining measures, …" (emphasis added).307
302Appellate Body report on EC – Bananas III, at paragraph 167: " ... since the GATT CONTRACTING PARTIES incorporated a reference to the Lomé Convention into the Lomé waiver, the meaning of the Lomé Convention became a GATT/WTO issue, at least to that extent. Thus, we have no alternative but to examine the provisions of the Lomé Convention ourselves in so far as it is necessary to interpret the Lomé waiver." (Emphasis added.)
303 Appellate Body report on EC – Poultry, paragraph 83: " … Therefore, in our view, the Oilseeds Agreement may serve as a supplementary means of interpretation of Schedule LXXX pursuant to Article 32 of the Vienna Convention, as it is part of the historical background of the concessions of the European Communities for frozen poultry meat."
304 In Appellate Body report on EC - Computer Equipment, it was stated: "93 … The purpose of treaty
interpretation is to establish the common intention of the parties to the treaty. To establish this intention, the prior practice of only one of the parties may be relevant, but it is clearly of more limited value than the practice of all parties". (Emphasis added.)
305 In US - Shrimp, the Appellate Body used a variety of non-WTO international rules to interpret WTO provisions. As noted above in Part I, the Appellate Body examined the use of the term "natural resources" in a number of international conventions (paragraphs 127-134). It referred to other international conventions when
assessing the meaning of sustainable development referred to in the Preamble of the WTO Agreement (paragraph 154). It referred to international (and regional) treaties when assessing whether the US measure had been applied in unjustifiable discrimination, in particular with reference to the way consultations had been conducted and ought to be conducted under other international conventions (paragraphs 166-177).
306 BOP/R/183/Add.1, 27 October 1989.
307 BOP/R/171, 10 December 1987.
WT/DS161/R WT/DS169/R
Page 132
During the 1989 consultations, Korea communicated its intention to disinvoke restrictions imposed through Article XVIII:B by January 1990. In a statement to the BOP Committee on Balance- of-Payments, Korea proposed this course of action on the proviso that the CONTRACTING PARTIES:
"(i) agree to a grace period of ten years from the date of disinvocation;
allow Korea to phase out during the grace period the existing balance-of- payments restrictions in a progressive manner, but having due regard to the interests of other contracting parties; and
reach an understanding not to take any unilateral or multilateral legal actions against Korea's remaining restrictions during the given grace period." (statement by Korea 23 October 1989, Annex I to BOP/R/183/Add.1) 308
During the consultations, it had been noted by Members of the Committee that:
"Korea was encouraged … to develop, in consultation with other Contracting Parties, an orderly program of liberalisation which would phase out remaining restrictions in a reasonably short period of time." (Emphasis added.)309
This observation was maintained in the Committee's conclusion that:
"… appropriate flexibility was necessary for Korea to phase out, or bring into conformity with other GATT provisions, its remaining restrictions … largely in the agricultural sector." (Emphasis added.)310
The conclusions of the Committee required Korea to:
"… eliminate its remaining restrictions or otherwise bring them into conformity with GATT provisions by 1 July 1997 … in a generally even manner, on a most-favoured- nation basis, over two three-year programmes beginning on the expiry of the current liberalization programme." (Emphasis added.)311
Thus, it is evident that the results of the 1989 consultations were that Korea should, "in consultation with other Contracting Parties," develop a programme that would phase out the import restrictions remaining after Korea's disinvocation of Article XVIII:B over a ten year period starting from the date of the actual disinvocation. The consultations identified no list of such measures and provided no general description. In this regard, the findings of the Committee are clear that Korea should "consult" with contracting parties on the substance of the programmes proposed to phase out the "remaining restrictions".
The 1989 Panel Reports
It is important to note that the ROUs entered into by the above parties were also the result of recommendations made by two 1989 GATT panels which specifically examined Korea's alleged balance-of-payments restrictions as they related to beef products in the respective complaints by Australia and the United States.312 In both panels, parties challenged the existence of an import quota
308 BOP/R/183/Add.1, paragraph 10.
309 Ibid. paragraph 7.
310 Ibid. paragraph 11.
311 Ibid. paragraph 12.
312 A similar and parallel panel was also established following the complaint of New Zealand.
WT/DS161/R WT/DS169/R
Page 133
on beef and the role of the LPMO, established in 1988, in setting imported beef prices (mark-up) and in its distribution activities.
The panel held that there were essentially two sets of restrictions on beef imports maintained by Korea:
"(a) measures amounting to a virtual suspension of imports introduced in November 1984 and May 1985 and subsequently amended in August 1988. These measures were neither notified to, nor reviewed by, the GATT Committee on Balance-of-Payments;
restrictions on beef existing since Korea's accession to the General Agreement in 1967, which were notified to, and reviewed by the Balance-of-Payments Committee."313
After finding that Korea should eliminate or otherwise bring into conformity with the GATT import measures on beef "introduced in 1984/85 and amended in 1988", the panel recommended that Korea hold consultations with Australia and the United States and other interested contracting parties in order to:
"work out a timetable for the removal of import restrictions on beef justified since 1967 by Korea for balance-of-payments reasons and report the result of such consultations within a period of three months following the adoption of the Panel report to the Council".314
It is thus evident that those panel reports form part of the background to the results of the 1989 Committee on Balance-of-Payments consultations. Not only were the panel reports issued prior to the 1989 consultations, but also, the need for GATT Committee on Balance-of-Payments consultations was referred to in each of the panel reports. Indeed, both the panel reports and the results of the Committee consultation were adopted by the Council on the same day, 7 November 1989.
Korea's consultations with some of the contracting parties (representing for that purpose the CONTRACTING PARTIES) led it to adopt a number of individual Records of Understanding (ROUs) with Australia and the United States between 1990 and 1993.315 As will be shown, these ROUs formed the basis of Korea's Schedule of Concessions at the end of the Uruguay Round. The Panel's examination of the ROUs for the purpose of determining the meaning of the term "remaining restrictions" is therefore not only consistent with the "results" of the 1989 consultations, but also with the specific wording of Note 6(e), which calls for an examination of the "results" of both the 1989 consultations and the Uruguay Round.
It follows that the next step in the Panel's investigation into the meaning of "remaining restrictions" must necessarily involve examination of the consultations and understandings reached by Korea with the CONTRACTING PARTIES. The Panel recalls that it does so only to the extent necessary to interpret the terms of Note 6(e) to Korea's Schedule.
313 Panel report on Korea – Beef (Australia), paragraph 91.
314 Panel reports on Korea – Beef (Australia), paragraph 109, and Korea – Beef (US), paragraph 131.
315 Korea also concluded an ROU with New Zealand.
WT/DS161/R WT/DS169/R
Page 134
The Records of Understanding
The 1990 Records of Understanding Between Korea and Australia; and Korea and the United States
The first of the Records of Understanding between Korea and Australia and Korea and the United States316 was entered into in 1990. Both the 1990 ROUs were circulated to all GATT contracting parties. The terms of the respective ROUs were almost identical and will, therefore, be examined together. Consistent with the results of the 1989 BOP Committee consultations, the 1990 ROUs manifest an intention on the part of Korea to:
… eliminate its remaining import restrictions or otherwise bring them into conformity with GATT provisions as included in the conclusion of the report of the GATT/BOP Committee.…"
To this end, the ROUs provide, generally, for the creation of a "joint study" team to:
(1) examine the structural weakness of the Korean livestock industry and to review the effects of the industry structure on the appropriate timing of market liberalisation; and
review the functions of the LPMO and make recommendations for improvements in marketing and pricing practices in the future." (Paragraph I.D.)
The ROUs call for the implementation of a "simultaneous buy/sell" (SBS) system, composed of super-groups that would control a gradually increased share of the imports of beef into Korea (now 70 per cent of Korea's import quota). The purpose of this mechanism was to increase access to Korea's beef market. The SBS is to replace gradually the activities of the LPMO. In the 1990 ROUs, it is envisaged that the details of the SBS mechanism is left to be determined through further consultations between the parties (paragraph II.C). Provision is also made for "industry-to-industry dialogue" on issues associated with the beef trade (paragraph III).317
As such, the 1990 ROUs did set up a framework for Korea to eliminate its remaining import restrictions in accordance with the results of the GATT/BOP Committee consultations. In doing so, it is clear that the ROUs result from the 1989 consultations and identify the general nature of "the remaining restrictions" referred to in Note 6(e) of Korea's Schedule.
The July 1993 Records of Understanding Between Korea and Australia; and Korea and the United States
Korea's second set of Records of Understanding (ROUs) with Australia and the United States was entered into in July 1993. These ROUs were also circulated to all contracting parties. As with the 1990 ROUs, the terms of the respective 1993 ROUs were almost identical and will therefore be examined together. The main objective of the July 1993 ROUs, as of the 1990 ROUs, was to
316 See attached to the present Panel report, as Annex 1 (the ROU between Korea and Australia).
317 In addition, the ROUs stipulate that Parties are to reserve their rights under the GATT (paragraph V).
WT/DS161/R WT/DS169/R
Page 135
eliminate all remaining import restrictions318 in accordance with the results of the 1989 GATT/BOP Committee consultations and the 1989 GATT panel reports.319
In the July 1993 ROUs, the link between the 1989 panel's conclusion, the inconsistencies of certain Korean measures and the transition period through the ROUs, is emphasised. The July 1993 ROUs add considerably more detail on the operation of the SBS system, created in the 1990 ROUs.320
The December 1993 Record of Understanding Between Korea and the United States
A further ROU was entered into between Korea and the United States in December 1993. The title of this ROU, in referring to "agricultural market access in the Uruguay Round", suggests that it was reflective of Korea's agriculture negotiations under the Uruguay Round. Indeed, the December 1993 ROU sets out specific understandings on the importation of a number of agricultural products. In relation to beef, the ROU presents a schedule of quota volume for beef imports increasing until the year 2000. The ROU further sets out the amounts of duty and mark-up to be imposed on the beef quota in each year and established a corresponding percentage share of the annual quota for the SBS system.
The December 1993 ROU also expressly provided that:
"all balance-of-payments restrictions on beef shall expire no later than December 31 2000. In the year 2001, there shall be no quota, no mark-up, no LPMO involvement, and complete private sector autonomy regarding product quantity, price, quality, and supplier. There shall be no government restrictions on product utilisation".
Like the 1990 ROUs, the July 1993 ROUs, in establishing specific rules for the importation of beef into Korea with a view to implementing the results of the BOP Committee consultations, identified the "remaining restrictions" referred to in Note 6(e) to Korea's Schedule. The Panel notes that nowhere in the July or December 1993 ROUs is there a reference to the effect that the contents of the 1993 ROUs should replace the 1990 ROUs. The July 1993 ROUs are an elaboration of parts of the 1990 ROUs. Indeed, the December 1993 ROU expressly provides that:
"the current July 15, 1993 record of understanding (L/7270) shall continue to apply except as modified to incorporate the provisions of the new understanding".
The December 1993 ROU between the United States and Korea was not circulated to GATT contracting parties. However, the link between this ROU and the Uruguay Round seems to have been admitted by the United States. For the United States, the effect of the December 1993 ROU was to extend the duration of the quotas until 2001, and that this was ultimately made part of Korea's WTO Schedule of Concessions.321 The fact that the content of the ROUs was reflected in Korea's Uruguay
318 See paragraph I:C of the July 1993 ROUs: "This Understanding is the second Understanding between the ROKG and USG concerning market access for beef. This Understanding reflects the desire of the parties to implement the GATT dispute settlement panel recommendations and Balance-of-Payments Committee determinations." The same commitment is reiterated in paragraph 3 - front page – and in paragraph VI.A.
319 In addition, the July 1993 ROUs stipulate that parties are to reserve their rights under the GATT (paragraph VI.B).
320 For instance, paragraph IV:C.7(c) of the July 1993 ROU is a recognition of the continuity between
the panel's conclusion and the object of the ROUs when it provides that "in further implementation of the findings of the GATT dispute settlement panel on beef, during 1993 the [SBS] mark-up on beef shall not exceed 100 per cent …" (emphasis added).
321 Paragraph 99 of this Panel report.
WT/DS161/R WT/DS169/R
Page 136
Round concessions is also admitted by Korea.322 Australia also recognizes the link between the Schedule and the closing of the Uruguay Round, but does not agree to the meaning given by Korea to Note 6(e).
The Panel considers that the December 1993 ROU, even if concluded only between Korea and the United States, is relevant to assist the interpretation of the ambiguous terms of Note 6(e). The Panel recalls that in EC – Computer Equipment, the practice of one single WTO Member was stated to be relevant when interpreting the provisions of the Schedule of the European Communities.323 In particular, the Panel notes that the reference to a phasing out period until 1 January 2001 appears for the first time in the December 1993 ROU. It seems reasonable to try to understand the relationship between a first transition period to phase-out "remaining restrictions" until 1997 (provided to Korea by the Committee on Balance-of-Payments) and the reference in Korea's WTO Schedule to the "remaining restrictions" to be phased-out by 2001. The Panel underlines again that here it is not enforcing the bilateral agreement between the United States and Korea but simply reading and interpreting it in order to interpret a provision in a Member's Schedule.
Material to be consulted in order to interpret Note 6(e) of Korea's Schedule
The Panel recalls that in its efforts to interpret the ambiguous terms of Note 6(e) of Korea's Schedule, the circumstances of the conclusion of Korea's Schedules lead it to examine: the 1989 panel reports on beef; the 1989 report of the Committee on Balance-of-Payments; and the various ROUs negotiated by some GATT contracting parties upon recommendations of the GATT CONTRACTING PARTIES in the wake of the reports just mentioned.
The Panel is thus called upon to determine the extent to which the measures at issue can be found to exist in the 1989 panel reports on beef, in the 1989 report of the GATT Committee on Balance-of-Payments or in the ROUs which were governing the beef trade relations between Korea, the United States, Australia and New Zealand. To the extent they are mentioned in these documents and were still in place at the time of the conclusion of the Uruguay Round, the measures must be part of "the remaining restrictions" within the meaning of Note 6(e). As a consequence, such measures benefit from a "transition period" until 1 January 2001 and until then, they cannot be successfully challenged. At the same time, as the Panel has determined above, the same measures found to be part of "the remaining restrictions" would also be considered inconsistent with the WTO Agreement – save for the transition period - and will, therefore, have to be phased-out by 1 January 2001. Conversely, measures falling outside the scope of restrictions envisaged or identified in the ROUs or in the 1989 panel reports and Committee on Balance-of-Payments reports could not have been intended to be included in the reference to "the remaining restrictions" in Note 6(e) to Korea's Schedule.
Determination of the measures which qualify as "remaining restrictions"
Before proceeding to the determination as to whether the specific measures at issue in the present dispute are "remaining restrictions" within the meaning of Note 6(e), it is worth recalling them in detail.
Measures challenged
The measures challenged by the Complaining parties are the following:
322 Paragraph 87 of this Panel report.
323 Appellate Body Report on EC – Computer Equipment, paragraph 93.
WT/DS161/R WT/DS169/R
Page 137
Restrictions on the retail sale of imported beef
the requirement that imported beef be sold in specialized beef stores;
separate sales areas for the sale of imported beef in department stores; and
obligation to display an imported beef store sign.
Restrictions on purchases and sales in the wholesale market (for the LPMO's imports)
mandatory acquisition of imported beef through established distribution channels (middlemen);
supply from imported beef wholesale markets is restricted to specialized imported- beef stores only;
imported beef to be supplied only on a cash payments basis; and
wholesale markets required to retain records of the supplies of imported beef for at least two years.
Limitations on participation in the SBS import system
end-users (customers) not members of super-groups excluded from the system;
range of end-users is restricted;
end-users can only import beef through the super-group to which they belong and can belong to only one super-group;
quotas and sub-quotas allocated to super-groups according to annual plans rather than demand; and
labelling, reporting and record-keeping requirements not imposed on domestic beef.
Restrictions on discharge of LPMO's imports
the LPMO's monthly and daily discharge practices;
minimum wholesale price at auctions of imported beef.
Restrictions resulting from LPMO tendering practices
refusal or delays in calling for tenders
the LPMO's tendering practice restricting the type of beef that may fill a tender to grain-fed beef to the exclusion of grass-fed beef.
WT/DS161/R WT/DS169/R
Page 138
Price mark-up applied to imports through the SBS system that is additional to the tariff Discretionary licensing system
The Panel now proceeds to examine whether the above measures were envisaged or can be said to originate in the ROUs negotiated between the parties, and thus constitute "remaining restrictions" within the meaning of Note 6(e).
Disputed measures that were in place in 1989 or originate in the ROUs and which therefore constitute "remaining restrictions" within the meaning of Note 6(e)
Restrictions on purchases and sales in the wholesale market (for the LPMO's imports)
- mandatory acquisition of imported beef through established distribution channels (middlemen);
The Panel recalls that state-trading enterprises as such are consistent with the WTO Agreement but their operations may be restrictive within the meaning of the WTO Agreement. To the extent that a Korean regulation (or guidelines) requires the LPMO to sell its imports or some of them through the wholesale market (and therefore prohibits it from selling to any consumers contrary to what would otherwise be permitted for like domestic products), such a requirement is restrictive. However, it appears from the 1989 panel reports that the LPMO has always sold beef predominantly through the wholesale market.324 The Panel concludes, therefore, that this measure falls within the meaning of the term "the remaining restrictions" mentioned in Note 6(e).325
Limitations on participation in the SBS import system
In giving effect to the results of the 1989 BOP consultations, the ROUs setting up the SBS system were intended to assist Korea in establishing an "orderly program of liberalisation" with "appropriate flexibility" to allow Korea to phase out its "remaining restrictions" by the year 2001. By its very nature, an "orderly program of liberalisation" may contain some temporary restrictions.
To this extent, the Panel considers that restrictions inherent to the SBS system326 put in place at the time of the ROUs were intended to be covered by the term "the remaining restrictions" and, therefore, were to be tolerated until 2001. However, this intention must be viewed in the light of the more general requirements of the July 1993 ROUs in Paragraph IV.C.6(a) that:
"except as otherwise specified in this understanding, there shall be no restrictions placed by the ROKG or any super-group on beef (regardless of country of origin, product type, or specification, whether grass-fed or grain-fed or whether fresh, chilled or frozen) imported under the SBS system, including processing requirements, labelling, pricing, marking or packaging requirements or other barriers to legitimate
324 See for instance paragraphs 23-24 and 39 of the panel report on Korea – Beef (US): "Korea recalled that virtually all imported beef was resold through wholesale market auctions."
325 The Panel also recalls that, in the ROUs parties have agreed that as of 2001, the LPMO would no longer be involved in the beef market and that with the disappearance of the beef import quota, the LPMO practices will have to be brought into conformity with the WTO Agreement.
326 The Panel considers it a governmental measure. It was set up by the Korean government in the ROUs, it creates a system of incentives and disincentives if one is interested in importing beef and it is
monitored by the MAF and the LPMO. The Panel notes that the LPMO not only possesses the exclusive right to import a substantial portion of the imported beef quota, but also exercises considerable control over the use of the remaining portion of the quota through its authority to allocate quota shares to the SBS super-groups and to approve their import requests. See the panel report on Japan – Semi-Conductors, paragraph 108.
WT/DS161/R WT/DS169/R
Page 139
importation, distribution and sale that create unnecessary obstacles to trade or otherwise undermine the objectives of the understanding."327
- Super-group membership requirement
Some limitation on membership was envisaged in the 1990 ROUs in that it was stipulated that "the mechanism will be used initially by tourist hotels, tourist restaurants, the NLCF and the Korean Cold Storage company … Both governments will consult concerning future expansion of the SBS system". (Paragraph II.C) More specifically, both the July 1993 ROUs prescribe rules for adding "new super-groups" implying that there is indeed a membership requirement (paragraphs IV.A.1 and IV.A.2). The Panel concludes that this measure falls within the meaning of the term "the remaining restrictions" mentioned in Note 6(e); it thus benefits from a transition period until 1 January 2001, by which date it shall be phased out or otherwise brought into conformity with the WTO.
- Restrictions on range of end-users
The Panel considers that some restrictions on the range of end-users are inherent to the SBS system. This is confirmed in the definition of an end-user provided in both the July 1993 ROUs as "any individual private enterprise, firm, business, or grouping thereof, and/or their buying agents that has the right to import beef through any supergroup except NLCF and KCSC." (paragraph II, emphasis added). Therefore, the restrictions limiting the range of end-users who can import directly from Australia and the United States existed at the time of the ROUs and can be viewed as some of the "remaining restrictions" for the purpose of Note 6(e); these thus benefit from a transition period until 1 January 2001, by which date they shall be phased out or otherwise brought into conformity with the WTO.
- Prohibition on cross-trading between end-users, and between end-users and super- groups
The July 1993 ROUs envisage cross-trading between certain end-users and two specific super-groups. For instance, KOSCA members not eligible to import through the KOSCA super-group "shall have the right to participate in the SBS system as customers under the NLCF and KCSC." (paragraph IV.B.2(d), emphasis added). The ROUs also establish that "… beginning in January 1995, any butcher shops that are or become registered dealers of imported beef shall have the right to participate in the SBS system as customers under NLCF and KCSC." (Paragraph IV.B.2(e) emphasis added). Further references exist to all KOSCA members being allowed to participate in the SBS system as customers under NLCF and KCSC (ParagraphIV.C.1 (a)).
The specific inclusion of provisions permitting cross-trading between certain end-users and super-groups, together with the membership requirement, implies the existence of a prohibition of cross-trading with other super-groups. If the parties had intended to permit cross-trading between end-users and any other super-groups they would not have limited the super-groups allowed to do so to NLCF and KCSC. To this extent, the Panel finds that the prohibition on cross-trading between end-users, other than those within the KOSCA group, and super-groups other than NLCF and KCSC, is inherent to the SBS system established in the ROUs and therefore is a "remaining restriction". Hence, the Panel finds that it constitutes a "remaining restriction" within the meaning of Note 6(e) to Korea's Schedule and benefits from a transition period until 1 January 2001, by which date it shall be phased out or otherwise brought into conformity with the WTO.
327 In this light, the Panel considers that restrictions not inherent to the SBS system or creating otherwise "unnecessary obstacles to trade" could not have been intended to be part of "the remaining restrictions".
WT/DS161/R WT/DS169/R
Page 140
The ROUs also envisaged that there would not be any cross-trading between super-groups as their allocation of shares was pre-determined annually and issued on a quarterly basis. In addition, it was provided in paragraph IV.C.6(b) of the July 1993 ROU that "any SBS sub-share that is not fully utilised by a super-group by the end of the third calendar year quarter shall be reallocated to all other super-groups on a pro rata basis … Such reallocation shall be made no later than October 15". The very existence of the need to provide for the re-allocation of non-utilized quota shares is evidence that cross-trading was otherwise understood to have been prohibited. Thus, the Panel finds that the prohibition on cross-trading between super-groups is inherent to the SBS system as then envisaged. Therefore, the Panel finds that it constitutes a "remaining restriction" within the meaning of Note 6(e) to Korea's Schedule and benefits from a transition period until 1 January 2001, by which date it shall be phased out or otherwise brought into conformity with the WTO.
The ROUs do not, however, make any reference to the existence of any restriction on trading between end-users.
- quotas and sub-quotas allocated to super-groups according to annual plans rather than demand
The allocation and re-allocation of quotas to super-groups was expressly envisaged in the 1993 ROUs which specifically provide for the allocation of "shares and sub-shares" to super-groups existing at the time of the ROUs (e.g. paragraph IV). This, coupled with the possibility of the entry of new super-groups into the SBS system, implies that allocation and re-allocation of quotas must be inherent to the system. The needs of new super-groups could not be satisfied without re-allocation of quotas.
The existence of a mechanism of allocation of quota amounts is not only inherent to the SBS system but it is also consistent with the general objective of the whole system to assist Korea to establish an "orderly program of liberalisation" with "appropriate flexibility" to allow Korea to phase out its "remaining restrictions" by the year 2001. The Panel, therefore, finds that this measure is a "remaining restriction" for the purpose of Note 6(e) and benefits from a transition period until 1 January 2001, by which date it shall be phased out or otherwise brought into conformity with the WTO.
- recording requirements
Paragraph IV.C.14 of the July 1993 ROUs provide for record keeping measures to be introduced along with the SBS system:
"approved super-groups shall administer record keeping of purchases to ensure compliance with the annual and quarterly SBS shares."
The Panel finds that the record keeping requirements of the type actually imposed by Korea, being practically the same as those explicitly referred to in the ROUs, were accepted by the parties as being inherent to the SBS system and thereby fall within the meaning of "the remaining restrictions" of Note 6(e); they thus benefits from a transition period until 1 January 2001, by which date it shall be phased out or otherwise brought into conformity with the WTO.
Restrictions on discharge of imports through the wholesale system
- minimum wholesale price328 (auction/target price)
328 Also called "target price" or "minimum auction price" by the parties.
WT/DS161/R WT/DS169/R
Page 141
This form of pricing practice has been in place for many years. The 1989 panel first noted that a minimum bid price at wholesale auction, or derived price for direct sale, was set by the LPMO with reference to the wholesale price for domestic beef.
The 1990 ROUs (paragraph D.(2)) provide that the joint study team, established by agreement, should:
"review the functions of the LPMO and make recommendations for improvements in marketing and pricing practices in the future."
This passage reveals a concern with the LPMO's role in the "marketing and pricing practices" of beef imports. The LPMO's restrictive pricing practices, such as the so-called minimum wholesale price, appears to be amongst the types of practices, which falls within this concern.
Paragraph IV:C.7(c) also reveals the concern of the parties over Korea's import pricing practices: "in further implementation of the findings of the GATT dispute settlement panel on beef, during 1993 the mark-up on beef shall not exceed 100 per cent" (emphasis added).
The LPMO's pricing practices, including its minimum wholesale price, are therefore to be considered as one of "the remaining restrictions" within the meaning of Note 6(e), needing to be addressed during Korea's transition period under the ROUs. To this extent, the LPMO's minimum wholesale price constitutes a "remaining restriction" which benefits from a transition period until 1 January 2001, by which date it shall be eliminated or otherwise brought into conformity with the WTO Agreement.
Price mark-up applied to imports through the SBS system that is additional to the tariff
Both sets of 1993 ROUs contain the following reference to the determination of prices through the SBS system:
"The ROKG shall take no action to increase the price of beef entering under the SBS system above the price of similar beef imported under general tender." (Paragraph IV.A.3.)
In addition, paragraph IV.C.7 of the 1993 ROUs specifically address the existence of an SBS mark-up in the following terms:
(a) A single, uniform percentage mark-up shall be applied to all types of beef purchased under the SBS system and shall be equal to the difference between the duty-paid price, c.i.f. Korea, and the price for all boneless cuts of imported grain-fed high quality beef, based on the purchases of the LPMO sold in the general tender system."
…
(c) … in further implementation of the findings of the GATT dispute settlement panel on beef, during 1993 the mark-up on beef shall not exceed 100 per cent of the weighted average percentage mark-up applied to imported bone-less grain-fed high quality beef during calendar year 1992, as derived from data in Attachment I."329
329 It happens that in 1992, as can be seen from Attachment 1, the LPMO mark-up expressed as a percentage of duty paid export price was almost 100 per cent of the import price.
WT/DS161/R WT/DS169/R
Page 142
This passage, in particular, indicates that the existence of an SBS-like mark-up was indeed contemplated at the time of the ROUs. Korea has also submitted "talking points"330 from an official of the US Department of Agriculture on 24 February 1994, which shows that the United States had accepted the imposition of the mark-up as an integral part of the 1993 ROU on beef and the Uruguay Round market access. The Panel finds, therefore, that the SBS mark-up is a "remaining restriction" within the meaning of Note 6(e) and benefits from a transition period until I January 2001, by which date it shall be eliminated or otherwise brought into conformity with the GATT/WTO.
Discretionary Licensing System
In addition to the measures listed by the Complaining parties, the United States claimed that Korea's import licensing regime for imported beef, based on the issuance of import recommendations by the LPMO, is totally discretionary and, therefore, constitutes a non-automatic licensing procedure for the purposes of the Agreement on Import Licensing Procedures ("Licensing Agreement"). The United States submitted that the licensing procedures are administered in such a manner as to have restrictive effects on the imports in question.
To the extent that imports are restricted through the application of a WTO compatible import quota, a licensing system is necessary. Indeed, the very nature of the SBS system set up under the ROUs regulates the manner in which foreign beef enters Korea's market. Therefore, the existence of a licensing system per se, as distinct from its operation, must be one of the "remaining restrictions" envisaged in Note 6(e). In addition, since the beef import quota of the LPMO and the super-groups benefit from a transition period until 1 January 2001, the provisions of its licensing system inherent to the administration of the same beef quota must benefit from the same transition period.331
The Panel is, therefore, of the view that it is appropriate to examine each of the specific measures identified by the United States and reach a conclusion on each of them rather than examine Korea's import licensing system generally. In the context of these specific determinations, the Panel will necessarily examine the US arguments and suggested evidence that Korea's administration of its licensing system was more trade-restrictive than necessary and contrary to the Licensing Agreement.
Disputed Measures not associated with the administration of the beef quota as of 1989 and not envisaged in the ROUs
In entering into the ROUs, it is evident that the parties intended to keep open the possibility of challenging any measures which were not inherent to those permitted in the ROUs. To this extent, it is the view of the Panel that the term "the remaining restrictions" could not have been intended to allow reliance on restrictions under the ROUs, if such restrictions were not inherent to those permitted thereunder.
In support of the above, the Panel notes that, although providing for the existence of certain restrictions, the July 1993 ROUs also set up a mechanism for consultations between the parties should there be any disputes or problems of implementation.332 This envisages precisely the kind of situation described in the previous paragraph, namely, the existence of restrictions not inherent to those prescribed.
330 Paragraph 306 of this Panel report.
331 However, other aspects of Korea's import licensing system, such as those features not inherent to any remaining restriction – thus not benefiting from the transition period - can be successfully challenged and considered WTO incompatible.
332 Paragraph VI of the July 1993 ROU between Korea and the United States and paragraph VII of the July 1993 ROU between Korea and Australia.
WT/DS161/R WT/DS169/R
Page 143
The Panel, therefore, considers that the following measures or practices were not covered by the wording of any of the ROUs and do not appear to be necessary or inherent to measures (restrictions) otherwise explicitly envisaged in those agreements for the purpose of phasing out the import quota.
Restrictions on the retail sale of imported beef
the requirement that imported beef be sold in specialized beef stores;
separate sales areas for the sale of imported beef in department stores; and
obligation to display an imported beef store sign.
With reference to its dual retail system for beef, Korea claims that it is not discriminatory. In the alternative, Korea claims that it benefits from the protection of Article XX. Finally, Korea also claims that it is one of "the remaining restrictions", (thus admitting its restrictive nature) because it existed at the time of the conclusion of the ROUs and this fact is, according to Korea, recognized in the ROUs. Korea draws this conclusion from Section IV B2(e) of the July 1993 ROU which provides that: "Also beginning January 1, 1995, any butcher shops that are or become registered dealers of imported beef shall have the right to participate in the SBS system … Such individual butcher shops shall have the right to negotiate and place collective orders through NLCF and KCSC."
The Panel fails to see why the fact that butchers who sell foreign beef must be registered implies that such butchers cannot also sell domestic beef or why this reference would imply that domestic supermarkets must have different cabinets or areas for foreign beef.
Moreover and more importantly, it is difficult to see how a dual retail system that did not exist at the time of the 1989 panel reports or the 1989 balance-of-payments consultations and which was not negotiated in the context of the ROUs could have any relation with the phasing-out of balance-of-payments restrictions, the issue at the centre of the consultations and the ROUs.
The Panel is, therefore, of the view that the above measures do not fall within the meaning of "remaining restrictions".
Restrictions on purchases and sales in the wholesale market (for the LPMO's imports
supply from imported beef wholesale market is restricted to specialised beef stores only;
imported beef to be supplied on a cash payment basis; and
wholesale markets required to retain records of the supplies of imported beef for at least two years.
Although the LPMO has existed for many years, there is no indication anywhere that the above three measures are inherent to any state-trading activities or to the LPMO's marketing or pricing activities as discussed in the 1989 panel report, the balance-of-payments consultations and in the 1990 and the July 1993 ROUs. The Panel finds, therefore, that the three measures do not fall within the meaning of "remaining restrictions".
Limitations on participation in the SBS import system
- Prohibition on cross-trading between end-users
WT/DS161/R WT/DS169/R
Page 144
As mentioned above, the July 1993 ROUs envisage some restriction on cross-trading between super-groups and between super-groups and end-users. The ROUs do not, however, make any reference to the existence of any restriction on trading between end-users. In addition, such a restriction would be more trade restrictive than necessary to achieve the objectives of the ROUs. The Panel, therefore, finds that the prohibition on cross-trading between end-users is not a restriction envisaged by the parties to fall within the meaning of "the remaining restrictions".
- Labelling requirements
Paragraph IV.C.6 of the July 1993 ROUs, prescribes that:
"except as otherwise specified in this understanding, there shall be no … labelling, pricing, marking, or packaging requirements or other barriers to legitimate importation, distribution and sale that create unnecessary obstacles to trade or otherwise undermine the objectives of the understanding."
There is no provision for special labelling requirements in the ROU. The Panel, therefore, finds that any additional or specific labelling requirements, if any, imposed on beef imported through the SBS system are not "remaining restrictions".
Restrictions on discharge of imports
– the LPMO's monthly and daily discharge practices
Some aspects of the LPMO's role in the marketing of beef imports were envisaged as a "remaining restriction". However, according to the United States and Australia, behaviour which effectively led to restrictive practices additional to and independent of the otherwise legal import quota on beef, could not have been intended by the parties to be "remaining restrictions" referred to in Note 6(e). The type of marketing practices envisaged within "remaining restrictions" could not have been those which effectively added to the normal restrictions of the beef import quota.
To the extent that the United States and Australia claim that the Korean authorities have imposed time constraints and administered the auctioning system in an abusive and non-commercial manner, such restrictions could not have been considered by the parties to the ROU as acceptable temporary restrictions inherent to any state-trading activity of the LPMO. Such behaviour would be rather additional to and independent from what was envisaged under the ROUs.
The Panel is, therefore, of the view that such practice could not have been considered to be a "remaining restriction" within the meaning of Note 6(e).
Restrictions resulting from LPMO tendering practices
- refusal or delays in calling for tenders
The United States claims that by refusing to call for tenders from the end of October 1997 to the end of May 1998, (and keeping stocks of imported beef too high), Korea imposed import restrictions, contrary to Article XI of GATT. This type of measure is neither dictated by the existence of an import quota, nor contemplated by the ROUs.
The Panel shall discuss this measure together with Australia's claims that the LPMO's discharge of imports through the wholesale system, in particular LPMO's alleged refusal to release imports into the Korean market together with its stocking of imported beef, violated Article XI and its Ad Note.
WT/DS161/R WT/DS169/R
Page 145
- grain-fed/grass-fed distinction
Although not expressly mentioned in terms of the LPMO tendering activities, the problem does surface in Attachment 3 to Australia's 1990 ROU in relation to the operation of the SBS system, and again more specifically in Part V of Australia's 1993 ROU. The Attachment to the 1990 ROU provides that:
"All imports of beef under the simultaneous buy/sell system will receive equal, non- discriminatory treatment without regard to country of origin and without regard to whether it is grass-fed or grain-fed; fresh, chilled or frozen; bone-in or bone-out."
Paragraph IV.C.6(a) of the 1993 ROU provides:
"Except as otherwise specified in this Understanding, there shall be no restrictions placed by the ROKG or any super-group on beef (regardless of country of origin, product type, or specification, whether grassfed or grain-fed ...)."
The existence of the above references to grass-fed beef reveals that Australia was concerned with discrimination between grass-fed and grain-fed beef in the wholesale market through the operation of the SBS system. It is clear that no such restrictions could be tolerated by Australia. Thus, the alleged discrimination between grass-fed and grain-fed beef which, according to Australia, characterized the LPMO's tendering requirements for imports on several occasions, is not one of the envisaged "remaining restrictions".
Summary of the Panel's Conclusions with Respect to the Measures in Dispute and Note 6(e) of Korea's Schedule
The Panel has found the following measures to be part of "the remaining restrictions" within the meaning of Note 6(e):
Limitations on participation in the SBS import system
super-group membership requirement;
restriction on range of end-users;
prohibition on cross-trading between end-users and super-groups;
quotas and sub-quotas allocated to super-groups according to annual plans rather than demand; and
record booking requirements.
Restrictions on purchases and sales into the wholesale market (for the LPMO's imports)
mandatory acquisition of imported beef through established distribution channels (middlemen)
Restrictions on LPMO's discharge of imports
minimum wholesale price
Price mark-up applied to imports through the SBS system that is additional to the tariff
WT/DS161/R WT/DS169/R
Page 146
Per se Existence of a Discretionary Licensing System relating to remaining restrictions (as distinct from its operation)
The consequence of this finding is that all of the above measures, being covered by the term "the remaining restrictions", benefit from the transition period until 1 January 2001 as prescribed under Note 6(e). At the same time, this finding also implies that all of the above measures are GATT inconsistent and will need to be eliminated or otherwise brought into conformity with the WTO Agreement by 1 January 2001.
The Panel also reaches the conclusion that the following measures are not "remaining restrictions" within the meaning of Note 6(e):
Restrictions on the retail sale of imported beef
the requirement that imported beef be sold in specialized beef stores;
separate sales areas for the sale of imported beef in department stores; and
obligation to display imported beef store sign.
Restrictions on purchases and sales in the wholesale market (for the LPMO's imports)
supply from imported beef wholesale markets is restricted to specialised beef stores only;
imported beef to be supplied on a cash payments basis; and
wholesale markets required to retain records of the supplies of imported beef for at least two years.
Limitations on participation in the SBS import system
prohibition on cross-trading between end-users;
discriminatory labelling requirements.
Restrictions on discharge of imports through the wholesale system
the LPMO's monthly and daily discharge practices.
Restrictions resulting from the LPMO's tender practices
refusal or delays in calling for tenders;
the grain-fed/grass-fed distinction imposed when calling for tenders.
The consequence of these findings is that all of the above measures do not benefit from the transition period set out in Note 6(e), and can, therefore, be challenged in the present procedure.
In the light of the above findings, the Panel will now proceed to determine the validity of the Complaining parties' claims in relation to the above measures which do not constitute "remaining restrictions" within the meaning of Note 6(e) of Korea's Schedule.
WT/DS161/R WT/DS169/R
Page 147
CLAIMS AGAINST THE DUAL RETAIL SYSTEM AND RELATED MEASURES
General claims and defence of the parties
614. Australia and the United States claim that the dual retail system (and related measures333) violate Article III:4 of GATT as it results in imported beef being treated less favourably than domestic beef.
615. Korea's first defence is that the dual retail system for beef does not impose less favourable treatment on imported beef as domestic and imported beef are both sold in separate shops. Korea adds that there are no limitations on the number of imported-beef shops and that decisions to open imported-beef shops are determined exclusively on the basis of commercial considerations within the context of the WTO compatible beef import quota. Korea contends that, in order to substantiate their claims under Article III of GATT, the Complaining parties must show that the measures in question result in actual prejudice to them in addition to the market access limitations resulting from Korea's beef quota. According to Korea, where a legal import quota is in place two situations are possible. If the quota is fully absorbed, the claim that the WTO Agreement has been violated and as a result the Complaining parties' rights have been prejudiced has to be rejected.334 If the quota is not fully absorbed the Complaining parties would have to show that the Korean regulation imposing on traders the obligation to sell domestic and imported beef in separate stores is the very reason why the quota has not been absorbed. According to Korea, the Complaining parties must show injury resulting from the dual retail system independent of the protection afforded to domestic production through the negotiation of the import quota for beef.335 Korea recalls that its considers that it import quota was fully absorbed in 1997 and 1998. Korea's alternative defence is that the dual retail system is necessary for the enforcement of its domestic law prohibiting fraudulent practices. Therefore, should it be found prima facie to be inconsistent with Article III:4, the dual retail system should benefit from the application of Article XX(d) of GATT and be declared WTO compatible.
2. Article III:4 of GATT and the dual retail system
Article III:4 of the General Agreement requires that imported products:
"The products of the territory of any contracting party imported into the territory of any other contracting party shall be accorded treatment no less favourable than that accorded to like products of national origin in respect of all laws, regulations and requirements affecting their internal sale, offering for sale, purchase, transportation, distribution or use. The provisions of this paragraph shall not prevent the application of differential internal transportation charges which are based exclusively on the economic operation of the means of transport and not on the nationality of the product."
Article III:4 is violated if the Complaining parties demonstrate (a) that imported and domestic products are "like"; (b) that the measure at issue is either a law, regulation, or requirement affecting their internal sale, offering for sale, purchase, transportation, distribution, or use; and (c) which
333 Throughout these findings, a reference to the dual retail system includes: (1) the requirement that imported beef may not be sold in the same outlet as domestic beef but may only be sold in specialized imported- beef shops (Article 5C of the Guidelines Concerning Registration and Operation of Specialized Imported Beef Stores); (2) the obligation for department stores and supermarkets authorized to sell imported beef to hold a separate display (Article 3A of the same Guidelines). The obligation for foreign beef shops to bear a sign "Specialized Imported Beef Stores" is a related measure which the Panel addresses separately in Section 3 thereinafter.
334 Paragraph 228 of this Panel report.
335 Paragraph 229 of this Panel report.
WT/DS161/R WT/DS169/R
Page 148
provides to imported products a treatment less favourable than that accorded to like domestic products. Korea is essentially offering arguments relating to the third aspect, i.e. that imported beef is not less favourably treated than domestic beef.
Like product determination
This dispute is about imports into Korea of fresh, chilled and frozen beef which, the Complaining parties argue, are "like" Korean beef. It has not been contested that imported and domestic beef are "like products".336 Korea argues, in its Article XX defence, that imported and domestic beef are even indistinguishable. There is an important price differential between Korean beef and imported beef. However, according to Korea, such price differential is "mainly due to the relative cost of production, quality differences, consumer preferences and the existence of a legal quota".337 The Panel notes that almost 45 per cent of the imported beef is sold in restaurants, where no distinction is made between any origin of beef offered.338 The Panel concludes, therefore, that imported beef and Korean beef are like products within the meaning of Article III:4 of GATT.
Law, regulation, or requirement affecting their internal sale, offering for sale, purchase, transportation, distribution, or use
The measures at issue are clearly internal regulations, i.e. laws and/or regulations affecting the internal sale, offering for sale, purchase and distribution of imported and domestic products.
Less favourable treatment
Arguments of the parties
The Complaining parties argue that, contrary to Article III:4, the purpose of which is to provide equal conditions of competition once goods had been cleared through the customs339, the Korean dual retail system imposes less favourable treatment for imported beef. By requiring that imported beef be sold in stores that cannot sell Korean beef, Korea denies imported beef the opportunity to be sold in the vast majority of meat stores. Imported beef is sold in approximately 5,000 stores, whereas there are approximately 45,000 stores where Korean beef is sold.340 The result is that imported beef is excluded from the ordinary retail system where Korean consumers shop for meat. The Complaining parties refer to the adopted panel reports on Canada - Marketing Agencies (1992), and on US - Malt Beverages, where it was concluded that by excluding imported beer or wine from points of sale where domestic beer or wine could be sold, the imported products were denied certain competitive opportunities enjoyed by domestic products. Australia adds that the separate display requirements in larger outlets also discriminates against imported beef because it has the effect of emphasising any perception of quality differences between domestic and imported products. In Australia's view, the fact that foreign beef is sold either in separate shops or in separate cabinets has
336 Paragraphs 168-170 of this Panel report. "It is also well to remember that a prima facie case is one which, in the absence of effective refutation by the defending party, requires a panel, as a matter of law, to rule in favour of the Complaining party presenting the prima facie case." Appellate Body Report on EC – Hormones, paragraph 104.
337 (Korea, comment on response no 1, 28 February 2000). The Panel notes, however that the effect of the import quota should be to increase the price of imported beef. The Panel understands that Korea wanted to refer to the idea that in limiting the volume of imported beef, the competition in the domestic market is thus reduced.
338 Paragraph 193 and footnote 140 of this Panel report.
339 Panel reports on Italian Agricultural Machinery, paragraphs 11-13; US - Section 337, paragraphs 5.11-5.14; Canada – FIRA, paragraph 6.6.
340 According to Korea the number of foreign beef shops were as follows: in 1995: 7,713; in 1996: 7,569; in 1997: 7,026; in 1998: 5,498. See footnote 111 of this Panel report.
WT/DS161/R WT/DS169/R
Page 149
a negative effect on the marketability of imported beef. The overall limited availability of imported beef relative to domestic beef exacerbates this problem.
Korea argued that its dual retail system for imported and domestic beef does not offer less favourable treatment to imported beef. Korea submits that the United States and Australia have not been able to demonstrate how the system of separation of stores selling beef prejudices their rights under the WTO Agreement independently of the injury resulting from the very existence of the Korean quota on beef. For Korea, in situations where a WTO compatible import quota is in place and has been fully utilised, the claim that the WTO Agreement has been violated must be rejected. In situations where the quota has not been fully utilised341, the Complaining parties, according to Korea, have to show that this was the very result of the dual retail system, something which, according to Korea, the Complaining parties have failed to do.
Korea adds that to impose identical regulatory requirements on both categories of stores is in full compliance with Article III:4 of GATT. Indeed, the same restrictions apply to domestic beef stores (they cannot sell imported beef except pre-packed, although a few Korean supermarkets have a separate section for foreign beef) as to imported beef stores (they cannot sell domestic beef, except pre-packed): all stores must respect identical regulatory requirements. The fact that there are more stores selling domestic rather than imported beef does not constitute discrimination and does not engage the responsibility of Korea. The limited volume of imported beef circulating in the Korean market (a government choice which is consistent with Korea's WTO obligations) explains why there are fewer stores selling imported beef in the Korean market. Korea argues that imported beef can be sold anywhere in Korea, and is subject to the same regulatory requirements. The decision whether to open a store selling domestic or imported beef is left to private operators. The number of stores selling imported beef has evolved freely over the years since the quota was established.
The relevant GATT/WTO jurisprudence
There is no doubt that there is no "effect test" requirement under Article III, the national treatment principle of GATT. GATT panels have consistently concluded that the pertinent criterion under Article III:4 is whether Members "provide equal conditions of competition" once goods are cleared through customs. To cite the US – Section 337 panel report:
"Article III:4 would not serve this purpose if the United States interpretation [referring to the US defence advanced in the Section 337 dispute] were adopted, since a law, regulation or requirement could then only be challenged in GATT after the event as a means of rectifying less favourable treatment of imported products rather than as a means of forestalling it … [The panel] noted that this approach is in accordance with previous practice of the CONTRACTING PARTIES in applying Article III, which has been to base their decisions on the distinctions made by the laws, regulations or requirements themselves and on their potential impact, rather than on the actual consequences for specific imported products." (Emphasis added; footnotes omitted.)342
As the panel on US – Section 337 emphasised, Article III:4 is concerned with the effective equality of opportunities in the application of laws, regulations and requirements. The same applies to the national treatment provision of Article XVII:3 of GATS, which explicitly provides that formally identical legal provisions, may, in some cases, have the effect of according less favourable treatment to imported products.
341 Which is not the case in this dispute according to Korea.
342 Panel report on US – Section 337, paragraph 5.13.
WT/DS161/R WT/DS169/R
Page 150
In Japan – Alcoholic Beverages it was reiterated that "the broad and fundamental purpose of Article III is to avoid protectionism in the application of … regulatory measures".
"Towards this end, Article III obliges Members of the WTO to provide equality of competitive conditions for imported products in relation to domestic products…. Moreover it is irrelevant that the trade effects of the tax differential between imported and domestic products, as reflected in the volumes of imports, are significant or even non-existent; Article III protects expectations not of any particular trade volume but rather of the equal competitive relationship between imported and domestic products."343
Similarly, in Canada – Marketing Agencies (1992), the panel stated that:
"The Panel recalled that the CONTRACTING PARTIES had decided in a number of previous cases that the requirement of Article III:4 to accord imported products treatment no less favorable treatment than that accorded to domestic products was a requirement to accord imported products competitive opportunities no less favourable than those accorded to domestic products. The Panel found that, by allowing the access of domestic beer to points of sale not available to imported beer, Canada accorded domestic beer competitive opportunities denied to imported beer".344
Any regulatory distinction that is based exclusively on criteria relating to the nationality or the origin of the products is incompatible with Article III and this conclusion can be reached even in the absence of any imports (as hypothetical imports can be used to reach this conclusion) confirming that there is no need to demonstrate the actual and specific trade effects of a measure for it to be found in violation of Article III.345 The object of Article III:4 is, thus, to guarantee effective market access to imported products and to ensure that the latter are offered the same market opportunities as domestic products.
The Panel takes this to mean that like products are to be offered the possibility to compete in the framework of an integrated market.
343 Appellate Body Report on Japan – Alcoholic Beverages, page 16. In EC – Bananas III, paragraph 252 the Appellate Body reiterated the conclusion of the GATT panel report US – Superfund: "Article III:2, first sentence, cannot be interpreted to protect expectations on export volumes; it protects expectations on the competitive relationship between imported and domestic products. A change in the competitive relationship contrary to that provision must consequently be regarded ipso facto as a nullification or impairment of benefits accruing under the General Agreement." (Emphasis added.)
344 Panel report on Canada – Marketing Agencies (1992), paragraph 5.6.
345 See for instance the panel report on Indonesia – Automobiles where it was concluded that: "14.112
… The distinction between the products, which results in different levels of taxation, is not based on the products per se, but rather on such factors as the nationality of the producer or the origin of the parts and components contained in the product. As such, an imported product identical in all respects to a domestic product, except for its origin or the origin of its parts and components or other factors not related to the product itself, would be subject to a different level of taxation." "14.113 … Under the Indonesian car programmes the distinction between the products for [domestic] tax purposes is based on such factors as the nationality of the producer or the origin of the parts and components contained in the product. Appropriate hypotheticals are therefore easily constructed. An imported motor vehicle alike in all aspects relevant to a likeness determination would be taxed at higher rate simply because of its origin or lack of sufficient local content. Such vehicles certainly can exist (and, as demonstrated above, do in fact exist). In our view, such an origin-based distinction in respect of internal taxes suffices in itself to violate Article III:2, without the need to demonstrate the existence of actually traded like products."
WT/DS161/R WT/DS169/R
Page 151
The Panel's assessment
Korea's main argument is that its domestic beef is prohibited access to imported-beef shops and, therefore, imported and domestic beef are treated equally. Korea adds that to require the dismantling of its dual retail regime would imply that GATT requires deregulation, which, according to Korea, is not the case.
The Panel wants to stress first that Article III:4 of GATT is not concerned with the treatment of domestic products as such but whether imported products are treated less favourably than domestic products. In this regard, the Panel considers that, contrary to what Korea asserts, the measure Korea applies to imported beef since 1990, whereby imported beef cannot be sold at the retail level through the same outlets or in the same areas (in the case of department stores) as domestic beef, constitutes in itself differential treatment and, what is decisive under Article III:4, such differential treatment unavoidably results in the imported products being less favourably treated on the Korean market than the like domestic products.
Regulations providing for the segregation of imported products on the domestic market limit the possibility for consumers to compare imported and domestic products and effectively base their consumption choice on the differences in quality, characteristic and prices of products (either domestic or imported). Thereby they reduce opportunities for imported products to compete directly with domestic products.
Suppose an exporter wishes to increase its share of a foreign market. It has to convince distributors, and ultimately consumers, that it has a worthwhile product to sell at an attractive price, in the same way as a domestic manufacturer. In the case of a domestic manufacturer, he must persuade the retailer to stock his product, which may mean replacing an existing domestic product, but will usually involve the two products being sold side by side on a trial basis. However, under a dual retail system, the only way the imported product can get on the shelves is if the retailer agrees to substitute it, not only for one but for all existing like domestic products. This is clearly an added burden on the imported product in principle, which will be particularly severe when imports have a small share of the market in the first place. It cannot be accepted that a dual retail system for beef, even if formally identical for both domestic and imported goods, is in principle compatible with Article III:4. Moreover, even assuming there could be a functioning dual retail system for imported goods, such that its restrictive effects may appear to be minimal, this does not condone the inherently discriminatory nature of such a dual retail system.
In the present case, the notion of equal competitive opportunity implies, at the very least, that there be a possibility for imported beef to be physically present with like domestic beef at the point of sale to the consumer. By excluding imported beef from the existing retail system for domestic beef (which comprises the vast majority of sales outlets), the dual retail system limits the potential market opportunities for imported beef. This is particularly evident since beef is a product which is consumed on a daily basis, and for which consumers may not be willing to "shop-around" before making their final purchase.
The dual retail system limits the competitive opportunities for imported beef in other ways. In the context of a market mostly dominated by the domestic product, the costs associated with the implementation of the dual retail system bear more heavily on imported than on domestic beef. Indeed, one may expect that the latter will continue to be sold from existing retail facilities whereas the former will require the establishment of new retail facilities.346 Requiring that imported beef be
346 Korea argues that there are no start-up costs for new outlets since existing domestic-beef shops may be converted into imported-beef shops. However, Korea does not indicate the proportion of imported-beef
WT/DS161/R WT/DS169/R
Page 152
sold in specialized stores, or in separate display cabinets in large stores, encourages the perception that imported beef and domestic beef are different, when they are in fact like products belonging to the same market, as admitted by Korea. The segregation of domestic and imported beef provides the domestic product with a competitive advantage over the imported product based on criteria not related to the products themselves. It also facilitates the maintenance of a price differential to the advantage of domestic beef. Overall, the segregation of domestic and imported beef tends to shelter the high priced domestic products from the competition coming from the lower priced imported products.
Article III:4 of GATT is concerned with state measures and not with the autonomous behaviour of economic operators. Private firms, if they so wish, may decide on commercial grounds to distribute either domestic or imported goods alone. However, a government regulation contravenes Article III:4 if, as in the present case, it forces distributors to make such a choice.
The dual retail system enforced by Korea in the case of beef is particularly unfavourable to the imported products, if one considers that it was established at a time when the import quota was being phased out. Against this background, the dual retail system can be seen as a potential brake on the market access prospects normally open to less expensive imported beef, the effect of which will be fully felt the day the quota is lifted.
Actually, the jurisprudence on Article III makes it clear that no consideration needs to be given to the effects of any less favourable treatment or the impact of such discriminatory regulation on trade volume.347 In order to demonstrate the Article III violation, there is, thus, no need to prove that the dual retail system is having any effect on the Korean market distinct from that of the WTO compatible quota. The existence of a WTO compatible import beef quota is of no relevance to the claims that the Korean dual retail system provides less favourable treatment to imported products. Therefore, the Panel disagrees with Korea that it was for the Complaining parties to show that the dual retail system causes them prejudice additional to (and independent of) that resulting from the WTO compatible beef import quota, as there is no need to demonstrate any such prejudice.
As to the relationship between the existence of a WTO compatible quota and the possibility of claims under Article III, it is well established that WTO Members are bound by all WTO provisions simultaneously:
"… the WTO Agreement is a "Single Undertaking" and therefore all WTO obligations are generally cumulative and Members must comply with all of them simultaneously …"348 (emphasis added).
That is to say that even if Korea benefits from a WTO compatible import quota on beef, all Korea's measures, such as the distinct dual retail system for beef, must respect all the other relevant provisions of the WTO Agreement, including Article III of GATT.
shops that have resulted from the conversion of former domestic-beef shops. Such converted shops would in any case have lost the right to continue to sell domestic beef to Korean consumers who want to buy such beef.
347 Although there is no need to prove any trade effect to win a claim of Article III violation, the effects
of the Korean dual retail system can be seen when during the financial crisis (1998) the importers of foreign beef were not able to "adjust" as well as the domestic producers because the retail (and the SBS) systems in place limited their flexibility to search for additional and new points of sales. It is reported that in 1997 and in particular 1998 the number of foreign-beef shops went down importantly (in 1995: 7,713; in 1996: 7,569; in 1997: 7,026; in 1998: 5,498. See footnote 111 of this Panel report.
348 Appellate Body Report on Korea – Safeguards, paragraph 74.
WT/DS161/R WT/DS169/R
Page 153
Conclusion
The Panel finds that under the Korean dual retail system imported beef is treated less favourably than domestic beef. Accordingly, the Korean dual retail system for beef is inconsistent with Article III:4 of GATT. Having reached this conclusion, the Panel considers that it is unnecessary to determine whether this same measure also violates Article XI of GATT, as claimed by Australia.
3. Article III:4 and the requirement to display a special sign
The arguments of the parties
640. The Complaining parties claim that the requirement for specialized imported-beef shops to display a sign "Specialized Imported Beef Store" constitutes a less favourable treatment for imported beef, imposing a requirement that does not exist for domestic beef. Australia adds that the sign "Specialized Imported Beef Store" has the effect of emphasising any negative perceptions about the quality of imported beef; this has detrimental effect on the marketability of imported beef and a dampening effect on prices. Australia recalled that in 1955, it had complained that an Hawaiian regulation requiring firms which sold imported eggs to display a sign stating: "We sell foreign eggs", violated Article III:4. The complaint was withdrawn when a US domestic court decision declared the law unconstitutional and contrary to Article III:4 of GATT.
The Panel's assessment
641. The Panel is of the view that such a sign display requirement being essentially ancillary to the dual retail system, itself is inconsistent with Article III:4, is necessarily also inconsistent with Article III:4.
642. In addition, the requirement to display the sign "Specialized Imported Beef Store" goes beyond the indication of origin on products and therefore is in violation of Article III:4 of GATT. The Panel recalls that the 1956 Working Party report on "Certificates of Origin, Marks of Origin, Consular Formalities" noted that "requirements going beyond the obligation to indicate origin would not be consistent with the provisions of Article III, if the same requirements did not apply to domestic producers of like products".349
643. The Panel finds, therefore, that the requirement imposed on shops selling imported beef to display a sign " Specialized Imported Beef Store" is prima facie in violation of Article III:4 of GATT.
644. The Panel now proceeds to examine Korea's defence based on Article XX(d) of GATT.
4. Korea's defence based on Article XX(d) of GATT
Arguments of the parties
645. Korea claims that its dual retail system for beef, if found in violation of Article III:4, as is the case, should benefit from the protection of Article XX(d) of GATT.350 Korea submits that it is necessary to have domestic and imported beef sold through separate stores in order to counteract fraudulent practices prohibited by the Unfair Competition Act. Because imported beef is cheaper than domestic beef, traders have a strong incentive to sell imported beef as domestic beef since by doing so they can profit from the higher sales price. In 1990, in order to stop these deceptive practices,
349 The 1956 Working Party report on "Certificates of Origin, Marks of Origin, Consular Formalities", BISD 5S/102, paragraph 13.
350 Korea also argues that the dual retail system is a remaining restriction, something the Panel does not accept. See paragraphs 593 to 597 above.
WT/DS161/R WT/DS169/R
Page 154
Korea enacted the dual retail system and decided to eliminate the previous simultaneous sales system which had been in place since 1988 when imports of beef first resumed. Korea argues that it seriously considered the choice of instrument in order to reach its regulatory objective to ban fraudulent practices by individual traders with respect to sales of beef. In Korea's view, continuous policing of the shops was not an option in view of the substantial costs to the government.351 On the other hand, Korea stated that the dual retail system relies on policing only domestic-beef shops whilst ensuring that stores selling imported beef indicate that they do so. In Korea's view, this indication is sufficient to remove the risk that imported beef be sold as domestic beef, as consumers know that in foreign beef shops cheaper imported beef is offered.352
646. Korea refers the Panel to its Unfair Competition Act, which addresses commercial practices which are considered unfair vis-Ã -vis competitors and consumers (including fraudulent practices). The purpose of the Act, as stated in Article 1, is to "maintain the order of sound transactions by preventing unfair competitive acts."
647. In paragraph 1 of Article 2, the term "unfair competitive act" is defined as follows:
"(1) Act misleading the public to understand the place of origin of any goods either by falsely marking that place on any commercial document or communication, in said goods or any advertisement thereof or in any manner of misleading the general public, or by selling, distributing, importing or exporting goods bearing such mark;
(2) Act making a mark misleading people to understand as if any goods were produced or processed in an area other than that where said goods are produced, manufactured or processed, on any commercial document or communication, in said goods or any advertisement thereof, or in any manner of misleading the general public, or act selling, distributing, importing or exporting goods bearing such mark;"
Korea submits that the system of separation of sales outlets is necessary to enforce this Act and that Article XX(d) GATT provides an appropriate legal framework to justify the dual retail system.
648. Australia and the United States submit that, contrary to paragraph (d) of Article XX, the dual retail system for beef was not put in place to secure compliance with a WTO compatible regulation on deceptive practices; at best the dual retail system has the same objective as the Unfair Competition Act. Australia also submits that Korea's substantial market price support and the dual retail system are actually exacerbating the price differential between domestic and imported beef, and therefore increasing the likelihood of fraud. In Australia's view, fraud will cease only when this artificial price differential disappears. In Australia's view, it is pertinent that record-keeping requirements that are imposed on imported beef stores are not imposed on domestic beef stores. Therefore, Korea cannot ascertain the sources of supply for domestic beef and hence whether fraud takes place in domestic shops.
649. In addition, the Complaining parties argue that the dual retail system is not "necessary" to avoid fraudulent practices. They also suggest WTO consistent alternatives to the dual retail system that would allegedly ensure the prevention of deceptive practices. In support of their allegations, the Complaining parties point to the manner in which Korea dealt with similar situations involving domestic beef (misrepresentation of dairy beef for Hanwoo beef) or other sectors of the Korean economy where frequent fraudulent practices are reported to occur. Finally, the Complaining parties claim that the Korean dual retail system for beef is in any event inconsistent with the provisions of the
351 See paragraph 244 of this Panel report.
352 See paragraph 255 of this Panel report.
WT/DS161/R WT/DS169/R
Page 155
chapeau of Article XX, in that it imposes a disguised restriction on international trade since its only purpose it to protect Korean beef production.
Article XX(d) of GATT and the GATT/WTO jurisprudence 650. GATT Article XX (d) provides:
"Subject to the requirement that such measures are not applied in a manner which would constitute a means of arbitrary or unjustifiable discrimination between countries where the same conditions prevail, or a disguised restriction on international trade, nothing in this Agreement shall be construed to prevent the adoption or enforcement by any contracting party of measures:
…
(d) necessary to secure compliance with laws or regulations which are not inconsistent with the provisions of this Agreement, including those relating to customs enforcement, the enforcement of monopolies operated under paragraph 4 of Article II and Article XVII, the protection of patents, trade marks and copyrights, and the prevention of deceptive practices;"
Korea concedes that it bears the burden of showing that its retail restrictions fall within the scope of Article XX.353 To satisfy its burden under Article XX, Korea must thus show that the requirement for sale of imported beef in separate stores is "necessary to secure compliance with laws that are themselves consistent with the GATT 1994" and further that the dual retail system is not "applied in a manner which would constitute a means of arbitrary or unjustifiable discrimination between countries where the same conditions prevail or a disguised restriction on international trade".
With reference to Article XX(d), the GATT panel report on US – Section 337 provided that the first issue to be determined is whether a GATT consistent alternative could have been employed:
"It was clear to the Panel that a contracting party cannot justify a measure inconsistent with another GATT provision as "necessary" in terms of Article XX(d) if an alternative measure which it could reasonably be expected to employ and which is not inconsistent with other GATT provisions is available to it".354 (Emphasis added)
In US – Gasoline, the Appellate Body also considered the existence of WTO consistent alternative courses of action, concluding that the US measure did not benefit from the application of Article XX355:
"There was more than one alternative course of action available to the United States in promulgating regulations implementing the CAA. These included the imposition of statutory baselines without differentiation as between domestic and imported gasoline. This approach, if properly implemented, could have avoided any discrimination at all."356 (emphasis added)
353 Appellate Body report in US – Gasoline, page 22.
354 See Panel report in US - Section 337, paragraph 5.26.
355 In that case however, the Appellate Body, proceeded to the examination of alternatives under the provision of the chapeau of Article XX.
356 Appellate Body report on US – Gasoline, page 25.
WT/DS161/R WT/DS169/R
Page 156
The Panel's assessment
In order to benefit from the protection of Article XX(d), Korea must demonstrate that the dual retail system (including related measures), although inconsistent with Article III:4:
is in place in order to "secure compliance" with a domestic GATT consistent law or regulation which, here, means to enforce the Korean law against deceptive practices; and if this is the case,
is "necessary" to prevent deceptive practices from occurring in the Korean beef market (and more particularly the passing of foreign beef as domestic beef); and if this is the case,
is not applied in a manner which would constitute a means of arbitrary or unjustifiable discrimination between countries where the same conditions prevail, or a disguised restriction on international trade.
"… secure compliance with GATT consistent regulation"
The Panel must first identify and characterize the alleged GATT consistent regulation. In this case, the regulation referred to by Korea, is the Korean Unfair Competition Act, which among other things, aims at the prevention of deceptive practices. At face value, this is a GATT consistent regulation. Secondly, the Panel must identify the practices that Korea considers deceptive and aims to prevent. In the present case, the alleged deceptive practices are the misrepresentation of the origin of beef, i.e. selling imported beef as domestic beef, a practice which is commercially profitable because of the price differential. The Panel acknowledges that, whatever is the cause of such fraudulent practices, selling imported beef as domestic beef constitutes misrepresentation as to the origin of the beef, contrary to Article 2 of the Unfair Competition Act.357 The Panel recognizes that there can be good reasons – apart from any protectionist motives – why a WTO Member might want information to be provided as to the origin of products, and particularly meat products, at the retail level.
As the Panel understands it, the application of the Korean Unfair Competition Act is initiated either by private parties or by public authorities and takes the form of policing, investigations, desist orders, fines, etc. The normal application of the Unfair Competition Act would not have given rise to an issue under Article III:4 and thus would not have required any justification under Article XX(d), provided that the same degree of enforcement applies in the case of domestic and imported products. The Korean measure under discussion does not pertain to the normal enforcement of the Unfair Competition Act. The establishment of a dual retail system is not among the tools, the use of which the Unfair Competition Act envisages or mandates for the purpose of deterring acts of misrepresentation or other types of fraudulent practices.358
Korea submits that in the case of foreign beef, it had to discard the normal application of the Unfair Competition Act since this proved to be too difficult and too costly in late 1989 and early 1990 in view of the number of fraud cases which occurred at that time in the context of the single retail system and where foreign beef was misrepresented as domestic beef. The cases of misrepresentation were themselves induced by the large difference between the respective prices of domestic and
357 The Panel recalls that Article 1 of the Unfair Competition Act prohibits any "act misleading the public to understand the place of origin of any goods either by falsely marking that place on any commercial document or communication, in said goods or any advertisement thereof or in any manner of misleading the general public, or by selling, distributing, importing or exporting goods bearing such mark."
358 The Panel notes that in the Guidelines Concerning Registration and Operation of Specialized Imported Beef Stores, no reference is made to the need to combat fraud, as the basic rationale for the implementation of such dual retail system.
WT/DS161/R WT/DS169/R
Page 157
foreign beef.359 Thus, according to Korea, the arrival of less expensive foreign beef on the Korean market, after imports resumed in 1989, created an exceptional situation due to the frequency of deceptive practices. In order to prevent such practices from occurring, Korea decided to segregate foreign beef at the retail level. In other words, the dual retail system is presented by Korea as being an exceptional remedy and a substitute to the normal manner of preventing practices forbidden by the Unfair Competition Act.360 The Panel considers that the dual retail system is indeed an exceptional remedy for the purpose of preventing acts of misrepresentation. In addition to being discriminatory, it is a measure of a permanent and fixed character, which, once taken and until removed, cannot easily be adjusted to changing circumstances.361 This is in contrast with the flexibility afforded by the Unfair Competition Act.362
However, despite these troublesome aspects, the Panel accepts that the dual retail system was put in place, at least in part, in order to secure compliance with the Korean legislation against deceptive practices to the extent that it serves to prevent acts inconsistent with the Unfair Competition Act. First, the system was established at the time when, as stated by Korea and not refuted by the Complaining parties, acts of misrepresentation were widespread in the beef sector. Second, it must be conceded that the dual retail system does appear to reduce the opportunities and thus the temptations for butchers to misrepresent foreign beef for domestic beef, when compared with the situation where all domestic and imported beef could officially be supplied to the same shop. The Panel notes that its interpretation of the words "measure … to secure compliance with laws and regulations" is not inconsistent with the approach taken by the panel on EEC – Parts and Components and later followed by the panel on Canada – Periodicals.363 If one admits that the dual retail system was established in part to secure compliance with the Korean statute against deceptive practices, the crucial question is
359 Korea reports that the price of Korean-bred cattle was 12,000-15,000 won per kilogram while imported beef was sold at 4,800 won per kilogram.
360 The Panel notes that it is not a complete substitute to the enforcement of the Unfair Competition Act to the extent that, as recognized by Korea, the dual retail system does not eliminate the need to prevent through traditional means the large number of domestic-beef shops from trying to sell foreign beef as domestic beef. Also, the need to police large department stores remains high due to, in this case, the physical proximity of imported and domestic beef.
361 For instance the price differential has been diminishing since 1990, and to the same extent the incentive to engage in fraudulent practices. However, the dual retail system has not been altered.
362 While Korea could claim that it made efforts to be somehow flexible in allowing imported packaged beef to be sold in beef domestic shops, the Panel notes that Korean consumers are not asking for packaged beef, as evidenced by the very low level of consumption (and imports of such pre-packaged beef).
363 In the EEC- Part and Components, the EEC had argued that Article XX(d) could cover a measure (in that case, the imposition of anticircumvention duties) which prevented actions that were consistent with laws
and regulations (in that case, the EEC's antidumping regulation) but undermined their objectives. That panel took the view that it was not enough for the measure to share the same objective as the "laws and regulations". That panel considered that the measures covered by Article XX(d) "must prevent actions inconsistent with the obligations set out in laws or regulations" (para. 5.15). That panel referred to "The examples of the laws and regulations indicated in Article XX(d), namely 'those relating to customs enforcement, the enforcement of monopolies …, the protection of patents … and the prevention of deceptive practices" (emphasis added) … [which] suggest that Article XX(d) covers only measures designed to prevent actions that would be illegal under the laws or regulations." (para. 5.16). Canada – Periodicals concerned an import ban, which did no more than share the same objective, i.e. the channelling of advertising revenue towards Canadian periodicals, as a tax provision granting tax deduction for expenses, (paras. 5.8 to 5.10).
The interpretation given by the present Panel to the words "measure to secure compliance …" would be inconsistent with the EEC - Parts and Components only if one were to interpret the approach taken by the panel in that case as requiring that measures coming within the scope of Article XX(d) be technically part of the "laws and regulations" themselves. The reading of the EEC – Parts and Components does not warrant such an interpretation and if it would, which is not the case, the present Panel would disagree with so narrow an interpretation of Article XX(d).
WT/DS161/R WT/DS169/R
Page 158
whether the measure is "necessary" to prevent misrepresentation of imported beef for domestic beef. Here again the burden of proof is on Korea.
"necessary to prevent misrepresentation as to the origin of beef"
To demonstrate that the dual retail system is "necessary", Korea has to convince the Panel that, contrary to what was alleged by Australia and the United States, no alternative measure consistent with the WTO Agreement is reasonably available at present in order to deal with misrepresentation in the retail beef market as to the origin of beef. The Panel considers that Korea has not discharged this burden for two inter-related reasons. First, Korea has not found it "necessary" to establish "dual retail systems" in order to prevent similar cases of misrepresentation of origin from occurring in other sectors of its domestic economy. Second, Korea has not shown to the satisfaction of the Panel that measures, other than a dual retail system, compatible with the WTO Agreement, are not sufficient to deal with cases of misrepresentation of origin involving imported beef. The Panel will detail each of these two reasons, noting that the first turns on facts – what does Korea do to prevent misrepresentation in cases other than the one at hand? The second rests both on factual findings, some of those facts being the same as are relevant to the first question, as well as on projections, based on those facts, regarding what Korea reasonably could do to prevent misrepresentation involving imported beef at the retail level?
Absence of dual retail systems in other sectors of the Korean economy
Deceptive practices similar to those which affected, in 1989 and 1990, the sale of foreign beef at the retail level are reported to occur or may occur in other sectors of the Korean economy. However, in those instances, Korea did, or does, not require that the products involved be sold through separate channels as a means to secure compliance with the Korean law on deceptive practices.
For instance, Korea has treated differently situations involving similar risks of fraud such as between domestic Hanwoo and domestic dairy cattle beef (dairy steer beef and dairy cow beef). However, there is no dual retail system for domestic dairy cattle beef. Korea's justification is that the amount of such dairy beef is negligible. In 1990, the year the dual retail system was established, beef from domestic dairy cattle represented somewhat less than half the amount of imported beef and about 25 per cent of total beef consumption in Korea.364 In 1998, beef from dairy cattle amounted to approximately half of the amount of imported beef and 12 per cent of total beef consumption.365 Therefore, the Panel considers that the amount of beef coming from dairy cattle is not negligible. Korea also submitted that in late 1998 it discovered a DNA test that apparently distinguishes between the two types of domestic beef. The Panel is not convinced that such a scientific test, if being able to distinguish between domestic Hanwoo beef and dairy beef, would not also be able to distinguish
364 The Panel was not able to make comparisons at the retail level. According to Korea, beef imported in 1990 amounted to 84,000 MT (See paragraph 258 of this Panel report) in excess of the 58,000 MT quota for that year while according to MAF statistics, Korean beef production amounted to 95,000 MT of which about 42 per cent came from dairy cattle. In 1991, imports of beef amounted to 124,000 MT and domestic beef amounted to 98,000 MT, of which 42 per cent came from dairy cattle. At the Interim review stage Korea and the United States submitted new data indicating that the amount of imported beef in 1991 would have been 127,000 MT. Even if one were to rely on this new data, this would not make the amount of dairy cattle beef less negligible.
365 In 1998, total consumption in Korea amounted to 345,000MT of which 91,000 MT was imported, and about 254,000MT came from domestic production. According to statistics by the NLCF, dairy cattle
represented, in 1998, 18.25 per cent of total Korean slaughter (head). According to Korea, dairy cow beef alone represented 28,000 MT (Annex 11), i.e. 8.1 per cent of total beef consumption, 11 per cent of domestic production and corresponded to 30 per cent of the amount of imported beef. See Annexes 8, 9, 10 and 11 of this Panel report.
WT/DS161/R WT/DS169/R
Page 159
between foreign and Korean beef. Furthermore the discovery of a DNA test in 1998 can not explain the absence of a dual retail system for domestic beef during the period before that date.
The Panel notes also that there is no dual retail system for other agricultural products. Korea suggests that it is necessary to resort to the drastic measure of segregating retail sales in the case of beef, but not in the instance of other products, because of beef 's particular importance as a component of the average Korean's diet and the substantial commercial activity in beef. However, Korea did not explain to the satisfaction of the Panel why other sources of protein, such as pork and seafood, which also have been identified as subject to fraudulent misrepresentation of the country of origin, were not made subject to a dual retail system.
Moreover, although some 45 per cent of imported beef is sold in restaurants, there is no requirement that domestic and foreign beef be offered in separate restaurants. Restaurants selling imported beef do not need to indicate whether they serve domestic or imported beef, or at least not until 2000. Two types of situations may arise.366 In the first, some Korean restaurants may serve imported beef as Hanwoo beef, thus suggesting that Korea may not consider the prevention of such acts of misrepresentation to require the establishment of a dual restaurant system. In the second, some restaurants, while not necessarily claiming that their beef is Hanwoo beef, may in fact sell beef without any reference to its origin, thus suggesting that Korea, unlike in the cases of butcher shops, is at least, not preoccupied with the profits restaurants may make from such practices and with precise information to be provided to consumers.
The Panel considers that the previous examples taken from outside as well as within the beef sector indicate that misrepresentation of origin can indeed be dealt with on the basis of basic methods, consistent with the WTO Agreement, and thus less trade restrictive and less market intrusive, such as the normal policing under the Korean Unfair Competition Act.367 These examples could leave the impression that only when imported beef is sold at the retail level does misrepresentation of origin become a matter of such concern to Korea. This directly questions the "necessity" of the dual retail system.
Existence of WTO consistent alternative measures to prevent deceptive practices in the beef retail market
The Panel considers that in the presence of an alternative measure consistent with WTO rules, it is for Korea to demonstrate that such an alternative measure is not reasonably available or is unreasonably burdensome, financially or technically, taking into account a variety of factors including the domestic costs of such alternative measure, to ensure that consumers are not misled as to the origin of the beef.
The Complaining parties have suggested that there exist alternatives measures consistent with the WTO Agreement, including labelling, record-keeping, prosecution and fines that would be effective in detecting and preventing deceptive practices as to the origin of beef.
With reference to the suggestion that the Korean government could increase investigations, prosecutions and the use of fines, Korea submits that imposing higher fines does not help to resolve the issue since traders will continue to have an incentive to cheat. Korea also asserts that more traditional means of addressing fraud, such as through investigations and prosecutions, are not
366 The Panel notes that the Livestock Times reported that the deceptive beef marketing practice was widespread in restaurants (where price differential was 58 per cent).
367 The Panel also notes that Korea has not submitted any evidence of similar dual retail systems for the purpose of preventing acts of misrepresentation as to the origin of goods in other WTO Members.
WT/DS161/R WT/DS169/R
Page 160
practical because imported beef is allegedly nearly impossible to distinguish from domestic beef. Korea's contention is unconvincing for a number of reasons.
With reference to Korea's allegation that investigations are impossible368, the Panel recalls that in the discussions of the December 1989 report (by the National Assembly's Subcommittee on Audits of Agricultural and Livestock Marketing), Korea was able to be very precise in terms of the exact amount of imported beef sold in deceptive ways. According to Korea, "a Marketing Association confirmed that 28 per cent of imported beef transacted at general butcher shops have been faked and sold as Hanwoo". It seems that Korea had then, before the entry into force of the dual retail system, an investigation system that allowed it to identify imported beef and to distinguish it from Korean beef. The Report of the Proceedings of the National Assembly's Committee on Agriculture, Forestry and Fisheries (7 March 1990), after investigations, reported fraudulent beef sales in 604 instances. At the time, Korea's investigation system and capacities appear to have been sufficient to detect fraudulent practices even in the beef sector369, without any need to having recourse to a dual retail system. Contrary to Korea's allegations, therefore, it would seem that Korea had the ability to distinguish imported beef from locally produced beef or at least to detect fraud when the one was passed off for the other. It is unlikely that such capacity would have disappeared in the course of a few years.
The effectiveness of fines will depend, on the one hand, on the level of such fines and the probability of being caught and, on the other, on the level of profit margin resulting from such fraud.370 The Panel considers that the threat of prosecution, which for small butchers would imply an attack on their reputation, would be an effective deterrent.
The Complaining parties submit that the auditing of purchase and sale records could supplement Korea's WTO-consistent efforts to identify instances of fraudulent misrepresentation of product origin. The Complaining parties suggest that enforcement of record-keeping requirements, applied universally to sales of beef, would be a WTO-consistent way of combating any fraud, as Korean regulations relating to imported beef already require substantial record-keeping by the various levels of trade.
Korea's response is that audit trails are not yet a feasible option for Korea's under-developed system of distribution. With respect to record-keeping, Korea's response is that few merchants in practice maintain comprehensive and accurate book records.
The Panel agrees that some forms of audit trailing are a rather sophisticated system of fraud detection. But there are several alternative means available to Korea to ensure the prevention of deceptive practices. For instance, a generally applied record-keeping requirement backed with sanctions would constitute a WTO consistent alternative to the WTO inconsistent dual retail system. If foreign beef shops can keep book-records371, it is difficult to see why the same could not be requested from domestic shops. Indeed, all beef traders at all levels of trade could be required to keep records so that investigations would easily detect the origin of the beef sold and/or purchased and be able to compare the prices of beef products and the profit made.
368 Paragraph 244 of this Panel report.
369 Some kind of similar system must now be in place with respect to large department stores which can
be officially supplied with both domestic and imported beef, even though they are supposed to sell them in separate areas.
370 If fines were commensurate to incentives to engage in fraudulent practices on the Korean market, whether domestic or foreign goods are involved, this would appear consistent with Article III:4 of GATT.
371 A practice which when imposed only on foreign beef shops would be contrary to Article III:4 of
GATT.
WT/DS161/R WT/DS169/R
Page 161
Korea also argues generally that, in the absence of a dual retail system, the prevention of acts of misrepresentation at the retail level would require the continuous policing of beef stores, something which, according to Korea, would be too costly. However, Korea has not supplied any data as to the costs which, for example, the normal enforcement of the Unfair Competition Act would entail. Moreover, as mentioned above, reliance on traditional means does not seem too costly an alternative in those instances where acts of misrepresentation do or may occur on the Korean market. After all, with the WTO Agreement the Members have made a bargain372 and compliance with the WTO Agreement may sometimes require (costly) adjustments to domestic policies and laws.373
On the basis of the previous discussion, the Panel considers that Korea has not demonstrated to the satisfaction of the Panel that alternative measures consistent with the WTO Agreement were not reasonably available in order to detect deceptive practices in the beef retail sector.
Non-fulfilment of the "necessity" requirement
For the reasons detailed above, the Panel finds that the dual retail system is a disproportionate measure not necessary to secure compliance with the Korean law against deceptive practices. Therefore, it is not justified by Article XX(d) of GATT. Consequently, there is no need for the Panel to examine the relevance of the chapeau of Article XX of GATT.
Conclusion on Korea's Article XX defence
The Panel has thus not been convinced by Korea's defence that its dual retail system should benefit from the application of Article XX(d) of GATT.
5. Conclusion on the WTO compatibility of the dual retail system for beef
677. The Panel finds, therefore, that Korea's dual retail system for beef is inconsistent with the provisions of Article III:4 of GATT by treating imported beef less favourably than domestic beef, a discrimination that cannot be justified pursuant to Article XX(d) of GATT. It should therefore be removed or otherwise brought into conformity with the WTO Agreement. It is, however, for Korea to decide which measure(s) consistent with WTO it wants to choose, whether measures already in use in Korea, or measures suggested above, or other measures, to replace the dual retail system.
CLAIMS AGAINST THE (LPMO) DISTRIBUTION SYSTEM AT THE WHOLESALE LEVEL
General Arguments of the Parties
678. Australia raises the following specific claims against various requirements pertaining to sales of beef imported by the LPMO: (a) the limitation of sales of imported beef to the wholesale market, unless beef is processed and packaged; (b) the restrictions on supply of beef from the wholesale market to specialized imported-beef stores only; (c) sales on a cash payment basis; and (d) record- keeping requirements, which according to Australia, are imposed only on beef imported by the LPMO and thus accord less favourable treatment to imported beef. The United States does not raise any specific claims on this matter although it has claimed that the dual retail system, generally, is in violation of Article III:4.
372 As stated by the Appellate Body in its report on Japan – Alcoholic Beverages (page 15) :"The WTO Agreement is a treaty -- the international equivalent of a contract. It is self-evident that in an exercise of their sovereignty, and in pursuit of their own respective national interests, the Members of the WTO have made a bargain. In exchange for the benefits they expect to derive as Members of the WTO, they have agreed to exercise their sovereignty according to the commitments they have made in the WTO Agreement."
373 See Article XVI:4 of the Agreement Establishing the WTO.
WT/DS161/R WT/DS169/R
Page 162
679. Korea's counter-arguments with reference to each specific claim above is that: (a) it is impossible to establish comparability between domestic and imported beef since there is a WTO compatible quota; (b) the dual retail system, including the obligation for department stores to have a separate section selling foreign beef, is compatible with the WTO; (c) Korea admitted that the LPMO's sales of imported beef through the wholesale market shall in principle be on a cash basis,374 however, Korea argues that this requirement is also applied to the NLCF sales of domestic beef to domestic beef stores; (d) Korea did not submit any counter-argument to this claim. Korea concluded that these measures, therefore, do not violate Article III:4. Should the Panel reach a different conclusion, Korea claims that it benefits from the protection of Article XX(d) of GATT.
2. The Panel's Assessment
The Panel recalls that in paragraph 584, it concluded that the LPMO's sale of imported beef through the Korean wholesale market is a "remaining restriction" which benefits from a transition period until 1 January 2001, by which date it shall be eliminated or otherwise brought into conformity with the WTO Agreement. This measure will therefore not be further discussed.
The Panel also recalls its discussion on Article III:4 of GATT in paragraphs 627 to 638 where it concludes that the object of Article III:4 is to guarantee effective market access to imported products and to ensure that the latter are offered the same market opportunities as domestic products.
It is not disputed that imported and Korean beef are like products. Nor is it disputed that the above-mentioned measures are regulations or requirements affecting the sale, offering for sale or distribution of imported beef. Article III:4 of GATT is thus applicable to the present situation. The Panel will now proceed to examine Australia's claim that less favourable treatment is imposed on imported beef by the LPMO distribution rules.
Restrictions on supply of beef from the wholesale market to specialized imported-beef stores
– the dual retail system
Australia claims that the requirement that beef imported through the LPMO be sold only in specialized foreign beef shops is in violation of Article III:4.
The Panel has already reached the conclusion that the Korean dual retail system, whereby imported beef (except pre-packed or processed) can only be sold in "foreign beef shops", is contrary to Article III:4 and cannot benefit from the protection of Article XX.
The Panel finds, therefore, that the restrictions imposed on the supply of beef from the wholesale market to specialized imported-beef stores, i.e. an application of the dual retail system, impose on beef imported through the LPMO treatment less favourable than that accorded to domestic beef which is not subject to any such restriction, and thus are contrary to Article III:4 of GATT. For the reasons provided in paragraphs 654 to 676 above, the Panel reaches the same conclusion with regard to the non-application of Article XX(d) to the present measures.
Sales of imported beef through the wholesale market can allegedly only be on a cash basis
Australia claims that the requirement, contained in Article 11 of the Regulation Concerning Sales of Imported Beef, that imported beef be supplied on a cash basis only is in violation of Article III:4.
374 See paragraph 214 of this Panel report.
WT/DS161/R WT/DS169/R
Page 163
Korea's defence that this requirement is also applied to the NLCF sales of domestic beef to domestic beef stores does not appear to have been contradicted by Australia. Korea submits that both imported and domestic beef stores sell their products mostly on a cash basis except where a credit relationship is formed between the traders or when the trader has secured a mortgage bond.375 It is not clear whether a "credit relationship" can legitimately take place in favour of specialized imported-beef shops.
The Panel recalls that Australia bears the burden of proving its claim that beef imported by the LPMO is subject to less favourable treatment (such as the requirement that payment take place only on a cash basis) than domestic beef. Considering the evidence before it, the Panel is of the view that Australia has failed to do so and therefore cannot accept this claim.
Record-keeping requirements
Australia claims that the obligation imposed on those who purchase foreign beef imported by the LPMO to record all purchases and sales and retain such records for at least two years creates compliance costs on distributors of imported beef in terms of time and expense. These costs have an inevitable impact on the price of imported product. For Australia, the absence of similar requirements on domestic beef, impose less favourable treatment on foreign beef imported through the LPMO, contrary to Article III:4 of GATT.
Korea submits that under the revised Guidelines, the specialized shops are no longer required to keep records of sales. The Panel is aware that its terms of reference oblige it to examine the factual and legal situation on 26 May and on 26 July 1999, and that such revised Guidelines were adopted after the Panel was established.
The Panel recalls Korea's concern with respect to fraudulent practices, that imported beef could be sold as domestic beef. To the extent that such record-keeping requirements were imposed equally on the LPMO, to those who purchase from the LPMO and to distributors of both imported and domestic beef, such record-keeping requirements could be seen as a reasonable and feasible alternative to ensure the prevention of fraudulent practices in Korea.
The Panel's appreciation of the evidence relevant to the time when it was given its mandate is that those in Korea who purchased foreign beef imported by the LPMO were subject to more stringent record-keeping requirements than those who purchased domestic beef. There is no doubt that such additional requirements are in violation of Article III:4.
CLAIMS AGAINST THE SBS SYSTEM
General description of the claims of the Parties
693. The Complaining parties argue that the very existence of the SBS system, the restrictions on who can import, the SBS membership requirement, the prohibition on cross-trading between super- groups, the prohibition on cross-trading between end-users and super-groups and the prohibition on cross-trading between end-users are restrictive and inconsistent with Articles III:4, and XI and its Ad Note.
694. Australia adds that Korea's overall "supervision of imports", i.e. the labelling, reporting and record-keeping requirements, is in violation of Article III:4, as similar requirements do not exist for domestic beef.
375 Ibid.
WT/DS161/R WT/DS169/R
Page 164
695. Korea offers specific defences addressed below.
2. The Panel's assessment in the light of Note 6(e)
696. The Panel recalls its conclusion in paragraphs 569 to 580 that the SBS system, including its exclusive membership mechanism, the prohibition on cross-trading between super-groups, and between super-groups and end-users as well as some more onerous record book keeping requirements were "inherent" features of the SBS system376 as set up by the parties in the ROUs and, thus, constituted some of the remaining restrictions which benefit from a transition period until 1 January 2001, by which date they shall be eliminated or otherwise brought into conformity with the WTO.
697. However, prohibition to cross-trade between end-users cannot be seen as "inherent" to the SBS system as set up in the ROUs, as there is no reference to the existence of any restriction on trading between end-users. The same is to be said of any additional (or abusive) labelling requirement imposed only on imported products as there is no reference to specific labelling requirements in the ROUs. Some of the features of the SBS system relate to the distribution of imported beef. However, the origin of beef should be of no legal relevance to its distribution within Korea. In the Panel's view, such additional labelling requirements are not inherent to the SBS system. The prohibition on cross- trading between end-users and additional labelling requirements of the SBS system are not "remaining restrictions". The Panel proceeds to the examination of these specific measures.
3. Examination of two specific measures of the SBS system
Prohibition on cross-trading between end-users
Arguments of the Parties
The Complaining parties claim that the prohibition on cross-trading between end-users impose a treatment less favourable on imported beef than on domestic beef.
Korea's response is that the Revised Management Guideline for Imported Beef prohibit only the resale of imported beef by specialised stores to their counterparts selling domestic beef, but cross- trading between specialized stores is now allowed.
The Panel's assessment
First, the Panel recalls that, based on its terms of reference, it must examine the situation on and before 26 May and 26 July 1998.
Article 11 of the Guidelines prohibits, as previously, the use of imported beef for any purpose other than a use permitted under the Guidelines for the particular end-user or customer. 377 It specifies the permitted uses of beef for the end-users of each of the super-groups and provides that no use or
376 See in particular paragraphs 579-580 of this Panel report.
377 The prohibited activities, formerly identified in Articles 6 and 11 of the December 1997 Guidelines, and previously in the SBS Operational Guidelines, are now contained in Article 26 of the October 1999 Guidelines. Although Korea recently reissued both the Regulations Concerning Imported Beef Stores and the Operational Guidelines for Imported Beef Under the SBS System, and consolidated those directives into a single document, the substance of the requirements is left unchanged.
WT/DS161/R WT/DS169/R
Page 165
sale other than that provided for in Article 11 shall be authorized.378 Sanctions for failure to comply with the specified use and sale limitations are severe.
The Panel recalls its discussion (see paragraphs 629 to 640 of this Panel Report and the panel report on US – Section 337, paragraph 5.13) on Article III:4 of GATT where it concludes that the purpose of Article III:4 is to oblige all domestic laws and regulations to provide equality of competitive conditions to imported products in relation to domestic products.379
The SBS Operational Guidelines and the December 1997 Guidelines are laws, regulations and requirements affecting the internal sale, offering for sale, purchase, distribution or use of domestic or imported beef. It is not disputed that imported and Korean beef are like products.
The Panel recalls that similar restrictions on the internal distribution of domestic beef do not exist. The Panel finds, therefore, that foreign beef imported through the SBS system is accorded less competitive opportunities to reach potential consumers in the Korean market than those accorded to domestic beef, for which there is no prohibition on cross-trading between end-users.
Thus, the prohibition against cross-trading between end-users imposed on foreign beef imported through the SBS system is contrary to Article III:4 of GATT. Having reached this conclusion the Panel does not consider it necessary to examine the Complaining parties' claims that the same measure also violates Article XI and its Ad Note.
Additional labelling requirements
Arguments of the Parties
Australia argues that the Korean labelling requirements imposed on beef imported through the SBS system are in violation of Article III:4, as similar requirements do not exist for domestic beef. Australia further claims that this requirement imposes an unnecessary, impractical and expensive measure imposed only on the imported product, thereby artificially reducing the competitive ability of the imported product. For Australia, the current labelling of Australian products clearly identifies the origin and product. In Australia's view, many elements of what is required by Korea to be included on the label are of no relevance, impracticable and more restrictive than necessary. For instance, for the end consumer, the contract number and super-group importer adds no information of any relevance as these matters are concerned with the importation of foreign beef. This requirement (to indicate the number of the contract and the super-group) is impractical because the contract number and super-group may be unknown at the time the product is packed by the producer. The measure, therefore, requires re-labelling either prior to shipment or in Korea. For Australia, whether re-labelled in Korea or Australia, there will be additional costs for the re-labelling, which will serve to make the imported product less competitive.
Korea submits that all imported livestock products including beef are required to be marked with, among other things, the name of the product, importer, the address of the importer, production date, and shelf life. For Korea, these requirements are necessary to facilitate the importation of these products and are used for customs clearance purposes as well as distribution. Korea adds that the domestic beef traders must also mark the name of the products, producer, shelf life, and the production date. For Korea, these requirements aim to protect public health and to establish sound distribution processes.
378 The restrictions on the specific use of imported beef by each end-user and customer are now set forth in Article 21 of the new Guidelines.
379 The panel report on US - Section 337, paragraph 5.13.
WT/DS161/R WT/DS169/R
Page 166
The Panel's assessment
The Panel notes that no such additional labelling requirement is inherent to the SBS system. Some of the features of the SBS system relate to the distribution of imported beef. However, under basic WTO national treatment principle, the origin of beef cannot be a factor affecting the distribution of beef within Korea. The Panel notes also that Korea has not raised any specific defence based on the application of Article XX(b) for the protection of public health.
Under Article III:4 of GATT, imported products must not be subject to more stringent requirements affecting their distribution within the Korean market than domestic products. The Panel has already referred to the 1956 Working Party report on "Certificates of Origin, Marks of Origin, Consular Formalities" where it was concluded that the "requirements going beyond the obligation to indicate origin would not be consistent with the provisions of Article III:4, if they are not also imposed on domestic products".380
The Panel, therefore, finds that any additional labelling requirements imposed on foreign beef imported through the SBS system that are not also imposed on domestic beef, such as the requirements that the end consumer, the contract number and super-group importer be marked on the imported beef, are contrary to Article III:4 of GATT.
CLAIMS AGAINST THE LPMO'S MINIMUM WHOLESALE PRICE, THE REFUSAL OR DELAYS IN CALLING FOR TENDERS AND THE DISCHARGE PRACTICES IN 1997-1998
General Arguments of the Parties
The United States claims that various "operating procedures" of the LPMO, including its alleged establishment of a minimum wholesale price or minimum auction price, the alleged refusal or delays in calling for tenders and the alleged delays selling into the Korean market such imported beef as well as the withholding of quota shares to SBS super-groups, amount to restrictions additional to that of the WTO compatible beef import quota.
Australia's focus of concern is the manner in which the LPMO satisfies its mandate of price stabilization. In this regard, Australia submits that the LPMO's alleged practice of imposing a minimum wholesale price or minimum auction price, the establishment and execution of monthly discharge plans, and its control over daily imported beef discharge at the wholesale market are inconsistent with the WTO Agreement.
Both Complaining parties point to the fact that Korea's import quota (both the LPMO and SBS shares) were not filled which for them constitutes prima facie evidence that Korea's practices in its administration of the beef quota constituted an import restriction.
For the Complaining parties, the fact that such practices were those of a state-trading enterprise cannot be used to justify their inconsistency with Article XI of GATT, in view of the Ad Note to Article XI which provides that the requirements of Article XI also apply to measures taken by a state-trading enterprise. Both Complaining parties claim that the same measures, as they restrict imports of agricultural products, are also inconsistent with the provision of Article 4.2 of the Agreement on Agriculture and its footnote, which more specifically prohibits restrictions on imports of agricultural products maintained through a state-trading enterprise. Australia claims that the same measures violate Articles XVII and III:4 of GATT, while the United States argues that the same practices also violate Article 3 of the Licensing Agreement since the administration of the import
380 The 1956 Working Party report on "Certificates of Origin, Marks of Origin, Consular Formalities", paragraph 13.
WT/DS161/R WT/DS169/R
Page 167
licensing procedures are more "administratively burdensome than absolutely necessary to administer the relevant measure". The United States did not further develop its claim that such LPMO's practices violate Article XVII of GATT.
Korea's defence to these claims is that, since it has a WTO compatible beef import quota in place, the only way for Australia and the United States to establish a violation is for them to prove that the quota was not fully utilized and that the failure to fill the quota is caused by, or the result of, a separately identifiable prohibition or restriction. Korea argues that even if such a quota is not fully utilized, for the Complaining parties to successfully claim a violation of Article XI, they must establish a clear causal relationship between separately identifiable restrictions and the non-fulfilment of the quota (since the non-fulfilment can be due to a multitude of market factors).
In summary, Korea submits that in order to establish a violation of Article XI:1 in this case, the United States and Australia must establish: (1) the existence of a separately identifiable prohibition or restriction (beyond the quota and its implementation) on the importation of product, other than duties, taxes or charges; (2) that such prohibition has been "made effective." In the present case, this would involve establishing that (i) the quota has not been fulfilled, (ii) the restriction has actually had the intended effect of restricting imports to a level below the quota level and that (iii) a clear causal link establishing that the non-fulfilment of the quota is specifically due to the measure at issue and is not attributable to other factors.
Korea argues that it fully used its beef import quota so the Australian and US claims should be rejected. Furthermore, Korea argues that the United States and Australia do not properly attempt to explain how any of the alleged restrictions constitute restrictions in addition to the restrictions imposed for the purposes of implementing the legally valid quota. Thus, in Korea's view, the fact that the Complaining parties did not submit any evidence or arguments on the causal relationship between any alleged restrictions and the reduced import levels is fatal to the Complaining parties since the Korean financial crisis provides the commercial and economic reasons for the inability of Korea to fill its import quota.
2. Minimum wholesale price
Arguments of the Parties
718. The Complaining parties claim that, with a view to stabilizing prices, the LPMO auctions beef which it imports while a minimum wholesale price (or minimum auction price or target price) is fixed with reference to the domestic price. The Panel considers that the basis on which such a minimum wholesale price is established is not clear. In its first submission, Korea argues that the minimum wholesale price for imported beef is fixed by reference to the price of domestic beef.381 In its second submission Korea argues that the minimum wholesale price is set to "avoid the sale of imported beef below a certain price level".382 In response to a question by the Panel, Korea responded that "target prices are set based mainly on the import price (duty paid CIF + selling cost) of beef … thereby aimed at avoiding losses".383
Panel's assessment in light of Note 6(e)
719. The Panel has already reached the conclusion that some kind of minimum wholesale price or minimum auction price existed (and was indeed condemned by the 1989 Panel) at the time of the 1989 panel reports and must have existed at the time of the conclusion of Korea's Schedule, since the
381 See paragraph 207 of this Panel report.
382 See for instance, paragraphs 130 and 131 of this Panel report.
383 See paragraph 131 of this Panel report.
WT/DS161/R WT/DS169/R
Page 168
July 1993 ROUs provide for the need to improve LPMO's pricing practices. In the Panel's view, and to the extent that some minimum/target auction price can be viewed as a "remaining restriction", the Panel finds that such a restrictive pricing practice benefits from a transition period until 1 January 2001, by which date it should be phased out or otherwise made WTO compatible. The Panel will not discuss this measure any further.
720. The Panel notes, however, that the Complaining parties have made other and distinct claims against the administration of the beef quota by the LPMO, namely, that the alleged refusal to discharge imported beef into the Korean market resulted in the stocking of imported beef, and that the alleged delays and refusal to call for tenders during certain periods contributed to the non-filling of Korea's import quota. The Panel shall, therefore, address these claims separately, below.
3. The LPMO's daily and monthly discharge practices; the withholding of imported stocks; and the refusal or delays in calling for import tenders
Arguments of the parties and factual determination made by the Panel
Were the beef import quotas filled in 1997 and 1998?
In reply to the claims that the LPMO's auctioning and discharge functions are essentially restrictive and led to the non-filling of the import quota for 1997 and 1998, Korea's first defence is that its import quotas have been fully used. In Korea's view, therefore, it cannot be in violation of its WTO obligation and, in particular, its licensing system cannot have any trade-distortive effects as prohibited by Article 1.2 and 3.2 of the Licensing Agreement. In support of its arguments, Korea refers the Panel to the conclusions of the panel and the Appellate Body in EC – Poultry, where it was said that the full utilisation of import licenses "strongly suggests that any trade-distortive effects of the operation of the licensing rules have been overcome by the exporters."384
The parties have submitted data with reference to imports of beef by the SBS system and the LPMO. Korea provided the following data:
1997 | LPMO | SBS |
Quota amount | 83,500 tonnes | 83,500 tonnes |
Amount Purchased | 83,500 tonnes | 83,486 tonnes |
Amount Customs Cleared | 75,266 tonnes | 75,666 tonnes |
Amount of the quota not cleared | 8,234 tonnes | 7,509 tonnes |
1998 | LPMO | SBS |
Quota amount | 74,800 tonnes | 112,200 tonnes |
Amount Purchased | 74,800 tonnes | 69,933 tonnes |
Amount Customs Cleared | 26,961 tonnes | 94,395 tonnes |
Amount of the quota not cleared | 47,839 tonnes | 17,805 tonnes |
The Complaining parties submitted more or less similar data except for the non-use of the SBS's share of Korea's import quota in 1998:
384 Panel report on EC – Poultry, paragraph 249; and Appellate Body report, paragraphs 119-122.
WT/DS161/R WT/DS169/R
Page 169
1997 | LPMO | SBS |
Quota amount | 83,500 tonnes | 83,500 tonnes |
Amount Purchased | 83,500 tonnes | 83,175 tonnes |
Amount Customs Cleared | 75,266 tonnes | 76,723 tonnes |
Amount of the quota not cleared | 8,234 tonnes | 6,777 tonnes |
1998 | LPMO | SBS |
Quota amount | 74,800 tonnes | 112,200 tonnes |
Amount Purchased | 74,800 tonnes | 69,933 tonnes |
Amount Customs Cleared | 26,961 tonnes | 52,128 tonnes |
Amount of the quota not cleared | 47,839 tonnes | 60,072 tonnes |
In order to assess whether Korea's import quota has been filled, the Panel must determine whether the annual level of imported beef is below the level at which Korea is entitled to limit imports. The date when contracts are signed between commercial actors is of no relevance when assessing whether Korea's annual imports have been restricted. What is relevant is the date of importation of the beef products and the level of those imports. The relevant date is the customs- clearance date, i.e. the date when such beef products are effectively imported into Korea.
The Panel notes in particular the different figures submitted by the parties with regard to the amount of customs cleared beef under the SBS in 1998. The Panel notes as well that Korea submits that in 1997 the amount of beef customs cleared under the SBS was 75,666 tonnes and the amount purchased was 83,486 tonnes while in 1998 the amount of beef customs cleared was 94,395 tonnes for 69,933 tonnes purchased. The Panel notes furthermore that, according to these figures, under the SBS system, super-groups were able to customs clear so much more than they purchased in spite of the fact that super-groups, according to Korea, do not carry over stocks.
Australia submitted non-refuted evidence that in 1998, 112,200 tonnes was allocated among the SBS super-groups (70 per cent of Korea's quota). Of this amount, only 69,933 tonnes or 62.3 per cent was actually taken up. Among the various super-groups, KMPA, LCTM and KMIA used up
99.8 per cent, 99.3 per cent and 97.0 per cent of their allocations, respectively. However, KTSC, KFMP and KRSC used up only 33.0 per cent, 26.0 per cent and 14.8 per cent of their allocation. This suggests that super-groups with excess demand were prevented from purchasing additional imports whilst other super-groups had unused quotas. Although this appears very restrictive, the Panel has reached the conclusion that such restrictions, i.e. the allocation and re-allocation process of the SBS system, constitute part of "the remaining restrictions" within the meaning of Note 6(e) to Korea's Schedule which, therefore, benefit from a transition period until 1 January 2001, by which date they should be phased out or otherwise brought into conformity with the WTO Agreement. Therefore, although the SBS system of re-allocation of quotas (in which LPMO and MAF are involved) may explain the non-filling of the SBS 70 per cent share of Korea's beef import quota, such SBS system cannot be successfully challenged at the moment. The Panel will, therefore, limit its discussion to the LPMO practices – delays in selling stocks of imported beef and in calling for tenders – with regard to the LPMO's 30 per cent share of Korea's beef import quota.
In respect of the LPMO's share of Korea's beef import quota, the Panel concludes that it was not filled in 1997 and 1998. As such, this is not evidence of any violation of any WTO rules. In this respect, the Panel notes that Korea is not bound by any minimum purchase or minimum import obligation.
WT/DS161/R WT/DS169/R
Page 170
The LPMO's role in the non-filling of the import quota
Korea admits that the LPMO suspended its tenders for beef of foreign origin between the end of October 1997 and May 1998.385 In other words, in the Panel's view, while Korea was entitled to limit imports of beef to the level of its import quota (30 per cent of which is exclusively allocated to the LPMO), at the end of October 1997 the LPMO unilaterally decided to further reduce the level of its import quota by part of this 30 per cent.
Australia submits evidence of demands for imported beef that remained unsatisfied notwithstanding the fact that there was an important amount of beef in stock. The Complaining parties submit extracts from the Daily Meat News from 1997 to 1999 which show a consistent pattern of supplying a range of imported beef cuts below amounts demanded and below amounts in stock. For example, data from the Daily Meat News on 13 February 1999 shows that although 275 boxes of Excel (EC) brand chuck roll were demanded, only 175 boxes were awarded, despite availability of 500 boxes. Similarly, despite demand for 655 boxes of IBP chuck roll and the availability of 800 boxes, only 555 boxes were sold. Korea responds that these requests were not filled because the price offered would have been below the minimum wholesale price.
There is also evidence that, in October 1997, the LPMO had an estimated 28,000 tonnes of imported beef in stock. By the end of 1998, the LPMO had accrued stocks of 67,934 tonnes of imported beef, more than the LPMO's entire quota allocation for 1999. As at July 1999, these stocks had fallen to 61,524 tonnes.386 The LPMO had, thus, enough beef in stock to respond to the market demand.
To the extent that (i) Korea admits that the LPMO did not call for tenders between the end of October 1997 and the end of May 1998; (ii) in 1998 the LPMO had stocks of imported beef amounting to almost one full year of quota which necessarily led to very high stocking costs for the LPMO; (iii) there is evidence that in 1997 and 1998 LPMO/NLCF (hereafter collectively designated as the LPMO) refused to sell imported beef although it had sufficient stock to respond to the demand and that (iv) imported beef is generally cheaper than domestic beef, the Panel considers that the Complaining parties have submitted a prima facie case that the LPMO's delays or refusal to call for tenders in 1997 and 1998 and its discharge practices during the same period were, at least in part, responsible for the non-filling of its portion of Korea's beef quota.
(iii) The issue of the economic justifications for Korea to do so
The Panel recalls that in light of the facts mentioned in paragraph 731 above, Korea has the burden of rebutting the prima facie case established by the Complaining parties. In this regard Korea submits that in the context of the 1997-1998 financial crisis, it was commercially justified for the LPMO to refuse to discharge (i.e. to sell the beef it had in stock) and to refuse or delay the call for tenders between the end of October 1997 and the end of 1998 because it would have made losses on those sales. Korea adds that the LPMO was already making important losses.387 The Panel considers that two distinct periods must be examined: first the period between the end of October 1997 and the end of May 1998 and second, the period between June 1998 and the end of December 1998.
385 See paragraph 138 of this Panel report.
386 "Cattle Prices and Beef Supply and Demand Trends", issued with MAF Press Release of 22 July 1999. (Attached as Annex 12 of this Panel report.)
387 The Complaining parties submit that during that period the LPMO was not making real losses. For them, the LPMO's losses (as set forth in Annex 4 to this Panel report) appear to be overstated since they were calculated by comparing the LPMO's selling price to its costs which include, however, selling expenses.
WT/DS161/R WT/DS169/R
Page 171
From the end of October 1997 to the end of May 1998
Korea admits that the LPMO refused to call for tenders between the end of October 1997 and the end of May 1998.388 It argues that the LPMO's failure to call for tenders for beef imports between November 1997 and May 1998 was the result of stagnant beef sales due to decreased domestic demand for imported beef, resulting in increased imported beef stocks.389 It noted that, after November 1997, no subsequent purchases were made by the LPMO because it had already purchased the total quota by October 1997. It submits that, after the depreciation of the Korean won towards the end of 1997, import prices in won surged while domestic beef prices fell, leading to a substantial decline in the demand for imported beef.390
The Complaining parties do not dispute the effect of the financial crisis on the demand for beef in Korea. However, they argue that the main reason for the drop in imported beef consumption was the refusal of the LPMO to supply as part of a deliberate policy to stabilize and support the price of domestic beef.391 The higher cost of feed had an adverse effect on the profitability of Korean beef farming in 1998, encouraging a sell-off of cattle with a consequent downward pressure on the domestic beef price.392 They argue that the LPMO's actions in maintaining a minimum wholesale price for imported beef were intended to offset this.
Korea's response is that the LPMO would have made losses on the import of beef and that it was justified in maintaining the minimum wholesale price at the level it did in order to prevent losses on sales of imported beef. In support of its allegation, Korea presents price data in Annexes 5 and 6 (KOREA's Exhibits 41 and 45)393. These exhibits show average import prices above the LPMO wholesale prices throughout 1998 (especially in the summer, well after the peak of the currency crisis). It argues that purchasers were not prepared to meet the target price level (set by reference to
c.i.f. + tariff + selling costs) and thus that it would have made losses if it had sold below this price.
The Panel notes some problems with the price data presented in Annex 4. Korea does not indicate how the import prices for the period during which tenders for imports were suspended as shown in its Annex 4, are derived. The Panel also notes that, in calculating the LPMO losses in Annex 4, Korea takes into account the LPMO's selling costs. These selling costs averaged 11.5 per cent in 1998 but were as high as 35 per cent on some cuts in some months. Selling costs appear to vary depending on the type of beef (grain-fed or grass-fed) and the type of cuts; selling costs also change every month. These high selling costs are in striking contrast with the fees charged by the super-groups to their end-users or customers.394 The Panel is not convinced that the LPMO's selling costs could not have been reduced by selling the beef it had in stock, as some of the very high costs probably were the result of its large stocks of imported beef. The Panel, thus, has difficulty in accepting that these selling costs always represent a legitimate cost item which should be deducted in arriving at the LPMO profit or loss from selling imported beef.
The Panel notes also that super-groups continued to import beef in 1998 (as the LPMO also did in the second half of 1998): this would not have been the case if, as Korea seems to argue, there was not some demand for beef at prices higher than import prices. While it is true that not all super-
388 See paragraph 138 of this Panel report. 389 See paragraph 138 of this Panel report. 390 See paragraph 138 of this Panel report. 391 See paragraph 127 of this Panel report. 392 See paragraph 193 of this Panel report. 393 See Annexe 4 to this Panel report.
394 The Panel is aware that the super-groups are not supposed to keep stocks of beef under the ROUs; the charges and fees that they are allowed to collect are much lower. The United States alleges that SBS super- groups are only allowed by the MAF to charge 2-3 per cent to their end-users/customers. See paragraph 140 of this Panel report.
WT/DS161/R WT/DS169/R
Page 172
groups used their quotas, it is apparent that at the end of 1998, there was an important demand for imported beef, as evidenced by the three reallocations of sub-shares, and the extensive import activities of some super-groups (KMIA, LCTM and KMPA: representing processors, and sales agents to shops and restaurants).
Korea also claims that there were health scares during that same period. The Panel considers, however, that Korea did not offer any evidence, other than newspapers clippings, that the cited health scares had any impact on import levels during the relevant period or that they affected the prices of imports or the prices Korean consumers were willing to pay for imported beef.395
However, in the absence of convincing evidence that these import prices and selling costs are erroneous, the Panel will use the data in Annex 4 to evaluate Korea's claim that the LPMO would have made important losses on imported beef at the end of 1997 and through 1998 on the grounds that demand for imported beef fell and stocks were building up.
The sales volume of imported beef at the wholesale level is not independent of the minimum auction price set by the LPMO. In this regard, the Panel notes that, for the specific chuck roll cut, there is evidence that Korea increased the target price considerably between the last quarter of 1997 and January/February 1998 from 3,800 won/kg. to 4,620 won/kg.396 Korea argues that the target price is set by reference to the c.i.f. import price plus duty plus selling costs in order to avoid selling imported beef at a loss. But, even though it may be the case that a higher import price had to be paid for the beef imported during those months, from the stock-holding perspective the relevant comparison to make is between the price at which the LPMO had bought the beef that was in stock and the price it would be able to get on selling it. As the LPMO did not tender for beef after November 1997, it must be that the beef in stock had been bought before the financial crisis and the devaluation of the won. Therefore, the LPMO would not have made losses as long as it sold beef from its stocks.397 In the Panel's view, during the period running from the end of October 1997 to the end of May 1998, Korea would not have made all the losses it claims have occurred. The Panel adds that during that same period the level of beef stocks was very high and not commercially reasonable. There was, therefore, no need for Korea to take into account what would have been high "replacement" costs of all such stocks. Therefore, the Panel finds that Korea's delays in discharging its imported beef were not commercially justified.
The Panel also finds that the absence of any LPMO tenders for imported beef in the period between the end of October 1997 and May 1998 was not justified by the evidence presented. By not inviting tenders, the LPMO had no way of knowing whether imported beef was available at prices that would permit the LPMO to import without incurring any financial losses. In not inviting tenders the LPMO effectively closed the Korean market to imported beef to the extent of LPMO’s quota share.
From June to the end of December 1998
With regard to Korea's absence and delays in calling for tenders, the Panel notes that the two most important cuts in volume terms imported in 1998 were chuck roll and grass-fed (bone-in) beef.
395 The Panel cannot see any link between an alleged health scare in September 1997 or June 1999 and the period of the end of November 1998 and the end of May 1999.
396 The figure of 3,800 won/kg. was the average level of the target price for chuck roll for the last three months of 1997 in Annex 7 to this Panel report in response to the Panel's Question No. 29 on 14 January 2000.
In the table in paragraph 2.28 in Korea's First Submission the target price was given as 4,620 won/kg. in late January 1998 for the same cut of beef.
397 For example, for chuck roll, the ex-LPMO import price (c.i.f. price + duty + selling costs) in the last quarter of 1997 was 4,311 won/kg. (Annex 7 to this Panel report). The wholesale price in November and December 1997 was very slightly less than this, but was significantly higher in the January through May 1998 period when, according to Korea, stocks were increasing (Annex 8 of this Panel report).
WT/DS161/R WT/DS169/R
Page 173
Korea's figures for 1998 in Annex 4 suggest that it made losses in importing grass-fed (bone-in) beef in each month that year, and on importing chuck roll from April of that year. These losses are calculated as the difference between the actual wholesale price obtained and the ex-LPMO import price (c.i.f. price + duty + selling costs). In this connection, it is relevant to recall that the Complaining parties have argued that the wholesale price obtained by the LPMO was manipulated by the minimum target price system in order to hold it at a higher level than would otherwise have been the case. It therefore follows that, if the LPMO had in fact imported and discharged imported beef in a "normal" manner, the wholesale price of imported beef would have been even lower than the level which prevailed, and the losses incurred would have been even greater.
In reaching this conclusion, the Panel has assumed that the auction system for imported beef operates in a transparent way and that all beef which is demanded at the auction price is, in fact, supplied. Australia submits evidence that fewer boxes of beef were awarded than were demanded (on a date in February 1999), despite the general availability of beef on that day. Korea responds398 that the reason for the release volumes being less than domestic demand is that bid prices for the bulk of imported beef were lower than minimum auction prices. If Korea had released beef at these bid prices, it would have incurred higher losses than those reported in Annex 4. Thus, while the Panel believes that the LPMO import prices, and hence the LPMO losses, may be exaggerated by the level of selling costs included in the import price, the operation of the minimum auction price system acted to offset this and would have reduced the size of reported losses. If it were the case that, even at the price being bid, Korea rationed the award of beef, then the argument in this paragraph would not be valid. However, no evidence was submitted to challenge Korea's explanation on this point.
Given the LPMO's ability to influence the level of demand for imported beef through its manipulation of the minimum target price system at auctions399, it is for Korea to prove that it did not abuse this practice by preventing access to imported beef by domestic consumers who, even after the financial crisis at the end of 1997, might have been prepared to pay the commercial price for that beef. Korea has submitted that the price being bid at the wholesale auction markets for particular cuts of beef was insufficient to cover its import price for most of 1998 and that this justified its delays in tendering and shipping. While the Panel has some reservations about the figures used by Korea to make this point, it accepts that Korea was commercially justified to delay its purchasing of imported beef during 1998.
(iv) Conclusion
In sum, with the rather limited evidence before the Panel, it appears to the Panel that Korea did not have an economic reason for not calling for tenders and not discharging imported beef during the period between the end of October 1997 and the end of May 1998. Korea's lack and delays in calling for tenders and its discharge practices of imported beef after May 1998 until December 1998 (the last month for which detailed price data was provided by Korea in Exhibit 45, Annex 4 of this Panel report) may be justified by normal economic considerations.
Having reached this factual conclusion, the Panel shall now examine whether the LPMO's refusal to call for tenders between the end of October 1997 and the end of May 1998 and its daily and monthly discharge practices during this period are inconsistent with the WTO Agreement. Before proceeding to its legal discussion, the Panel notes that Korea did not invoke Articles XII or XVIII:B of GATT during the period when it experienced financial difficulties and does not claim, still today, to have had any balance-of-payments difficulties in 1997 and 1998.
398 See paragraph 138 of this Panel report.
399 A practice which in paragraph 584, the Panel has already deemed to be a "remaining restriction" having to be phased out or otherwise brought into conformity by 1 January 2001.
WT/DS161/R WT/DS169/R
Page 174
The WTO provisions and jurisprudence on restrictions imposed by state-trading enterprises
The Panel shall now proceed to examine the law applicable to restrictions imposed by state- trading enterprises. The Complaining parties claim that the LPMO practices violate Article XI and its Ad Note, Articles III and XVII of the GATT 1994 and Article 4.2 of the Agreement on Agriculture. Korea's defence is that its import quota was filled in 1997 and 1998 or that in any event all its quota had been purchased in 1997 and 1998 and would receive customs clearance before the end of 2000. In addition, Korea argues that, in any event, the LPMO was justified in its refusal and delays to call for tenders and discharge because it would have incurred losses in doing so. The Panel has already reached the conclusion that Korea has not demonstrated these facts to the satisfaction of the Panel for the period between the end of October 1997 until the end of May 1998. For the rest of 1998, Korea may have been justified to keep some delays in calling for tenders and in discharging its imports as it appears that, if it had not done so, the LPMO would have incurred further losses.
Articles XI, the Ad Note to Articles XI, XII, XIII, XIV and XVIII and Article XVI of GATT
Article XI.1 of the GATT provides that:
"No prohibitions or restrictions other than duties, taxes or charges, whether made effective through quotas, import or export licences or other measures, shall be instituted or maintained by any contracting party on the importation of any product of the territory of any other contracting party … "
The Ad Note to Articles XI, XII, XIII, XIV and XVIII provides that:
Throughout Articles XI, XII, XIII, XIV and XVIII, the terms "import restrictions" or "export restrictions" include restrictions made effective through state-trading operations.
This is to say that when an import restriction is imposed by a state-trading enterprise, with or without exclusive rights, such restriction would be covered by Article XI400.
In the dispute on Japan - Agricultural Products the Panel took note of Japan's contention that quantitative restrictions made effective through import monopolies could not be covered by Article XI:1 and found that:
"Article XI:1 covers restrictions on the importation of any product, 'whether made effective through quotas, import ... licences or other measures.' The wording of this provision is comprehensive, thus comprising restrictions made effective though an import monopoly. This is confirmed by the note to Articles XI, XII, XIII, XIV and XVIII, according to which the term 'import restrictions' throughout these Articles covers restrictions made effective through state trading operations." (Emphasis added.)
More specifically, the panel in this case noted that:
"The basic purpose of this note is to extend to state-trading the rules of the General Agreement governing private trade and to ensure that the contracting parties cannot
400 The Panel notes that the general prohibition against import restrictions contained in Article XI and its Ad Note find a more specific application in Article 4.2 of the Agreement on Agriculture together with its footnote with regard to agricultural products. The Panel shall discuss further the relationship between this set of provisions below.
WT/DS161/R WT/DS169/R
Page 175
escape their obligations with respect to private trade by establishing state-trading operations."401 (Emphasis added.)
The adopted GATT panel report on Canada - Marketing Agencies (1988), dealt with import and distribution restrictions imposed by a state-trading enterprise which held monopoly rights on both the importation and the distribution. It was found that:
" 4.24 … the note to Articles XI, XII, XIII, XIV and XVIII provided that throughout these Articles "the terms 'import restrictions' and 'export restrictions' include restrictions made effective through state-trading operations". The Panel considered it significant that the note referred to "restrictions made effective through state-trading operations" and not to "import restrictions". It considered that this was a recognition of the fact that in the case of enterprises enjoying a monopoly of both importation and distribution in the domestic market, the distinction normally made in the General Agreement between restrictions affecting the importation of products and restrictions affecting imported products lost much of its significance since both types of restriction could be made effective through decision by the monopoly. The Panel considered that systematic discriminatory practices of the kind referred to should be considered as restrictions made effective through "other measures" contrary to the provisions of Article XI:1. It also noted that an agreement or arrangement would have to be consistent with the General Agreement."402 (Emphasis added.)
Thus, in the special case where a state-trading enterprise possesses an import monopoly and a distribution monopoly, any restriction it imposes on the distribution of imported products will lead to a restriction on importation of the particular product over which it has a monopoly. In other words, the effective control over both importation and distribution channels by a state-trading enterprise means that the imposition of any restrictive measure, including internal measures, will have an adverse effect on the importation of the products concerned. The Ad Note to Article XI therefore prohibits a state-trading enterprise enjoying monopoly right over both importation and distribution from imposing any internal restriction against such imported products.
Article XVII of GATT (and the parallel footnote to Article 4.2 of the Agreement on Agriculture further discussed below) is also relevant to state-trading enterprises activities and practices. Article XVII of GATT provides that:
1.* (a) Each contracting party undertakes that if it establishes or maintains a State enterprise, wherever located, or grants to any enterprise, formally or in effect, exclusive or special privileges,* such enterprise shall, in its purchases or sales involving either imports or exports, act in a manner consistent with the general principles of non-discriminatory treatment prescribed in this Agreement for governmental measures affecting imports or exports by private traders.
The provisions of subparagraph (a) of this paragraph shall be understood to require that such enterprises shall, having due regard to the other provisions of this Agreement, make any such purchases or sales solely in accordance with commercial considerations,* including price, quality, availability, marketability, transportation and other conditions of purchase or sale, and shall afford the enterprises of the other contracting parties adequate opportunity, in accordance with customary business practice, to compete for participation in such purchases or sales.
401 Panel report on Japan - Agricultural Products, paragraph 5.2.2.2.
402 Panel report on (1988) Canada - Marketing Agencies, paragraph 4.24.
WT/DS161/R WT/DS169/R
Page 176
No contracting party shall prevent any enterprise (whether or not an enterprise described in subparagraph (a) of this paragraph) under its jurisdiction from acting in accordance with the principles of subparagraphs (a) and (b) of this paragraph.
2. …
3. The contracting parties recognize that enterprises of the kind described in paragraph 1 (a) of this Article might be operated so as to create serious obstacles to trade; thus negotiations on a reciprocal and mutually advantageous basis designed to limit or reduce such obstacles are of importance to the expansion of international trade.*
Article XVII.1(a) establishes the general obligation on state trading enterprises to undertake their activities in accordance with the GATT principles of non-discrimination. The Panel considers that this general principle of non-discrimination includes at least the provisions of Articles I and III of GATT. This seems to be where the GATT jurisprudence was pointed to when in Canada - Marketing Agencies (1988), the Panel stated:
"4.26 The Panel then examined the contention of the European Communities that the practices complained of were contrary to Article III. The Panel noted that Canada did not consider Article III to be relevant to this case, arguing that the Interpretative Note to Articles XI, XII, XIII, XIV and XVIII made it clear that provisions other than Article XVII applied to state-trading enterprises by specific reference only. The Panel considered that it was not necessary to decide in this particular case whether the practices complained of were contrary to Article III:4 because it had already found that they were inconsistent with Article XI. However, the Panel saw great force in the argument that Article III:4 was also applicable to state-trading enterprises at least when the monopoly of the importation and monopoly of the distribution in the domestic markets were combined, as was the case of the provincial liquor boards in Canada. This interpretation was confirmed a contrario by the wording of Article III:8(a). (Emphasis added.)
In the panel report on Canada - Marketing Agencies (1992), the Panel also concluded:
"For these reasons the Panel found that Canada's right under the General Agreement to establish an import and sales monopoly for beer did not entail the right to discriminate against imported beer inconsistently with Article III:4 through regulations affecting its international transportation"403 (emphasis added).
The GATT jurisprudence has also made clear that the scope of paragraph (b), which refers to commercial considerations, defines the obligations set out in paragraph (a).
In Canada – FIRA, the panel concluded:
"5.16 The Panel takes the view that, through its reference to sub-paragraph (a), paragraph l(c) of Article XVII of the General Agreement imposes on contracting parties the obligation to act in their relations with state-trading and other enterprises "in a manner consistent with the general principles of non-discriminatory treatment prescribed in this Agreement for governmental measures affecting imports or exports by private traders". This obligation is defined in subparagraph (b), which declares,
403 Panel report on Canada - Marketing Agencies (1992), paragraph 5.15.
WT/DS161/R WT/DS169/R
Page 177
inter alia, that these principles are understood to require the enterprises to make their purchases and sales solely in accordance with commercial considerations. The fact that sub-paragraph (b) does not establish a separate general obligation to allow enterprises to act in accordance with commercial considerations, but merely defines the obligations set out in the preceding subparagraph, is made clear through the introductory words "The provisions of subparagraph (a) of the paragraph shall be understood to require ...". (Emphasis added.)
In other words the terms "general principle of non-discrimination treatment prescribed in this Agreement" (Art. XVII:1(a)) should be equated with "make any such purchases or sales solely in accordance with commercial considerations" (Art. XVII:1(b)). The list of variables that can be used to assess whether a state-trading action is based on commercial consideration (prices, availability etc…) are to be used to facilitate the assessment whether the state-trading enterprise has acted in respect of the general principles of non-discrimination. A conclusion that the principle of non- discrimination was violated would suffice to prove a violation of Article XVII; similarly, a conclusion that a decision to purchase or buy was not based on "commercial considerations", would also suffice to show a violation of Article XVII.
Therefore, when assessing the claim of the WTO compatibility of the LPMO's discharge practices, in particular its practice of refusing or delaying to sell imported beef into the Korean market, the Panel shall also determine whether the LPMO "in … sales involving either imports or exports, act[ed] in a manner consistent with the general principles of non-discriminatory treatment prescribed in this Agreement for governmental measures" pursuant to Article XVII.
Article 4.2 of the Agreement on Agriculture
The Complaining parties claim that the practices mentioned above are also in violation of Article 4.2 of the Agreement on Agriculture, taking into account footnote 1 which extends the prohibition against import restrictions to non-tariff measures maintained through state-trading enterprises.
The Panel recalls that Article 4.2 of the Agreement on Agriculture provides that:
"Members shall not maintain, resort to, or revert to any measures of the kind which have been required to be converted into ordinary customs duties … "
Footnote 1 to Article 4.2 clarifies that:
"These measures include quantitative import restrictions … discretionary import licensing, non-tariff measures maintained through state-trading enterprises … and similar border measures other than ordinary customs duties, whether or not the measures are maintained under country-specific derogations from the provisions of GATT 1947 …"
Therefore, when dealing with measures relating to agricultural products which should have been converted into tariffs or tariff-quotas, a violation of Article XI of GATT and its Ad Note relating to state-trading operations would necessarily constitute a violation of Article 4.2 of the Agreement on Agriculture and its footnote which refers to non-tariff measures maintained through state-trading enterprises.
WT/DS161/R WT/DS169/R
Page 178
The Panel's assessment
The LPMO is a notified state-trading agency for beef and imports its share of the annual quota through a tendering system.404 The import, distribution and sale of beef imported by the LPMO was still regulated at the time of the establishment of this Panel by Regulations on Imported Beef and the Imported Beef Dealer Designation and Product Supply the purpose of which was "the establishment of operational guidelines with regard to the storage, sales etc of beef imported in accordance with the government's supply plan implemented in order to stabilize the prices of cattle and beef in Korea".405 In its notification to the Committee on State-Trading Enterprises, Korea identifies the LPMO as the entity appointed by the MAF to administer the import regime for beef. Moreover, as earlier discussed, MAF has delegated extensive powers to the LPMO to administer Korea's licensing regime for imported beef.
From 1988 to 1991, the LPMO was responsible for purchasing 100 per cent of the Korean beef import quota; it was thus a full import monopoly. Its share of the import quota has been reduced over time but the LPMO is still responsible for the import of 30 per cent, over which no other importer has any right. Special rights in relation to the import and discharge of the LPMO beef are shared between two state trading agencies under a "consignment agreement" between the principal, the LPMO and its agent, the NLCF. The NLCF has also been granted exclusive or special privileges under government regulation, to control the daily discharge of beef on behalf of the LPMO. Both organizations have the stated objective of stabilizing the price of domestic beef.406 The activities of both organizations are also regulated and supervised closely by the MAF.
Thus, the LPMO and its agent the NLCF (herein referred to collectively as LPMO) have exclusive rights of import for its 30 per cent share of Korea's beef import quota, to the extent that no other entity can benefit from any of its import rights (as the SBS cannot import more than its 70 per cent share) and therefore exercises full control over that 30 per cent of the Korean beef import market. To the extent that the LPMO has such exclusive import right over the said 30 per cent of Korea's beef quota, and that the LPMO/NLCF also have full control over the discharge into the Korean market for that same 30 per cent of all imported beef into Korea, the Panel considers that, though the LPMO does not control all details of distribution, its powers over the discharge of imported beef into the Korean market give it full control over the quantity distributed in the Korean market of the 30 per cent allocated to it. Therefore, the Panel is of the view that the LPMO has exclusive right of import and distribution over its allocated share of Korea's import quota on beef.
Based on the panel findings in the Canada - Marketing Agencies (1988) case, the Panel considers that to the extent that LPMO fully controls both the importation and distribution of its 30 per cent share of Korean beef quota, the distinction normally made in the GATT between restrictions affecting the importation of products (i.e. border measures) and restrictions affecting imported products (i.e. internal measures) loses much of its significance.
Therefore, the Panel concludes that the LPMO's lack and delays in calling for tenders and its discharge practices between the end of October 1997 and the end of May 1998, i.e. the LPMO's refusal to discharge into the Korean market imported beef led it to keep important stocks of beef and in turn to reduce imports, were restrictive. As demonstrated above, these LPMO practices are closely connected and have led to import restrictions on foreign beef, contrary to Article XI through the application of its Ad Note.
404 G/STR/N/4/KOR, 10 December 1998.
405 Regulations Concerning Sales of Imported Beef, Article 1. As of 1 October 1999, they are regulated by the Government through the Management Guideline for Imported Beef and Article 3 notes that beef is imported by the LPMO for stabilizing demand and supply in the market.
406 LPMO, Foreword, page 1; Brief Introduction of NLCF, page 3.
WT/DS161/R WT/DS169/R
Page 179
Since the Panel has already reached the conclusion that the above measures are inconsistent with Article XI and the Ad Note to Articles XI, XII, XIII, XIV and XVIII relating to state-trading enterprises, the same measures are necessarily inconsistent with Article 4.2 of the Agreement on Agriculture and its footnote referring to non-tariff measures maintained through state-trading enterprises.
Should the LPMO/NCLF not be viewed as having full control over the distribution of its 30 per cent share of Korea's import quota, the Panel considers that, when it delayed its sales of imported beef into the Korean market while having important stocks, the LPMO was not acting "in a manner consistent with the general principles of non-discriminatory treatment prescribed in this Agreement for governmental measures affecting imports or exports by private traders" (Article XVII:1(a)). The Panel finds therefore that the LPMO's discharge practices after the end of October 1997 and until the end of May 1998, were inconsistent with Article XVII.1(a) of GATT. The LPMO's suspension of calls for any tenders during the same period would still constitute an import restriction, contrary to Article XI through the application of the Ad Note to Articles XI, XII, XIII, XIV and XVIII of GATT.
CLAIM WITH REGARD TO THE GRASS/GRAIN FED BEEF DISTINCTION
Arguments of the parties
770. Australia claims that in allocating the LPMO quota between grass-fed and grain-fed beef and in excluding grass-fed beef from three tenders in 1999, on 10 June, 14 July and 10 September407, the LPMO constricted the supply of imported grass-fed beef at a time when sales of grass-fed beef were growing significantly. Australia claims, therefore, that such restrictive tender practices are inconsistent with Article II, in that it imposes conditions contrary to and additional to the "terms, conditions or qualifications" contained in Korea's Schedule. Australia also claims that such grass- fed/grain fed tendering practices provided less favourable treatment to imported beef than to domestic beef where such a distinction is not made. For Australia, it also constitutes an import restriction on grass-fed beef contrary to Article XI and its Ad Note and contrary to Article XVII of GATT in that it is discriminatory and not based on commercial considerations.
771. Korea responds that the distinction between grass-fed and grain-fed beef does not by itself constitute discriminatory treatment or an infringement of MFN principles. All tenders are open to all supplying countries and perfectly origin neutral. For Korea, Australian exporters are free to participate both in tenders for grass-fed and grain-fed beef and Australia has not adduced any evidence that Australian products have been discriminated against based on their origin. Korea submits that if Australia's producers are operating on a commercial basis, they can be expected to adjust to the customers' demand, rather than expecting the customer to change its demand based on their supply. Korea also argues that import data show that the share of Australian imported beef has grown in 1999, and therefore, no discrimination on the basis of origin has taken place. Australia challenges the Korean data and claims that imports of grass-fed beef by the LPMO in 1999 have fallen by approximately 60 per cent.
2. Factual determination by the Panel
772. The Panel recalls that Korea's Schedule of Concessions includes tariff bindings on all beef imported within the tariff quota of 43.6 per cent reducing to 41.6 per cent by 2000. The Panel notes also that Korea has made no qualification in its Schedule under column 7 "other terms and conditions" and no reference to grain-fed beef or grass-fed beef. The Panel also recalls that on 10 June and
407 See paragraph 122 of this Panel report.
WT/DS161/R WT/DS169/R
Page 180
14 July, i.e. before 26 July (date of the establishment of the present Panel for Australia408) grass-fed beef was completely excluded from the call for tenders.409
773. The evidence shows that as a general matter, grass-fed beef originating in Australia, and grain-fed beef from the United States, are like products. However, in calls for tenders, a distinction is made between these like products and on at least two occasions, i.e. on 10 June and on 14 July, grass- fed beef was excluded from the tenders. In addition, it may be emphasised that imports through the SBS system, a commercially based regime, are not subject to any similar distinction. Such a distinction is not imposed nor ever used in the commercial practices of the Korean domestic market where different types of beef are distinguished according to a grading system using criteria such as marbling, texture, meat colour, fat content and maturing level, pursuant to Article 28 of Korea's Livestock Act. The non-refuted evidence also shows that by May and June 1999, the sales of grass- fed beef on the Korean market increased by over three times compared to what had been consumed in 1998.410
3. The WTO provisions and jurisprudence
774. The Panel considers that the LPMO's calls for tenders that impose a distinction between grain- and grass-fed beef constitute de facto limits on importation of grass-fed beef, thus amounting to import restrictions. The Panel recalls its discussion on Article XI, the Ad Note to Articles XI, XII, XIII, XIV and XVIII, where it was concluded that the purpose of the Ad Note to Articles XI, XII, XIII, XIV and XVIII is to ensure that WTO Members cannot escape their basic obligations, such as the prohibition against import restrictions, by using a state-trading enterprise.
775. Article II:1 of GATT provides:
"(a) each contracting party shall accord to the commerce of the other contracting party treatment no less favourable than that provided for in the appropriate Part of the appropriate Schedule annexed to this Agreement.
The products described in Part 1 of the Schedule relating to any contracting party, which are the products of territories of other contracting parties, shall, on their importation into the territory to which the Schedule relates, and subject to the terms, conditions or qualifications set forth in that Schedule, be exempt from ordinary customs duties in excess of those set forth and provided therein."
776. The panel report on EEC - Beef found that:
"The words, 'terms, conditions or qualifications' in paragraph 1(b) of Article II could not be interpreted to mean that countries could (…) by the manner in which a concession was administered actually limit a given concession to the products of a particular country. The Panel further found that the fact that in Annex II there was only one certifying agency for the meat in questions and that this agency only certified meat of United States origin in effect prevented access of high quality meat from other countries."
408 See document WT/DS169/6 and the provisions of Article 9.2 of the DSU which provides that one single panel is established: "The single panel shall organize its examination and present its findings to the DSB in such a manner that the rights which the parties to the dispute would have enjoyed had separate panels examined the complaints are in no way impaired".
409 See paragraph 122 of this Panel report.
410 See paragraph 122 of this Panel report: 1220 MTs in May/June 1998 compared with 3720 MTs in May/June 1999.
WT/DS161/R WT/DS169/R
Page 181
"Consequently, the Panel concluded that the manner in which the EEC concession on high quality beef was implemented accorded less favourable treatment to Canada than that provided for in the relevant EEC Schedule, thus being inconsistent with the provisions of paragraph 1 of Article II of the General Agreement." (Emphasis added.)411
4. The Panel's assessment
In the light of the evidence before it, the Panel considers that the LPMO practices to call for tenders on the basis of the distinction between grass-fed and grain-fed beef, constitute an import restriction in violation of Article XI of GATT, through the Ad Note to Articles XI, XII, XIII, XIV and XVIII.
The Panel considers that pursuant to Article II, any other "terms, conditions or qualifications" that add to import concessions must be set forth in Korea's Schedule. The Panel recalls that Korea has made no condition concerning grass-fed/grain-fed beef in its Schedule. In administering its import beef quota on the basis of grain-fed and grass-fed beef distinctions, Korea is imposing a condition in the form of individual limits applied to grass and grain-fed beef, within Korea's total import quota. The Panel recalls its conclusion above, that such grass-fed/grain-fed condition constitutes a limit, an import restriction, inconsistent with Article XI of GATT.
Given that Korea made no such qualification, and that imports of grass-fed beef by the LPMO are thus restricted, the Panel finds that imports of grass-fed beef are accorded less favourable treatment than that is provided for in Korea's Schedule, contrary to Article II:1(a).
Having reached the above conclusions, the Panel does not find it necessary to address Australia's claims that the same measures also violate Articles III:4 and XVII of GATT.
CLAIM THAT KOREA'S IMPORT LICENSING SYSTEM PER SE VIOLATES VARIOUS PROVISIONS OF THE WTO AGREEMENT
The United States claims that Korea's regulatory regime, and thus its licensing system, by granting exclusive authority to the LPMO and the SBS system to import beef, effectively establishes a non-automatic import licensing system in violation of Article XI:1, Article 4.2 of the Agreement on Agriculture, and Article 3.2 of the Licensing Agreement. In support of its allegations, the United States refers to the panel and Appellate Body reports on India – Quantitative Restrictions.
With reference to the US claim that the Korean import licensing system is inconsistent with Article XI of GATT (and Article 4.2 of the Agreement on Agriculture), this Panel is of the view, as pointed out by Canada, that the conclusions reached in the India – Quantitative Restrictions reports are of no relevance to the present dispute, because the factual context is different. Under the Indian licensing system, a range of products had been added to a "Negative List of Imports" and such products could only be imported with a licence. These licences were issued on a discretionary basis. There was no other quantitative restriction with the licensing system. In other words, in the absence of the discretionary licensing system, there would be no restriction on imports. In these circumstances, the Indian discretionary licensing system was found to be, by itself, a restriction on imports. However, where a quota is in place, the use of a discretionary licensing system need not necessarily result in any additional restriction. Where a discretionary licensing system is implemented in conjunction with other restrictions, such as in the present dispute, the manner in which the discretionary licensing system is operated may create additional restrictions independent of those imposed by the principal restriction. Since this issue was not considered in the India -
411 Panel report on EEC – Beef, paragraphs 4.5-4.6.
WT/DS161/R WT/DS169/R
Page 182
Quantitative Restrictions report, that case does not provide authority for the proposition that a discretionary licensing system, used in conjunction with a quantitative restriction, necessarily provides some additional level of restriction over and above the inherent restriction on access created through the imposition of a quantitative restriction.
In addition, the Korean discretionary licensing system has been put in place for the administration of various import measures. The Panel recalls that conclusions on a number of specific measures have been reached in previous sections of this Panel report, including the fact that some of the challenged measures benefit from a transition period until 1 January 2001. The Panel, thus, does not see the need to reach a separate conclusion on Korea's import licensing system, as various aspects of Korea's import licensing system may be amended when Korea adopts new measures in accordance with the conclusions of this Panel report and at the expiry of the transition period, i.e. on 1 January 2001.
Finally, the Panel notes that many of the US claims regarding alleged violations of the Licensing Agreement are concerned with the substantive provisions of Korea's import (and distribution) regime (by the LPMO or SBS super-groups). It has been said repeatedly that such substantive matters are of no relevance to the Licensing Agreement which is concerned with the administrative rules of import licensing systems.412
For theses reasons, the Panel does not reach any general conclusion on the compatibility of Korea's import licensing system with the WTO Agreement.
CLAIMS AGAINST THE ALLEGED EXCESSIVE DOMESTIC SUPPORT TO KOREA'S CATTLE INDUSTRY
Korea's request for a preliminary ruling on the Panel's terms of reference and lack of specificity as concerns claims relating to domestic support of the US and Australian claims
Arguments of the Parties
Korea submits that the terms of reference of this Panel do not allow it to examine all the claims and arguments raised by the Complaining parties413.
Korea argues that since the Complaining parties' request for a panel stated that "Korea has increased the level of its domestic support for its cattle industry to the point that the total domestic support provided by Korea exceeds its Aggregate Measurement of Support (AMS) under the Agreement on Agriculture", the only measures that this Panel can legally examine are the Korean measures of domestic support for its cattle industry. Korea, therefore, argues that the data and calculation methods used to establish its Base Total AMS in Part IV of Korea's Schedule LX, or in broad terms, Korea's Schedule LX by itself, are not mentioned as disputed measures and no violation can be claimed with regard to these additional measures. Korea adds that the US and Australian requests for the establishment of a panel (which form the basis of the terms of reference of this Panel), were insufficiently detailed and specific to encompass the Complaining parties' claims based on Annex 3 of the Agreement on Agriculture and on the data and methodology used in Part IV of Korea's Schedule LX. Korea requests the Panel to limit its examination to Articles 3, 6 and 7 of the Agreement on Agriculture, i.e. the Articles listed in the Complaining parties' request, and not to allow the Complaining parties to bring claims or arguments which are based mainly on Annex 3 of the Agreement on Agriculture because Annex 3 was not identified as a legal basis upon which the Complaining parties wished this dispute to be examined.
412 Appellate Body report on EC – Bananas III, paragraph 197.
413 See paragraphs 30 to 32 of this Panel report.
WT/DS161/R WT/DS169/R
Page 183
In support of its request, Korea refers the Panel to the Appellate Body decisions on EC - Bananas III and on Korea – Dairy where it was concluded that panels must examine the request for their establishment carefully to ensure its compliance with both the letter and the spirit of Article 6.2 of the DSU and that the listing of the Articles claimed to have been violated is a minimum prerequisite if the legal basis of the complaint is to be presented at all.
In response, the United States and Australia argue that Korea's request came too late as the Panel's rules of procedure provide that a request for a preliminary ruling should be included in the first written submission, which was not the case in the present dispute, and that Korea did not invoke any just cause in support of its late request. The Complaining parties also argue that the measures at issue, and the specific provisions of the Agreement on Agriculture claimed to have been violated, were included in their requests for establishment of a panel and were developed in their first written submissions. Korea had the opportunity in its first written submission to raise the issue of adequacy of the panel request, but did not do so.
The Complaining parties add that in Korea – Dairy, the Appellate Body concentrated on the issue of whether the panel request was specific enough to ensure that Korea's ability to defend itself in the course of the panel proceedings was not prejudiced. The Appellate Body also made it clear that Korea had the burden of proof in claiming prejudice. For the Complaining parties, there is no basis for Korea to contend that it did not understand the claims being made or that it was not accorded an opportunity to respond to these claims, since in its first written submission Korea responded to the Complaining parties' claims regarding Articles 3, 6 and 7, and through Article 6, to Annex 3 and Part IV of its Schedule.
Both Complaining parties also insist that a textual analysis of Article 6 makes it clear that, if Article 6 is to have any meaning, it must be considered together with Annex 3 and Part IV of Korea's Schedule. Annex 3 and Part IV of Korea's Schedule are intrinsic to the Panel's interpretation of Korea's obligations under Article 6. The Panel's terms of reference explicitly requires it to examine the consistency of Korea's domestic support measures for beef with its scheduled commitments under Articles 3, 6 and 7, in particular Korea's obligation to include in the calculation of its Current Total AMS product specific support which exceeds the de minimis levels, and its obligation not to provide support exceeding its AMS commitments for any given year. For the Complaining parties, it is not possible to make any determination of a Member's compliance with these obligations without reference to the formulations contained in Annex 3, because Annex 3 contains the methodology required to determine the current AMS for specific products as well as the Current Total AMS. Furthermore, it is not possible to decide whether Korea has met its obligations under these Articles without reference to the reduction commitment levels contained in Korea's Schedule.
WTO provisions and jurisprudence on terms of reference
The terms of reference of the present Panel were determined by cross-referring to the Complaining parties' requests for the establishment of a panel.414 Both Complaining parties' requests for the establishment of a panel contend that:
"At the same time, Korea has increased the level of domestic support for its cattle industry to the point that [Australia used the term "in amounts which result in"] the total domestic support provided by Korea exceeds its Aggregate Measurement of Support (AMS) under the Agreement on Agriculture.
[Only the US request contains the following paragraph: Korea's measures appear to be inconsistent with the obligations of Korea under the General Agreement on Tariffs
414 See WT/DS 161-169/5 and WT/DS161-169/6.
WT/DS161/R WT/DS169/R
Page 184
and Trade 1994 (GATT 1994), the Agreement on Agriculture, and the Agreement on Import Licensing Procedures. In particular, the United States considers that Korea's measures are inconsistent with the obligations of Korea under:]
(…)
(2) Articles 3, 4, 6, and 7 of the Agreement on Agriculture, and (…)" 793. Article 6.2 of the DSU provides that
"The request for the establishment of a panel shall be made in writing. It shall indicate whether consultations were held, identify the specific measures at issue and provide a brief summary of the legal basis of the complaint sufficient to present the problem clearly. (…)" (emphasis added).
The Panel notes that the request for the establishment of a panel and, therefore, the terms of reference of a panel, must contain at least two fundamental elements: a description of the specific measure and the identification of the legal basis for the claims, both of which must be sufficient to present the "problem" clearly.
The WTO jurisprudence has provided further clarification on these two aspects of a panel's terms of reference, introducing a distinction between the claims and the arguments. In EC – Bananas III, the Appellate Body stated:
"141. In our view, there is a significant difference between the claims identified in the request for the establishment of a panel, which establish the panel's terms of reference under Article 7 of the DSU, and the arguments supporting those claims, which are set out and progressively clarified in the first written submissions, the rebuttal submissions and the first and second panel meetings with the parties.
142 … It is incumbent upon a panel to examine the request for the establishment of the panel very carefully to ensure its compliance with both the letter and the spirit of Article 6.2 of the DSU. It is important that a panel request be sufficiently precise for two reasons: first, it often forms the basis for the terms of reference of the panel pursuant to Article 7 of the DSU; and, second, it informs the defending party and the third parties of the legal basis of the complaint." 415 (emphasis added.)
In Korea - Dairy, the Appellate Body had the opportunity to elaborate its views on this matter:
"123. Thus, we did not purport in European Communities – Bananas to establish the mere listing of the articles of an agreement alleged to have been breached as a standard of precision, observance of which would always constitute sufficient compliance with the requirements of Article 6.2, in each and every case, without regard to the particular circumstances of such cases. …
124. Identification of the treaty provisions claimed to have been violated by the respondent is always necessary both for purposes of defining the terms of reference of a panel and for informing the respondent and the third parties of the claims made by the complainant; such identification is a minimum prerequisite if the legal basis of
415 In its report on EC – Hormones, the Appellate Body reiterated its views on the distinction between claims and arguments. See paragraphs 155-156.
WT/DS161/R WT/DS169/R
Page 185
the complaint is to be presented at all. But it may not always be enough. There may be situations where the simple listing of the articles of the agreement or agreements involved may, in the light of attendant circumstances, suffice to meet the standard of clarity in the statement of the legal basis of the complaint. However, there may also be situations in which the circumstances are such that the mere listing of treaty articles would not satisfy the standard of Article 6.2. This may be the case, for instance, where the articles listed establish not one single, distinct obligation, but rather multiple obligations. In such a situation, the listing of articles of an agreement, in and of itself, may fall short of the standard of Article 6.2. (Emphasis added.)
127. Along the same lines, we consider that whether the mere listing of the Articles claimed to have been violated meets the standard of Article 6.2 must be examined on a case-by-case basis. In resolving that question, we take into account whether the ability of the respondent to defend itself was prejudiced, given the actual course of the panel proceedings, by the fact that the panel request simply listed the provisions claimed to have been violated.
131. … Korea failed to demonstrate to us that the mere listing of the articles asserted to have been violated has prejudiced its ability to defend itself in the course of the Panel proceedings. Korea did assert that it had sustained prejudice, but offered no supporting particulars in its appellant's submission nor at the oral hearing. We, therefore, deny Korea's appeal relating to the consistency of the European Communities' request for the establishment of a panel with Article 6.2 of the DSU." (Emphasis added.)
In US - FISC the appellate Body insisted that "good faith" was a necessary component of any challenge on Panel's terms of reference which implies that a party's claim that it has misunderstood a request for consultation or a request for a panel should be raised as soon as possible:
"166. Article 3.10 of the DSU commits Members of the WTO, if a dispute arises, to engage in dispute settlement procedures "in good faith in an effort to resolve the dispute". This is another specific manifestation of the principle of good faith which, we have pointed out, is at once a general principle of law and a principle of general international law.416 This pervasive principle requires both complaining and responding Members to comply with the requirements of the DSU (and related requirements in other covered agreements) in good faith. By good faith compliance, complaining Members accord to the responding Members the full measure of protection and opportunity to defend, contemplated by the letter and spirit of the procedural rules. The same principle of good faith requires that responding Members seasonably and promptly bring claimed procedural deficiencies to the attention of the complaining Member, and to the DSB or the Panel, so that corrections, if needed, can be made to resolve disputes. The procedural rules of WTO dispute settlement are designed to promote, not the development of litigation techniques, but simply the fair, prompt and effective resolution of trade disputes."
The Panel's Assessment
In the particular circumstances of this case, three principles should govern the determination of the compatibility of a request for the establishment of a panel with Article 6.2 of the DSU. First,
416 [Original] United States – Shrimp, supra, footnote 99, para. 158. In that report, we addressed the issue of good faith in the context of the chapeau of Article XX of the GATT 1994.
WT/DS161/R WT/DS169/R
Page 186
the "specific measure" at issue must be clearly identified. Second, the claims must also be clearly identified – in this respect claims should be distinguished from arguments, in which the latter can be developed in written submissions. The obligation to identify the claims implies that at a minimum the Articles claimed to have been violated must be listed (but this may not always be sufficient); if an Article contains various distinct obligations, the listing of Articles of an agreement, in and of itself, may fall short of the standard of Article 6. Third, in assessing whether a request for a panel is sufficiently clear and detailed, the Panel ought to take into account whether the ability of the respondent to defend itself was prejudiced, "given the actual course of the panel proceedings".417
The Measures at Issue
In the present dispute the measure identified by the Complaining parties is Korea's level of domestic support to its cattle industry, resulting in a Current Total AMS exceeding Koreas' scheduled reduction commitments. Korea's domestic support notifications to the WTO refer to support to its "beef" industry. For the purpose of the present dispute, the Panel shall consider that domestic support in the form of administered support prices is provided in favour of producers of cattle as part of the Korean beef industry.418 For the Complaining parties, if the actual domestic support for the beef industry had been properly computed, Korea's Current Total AMS would have exceeded its scheduled domestic support reduction commitments in 1997, contrary to Article 3 of the Agreement on Agriculture. (The United States has a similar claim for 1998).
The United States also claims that the Base Total AMS specified in Section I, Part IV of Korea's Schedule was initially miscalculated and, therefore, continues to invalidate Korea's annual domestic support. The Panel considers that if the United States wanted to challenge the Base Total AMS itself as specified in Part IV of Korea's Schedule LX, and the related data and methods of calculation which are "incorporated by reference" in that Section of Part IV of Korea's Schedule, this should have been adequately identified in the US request for establishment of a panel. However, no such claim is set out in the US request for establishment of a panel. The Panel concludes that the only measure at issue is Korea's current domestic support for its beef industry in the context of Korea's scheduled commitment levels on domestic support under the Agreement on Agriculture.
This does not mean that the Complaining parties cannot refer, in their arguments, to Part IV of Korea's Schedule LX, since their legal claim is that Korea's Current Total AMS, if properly calculated to include domestic support for beef (according to Article 6 and Annex 3), would have led to a Current Total AMS exceeding Korea's annual commitment levels specified in Part IV of Korea's Schedule (as it stands), contrary to Article 3 of the Agreement on Agriculture. In this respect the Panel recalls that Article 3.2 explicitly refers to Part IV of Members' Schedules and that those Schedules explicitly incorporate Members' AGST (constituent data and methodology).
The claims under Articles 3, 6 and 7 of the Agreement on Agriculture
Regarding Korea's claim that the Complaining parties have limited their challenge to violations of Articles 3, 6 and 7 and, therefore, should not be allowed to raise claims or arguments based on any provisions of Annex 3, the Panel notes that the relevant part of Article 3 of the Agreement on Agriculture reads as follows:
417 See Appellate Body report in Korea –Safeguards (quoted above), paragraph 127.
418 According to the evidence submitted by Korea, cattle purchases under the Korea's price support programme for beef include Hanwoo steers, dairy cattle and hybrid cattle of Cheju Island. See paragraph 384 of this Panel report.
WT/DS161/R WT/DS169/R
Page 187
"Incorporation of Concessions and Commitments
… 2. Subject to the provisions of Article 6, a Member shall not provide support in favour of domestic producers in excess of the commitment levels specified in Section I of Part IV of its Schedule." (Emphasis added.)
It is, therefore, clear that Article 3 provides that support in favour of domestic producers (and here explicit reference is made to "subject to Article 6") cannot exceed the level of support provided for in a Member's schedule. So, when assessing the WTO compatibility of domestic support, two parameters are indicated: first the provisions of Article 6 which refer to the object of those same "commitments" on domestic support; and second, Section I of Part IV of a Member's schedule. Therefore, the Panel considers that its terms of reference require it to examine Korea's Schedule LX to assess whether its domestic support in 1997 and 1998 exceeded the reduction commitments contained in its Schedule.
The relevant provisions of Article 6 read as follows:
"Domestic Support Commitments
The domestic support reduction commitments of each Member contained in Part IV of its Schedule shall apply to all of its domestic support measures in favour of agricultural producers with the exception of domestic measures which are not subject to reduction in terms of the criteria set out in this Article and in Annex 2 to this Agreement. The commitments are expressed in terms of Total Aggregate Measurement of Support and "Annual and Final Bound Commitment Levels".
2. (…)
A Member shall be considered to be in compliance with its domestic support reduction commitments in any year in which its domestic support in favour of agricultural producers expressed in terms of Current Total AMS does not exceed the corresponding annual or final bound commitment level specified in Part IV of the Member's Schedule.
(a) A Member shall not be required to include in the calculation of its Current Total AMS and shall not be required to reduce:
product-specific domestic support which would otherwise be required to be included in a Member's calculation of its Current AMS where such support does not exceed 5 per cent of that Member's total value of production of a basic agricultural product during the relevant year; and
non-product-specific domestic support which would otherwise be required to be included in a Member's calculation of its Current AMS where such support does not exceed 5 per cent of the value of that Member's total agricultural production.
(b) For developing country Members, the de minimis percentage under this paragraph shall be 10 per cent."
Paragraph 3 of Article 6 elaborates on the prescriptions of Article 3 that domestic support, in any year, in favour of agricultural producers, as expressed in terms of Current Total AMS, cannot exceed the corresponding annual or final bound commitment level specified in Part IV of a Member's
WT/DS161/R WT/DS169/R
Page 188
schedule. Paragraph 3 adds that "domestic support in favour of agricultural producers" is to be expressed "in terms of Current Total AMS".
Article 7.2(a) of the Agreement on Agriculture provides that:
"Any domestic support measure in favour of agricultural producers, including any modification to such measure, and any measure that is subsequently introduced that cannot be shown to satisfy the criteria in Annex 2 to this Agreement or to be exempt from reduction by reason of any other provision of this Agreement shall be included in the Member's calculation of its Current Total AMS". ( Emphasis added.)
Current Total AMS is itself defined in Article 1(h) as representing the sum of (1) AMS for basic agricultural products, (2) all non-product-specific AMS and (3) all equivalent measurements of support for agricultural products, "calculated in accordance with the provisions of this Agreement, including Article 6, and with the constituent data and methodology used in the tables of supporting material incorporated by reference in Part IV of the Member's Schedule".419 This reference to "the provisions of the Agreement" in Article 1(h)(ii) clearly includes the provisions of Annex 3. This is confirmed by the Article 1(a)(ii) definition of the "AMS" as it relates to "support provided during any year of the implementation period and thereafter", or, in other words, as it relates to the "current AMS" which is specifically referred to in the context of the provisions of Article 6.4(a)(i) concerning the product-specific de minimis. This definition stipulates that "the current AMS", or "support provided during the implementation period and thereafter" is calculated in accordance with the provisions of Annex 3 and taking into account the constituent data and methodology used in the tables of supporting material incorporated by reference in Part IV of the Member's Schedule. 420 There are no conditions or exceptions placed on these definitions (except if the context may dictate otherwise as provided in the introduction of Article 1). The only guidance additional to that of Annex 3 is that the calculation should also take into account the data and methodology, if any, contained in the supporting tables.
It is the Panel's understanding that the general scheme of the domestic support commitments, which are unique to the agriculture sector, is one under which all WTO Members have obligations with respect to non-exempt, generally trade-distorting, domestic support measures. In the case of those Members whose domestic support measures in the 1986-88 base period were fully covered by one or more of the categories of exempt support, and who, therefore, have no Base Total AMS in Part IV of their Schedules, their obligation under Article 7.2(b) of the Agreement is "not to provide support to agriculture producers in excess of the relevant de minimis level set out in paragraph 4 of Article 6." Where this was not the case the Members concerned421 have a "Base Total AMS" in Part IV of their Schedules from which are derived the reduction commitment levels, or "annual commitment levels", for each year of the implementation period and the final bound levels which are applicable thereafter. Although the Base Total AMS reflects the particular complex of non-exempt (mainly product-specific) support in the base period, the annual AMS commitment levels derived therefrom represent a quantum of non-exempt support in monetary terms which may be used, subject to certain constraints as regards "actionability" under Article 13 of the Agreement, to provide support in favour of the producers of any agricultural product. In other words, the annual commitment levels are sector-wide commitments which operate as a ceiling on non-exempt domestic support. The monetary value of these annual ceiling commitments is reduced in nominal terms over the implementation period as specified in the Schedules. In addition, the value of these commitment
419 Article 1(h) of the Agreement on Agriculture.
420 Article 1(a)(ii) of the Agreement on Agriculture.
421 Of the 136 WTO Members 30 have domestic support reduction commitments in Section I of Part IV of their Schedules. This includes 15 developing country Members, all of whom (with the exception of Korea) established their Base Total AMS in relation to a level of support which prevailed in the period 1986-1988.
WT/DS161/R WT/DS169/R
Page 189
levels in real terms is further reduced by the fact that the Agreement makes no allowance for inflation, other than in respect of "excessive rates of inflation" in terms of Article 18.4 of the Agreement on Agriculture. The overall effect of these commitments is to constrain over time the use of non-exempt, generally product-specific, domestic support and to encourage a shift towards forms of domestic support which are classified, in the case for example of Annex 2 of the Agreement on Agriculture ("the Green Box"), as having "no, or at the most minimal, trade-distorting effects or effects on production". This shift away from non-exempt support is facilitated by the fact that there are no monetary ceilings on the exempt categories of support under Article 6, namely: the Green Box under Article 6.1 and Annex 2; the special and differential treatment exemptions under Article 6.2; and direct payments under "production-limiting programmes" (the so-called "Blue Box") in terms of Article 6.5 of the Agreement.
In terms of Article 6.3, compliance with the scheduled commitment level for any year consists in the Current Total AMS for that year not being in excess of that level. If it is, that is a breach of Article 3.2. The Complaining parties must therefore prove that Korea's total domestic support is in excess of the scheduled commitment level.422
In the first instance, the issue is how the Current Total AMS should have been calculated. One has to rely on what Article 1(a) and (h) stipulate in respect of the calculation of non-exempt current support (as distinct from the base or base total AMS). The Current Total AMS is a composite or aggregate of calculations of non-exempt support in respect of individual basic products and, if any, of non-exempt non-product-specific support under Article 6.4(a)(ii). In other words, the calculation of Current Total AMS is a "bottom-up" process.
Article 1(h)(ii) provides for two things: that the "Total AMS" is the "sum" of all the AMS sub-components; and that the Current Total AMS is calculated "in accordance with the provisions of this Agreement, including Article 6, and with the constituent data and methodology used in the tables of supporting material incorporated by reference in Part IV of the Member's Schedule." Article 1(a)(ii), in turn, provides that in any given year the AMS shall be calculated "in accordance with Annex 3, taking into account the constituent data and methodology used in the tables of supporting material incorporated by reference in Part IV of the Member's Schedule". In the calculations of product specific support the "constituent data and methodology" has an important role to play in ensuring that the calculation of support to any given product is calculated in subsequent years consistently with support calculated in the base period. Consequently, where no support was included in the base period calculation for any given product, there is no constituent data or methodology in the tables of supporting material to a Member's Schedule to refer to. In these circumstances, the only means available for calculating such domestic support is that provided in Annex 3.
The basic product "beef" was not included in Supporting Table 6 ("Market Price Support") in Korea's base period, i.e. in the product-specific support calculations contained in Korea's Supporting Tables Relating to Commitments on Agricultural Products in Part IV of the Schedule ("AGST/KOR"). Therefore, in the AGST incorporated by reference in Korea's Schedule, there is no "constituent data" or "methodology" for the calculation of support for beef. (The methodology that is used is for other products, with different external reference prices being used for rice (1993) than for
422 Article 7 of the Agreement on Agriculture: "1. Each Member shall ensure that any domestic support measures in favour of agricultural producers which are not subject to reduction commitments because they qualify under the criteria set out in Annex 2 to this Agreement are maintained in conformity therewith. 2.(a) Any domestic support measure in favour of agricultural producers, including any modification to such measure, and any measure that is subsequently introduced that cannot be shown to satisfy the criteria in Annex 2 to this Agreement or to be exempt from reduction by reason of any other provision of this Agreement shall be included in the Member's calculation of its Current Total AMS." (Emphasis added.)
WT/DS161/R WT/DS169/R
Page 190
other products in Supporting Table 6.) In the absence of AGST "constituent data and methodology" for beef, the relevant calculation has, therefore, to be made "in accordance with the provisions of this Agreement" (Article 1(h)) or "in accordance with Annex 3" (Article 1(a)(ii)). In the circumstances, this means that Annex 3 (which is an integral part of the Agreement on Agriculture and which provides specific guidance on AMS calculation) must be applicable for the purposes of calculating current non-exempt support in respect of Korean beef. The same result is arrived at if one approaches the matter via Article 1(a)(ii), which of course specifically refers to Annex 3. In fact, the two approaches are complementary.
In addition, all these concepts, e.g. domestic support, AMS, Current Total AMS, and total domestic support and the provisions of Articles 1(a), 1(h), 3.2, 6.4 and 7.2 are organically and inextricably linked. The obligation to respect the annual reduction commitments in Korea's Schedule cannot be read nor understood without an examination of: the level of domestic support provided by Korea; the resulting aggregate measurement of support for the producers of beef; and the consequence of this on the resulting Current Total AMS. Concepts such as "aggregate measurement of support" or "AMS" and "Current Total AMS" have only a meaning within the context of the Agreement on Agriculture. There is indeed a definition of such concepts in Article 1 of the Agreement on Agriculture. Aggregate measurement of support and Current Total AMS, by their very nature, refer to totals of specific and total domestic support that are arrived at through calculation.
The Panel considers that Annex 3 provides for the authoritative method for calculating the components of the Current Total AMS, in the light of the domestic support commitments contained in Article 6. The Panel could not assess whether Korea has met its obligations under Article 6 without examining the calculation prescriptions for AMS contained in Annex 3. There is, therefore, a direct link between Articles 3 and 6 and Annex 3. The titles of Article 3 "Incorporation of Concessions and Commitments", of Article 6 "Domestic Support Commitments" and of Annex 3 "Domestic Support: Calculation of Aggregate Measurement of Support" demonstrate the inherent relationship between these provisions. The first terms of Annex 3 are "subject to the provisions of Article 6". Annex 3 is so intrinsic to the calculation of the AMS that any analysis that ignores those provisions would render substantial portions of the text of the Agreement on Agriculture meaningless. As a consequence, Korea's interpretative approach – that unless there is a specific claim under Annex 3, reference cannot be made to the provisions of Annex 3 - is contrary to customary rules of treaty interpretation and must be rejected as it would render Article 6 "inutile."423
The Panel finds, therefore, that Articles 3, 6 and 7 provide the basis of Korea's obligations relating to domestic support, and it is against the obligations of Articles 3, 6 and 7 that Korea's actions must be judged. In all cases, Annex 3 contains the methodologies to calculate the AMS, by providing a basis for calculating support in respect of products not included in the "Base Total AMS". The Panel finds also that its assessment of the compatibility of Korea's domestic support with Articles 3, 6 and 7 requires that the Panel compares the effective support provided by Korea as determined using the calculation parameters of Annex 3. Only thereafter would the Panel be able to determine whether evidence adduced by the Complaining parties demonstrates that Korea's Current Total AMS exceeds Korea's scheduled commitment levels, contrary to Article 3. The Panel finds, therefore, that Australia and the United States are entitled to rely on Annex 3 to support their arguments that Korea's domestic
423 The principle of effective interpretation or "l'effet utile" reflects the general rule of interpretation which requires that a treaty be interpreted to give meaning and effect to all the terms of the treaty. For instance one provision should not be given an interpretation that will result in nullifying the effect of another provision of the same treaty. See for instance the statement of the Appellate Body in US – Gasoline, page 23: "An interpreter is not free to adopt a reading that would result in reducing whole clauses or paragraphs of a treaty to redundancy or inutility".
WT/DS161/R WT/DS169/R
Page 191
support for its beef producers was not properly calculated and indeed exceeded the 10 per cent
de minimis. 424
Korea's prejudice
Finally, the Panel notes that, although Korea submits generally that it was not able to prepare adequately its defense because of the lack of specificity of the Complaining parties' requests for the establishment of a panel, Korea has never claimed, and does not now allege, that it has ever been uncertain about, or without adequate notice of, the nature of the Complaining parties' claims regarding Korea's domestic support obligations. In fact, in its first submission, Korea submitted detailed explanations on how it had calculated its aggregate measurement of support for beef.. The Panel recalls that when challenging the terms of reference of a panel, parties must act in "good faith" which implies that their claim should be raised as soon as possible.425 In the present dispute Korea alluded to this point only in its rebuttals and made a formal request one day before the second meeting of the Panel with the parties. After reviewing Korea's submissions, its answers to the parties' as well as to the Panel's questions during the course of the present proceedings, the Panel remains of the opinion that Korea clearly understood the matter at issue. The Panel considers that Korea was not misled by the requests for establishment of panels because the reference to "Korea has also increased the level of domestic support for its cattle industry in amounts which results in426 the total domestic support provided by Korea exceeding its Aggregate Measurement of Support (AMS) under the Agreement on Agriculture" could only have referred to domestic support, which under the Agreement on Agriculture, is defined by reference to a Member's domestic support. For the Panel a claim that the level of aggregate measurement of support made available was greater than that provided for in Korea’s Schedule necessitates a calculation of AMS using the methodology prescribed in the Agreement on Agriculture. In the present case, having omitted any aggregate measurement of support for beef in its constituent data, Korea's current domestic support for beef can only have been calculated on the basis of the methodology contained in Annex 3.
Conclusion
The Panel is, therefore, unable to accept Korea's claim that this Panel is prohibited from examining the Complaining parties' arguments based on the provisions of Articles 3 and 6 and Annex 3 of the Agreement on Agriculture to the effect that Korea's Current Total AMS, if properly calculated, exceeded Korea's reduction commitments contained in its Schedule.
2. Claims that Korea's domestic support for beef exceeded the 10 per cent de minimis and led to a Total Current AMS for 1997 and 1998 which exceeded Korea's scheduled annual commitment levels
Arguments of the Parties
Australia and the United States claim that, as a result of support provided to cattle or beef producers, Korea has exceeded the annual commitment levels specified in Section 1, Part IV of its Schedule in 1997. The same claim is made by the United States in respect of the commitment levels for 1998. The basis of these claims is that, if properly calculated in accordance with the provisions of
424 The Panel notes that in Japan – Alcoholic Beverages, the panel and the Appellate Body reached conclusions based on the Ad Note to Article III:2 even though claims had been raised under Article III only. Ad Notes and Annexes are integral parts of the Agreement they relate to.
425 See the Appellate Body report on US – FISC, paragraph 166.
426 The US request for establishment of a panel (WT/DS 161/5) used the expression "At the same time, Korea has increased the level of domestic support for its cattle industry to the point that the total domestic support provided by Korea exceeds its Aggregate Measurement of Support (AMS) under the Agreement on Agriculture."
WT/DS161/R WT/DS169/R
Page 192
the Agreement on Agriculture, in particular Article 6.4 and Annex 3, support to producers of beef would exceed the de minimis level of 10 per cent provided for developing countries and would therefore have to be included in Korea's Current Total AMS for 1997, as required by Article 7.2(a) of the Agreement on Agriculture. If so included, the result would be that Korea's Current Total AMS would increase in 1997 from 1,936.95 billion won, as notified, to 2,245.2 billion won, and in 1998, from 1,562.77 billion won, as notified, to 1,753.9 billion, thus breaching the annual commitment levels of 1997 and 1998 which are specified in (the first column of commitment levels in) Section 1 of Part IV of Korea's Schedule. In addition, the United States claims that the Total Base AMS reflected in Korea's Schedule Section I, Part IV was initially miscalculated and, therefore, these initial errors continue to vitiate Korea's annual reduction commitments. In support of its claims of mis-calculation of the Total Base AMS (the initial computation), the United States refers, amongst other elements, to the provisions of the Modalities paper427 when interpreting provisions of Annex 3.
The Panel's assessment
The Panel has already concluded in paragraphs 799 to 801 that the measure challenged in the Complaining parties' request for a panel is the allegedly excessive domestic support for its beef industry and the resulting excessive Current Total AMS, and not Korea's Schedule itself, nor the methodology followed by Korea with respect to support provided for other products during the base period in the original setting of Section 104 Part IV of its Schedule. The Panel shall, therefore, determine whether, on the basis of Articles 3, 6, 7 and Annex 3, read in conjunction with Articles 1(a)(ii) and 1(h)(ii), Korea provided domestic support to its beef industry in excess of the de minimis 10 per cent of its total annual production and whether the resulting Current Total AMS exceeded Korea's scheduled commitment levels.
Korea's scheduled commitment levels of domestic support
The Panel notes that in Part IV of its Schedule, Korea sets forth the total current AMS for each year of the implementation period (1995-2004). However, unlike any other WTO Member, Korea has provided two separate numbers with respect to the Current Total AMS for each year. These figures are presented in two separate columns, the second of which is set off by parentheses. In the second column, the Total AMS annual commitment levels reflect the use of a 1993 base year for rice when domestic support for rice appears to have peaked; this has inflated the Total AMS annual commitment levels shown in brackets in the second column for the years 1995 through 2003. Nowhere in its Schedule does Korea identify which of the sets of support figures constitutes Korea's binding obligation.428 Through its 1997 and 1998 notifications, Korea appears to be following the commitments contained in the column where the figures appear in the parentheses:
427 MTN.GNG/MA/W/24, 20 December 1993.
428 However, in a response to a question during a meeting of the Committee on Agriculture as to which
of the two sets of figures in Korea's Schedule were dispositive, Korea answered: "The figures in brackets correspond to Korea's real annual commitment level, using the 1993 base period for rice and the 1989-1991 base period for other products, as indicated in the footnote of Korea's Schedule LX. The said calculation and annual commitment level of AMS were already reviewed and agreed upon by the Member countries in March 1994. The other set of figures corresponds to the annual commitment using the base period of 1989-1991 for all products." Summary Report, G/AG/R/9 (17 January 1997) at page 18.
WT/DS161/R WT/DS169/R
Page 193
Schedule LX – Republic of Korea
Total Base | 1995 : | 1,695.74 | (2,182.55) |
1,718.60 | 1996 : | 1,672.90 | (2,105.60) |
1997 : | 1,650.03 | (2,028.65) | |
1998 : | 1,627.17 | (1,951.70) | |
1999 : | 1,604.32 | (1,874.75) | |
2000 : | 1,581.46 | (1,797.80) | |
2001 : | 1,558.60 | (1,720.85) | |
2002 : | 1,535.74 | (1,643.90) | |
2003 : | 1,512.89 | (1,566.95) | |
2004 : | 1,490.00 | (1,490.00) |
The Panel first has to determine first which of the two sets of figures listed in Section I of Part IV of Schedule LX constitutes Korea's Total AMS commitment levels for 1997 and 1998 for the purposes of Article 3.2 of the Agreement on Agriculture. Given that it would be logically impossible, as well as contrary to the general object and purpose of the provisions of the Agreement on Agriculture on domestic support, to have two distinct Total AMS commitment levels for each of these years, the Panel considers that the set of annual figures which are not qualified by brackets must be treated as constituting Korea's commitment levels for the years in question for the purposes of Article 3.2 of the Agreement on Agriculture.
In support of this conclusion the Panel notes that, as with Section I of Part IV of other schedules which contains domestic support reduction commitments, the unbracketed figures in Korea's Schedule are derived from, and directly linked to, the "Base Total AMS". In other words, each of the figures in the first column represents a reduction in the annual commitment levels that is calculated by reference to the specified "Base Total AMS" figure of 1,718.60 billion won. On the other hand, the figures in the second column bear no such relationship to the specified "Base Total AMS" of 1,718.60 billion won. In fact, the bracketed figures in the second column for 1997 and 1998 are both higher than the "Base Total AMS" figure. This incongruity in the relationship between the bracketed figures for 1997 and 1998 and the specified "Base Total AMS" figure reinforces the Panel's conclusion that the unbracketed figures alone should be treated as constituting Korea's annual commitment levels.429 Korea is the only WTO Member whose Part IV domestic support Schedule contains two such sets of annual commitment levels. No provision of the Agreement on Agriculture authorises such a departure from the norm or practice which has been followed by all other developing country members in establishing their domestic support reduction commitments.
The Panel shall now proceed to examine the Complaining parties' claims that Korea's Current Total AMS as calculated violates Articles 3, 6 and 7 of the Agreement on Agriculture, in that the domestic support for Korea's beef industry in 1997 and 1998 was such as to exceed Korea's scheduled reduction commitments.
Domestic support for the beef industry in 1997 and 1998
The Panel noted that Korea's notification of its Current Total AMS for 1997 was 1,936.95 billion won.430 Korea's bound commitment level for 1997 was 1,650.03 billion won. Korea exceeded the level of domestic support provided under its commitment level for 1997 and, thus, violated Articles 3.2. and 6.3 of the Agreement on Agriculture. Even if the WTO compatible commitments were those between parentheses, and therefore, the annual maximum level of support for 1997 was 2,028.65 billion won, the Panel finds that the method employed by Korea to calculate
429 Where the drafters of the Agreement on Agriculture intended to allow for flexibility in the amount of an annual reduction commitment, they made specific provision for it, such as in Article 9.2(b) relating to export subsidy commitments. No similar provision exists in respect of domestic support.
430 Korea's Committee on Agriculture Notification, Table DS:1 at 2 (G/AG/N/KOR/18).
WT/DS161/R WT/DS169/R
Page 194
current support in respect of beef is not consistent with the provisions of the Agreement on Agriculture.
For 1998, Korea's bound commitment level is 1,627.17 billion won while Korea's notified Current Total AMS is 1,562.77 billion won. In the light of its examination, the Panel considers that, properly calculated pursuant to Article 6 and Annex 3, current support for beef would be higher in 1997 and in 1998 than the level notified and defended by Korea. The following errors in Korea's calculations have been identified by the Panel: incorrect calculation of (1) market price support for beef including through the use of a - fixed external reference price for beef relating to the wrong stage of processing; - the use of an incorrect eligible production level; and – the calculation of total production, as well as (2) the omission of other non-exempt support measures from the calculation of the current aggregate measurement of support for the producers of beef.
Market-price support
The principal form of support for beef producers used by Korea in 1997 and 1998 was "price support for beef,"431 a form of "market price support". Paragraph 8 of Annex 3 of the Agreement on Agriculture specifies how market price support should be assessed for the purpose of calculating its Current Total AMS. It provides that:
"market price support shall be calculated using the gap between a fixed external reference price and the applied administered price multiplied by the quantity of production eligible to receive the applied administered price".
It is worth recalling that the quantification of market price support in AMS terms is not based on expenditures by government. Market price support as defined in Annex 3 can exist even where there are no budgetary payments.432 Market price support gauges the effect of a government policy measure on agricultural producers of a basic product rather than the budgetary cost of that measure borne by government. In general, with market price support programmes, all producers of the products which are subject to the market price support mechanism enjoy the benefit of an assurance that their products can be marketed at least at the support price. Therefore, the minimum price support will be available to all marketable production of the type and quality to which the administered price support programme relates, including where actual market prices are above the administered minimum price level. There may, of course, be circumstances where eligible production may be less than total marketable production, as for example where the minimum price support is only available to producers in certain disadvantaged regions. Another possible example would be where there is a legislatively predetermined, non-discretionary, limitation on the quantity of marketable production that a governmental intervention agency could take off the market at the administered price in any year. In the latter case, the particular design and operation of the price support mechanism would have to be taken into account in determining eligible production, since even governmental purchases at a level below the legislatively predetermined quantity limit could, depending on market conditions, suffice to maintain market prices at above the minimum levels for all marketable production. Hence, with these qualifications, eligible production for the purposes of calculating the market price support component of current support should comprise the total marketable production of all producers which is eligible to benefit from the market price support, even though the proportion of production which is actually purchased by a governmental agency may be relatively small or even nil.
431 Korea's Committee on Agriculture notifications for 1997 and 1998 refer to "price support" (G/AG/N/KOR/18 and 24 respectively).
432 Paragraph 8 of Annex 3 explicitly notes that "[b]udgetary payments made to maintain this gap [between a fixed external reference price and the applied administered price], such as buying-in or storage costs, shall not be included in the AMS.
WT/DS161/R WT/DS169/R
Page 195
The market price support is calculated in computing the difference between a fixed external reference price (FERP) and an applied administered price (AAP) with the difference being multiplied by eligible production. Both the FERP and the AAP must be calculated at an equivalent stage of processing or converted accordingly. Since the aggregate measurement of support is calculated by reference to the applied administered price and the fixed external reference price, both of these two variables must be calculated at a comparable stage of production. Paragraph 7 of Annex 3 provides that the AMS shall be calculated as closely as practicable to the point of first sale of the agricultural product. Korea admits this.433 In other words, the fixed external reference price must be at (or converted to) the same stage in the processing chain as the applied administered price for the basic agricultural product(s) concerned.
"Fixed External Reference Price (FERP)"
Korea's calculation of its FERP is problematic. In 1997, Korea's applied administered price (AAP) for beef was, as set out in the Korean MAF press statement of 27 January 1997,434 2,400 thousand won per 500 kg. Hanwoo steer for the remainder of the 1997 calendar year. Since this programme was offered to different types of beef (with different support prices), Korea used a weighted average applied administered price and converted the base unit for the calculations from a per head basis to a per kilogram carcass weight (bone-in) basis, whereas the FERP is calculated on a (at least partly boneless) "product weight" basis for 1989-1991. The FERP has to be assessed at a practicable, comparable level of trade as close to the first point of sale as possible.435 The AAP is based on live animals, while the FERP refers to meat on a product weight basis. While both prices purport to be shown on a carcass weight basis, the FERP claimed by Korea includes slaughter costs, whereas the AAP does not. As a result, the FERP used by Korea is overstated. The effect of Korea's error is a narrowing of the difference between its AAP and the FERP, and consequently an understatement of the amount of domestic support.
Moreover, the Panel recalls that, by virtue of Articles 1(a)(ii) and 1(h)(ii), Korea is bound by the provisions of Annex 3, since it did not have any "constituent data and methodology" for beef in its Base Total AMS. This means, inter alia, that a 1986-88 external reference price has to be used (paragraphs 9 and 11 of Annex 3). Korea's objection that beef was not imported during that period and that it has no relevant import price data is not sustainable, since paragraph 9 of Annex 3 allows the use of proxy prices.436 Proxy prices were in fact used in Korea's AGST, Supporting Table 6, for rice and two types of barley.437 The Panel finds, therefore, that in both 1997 and 1998 Korea miscalculated its fixed external reference price contrary to Article 6 and paragraph 9 of Annex 3. Korea, by unilaterally electing to use a fixed external reference price based on data for 1989-1991 that is inconsistent with the methodology provided for in the Agreement on Agriculture, distorts the calculation of domestic support.
433 See paragraph 389 of this Panel report.
434 See paragraph 384 of this Panel report.
435 Paragraph 7 of Annex 3 of the Agreement on Agriculture provides that the AMS "shall be calculated as close as practicable to the point of first sale of the basic agricultural product concerned".
436 Paragraph 9: "The fixed external reference price shall be based on the years 1986 to 1988 and shall
generally be the average f.o.b. unit value for the basic agricultural product concerned in a net exporting country and the average c.i.f. unit value for the basic agricultural product concerned in a net importing country in the base period. The fixed reference price may be adjusted for quality differences as necessary". The reference to "generally" has been interpreted to allow countries to use proxy prices as Korea did for rice and two types of barley.
437 G/AG/AGST/KOR, page 8.
WT/DS161/R WT/DS169/R
Page 196
"Eligible/actual production"
The Panel finds that Korea has used an incorrect figure for the level of eligible production in its calculation of market price support. Korea argues that it used the actual production to calculate its market support. The language of paragraph 8 of Annex 3 makes it clear that it is the quantity of production which is "eligible" to receive the benefit of the price support provided through the applied administered price which is relevant. The actual quantity of purchases is not relevant in the calculation of market price support. Korea, by indicating its intent to purchase specified quantities, made them eligible to receive the applied administered price, and consequently affected and supported the price of all such products.
As mentioned, the fact that not all eligible production was actually purchased by the government is irrelevant. This interpretation of the eligibility of production for price support is confirmed by the language in the last sentence of paragraph 8 of Annex 3 which states that the provision is not concerned with the actual amount of budgetary outlays. It is the market price support provided by the government measure that is the focus of the provision, since as indicated in paragraph 827 above, it is marketable production as a whole which benefits from this type of support.
Korea argues that requiring the aggregate measurement of support for beef to be computed based on eligible production would be unfair because actual production was used for computing the base period AMS. The Panel recalls, however, that the Tables of Support Material upon which Korea's Base Total AMS was calculated (AGST/KOR) had no product specific AMS calculation for beef (or cattle) included in its (initial) Total Base AMS. Therefore, Korea is required by the wording of Article 1(a)(ii) of the Agreement on Agriculture, in the absence of "constituent data and methodology used in the tables of supporting material", to rely exclusively on the provisions of Annex 3.
Korea's underestimation would be even greater if the meaning of "eligible production", which the Panel considers to be appropriate in the light of its interpretation above, were to be applied. For instance, in 1997, based on the evidence submitted, that quantity was 500 head per day of Hanwoo cattle above 500 kg. within the 27 January to 31 December 1997 period (340 days). A total of 170,000 head of Hanwoo cattle were thus eligible in the 1997 calendar year as used by Korea for its domestic support commitments. In carcass weight terms, this amounts to 52,615 tonnes for Hanwoo cattle alone.438 However, Korea notified a total figure of 35,127 tonnes in 1997, thereby underestimating the eligible production (let alone any AMS for its beef industry), and thus the market price support, the aggregate measurement of support for producers of beef and the Current Total AMS. There is also evidence that dairy steer and hybrid cows were eligible for support, which would increase the aggregate measurement of support for beef.
"Total value of production"
The Panel further notes that there is also evidence that Korea's data for the total value of production was based on the value of 1996 production and not that of 1997.439 Korea explains that it did not have any available data for 1997. The Panel considers, however, that it would be against the spirit and wording of the Agreement on Agriculture if WTO Members could avoid their obligations to respect annual commitment levels by notifying data from another year.
438 170,000 head @ 500 kg. (0.5 tonne) per head multiplied by the conversion coefficient of 61.9 per cent, i.e. ((170,000*0.5)*.619) = 52,625 tonnes carcass weight equivalent. See paragraph 480 of this Panel report.
439 See paragraph 376 of this Panel report.
WT/DS161/R WT/DS169/R
Page 197
Product specific programmes
The Panel also notes that there are other features of Korea's calculation and characterisation of support for beef producers in both 1997 and 1998 which would have warranted closer examination in terms of the explicit provisions of Article 7.2(a) of the Agreement on Agriculture. This applies in particular to the programme described as the "Loan interest subsidy for livestock farming" (27.28 and
31.77 billion won in 1997 and 1998 respectively), which on the evidence presented by all parties substantially benefits beef producers (but presumably not only beef producers) and which has been classified by Korea as "non-product specific support" within the non-product-specific de minimis level in terms of Article 6.4 (a)(ii). In the Panel's view, given the clear language of Article 1(a), for a measure to be classified as "non-product-specific support" for the purposes of the exemption in Article 6.4(a)(ii), it would have to constitute "support provided in favour of agricultural producers in general", and not to a particular product-specific subset of producers.
Recalculation of the aggregate measurement of support for beef in 1997 and 1998 and of the Current Total AMS
The Panel considers that Australia and the United States have provided sufficient evidence and arguments in support of their claims that Korea has miscalculated its annual support to its beef industry in 1997 and 1998. The Complaining parties also submit recalculations of the numerous variables in the product-specific domestic support for beef and Korea's Current Total AMS.440 The Complaining parties also refer the Panel to the recalculations submitted by New Zealand, as third party, and with which the Complaining parties concur and which they use as an "adjunct" to their own submissions.441
For reasons of clarity and simplicity of those recalculations, the Panel has decided to rely on the recalculation offered by New Zealand.442 On the basis of the adjusted fixed external reference price and the recalculation of eligible production levels (but for Hanwoo beef alone), the following table offers revised data on Korea's beef aggregate measurement of support for 1997 and 1998. The beef product-specific aggregate measurement of support is then compared to the values of production supplied by Korea for 1997 and 1998.
440 See, for instance, paragraphs 365, 375, 379, 381, 382, 383 of this Panel report.
441 See paragraph 413 of this Panel report.
442 The Panel notes that for this recalculation of Korea's FERP, New Zealand even used 1989-1991 data (inflating Korea's legitimate level of domestic support), contrary to the Panel's conclusion that pursuant to
Annex 3 a 1986-1988 FERP should have been employed. Paragraph 9: "The fixed external reference price shall be based on the years 1986 to 1988 and shall generally be the average f.o.b. unit value for the basic agricultural product concerned in a net exporting country and the average c.i.f. unit value for the basic agricultural product concerned in a net importing country in the base period. The fixed reference price may be adjusted for quality differences as necessary". Paragraph 11: "The fixed reference price shall be based on the years 1986 to 1988 and shall generally be the actual price used for determining payment rates." (Emphasis added.)
WT/DS161/R WT/DS169/R
Page 198
Calculation of the product-specific AMS for Hanwoo beef and de minimis calculation443
Year | AAP | FERP | EP | MPS | OS | Total AMS | VP | Percentage |
won/kg. | tonnes | billion won | ||||||
1997 1998 | 7,351.1 6,883.2 | 1,514 1,514 | 52,615 35,328 | 307.1 189.7 | 1.09 1.40 | 308.2 191.1 | 2,107 1,836 | 14.6 10.4 |
The Complaining parties suggest that by adding the "actual" purchases of dairy cattle and hybrid cattle of Cheju Island to the eligible Hanwoo production as set out in the table above, the proportion of the total value of beef production accounted for by the beef product-specific domestic support increases to 15.8 per cent and 11.7 per cent in 1997 and 1998 respectively.444
If Korea had included the "eligible" production of dairy cattle and hybrid cattle of Cheju Island in its calculation, its aggregate measurement of support for beef would have certainly resulted in even higher figures, exceeding the 10 per cent de minimis referred to in Article 6.4(b) of the Agreement on Agriculture by a larger margin.
In so miscalculating Korea violated Article 6.4 of the Agreement on Agriculture. Thus, since it was above the 10 per cent de minimis, the product-specific aggregate measurement of support for beef should have been included in the calculation of Korea's Current Total AMS in both years, as provided for in Article 7.2(a) of the Agreement on Agriculture.
The Complaining parties also offer their own calculation of Korea's Total Current AMS for 1997 and 1998 (including the recalculation by New Zealand)445, evidence not refuted by Korea to the satisfaction of the Panel. Such calculations lead to the results set out in the table below:
Adjusted Current Total AMS for Korea 1997 and 1998
Year | Current Total AMS as notified by Korea (billion won) | Product Specific AMS for Beef (billion won) | Correct Current Total AMS (billion won) |
1997 | 1,936.95 | 308.2 | 2,245.2 |
1998 | 1,562.77 | 191.1 | 1,753.9 |
443 AAP - Applied administered price – Source: Notifications of Korea; FERP - Fixed external reference price; EP - Eligible production; MPS - Market price support – Source: ((AAP-FERP)*EP); OS - Other support – Source: Notifications of Korea; VP - Value of production – Source: Paragraph 483 of this Panel report.
444 Non-Hanwoo purchases amounted to 4,083 tonnes in 1997 and 4,454 tonnes in 1998. See paragraph 484 to this Panel report.
Year | AAP | FERP | EP | MPS | OS | Total AMS | VP | De minimis percentage |
won/kg | Tonnes | billion won | % | |||||
1997 1998 | 7,351.1 6,883.2 | 1,514 1,514 | 56,698 39,782 | 331.0 213.6 | 1.09 1.40 | 332.0 215.0 | 2,107 1,836 | 15.8 11.7 |
445 See paragraph 484 of this Panel report.
WT/DS161/R WT/DS169/R
Page 199
In the light of the evidence and the legal arguments presented, the Panel considers that the Complaining parties have established a prima facie case, which has not been rebutted by Korea, that in 1997, the correct Current Total AMS for Korea (2,245.2 billion won) exceeded the annual commitment level, i.e. 1,650.03 billion won (or even the levels referred to in the second column between parenthesis of 2,028.65 billion won) contrary to Article 3.2 of the Agreement on Agriculture. In 1998, the correct Current Total AMS - including only Hanwoo beef instead of total eligible beef – also exceeded the annual commitment level, i.e. 1,627.17 billion won, contrary to Article 3.2 of the Agreement on Agriculture.
Conclusion
The Panel finds, therefore, that Korea's domestic support for beef for 1997 and 1998 was not correctly calculated and exceeded the de minimis level, in violation of Article 6 of the Agreement on Agriculture. The Panel also finds that, for the same years, Korea's domestic support for beef was not included in Korea's Current Total AMS, in violation of Article 7.2(a). Finally, the Panel finds that Korea's Current Total AMS for 1997 and 1998 exceeded Korea's commitment levels, as specified in Section 1, Part IV of its Schedule, in violation of Article 3.2 of the Agreement on Agriculture.
WT/DS161/R WT/DS169/R
Page 200
VIII. CONCLUSIONS AND RECOMMENDATIONS
In the light of the above findings, the Panel concludes as follows:
The following measures are included in "the remaining restrictions" within the meaning of Note 6(e) of Korea's Schedule and thus benefit from a transitional period until 1 January 2001, by which date they shall be eliminated or otherwise brought into conformity with the WTO Agreement:
The price mark-up applied to imports through the SBS system that is additional to the tariff;
The limitations on participation in the SBS import system including the super-group membership requirement; the restriction on range of end-users; the prohibition on cross-trading between end-users and super-groups; the quotas and sub- quotas allocated to super-groups according to annual plans rather than demand; and the recording requirements;
The requirement that the beef imported through the LPMO be distributed only through the wholesale market;
The LPMO's minimum wholesale price;
The per se existence of a discretionary licensing system relating to any of "the remaining restrictions" (as distinct from its operation);
The dual retail system for beef (including the obligation for department stores and supermarkets authorized to sell imported beef to hold a separate display, and the obligation for foreign beef shops to bear a sign "Specialized Imported Beef Stores") is inconsistent with the provisions of Article III:4 in treating imported beef less favourably than domestic beef, a discrimination that cannot be justified pursuant to Article XX(d) of GATT;
The requirement that the supply of beef from the LPMO's wholesale market be limited to specialized imported beef import stores is inconsistent with Article III:4 of GATT and cannot be justified pursuant to Article XX(d) of GATT;
The more stringent record-keeping requirements imposed on those who purchase foreign beef imported by the LPMO than those who purchase domestic beef, is inconsistent with Article III:4 of GATT;
The prohibition against cross-trading between end-users of the SBS system is inconsistent with Article III:4 of GATT;
Any additional labelling requirements imposed on foreign beef imported through the SBS system that is not also imposed on domestic beef, such as the requirement that the end consumer, the contract number and super-group importer be marked on the imported beef, are inconsistent with Article III:4 of GATT;
The LPMO's lack of and delays in calling for tenders and its discharge practices between November 1997 and the end of May 1998, constitute import restrictions on foreign beef, inconsistent with Article XI of GATT through the application of the
WT/DS161/R WT/DS169/R
Page 201
Ad Note to Articles XI, XII, XIII, XIV and XVIII. The same practices are also inconsistent with Article 4.2 of the Agreement on Agriculture and its footnote.
Even if the LPMO had not had monopoly rights over the import and distribution of its 30 per cent share of Korea's beef import, the LPMO's lack of and delays in calling for tenders during the same period constituted an import restriction inconsistent with Article XI through the application of the Ad Note to Articles XI, XII, XIII, XIV and
XVIII. The LPMO's discharge practices during the same period were inconsistent with Article XVII.1(a) of GATT.
The LPMO's calls for tenders that are made subject to grass-fed or grain-fed distinctions impose import restrictions inconsistent with Article XI of GATT; they also treat imports of grass-fed beef less favourably than that is provided for in Korea's Schedule, contrary to Article II:1(a) of GATT.
Korea's domestic support for beef for 1997 and 1998 was not correctly calculated and exceeded the de minimis level, contrary to Article 6 of the Agreement on Agriculture, and was not included in Korea's Current Total AMS, contrary to Article 7.2(a) of the Agreement on Agriculture.
Korea's total domestic support (Current Total AMS) for 1997 and 1998 exceeded Korea's commitment levels, as specified in Section 1, Part IV of its Schedule, contrary to Article 3.2 of the Agreement on Agriculture.
Under Article 3.8 of the DSU, in cases where there is infringement of the obligations assumed under a covered agreement, the action is considered prima facie to constitute a case of nullification or impairment of benefits under that agreement. Accordingly, we conclude that, to the extent that the Korea has acted inconsistently with the provisions of covered agreements, as described in the preceding paragraphs, it has nullified or impaired the benefits accruing to the complainants under those agreements.
The Panel recommends that the Dispute Settlement Body request Korea to bring its various measures into conformity with its obligations under the covered agreements of the WTO mentioned in paragraph 845 above.
WT/DS161/R WT/DS169/R
Page 202
ANNEX 1
1990 RECORDS OF UNDERSTANDING*
RECORD OF UNDERSTANDING
BETWEEN THE GOVERNMENT OF THE REPUBLIC OF KOREA AND THE GOVERNMENT OF AUSTRALIA
ON BEEF
The Government of the Republic of Korea and the Government of Australia, recognizing the recommendations of the GATT dispute settlement panel report on Korean import restrictions on beef (L/6504) as well as the report of the GATT Balance of Payments Committee (BOP/R/183/Add.1) concerning Korea, have agreed as follows:
GENERAL TERMS
With regard to beef, the Government of the Republic of Korea (hereinafter referred to as the Korean Government) reaffirms its undertaking to eliminate its remaining import restrictions or otherwise bring them into conformity with GATT provisions as included in the conclusion of the report of the GATT/BOP committee on consultations with the Republic of Korea adopted by the GATT Council on November 7, 1989.
Both sides agree that the provisions of this Understanding relating to the import of beef will be implemented on a Most-Favoured-Nation (MFN) basis.
Conditions and levels of importation and sale of imported beef provided for in this Record of Understanding and its Attachments will not be impaired or modified by either government without prior consultation.
A joint study team will be established in order to:
examine the structural weakness of the Korean livestock industry and review the effects of the industry structure on the appropriate timing of market liberalization;
review the functions of the Livestock Products Marketing Organization (LPMO) and make recommendations for improvements in marketing and pricing practices in the future.
The study will be completed by May 1, 1991. Other details concerning the joint study are set out in Attachment 1.
Representatives of the National Livestock Cooperatives Federation (NLCF) and the LPMO and the Australian Meat and Livestock Industry will respectively select the Korean and Australian members of the study team. Both governments will participate as observers. Third country and industry representatives will be included on the study team. The results of the study team will be taken into consideration by both governments during future consultation.
Terms used in this Record of Understanding are defined in Attachment 2.
*The three 1990 ROUs are almost similar.
WT/DS161/R WT/DS169/R
Page 203
MARKET ACCESS MEASURES General Consumption
The base quota levels of general consumption importation on a customs clearance basis for each of the three years in the period beginning January 1, 1990 and ending December 31, 1992 will be as follows:
1990 | 1991 | 1992 |
58,000 MT | 62,000 MT | 66,000 MT |
Bilateral consultations concerning an import régime designed to increase imports following the year 1992 will be initiated no later than July 1, 1992.
Simultaneous Buy/Sell (SBS)
A simultaneous buy/sell system will be implemented for seven per cent of the base quota level for the import of beef. This mechanism will be used initially by tourist hotels, tourist restaurants, the NLCF and the Korean Cold Storage Company Ltd. Principles of the operation of this buyer access system are contained in Attachment 3. Details concerning the operation of this system will be determined by both governments no later than October 1, 1990 based upon recommendations from the industry-to-industry dialogue established in section III below. Implementation of the SBS system will be effective no later than October 1, 1990. Both governments will consult concerning the future expansion of the SBS system.
INDUSTRY-TO-INDUSTRY DIALOGUE
Representatives of the Korean and Australian meat and livestock industries met on 23 April to discuss a range of technical issues. The outcome of these discussions is reflected in Attachment 1.
The two industries will meet at the request of either industry to discuss issues associated with the beef trade.
The results of industry-to-industry dialogue will be submitted to the Korean and Australian governments for review and consultations, as appropriate.
CONSULTATIONS
Both sides will consult promptly at the request of either party on any matter relating to this Record of Understanding and its Attachments.
GATT RIGHTS
Nothing in this Record of Understanding will be interpreted to affect the rights and obligations of either country as contracting parties to the GATT.
STATUS OF ATTACHMENTS
The Attachments to this Understanding form an integral part of it.
Signed on May 31st day of 1990 by the Representatives of the Governments of the Republic of Korea and Australia.
WT/DS161/R WT/DS169/R
Page 204
ATTACHMENT 1
INDUSTRY-TO-INDUSTRY DIALOGUE
The following issues were discussed between LPMO, NLCF and the Australian industry (AMLC, AMEFC, CCA).
Bid & performance bonds
LPMO could not agree to the elimination of bid & performance bonds because of the difficulties LPMO may face without the bonds. It was agreed that future discussions on the issue would take into account the views of the Australian industry representatives.
Bid quantities
The Australian side noted that the minimum bid quantity had been reduced to 18 tonnes for boneless beef and remained at 200 tonnes for bone-in beef.
SBS system
The Australian side noted that the SBS system would be implemented no later than October 1, 1990 for 7% of the base quota. Details for the SBS system are not fixed and LPMO invited Australia's participation to assist in the developments of the new system.
The Australian side expressed its desire to meet in the near future to have detailed discussions on the SBS based on the principle of non-discrimination by source and by product type.
Technical issues
The LPMO agreed that AMLC technical representatives would be consulted in case problems arose with respect to product quality.
For quality specification, it was agreed that Korea and Australia would jointly develop the specification system. In the first place, the "Ausmeat K1" which codifies the specification of grain-fed beef that LPMO established shall be used. And the "Ausmeat P1" which codifies the specification of grass-fed beef that LPMO established shall be used. These codes would apply from the next tender issued.
Other issues which are set out in an exchange of letters between the LPMO and AMLC will be subject to further discussion.
Joint Study Team (JST)
LPMO and NLCF encouraged the Australian industry to participate actively in the study.
The Australian meat and livestock industry will notify the NLCF Chairman of the Australian co-chair for the joint study team in the near future, but no later than May 21, 1990. Composition of the joint study team and the topics for consideration by the team will be agreed as soon as possible.
WT/DS161/R WT/DS169/R
Page 205
The first meeting of participants in the study team will take place in Seoul either in the week beginning June 11 or 18 June, 1990. The agenda for this meeting will include details concerning study topics, study methodology and study timetable.
ATTACHMENT 2
DEFINITIONS
For the purpose of this Record of Understanding and its Attachments:
"Beef" means meat of bovine animals, fresh, chilled or frozen. All tonnage specified in the agreement is given in boneless weight equivalent.
"Tourist hotels" and "tourist restaurants" mean tourist hotels and tourist restaurants as defined by the Korean Foreign Trade Act and related and referenced regulations.
ATTACHMENT 3
SIMULTANEOUS BUY/SELL SYSTEM
All imports of beef under the simultaneous buy/sell system will receive equal, non-discriminatory treatment without regard to country of origin and without regard to whether it is grass-fed or grain-fed; fresh, chilled or frozen; bone-in or bone-out.
Buyers and sellers will have sole responsibility for product specification, delivery and other terms of sales.
Buyers and sellers will simultaneously submit buy and sell prices to the LPMO to participate in the LPMO tender.
Details of successful bids including product type, quantity, price, and origin will be made public, promptly, once awarded.
The operation of the SBS system will be reviewed at the request of either party.
WT/DS161/R WT/DS169/R
Page 206
ANNEX 2
JULY 1993 RECORDS OF UNDERSTANDING*
RECORD OF UNDERSTANDING
BETWEEN THE GOVERNMENTOF THE REPUBLIC OF KOREA AND THE GOVERNMENT OF AUSTRALIA
ON MARKET ACCESS FOR BEEF
The Government of the Republic of Korea and the Government of Australia, recognizing the recommendations of the General Agreement on Tariffs and Trade (GATT) dispute-settlement panel report on Korean import restrictions on beef (L/6504) as well as the report of the GATT Balance-of-Payments Committee (BOP/R/183/Add.1) concerning Korea, and the May 1990 bilateral Record of Understanding between the Government of the Republic of Korea and the Government of Australia on beef, have agreed as follows:
GENERAL PROVISIONS
The Governments of the Republic of Korea and Australia confirm that this Record of Understanding and its attachments (hereinafter referred to as "Understanding" will be implemented on a most-favoured-nation (m.f.n.) basis.
Conditions and levels of importation and sale of imported beef and all other provisions provided for in this Understanding shall not be impaired or modified by either Government without prior consultation and mutual agreement.
This Understanding is the second Understanding between the Government of the Republic of Korea and the Government of Australia on market access for beef. This Understanding reflects the desire of the Parties to implement the GATT dispute-- settlement panel recommendations and Balance-of-Payments Committee determinations. Consultations between the Parties regarding such measures will be held no later than 1 June 1995.
Unless otherwise specified in this Understanding, all provisions of this Understanding shall become effective upon the date of the exchange of letters confirming this Understanding between the Government of the Republic of Korea and the Government of Australia.
DEFINITIONS
For the purposes of this Understanding:
"Base amount" means the minimum annual amount, on a customs cleared basis, expressed in metric tonnes, of beef to be imported into the Republic of Korea.
"Beef" means all meat of bovine animals, fresh, chilled or frozen, as classified under HS 0201 and HS 0202. All tonnage specified in this Understanding is given in retail weight equivalent.
"Customer" means any individual private enterprise, firm, business or grouping thereof that under the terms of this Understanding has the right to import beef through NLCF and KCSC.
*The three July 1993 ROUs are almost similar.
WT/DS161/R WT/DS169/R
Page 207
"End-user" means any individual private enterprise, firm, business, or grouping thereof, and/or their buying agents that has the right to import beef through any super-group except NLCF or KCSC.
"General tender system" is the import and distribution system for beef imported into the Republic of Korea, excluding that which is supplied through the SBS system.
"Large-scale outlet" means a store with a total sales space of 3,000 square metres or more and with more than 30 per cent of the total sales space operated by the owner.
"Mark-up" means the charge collected by the ROKG expressed as a percentage of the duty-paid c.i.f. price.
"Parties" means the Government of the Republic of Korea and the Government of Australia.
"SBS share" means the portion of the base amount that must be allocated through the SBS system.
"SBS sub-share" means the portion of the SBS share that must be allocated to a super-group.
"SBS system" means the system through which suppliers of beef imported into the Republic of Korea conduct business directly with super-groups, end-users, or customers.
"Super-group" means and organization or association of end-users that has the right to import beef under the SBS system and, as appropriate, allocate SBS sub- shares among its affiliated end-users, and shall include the following entities, subject to the conditions and terms specified in this Understanding: the National Livestock Co-operatives Federation and its subsidiary companies (NLCF); Korea Cold Storage Company, Ltd. (KCSC); Korea Tourist Hotel Supply Centre (KTHSC); Korea Meat Industries Association (KMIA); Korea Super Chain Association (KOSCA); and a Non- Tourist Restaurant Organization (NTRO) to be formed for the purpose of importing and allocating imported beef.
"Supermarket" means a retail store whose principal business is the sale of food and beverages.
"Tourist hotels" means tourist hotels as defined by the Korean Foreign Trade Act and related and referenced regulations.
"Tourist restaurants" means tourist restaurants as defined by the Korean Foreign Trade Act and related and referenced regulations.
"Wholesale market" is the market for auction and distribution of beef imported under General Tenders, other than that which is directed to NLCF and KCSC for further processing.
MARKET ACCESS - BASE AMOUNTS
The base amounts are the minimum to be imported on a customs cleared basis for the three-year period beginning 1 January 1993, and ending 31 December 1995 and shall be as follows:
1993 99,000 metric tonnes
1994 106,000 metric tonnes
1995 113,000 metric tonnes
WT/DS161/R WT/DS169/R
Page 208
These base amounts shall be divided between SBS shares in the SBS system, as specified in this Understanding, and the general tender system. The general tenders
shall be published in domestic Korean newspapers, and the results of those tenders, when the results become known, shall be made available to any interested party upon request.
MARKET ACCESS MEASURES - SIMULTANEOUS BUY/SELL (SBS) SYSTEM
General
NLCF, KCSC, and KTHSC; which participated under the 1990 Understanding, shall participate in the SBS system as super-groups under this Understanding. New super-groups, end-users, and customers will be added to the SBS system over the term of this Understanding as specified in this Understanding.
The SBS system, as specified in this Understanding, will be implemented not later than 1 August 1993. However, 1993 SBS shares and sub-shares will be allocated to super-groups not later than the date of the exchange of letters confirming this Understanding between the Government of the Republic of Korea and the Government of Australia.
The ROKG shall take no action to increase the price of beef entering under the SBS system above the price of similar beef imported under general tender.
Framework for SBS system
Annual SBS share and sub-share allocations
The SBS annual shares are the amount to be allocated under the SBS system for the three-year period beginning 1 January 1993 and ending 31 December 1995 and shall be as follows:
1993 9,900 metric tonnes
1994 21,200 metric tonnes
1995 33,900 metric tonnes
Annual sub-shares to be allocated to SBS super-groups shall be as follows (expressed in metric tonnes, retail weight equivalent):
1993 | 1994 | 1995 | |
NLCF | 2,970 | 3,330 | 5,254 |
KCSC | 2,970 | 3,330 | 5,254 |
KTHSC | 3,960 | 4,664 | 5,424 |
NTRO | 2,000 | 2,712 | |
KMIA | 4,676 | 7,118 | |
KOSCA | 3,200 | 8,138 |
WT/DS161/R WT/DS169/R
Page 209
Schedule for addition of new entrants
In 1993 the SBS sub-shares will be allocated by the ROKG among the three super-groups (KTHSC, NLCF, KCSC), according to the schedule set out in Section IV.B.1.b of this Understanding. These super-groups shall import beef on behalf of affiliated end- users (except in the case of NLCF and KCSC) without the participation, direction, or other involvement of the LPMO or ROKG.
Beginning 1 January 1994 NTRO and KMIA will have the right to participate as super-groups, and will each be allocated an SBS sub-share by the ROKG, according to the schedule set out in Section IV.B.1.b of this Understanding. KMIA and NTRO will allocate SBS sub-shares to their affiliated end-users and conduct transactions without the participation, direction, or other involvement of the LPMO or ROKG.
Beginning 1 October 1994, KOSCA will have the right to participate as a super-group and will be allocated an SBS sub-share by the ROKG, according to the schedule set out in Section IV.B.1.b of this Understanding. The KOSCA super-group will allocated SBS sub-shares to its affiliated end-users and conduct transactions without the participation, direction, or other involvement of the LPMO or ROKG.
Criteria for determining eligibility for SBS participation of current and future KOSCA members are set out in Section IV.C.1 of this Understanding.
Beginning 1 January 1995 any member of KOSCA not eligible to import through the KOSCA super-group, as outlined in Section IV.C.1 of this Understanding, shall have the right to participate in the SBS system as customers under NLCF and KCSC. For the sake of commercial convenience, such individual KOSCA members shall have the right to negotiate and place collective orders through NLCF and KCSC.
Also beginning 1 January 1995, any butcher shops that are or become registered dealers of imported beef shall have the right to participate in the SBS system as customers under NLCF and KCSC. For the sake of commercial convenience, such individual butcher shops shall have the right to negotiate and place collective orders through NLCF and KCSC.
Beginning 1 August 1993 and in 1994 and 1995, KTHSC, as a super-group, will administer the portion of the SBS system under which individual tourist hotels and restaurants, as end-users, have the option to purchase beef through KTHSC or directly from foreign suppliers.
Additional provisions for SBS system
KOSCA member participation in the SBS system
Direct outlets of KOSCa member companies shall have the right to participate in the SBS system as end-users affiliated with the KOSCA super-group. Franchise outlets of KOSCA member companies that are or become registered dealers of imported beef shall have the right to participate in the SBS system as customers of NLCF and KCSC.
Any outlet of a KOSCA member company that is a large scale outlet shall be excluded from SBS participation, except as provided for in sub-paragraph (c).
WT/DS161/R WT/DS169/R
Page 210
Notwithstanding sub-paragraph (b), and notwithstanding whether a KOSCA member company outlet is affiliated with a large-scale outlet that is not a supermarket, such KOSCA member company outlets that are operated as supermarkets shall have the right to participate in the SBS system in the manner specified in Section IV.C.1.a.
Notification
The SBS sub-shares for a calendar year shall be divided by the super-groups into quarterly allocations in such a way as to reflect seasonal consumption patterns. These quarterly allocations shall be announced prior to the beginning of each calendar year. The allocations shall be expressed in metric tonnes, retail weight equivalent. SBS sub- share notifications shall be made available to any interested party on request.
Purchasing Authority
End-users shall have the right to sign contracts and negotiate all terms of sale, including price, quantities, specifications, terms of delivery, etc. Customers shall have the right to negotiate all terms of sale, including price, quantities, specifications, terms of delivery, etc.
End-users or their designated agents, and customers, shall have the right to apply to the appropriate super-group for import authorization amounts under the SBS sub-share. Such authorization shall be granted by the super-groups upon request. End-users and customers shall be granted such access to sub-shares through super- groups, as established in this Understanding, until the sub-share is exhausted. Once an end-user or customer receives authorization to import, there shall be no further involvement by the super-group in the commercial transaction with the exception than NLCF and KCSC will purchase and import beef on behalf of their customers.
Direct or indirect charges imposed by super-groups for importing beef on behalf of their customers shall not exceed reasonable administrative costs and expenses associated with such importation. Direct or indirect charges imposed by super-groups for administering the allocation of SBS sub-shares to end-users shall not exceed reasonable administrative costs and expenses associated with such allocation. Super-groups shall make details of all such administrative costs and expenses available to any interested party upon request and shall not extract profits beyond the extent of such costs and expenses.
Allocation of SBS sub-shares by super-groups to end-users
The allocation of sub-shares to end-users shall be the sole responsibility of super-groups. The procedures and criteria for allocation of these sub-shares shall be fair, equitable, transparent, and implemented in good faith. These criteria must be announced and published. To facilitate orderly marketing and development of normal commercial relationships between end-users and foreign suppliers, super-groups shall implement an allocation system that encourages stable, long-term commercial relationships between end-users and foreign suppliers while making provision for the entry of new end-users. Anticipating the addition of new end-users, the super-groups must have agreed procedures and criteria for distributing SBS sub-shares among their affiliated end-users.
Unused end-user sub-shares must be reallocated, prior to 1 October of the calendar year, by the super-group.
WT/DS161/R WT/DS169/R
Page 211
NLCF and KCSC super-groups and importation of beef on behalf of their customers
Notwithstanding Sections IV.C.3 and IV.C.4, not later than 1 October 1994, NLCF and KCSC will set and announce the standard by which they will purchase beef on behalf of their customers. This standard will be equitable, established in a transparent manner, and based on the following principles: NLCF and KCSC, taking into account their SBS shares and the number of their customers, will determine an appropriate ceiling for each customer and import on behalf of the customer amounts requested under the ceiling, and in doing so shall not discriminate unfairly against any customers. As long as a customer's request meets the standard thus established, NLCF and KCSC will carry our the importation on behalf of their customers without imposing further conditions.
Importation, utilization, and distribution of SBS product
Except as otherwise specified in this Understanding, there shall be no restrictions placed by the ROKG or any super-group on beef (regardless of country of origin, product type, or specification, whether grass-fed or grain-fed or whether fresh, chilled or frozen) imported under the SBS system, including processing requirements, labelling, pricing, marking or packaging requirements or other barriers to legitimate importation, distribution, and sale, that create unnecessary obstacles to trade or otherwise undermine the objectives of this Understanding. Beef imported under the SBS system must be distributed and sold through legal channels in conformance with Korean regulations.
Any SBS sub-share that it not fully used by a super-group in any of its quarterly allocations shall be transferred to that super-group's allocation for the subsequent quarter, except that any SBS sub-share that is not fully utilized by a super-group by the end of the third calendar year quarter shall be reallocated to all other super-groups on a pro rata basis, in proportion to their respective entitlements under the SBS system, for their use in the final calendar year quarter. Such reallocation shall be made no later than 15 October. With regard to any such pro rata share that is reallocated to KTHSC, any part of that reallocation used by KTHSC end-users shall be subject to the percentage mark-up specified in Section IV.C.7. of this Understanding.
Neither the ROKG nor LPMO shall take any action to discourage super-groups and their end-users or customers from importing or using their SBS shares or sub-shares, as appropriate, as allocated under the terms of this Understanding.
SBS mark-up
A single, uniform percentage mark-up shall be applied to all types of beef purchased under the SBS system and shall be equal to the difference between the duty-paid price, c.i.f. Korea, and the price for all boneless cuts of imported grain-fed high quality beef, based on the purchases of the Livestock Products Marketing Organization (LPMO) sold in the general tender system. Such prices shall be determined by calculating the average prices over the immediately preceding three-month period. The mark-up shall be recalculated monthly. This mark-up shall be publicly announced and published prior to becoming effective. However, in the event that the mark-up in any month is in excess of the current percentage mark-up in the general tender market, the mark-up in the SBS system shall be recalculated
WT/DS161/R WT/DS169/R
Page 212
weekly on a uniform basis using the latest available c.i.f. and general tender price data for the immediately preceding month.
The mark-up applied to beef subject to a contract shall be the mark-up in effect on the date of the contract.
Notwithstanding sub-paragraph (a), in further implementation of the findings of the GATT dispute settlement panel on beef, during 1993 the mark- up on beef shall not exceed 100 per cent of the weighted average percentage mark-up applied to imported bone-less grain-fed high quality beef during calendar year 1992, as derived from data in Attachment I. During 1994, the mark-up on beef shall not exceed 95 per cent of the weighted average percentage mark-up applied during calendar year 1992. During 1995, the mark-up on beef shall not exceed 90 per cent of the weighted average percentage mark-up applied during calendar year 1992. There shall be no minimum mark-up.
Notwithstanding sub-paragraph (a), the mark-up for beef imported by KTHSC for tourist hotels and restaurants shall be no more than 2 per cent of the duty-paid c.i.f. price, except for cuts of beef specified in Attachment II.
In the event that there are significant difficulties arising from discrepancies between the mark-up for bone-in beef in the wholesale market and the SBS mark-up in accordance with Section IV.C.7 of this Understanding, the Parties will consult with each other with a view to addressing and resolving such difficulties.
The Republic of Korea, LPMO, and super-groups shall neither directly nor indirectly exert any influence on pricing decisions of end-users aside from the mark-up agreed upon in this Understanding.
Samples
The importation of samples will be allowed under the SBS system, and the sample quantities shall be counted as part of the SBS share. Samples shall not be subject to the mark-up. All super-groups shall be responsible for establishing their sample import systems.
Bid and performance bonds and letters of credit
The utilization of bid and performance bonds and/or letters of credit shall be at the option of SBS participants.
Short-weight claims
Short-weight claims shall be resolved between buyers and sellers.
Minimum purchase unit
There shall be no governmental restrictions on the minimum purchase unit of beef imports.
Product coverage
Product coverage for the SBS system shall be the same as for the overall Understanding, as defined in Section II for the term "beef" and shall include all product classified under HS 0201 and HS 0202.
WT/DS161/R WT/DS169/R
Page 213
Purchasing frequency
There shall be no governmental restrictions on the timing of purchases by customers, end-users, or their designated agents.
Record-keeping
Approved super-groups shall administer record-keeping of purchases to ensure compliance with the annual and quarterly SBS shares.
Delivery periods
Delivery shall be determined between the end-user or customer and seller. Delivery of products purchased under quarterly SBS shares may be shipped in subsequent quarters as long as deliveries are completed within sixty days following the end of the calendar year in which the product was purchased.
GRASS-FED BEEF MARKETING
The ROKG will evaluate in a transparent manner the impact on beef marketing and consumer preferences of the 1993 trial imports of grass-fed beef into the wholesale market from July to September 1993.
Giving due consideration to the results of the trial marketing of grass-fed beef in the Korean wholesale market, the ROKG will allow gradually increasing tonnages of grass-fed beef to be distributed in the wholesale market upon the completion of the trial run. In the event that any difficulty arises in the market either during the process of the trial or after its completion, the Parties will have due recourse to the consultation provision in Section VII of this Understanding for taking appropriate measures to address and resolve such difficulties.
RELATIONSHIP TO THE GATT
With regard to beef, the ROKG reaffirms its undertaking to eliminate its remaining import restrictions or otherwise bring them into conformity with GATT provisions as provided in the conclusion of the report on the GATT Balance-of-Payments Committee on consultations with the Republic of Korea adopted by the GATT Council on 7 November 1989.
Notwithstanding the above, both Parties reserve their rights under the GATT.
CONSULTATION PROVISION
The Parties agree to consult promptly at the request of either Party on any matter relating to this Understanding.
The Parties shall consult quarterly to ensure full implementation of this Understanding. The first such consultations shall take place not later than 1 October 1993. The agenda for these consultations may include, inter alia, problems caused by employing the mark-up specified in Section IV.C.7.a of this Understanding and problems in access for end-users and super-groups under the SBS system in accordance with requirements of this understanding.
ATTACHMENT I
LPMO DATA FOR CIRCULATION OF 1992 AVERAGE MARK-UP
Wholesale Price, Duty-Paid Price, c.i.f. for Imported Beef
92.1 | 92.2 | 92.3 | 92.4 | 92.5 | 92.6 | 92.7 | 92.8 | 92.9 | 92.10 | 92.11 | 92.12 | AVG. | ||
Wholesale price (A) | 6,038 | 6,407 | 6,510 | 7,581 | 7,419 | 6,811 | 7,021 | 7,182 | 6,802 | 7,524 | 9,730 | 9,757 | 7,235 | |
Chuck Roll | c.i.f. + tariff (B) | 3,804 | 3,756 | 3,886 | 3,916 | 3,897 | 3,764 | 3,514 | 3,537 | 3,521 | 3,695 | 3,829 | 3,829 | 3,726 |
(A)-(B) | 2,234 | 2,651 | 2,624 | 3,665 | 3,522 | 3,047 | 3,507 | 3,645 | 3,281 | 3,929 | 5,901 | 5,928 | 3,509 | |
Volume | 3,885 | 1,335 | 1,945 | 1,681 | 2,414 | 2,211 | 2,281 | 3,362 | 3,029 | 1,895 | 1,397 | 1,916 | 2,279 | |
Wholesale price (A) | 5,936 | 5,759 | 5,285 | 6,039 | 5,979 | 5,606 | 6,008 | 5,793 | 5,451 | 6,094 | 7,526 | 7,312 | 6,132 | |
Shoulder | c.i.f. + tariff (B) | 2,682 | 2,677 | 2,750 | 2,749 | 2,732 | 2,886 | 2,946 | 2,926 | 2,912 | 2,912 | 2,902 | 2,900 | 2,812 |
Clod | ||||||||||||||
(A)-(B) | 3,254 | 3,082 | 2,535 | 3,290 | 3,247 | 2,720 | 3,060 | 2,867 | 2,539 | 3,182 | 4,624 | 4,412 | 3,320 | |
Volume | 77 | 129 | 238 | 185 | 179 | 19 | 43 | 44 | 93 | 196 | 272 | 27 | 125 | |
Wholesale price (A) | 6,349 | 6,087 | 6,520 | 6,983 | 6,500 | 5,731 | 6,002 | 6,100 | 5,661 | 7,627 | 8,332 | 8,858 | 6,600 | |
Knuckle | c.i.f. + tariff (B) | 3,507 | 3,587 | 3,643 | 3,667 | 3,740 | 3,766 | 3,654 | 3,628 | 3,605 | 3,509 | 3,675 | 3,674 | 3,646 |
(A)-(B) | 2,842 | 2,500 | 2,877 | 3,316 | 2,760 | 1,965 | 2,348 | 2,472 | 2,056 | 4,018 | 4,657 | 5,184 | 2,954 | |
Volume | 832 | 287 | 303 | 518 | 702 | 727 | 666 | 1,135 | 893 | 306 | 473 | 688 | 628 | |
Wholesale price (A) | 6,133 | 5,941 | 5,664 | 6,395 | 6,349 | 5,650 | 5,559 | 6,136 | 5,725 | 6,833 | 7,263 | 7,279 | 6,211 | |
Top Round | c.i.f. + tariff (B) | 3,385 | 3,419 | 3,522 | 3,576 | 3,649 | 3,696 | 3,797 | 3,754 | 3,799 | 3,682 | 3,729 | 3,731 | 3,643 |
(A)-(B) | 2,748 | 2,522 | 2,142 | 2,819 | 2,700 | 1,954 | 1,762 | 2,382 | 1,926 | 3,151 | 3,534 | 3,548 | 2,569 | |
Volume | 332 | 137 | 227 | 108 | 158 | 186 | 127 | 223 | 353 | 220 | 309 | 56 | 203 | |
Wholesale price (A) | 10,072 | 10,095 | 9,881 | 10,340 | 10,120 | 10,291 | 10,900 | 11,741 | 11,671 | 13,629 | 12,709 | 11,422 | 11,041 | |
Short Ribs | c.i.f. + tariff (B) | 4,803 | 4,855 | 4,788 | 4,724 | 4,689 | 4,667 | 4,708 | 4,707 | 4,669 | 4,678 | 4,796 | 4,797 | 4,739 |
(A)-(B) | 5,269 | 5,240 | 5,093 | 5,616 | 5,431 | 5,624 | 6,192 | 7,034 | 7,002 | 8,951 | 7,913 | 6,625 | 6,302 | |
Volume | 1,071 | 484 | 687 | 535 | 738 | 748 | 654 | 1,171 | 788 | 453 | 751 | 692 | 731 | |
Wholesale price (A) | 6,781 | 7,059 | 7,050 | 7,830 | 7,639 | 7,217 | 7,453 | 7,825 | 7,250 | 8,356 | 9,797 | 9,854 | 7,749 | |
Average | c.i.f. + tariff (B) | 3,900 | 3,881 | 3,943 | 3,933 | 3,951 | 3,930 | 3,749 | 3,789 | 3,719 | 3,781 | 3,944 | 3,986 | 3,867 |
(A)-(B) | 2,881 | 3,178 | 3,107 | 3,897 | 3,688 | 3,287 | 3,704 | 4,036 | 3,531 | 4,575 | 5,853 | 5,868 | 3,882 | |
Volume | 6,197 | 2,372 | 3,400 | 3,027 | 4,191 | 3,891 | 3,771 | 5,935 | 5,156 | 3,070 | 3,202 | 3,379 | 3,966 |
WT/DS161/R WT/DS169/R
Page 214
WT/DS161/R WT/DS169/R
Page 214
Note : Prices are for Won/kilogram, US$1=798.3 (as of 7 May 1993) Mark-up = (A)-(B)
Volume is in metric tonnes. Mark-up expressed as a percentage of duty paid import price
Average is weighted average and may slightly differ, due to rounding. (A)-(B)
= 3882/3867 = 100.38% B
Source: MAFF/ROKG
WT/DS161/R WT/DS169R
Page 215
ATTACHMENT II
CUTS OF BEEF IMPORTED BY KTHSC
The following five cuts of beef, as defined in the National Association of Meat Purveyors Meat Buyers Guide and the Handbook of Australian Meat, imported by KTHSC for tourist hotels and restaurants shall be subject to the mark-up level specified in Section IV.C.7.a of this Understanding.
Meat Buyers Guide Reference | Handbook of Australian Meat Reference | |
Shoulder Clod | 114, 114A, 114B | 2300 (Blade, Clod) |
Chuck Roll | 116A | 2275 (Chuck Roll) 2270 (Chuck-Square Cut) |
Short Rib | 123, 123A, 123B, 123C | 1690-1694: Bone-in 2235-2238 (Rib ends): Boneless |
Knuckle | 167, 167A, 167B | 2060 (Thick Flank) 2070 (Knuckle) |
Top Round | 168, 169 | 2000 (Top Side) 2010 (Inside) |
All other beef imported by KTHSC for tourist hotels and restaurants shall be subject to the mark-up level specified in Section IV.C.7.d of this Understanding.
WT/DS161/R WT/DS169/R
Page 216
ANNEX 3
DECEMBER 1993 RECORD OF UNDERSTANDING
RECORD OF UNDERSTANDING BETWEEN KOREA AND THE UNITED STATES
ON AGRICULTURAL MARKET ACCESS IN THE URUGUAY ROUND
Pork
Pork shall be liberalized by July 1, 1997, with nothing but a bound duty (minus appropriate DFA reductions) remaining. During the interim period (January 1995 through June 1997), Korea will provide access quotas for imported frozen pork* in the amounts specified below. Duties applied on the quota amounts shall not exceed the bound duty, with any charges or fees applied in conformity with GATT Article VIII. Korea shall show a base rate of 37 per cent reduced to a bound rate of 25 per cent in 10 equal instalments in its Uruguay Round country schedule. The applicable tariff rate at the time of liberalization shall be 33.4 per cent.
1995 21,930 MT CWE
1996 29,240 MT CWE
1997** 18,275 MT CWE
* HS 0203.21.0000, HS 0203.22.0000, & HS 0203.29.0000
** January through June Chicken
Chicken shall be liberalized by July 1, 1997, with nothing but a bound duty (minus appropriate DFA reductions) remaining. During the interim period (January 1995 through June 1997), Korea will provide access quotas for imported frozen chicken* in the amounts specified below. Duties applied on the quota amounts shall not exceed the bound duty, with any charges or fees applied in conformity with GATT Article VIII. Korea shall show a base rate of 35 per cent reduced to a bound rate of 20 per cent in 10 equal annual instalments in its Uruguay Round country schedule. The applicable tariff rate at the time of liberalization shall be 30.5 per cent.
1995 7,700 MT RTC
1996 10,400 MT RTC
1997** 6,500 MT RTC
* HS 0207.21.0000 & HS 0207.41.1000
** January through June
Dairy
Korea shall liberalize the following dairy items on January 1, 1995, at the applied rates, minus appropriate DFA reductions.
HS 0406.30.0000 | processed cheese | 40 per cent |
HS 0406.90.0000 | other cheese | 40 per cent |
HS 1901.10.1010 | preparations for infant use | 40 per cent* |
HS 1901.90.2000 | other food preparations | 40 per cent* |
* Bound rate of duty is 60 per cent; 1993 applied rate of duty is 40 per cent.
WT/DS161/R WT/DS169R
Page 217
Korea shall liberalize whey powder (HS 0404.10.1000) and other whey (HS 0404.10.9000) on January 1, 1995, and shall establish a tariff rate quota for calendar year 1995 of 23,000 MT with an annual growth rate of 10 per cent. The in-quota tariff rate shall be bound at 20 per cent. Korea shall bind in its Uruguay Round country schedule a ceiling binding of 99 per cent and shall reduce such rate by no less than 50 per cent over the implementation period.
Fresh Oranges
Korea shall liberalize fresh oranges on July 1, 1997. Korea shall provide access quotas for imported fresh oranges* in the amounts specified below. The quota shall be expanded from the 1997 base of 25,000 MT at an annual growth rate of 12.5 per cent. The in-quota tariff shall be bound at 50 per cent. Korea shall bind in its Uruguay Round country schedule a ceiling binding of 99 per cent and shall reduce such rate by no less than 50 per cent over the implementation period.
1995 15,000 MT
1996 20,000 MT
1997 25,000 MT
* HS 0805.10.0000
Orange Juice
Orange juice shall be liberalized by July 1, 1997, with nothing but a bound 60 per cent duty (minus appropriate DFA reductions) remaining. During the interim period (January 1995 through June 1997), Korea will provide access quotas for imported orange juice* in the amounts specified below. Duties applied on the quota amounts shall not exceed the currently applied rate of 50 per cent, with any charges or fees applied in conformity with GATT Article VIII.
1995 50,000 MT
1996 55,000 MT
1997** 30,000 MT
* HS 2009.11.1000, HS 2009.11.9000, HS 2009.19.1000, HS 2009.19.9000 & HS
2009.30.9000
** January through June.
Beef (not covered by the current ROU)
Beef jerky (HS 0210.20.0000) shall be liberalized by July 1, 1997, with nothing but the applied 30 per cent duty (minus appropriate DFA reductions) remaining.
Beef offal (HS 0206.29.0000) shall be liberalized by July 1, 1997, with nothing but the applied rate of 20 per cent (minus appropriate DFA reductions) remaining.
WT/DS161/R WT/DS169/R
YEAR | QUOTA AMOUNT (MT RWE) | DUTY (%) | MARK-UP (%) | PER CENT SBS (%) |
1993 | 99,000 | 20 | 100 | 15 |
1994 | 106,000 | 20 | 95 | 20 |
1995 | 123,000 | 43.6 | 70 | 30 |
1996 | 147,000 | 43.2 | 60 | 40 |
1997 | 167,000 | 42.8 | 40 | 50 |
1998 | 187,000 | 42.4 | 20 | 60 |
1999 | 206,000 | 42 | 10 | 70 |
2000 | 225,000 | 41.6 | 0 | 70 |
2001 | - | 41.2 | 0 | - |
2002 | - | 40.8 | 0 | - |
2003 | - | 40.4 | 0 | - |
2004 | - | 40 | 0 | - |
YEAR | QUOTA AMOUNT (MT RWE) | DUTY (%) | MARK-UP (%) | PER CENT SBS (%) |
1993 | 99,000 | 20 | 100 | 15 |
1994 | 106,000 | 20 | 95 | 20 |
1995 | 123,000 | 43.6 | 70 | 30 |
1996 | 147,000 | 43.2 | 60 | 40 |
1997 | 167,000 | 42.8 | 40 | 50 |
1998 | 187,000 | 42.4 | 20 | 60 |
1999 | 206,000 | 42 | 10 | 70 |
2000 | 225,000 | 41.6 | 0 | 70 |
2001 | - | 41.2 | 0 | - |
2002 | - | 40.8 | 0 | - |
2003 | - | 40.4 | 0 | - |
2004 | - | 40 | 0 | - |
Page 218 BEEF
All balance-of-payments restrictions on beef shall expire no later than December 31, 2000. In the year 2001, there shall be no quota, no mark-up, no LPMO involvement, and complete private sector autonomy regarding product quantity, price, quality, and supplier. There shall be no government restrictions on product utilization.
The current July 15, 1993 Record of Understanding (L/7270) shall continue to apply except as modified to incorporate the provisions of the new understanding.
NON-SENSITIVE UNLIBERALIZED BALANCE-OF-PAYMENTS ITEMS
Korea shall liberalize the following balance-of-payments items on January 1, 1995 or January 1, 1996, at the currently applied 1993 tariff rates.
HS CODE 0806 10 0000** | DESCRIPTION Grapes, fresh | APPLIED RATE 50 |
0808 10 0000* | Apples, fresh | 50 |
2009 60 0000* | Grape juice | 50 |
2009 70 0000** | Apple juice | 50 |
2202 90 2000* | Beverage of fruit juice | 10 |
* Korea agreed to liberalize these products in 1995.
** Korea agreed to liberalize these products in 1996.
WT/DS161/R WT/DS169R
Page 219
DUTY REDUCTIONS. UNITED STATES MARKET ACCESS REQUESTS FOR THE REPUBLIC OF KOREA
HS TARIFF LINE PRODUCT
0802 12 0000 ALMONDS, SHELLED
0802 32 0000 WALNUTS, SHELLED
0805 30 0000 FRESH LEMONS AND LIMES
0805 40 0000 FRESH GRAPEFRUIT
0806 20 0000 RAISINS
0809 20 0000 FRESH CHERRIES
0813 20 0000 PRUNES
1001 90 9000 WHEAT, OTHER (NOT DURUM)
* 1005 90 1000 FEED CORN
* 1005 90 2000 POPCORN
1101 00 1000 WHEAT FLOUR
1105 10 0000 POTATO FLOUR AND MEAL
1105 20 0000 POTATO FLAKES, PELLETS, ETC.
1108 12 0000 CORN STARCH
1202 20 0000 PEANUTS, SHELLED
1507 10 0000 SOYABEAN OIL, CRUDE
1507 90 1000 SOYABEAN OIL, REFINED
1512 11 1000 SUNFLOWER OIL, CRUDE
1512 19 1010 SUNFLOWER OIL, REFINED
1512 21 0000 COTTONSEED OIL, CRUDE
1512 29 1000 COTTONSEED OIL, REFINED
1601 00 1000 PORK SAUSAGES, INCLUDING HOT DOGS
1904 10 BREAKFAST CEREALS
2004 10 0000 FROZEN FRENCH FRIES
2005 80 0000 SWEET CORN, NOT FROZEN
2009 20 0000 GRAPEFRUIT JUICE
2104 10 SOUP AND BROTH
2304 00 SOYBEAN MEAL
2309 90 1010 MIXED FEEDS, FOR PIGS
2309 90 1020 MIXED FEEDS, FOR FOWLS
2309 90 1040 MIXED FEEDS FOR BOVINE ANIMALS
The duties on the products shown above shall be reduced by 40 per cent, for each individual tariff line, from the duty levels applied in 1993 and shall be bound at the reduced levels. These reductions shall be implemented in ten equal instalments, from 1995 to 2004.
* These products (HS 1005.90.1000, 1005.90.2000, 1105.10.0000, 1105.20.0000, 1202.20.0000 and
1108.12.0000) are subject to tariffication; the reduction commitments on these products shall be made on the in-quota tariff rates.
WT/DS161/R WT/DS169/R
Page 220
ANNEX 4
(Korea's Exhibit 45)
WT/DS161/R WT/DS169R
Page 221
WT/DS161/R WT/DS169/R
Page 222
WT/DS161/R WT/DS169R
Page 223
WT/DS161/R WT/DS169/R
Page 224
WT/DS161/R WT/DS169R
Page 225
ANNEX 5
(Korea Exhibit 27)
Estimated sales amount of imported beef
(Unit: M/T)
Year | Total | Retail store | Prepackaged | Processor | Restaurant | Military | Wholesale market |
1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 |
1995 | 146,495 | 18,697 | 27,203 | 7,299 | 9,683 | 12,369 | 71,244 |
1996 | 149,201 | 37,116 | 15,801 | 7,420 | 15,149 | 14,397 | 59,318 |
1997 | 134,225 | 45,501 | 14,612 | 10,498 | 17,758 | 11,288 | 34,568 |
1998 | 85,416 | 31,505 | 10,502 | 13,609 | 6,485 | 5,454 | 17,861 |
Notes:
Numbers in column 3 purchased through Super groups. Sales portion of retail store is as follows:
household (37.9 per cent), other imported beef sales outlets (17.8per cent), restaurant (44.2per cent).
Numbers in column 5 purchased through Super groups. Numbers in column 6 purchased through Super groups.
Those imported beef that the LPMO imported and sold at wholesale markets are purchased by retail stores, processors and restaurants, but data on their share in the total volume of imported beef marketed are not available.
Source: LPMO.
WT/DS161/R WT/DS169/R
Page 226
ANNEX 6
(Australia, 1st Submission, paragraph 3.6)
WT/DS161/R WT/DS169R
Page 227
ANNEX 7
(Korea Exhibit 19)
Import and target prices for 1997
Chuck roll | Ribs | |||||||
1.1-3.31 | 4.1-6.30 | 7.1-9.30 | 10.1-12.31 | 1.1-3.31 | 4.1-6.30 | 7.1-9.30 | 10.1-12.31 | |
import price | 4,246 | 4,332 | 3,971 | 4,311 | 4,793 | 4,815 | 4,804 | 5,994 |
target price | 3,800 | 3,800 | 3,800 | 3,800 | 3,340 | 3,340 | 3,340 | 3,340 |
Import Price = C.I.F.+DUTY+SELLING EXPENSES
WT/DS161/R WT/DS169/R
Page 228
ANNEX 8
(Korea Exhibit 39)
LPMO Stocks, Sales volume and Average exchange rate
Stocks | Sales volume | Average exchange rate | |
MT | Won/US$ | ||
Oct 1997 | 9,024 | 5,636 | 921.9 |
Nov 1997 | 14,130 | 4,519 | 1025.6 |
Dec 1997 | 17,061 | 3,701 | 1484.1 |
Jan 1998 | 16,600 | 2,419 | 1706.8 |
Feb 1998 | 18,293 | 1,652 | 1623.1 |
Mar 1998 | 18,837 | 2,191 | 1505.3 |
Apr 1998 | 18,475 | 1,793 | 1392.0 |
May 1998 | 17,011 | 1,872 | 1394.6 |
Jun 1998 | 15,514 | 1,498 | 1397.2 |
Jul 1998 | 12,717 | 2,802 | 1300.8 |
Note: Sales volume includes imported beef sold through wholesale market, for military use and as prepackaged.
ANNEX 9
(US Exhibit 60)
Slaughter Statistics for Korea 1000 Head
1989 | 1990 | 1991 | 1992 | 1993 | 1994 | 1995 | 1996 | 1997 | 1998 | 1999 | |
Hanwoo | 397 | 311 | 302 | 345 | 488 | 576 | 580 | 640 | 887 | 1,023 | 912 |
Dairy Cattle | 158 | 234 | 233 | 182 | 182 | 187 | 189 | 193 | 213 | 234 | 171 |
Other | 12 | 9 | 10 | 10 | 17 | 15 | 11 | 17 | 25 | 25 | 12 |
Total Slaughter | 567 | 554 | 545 | 537 | 687 | 778 | 780 | 850 | 1,125 | 1,282 | 1,095 |
% Dairy Cattle/Total | 27.87 | 42.24 | 42.75 | 33.89 | 26.49 | 24.04 | 24.23 | 22.71 | 18.93 | 18.25 | 15.62 |
WT/DS161/R WT/DS/169/R
Page 229
WT/DS161/R WT/DS/169/R
Page 229
Source: NLCF
WT/DS161/R WT/DS169/R
Page 230
ANNEX 10
(New Zealand, Annex 7, Table 13)
Livestock numbers and meat production
Livestock Meat Production
1980 | 1,541 | [1,361 180] | 1,784 | 40,130 | 423 | 93 | 235 | 90 |
1985 | 2,943 | [2,553 390] | 2,853 | 51, 081 | 588 | 116 | 345 | 126 |
1989 | 2,051 | [1,535 515] | 4,801 | 61,689 | 730 | 90 | 485 | 155 |
1990 | 2,126 | [1,622 504] | 4,528 | 74,463 | 773 | 95 | 506 | 172 |
1991 | 2,269 | [1,773 496] | 5,046 | 74,855 | 804 | 98 | 499 | 207 |
1992 | 2,527 | [2,019 408] | 5,463 | 73,324 | 932 | 100 | 601 | 231 |
1993 | 2,814 | [2,261 553] | 5,927 | 72,945 | 987 | 130 | 618 | 239 |
1994 | 2,945 | [2,393 552] | 5,955 | 80,569 | 1,006 | 147 | 614 | 245 |
1995 | 3,147 | [2,594 553] | 6,461 | 85,800 | 1,057 | 155 | 639 | 263 |
1996 | 3,395 | [2,844 551] | 6,516 | 82,829 | 1,143 | 174 | 692 | 277 |
1997 | 3,280 | [2,736 544] | 7,096 | 88,251 | 1,196 | 237 | 699 | 260 |
1980 | 1,541 | [1,361 180] | 1,784 | 40,130 | 423 | 93 | 235 | 90 |
1985 | 2,943 | [2,553 390] | 2,853 | 51, 081 | 588 | 116 | 345 | 126 |
1989 | 2,051 | [1,535 515] | 4,801 | 61,689 | 730 | 90 | 485 | 155 |
1990 | 2,126 | [1,622 504] | 4,528 | 74,463 | 773 | 95 | 506 | 172 |
1991 | 2,269 | [1,773 496] | 5,046 | 74,855 | 804 | 98 | 499 | 207 |
1992 | 2,527 | [2,019 408] | 5,463 | 73,324 | 932 | 100 | 601 | 231 |
1993 | 2,814 | [2,261 553] | 5,927 | 72,945 | 987 | 130 | 618 | 239 |
1994 | 2,945 | [2,393 552] | 5,955 | 80,569 | 1,006 | 147 | 614 | 245 |
1995 | 3,147 | [2,594 553] | 6,461 | 85,800 | 1,057 | 155 | 639 | 263 |
1996 | 3,395 | [2,844 551] | 6,516 | 82,829 | 1,143 | 174 | 692 | 277 |
1997 | 3,280 | [2,736 544] | 7,096 | 88,251 | 1,196 | 237 | 699 | 260 |
Cattle [Beef Dairy] Pigs Chicken Total Beef Pork Chicken 1,000 Head 1,000 MT
Source: MAF, Statistical Yearbook of Agriculture and Forestry (1998) and MAI (1998).
WT/DS161/R WT/DS169/R
Page 231
ANNEX 11
(Korea Exhibit 35)
Beef Import value, Import volume and Total consumption as compare to other products
Technical means for distinction existing | Import value ($ million) | Import volume (1000 MT) (A) | Total consumption (1000 MT) (B) | A/B(%) | |
Beef | NO | 247 | 91 | 345 | 26.3 |
Sesame seed | Yes | 45 | 54 | 90 | 60 |
Pork | NO | 137 | 52 | 700 | 7.4 |
Rice | Yes | 21 | 61 | 5,041 | 2.4 |
Garlic | Yes | 10 | 25 | 440 | 5.6 |
Potato flakes | NO | 0.000057 | 0.00025 | NA | - |
Milkow (domestic) | Yes | - | 28 | 345 | 8.1 |
Frozen chicken | NO | 15 | 12 | 260 | 4.6 |
Safflower seed | Yes | 0.033 | 0.041 | NA | - |
Grapes | Yes | 2 | 1.1 | 399 | 0.27 |
Orange | Yes | 28 | 36.6 | 36.6 | 100 |
Note: Import volume, import value and total consumption in 1998.
WT/DS161/R WT/DS169/R
Page 232
ANNEX 12
Australia Attachment 17
Cattle prices and beef supply & demand trends
Beef supply & demand trend as at 19 July 1999
1998 Accrued stock | 1999 Purchases | 1999 Sales | Stock | Forecast Purchases | ||
LPMO | Imported | 67,934 | 14,343 | 20,753 | 61,524 | 47,457 |
Domestic | 12,723 | - | 6,354 | 6,369 | - | |
Subtotal | 80,657 | 14,343 | 27,107 | 67,893 | 47,457 | |
SBS | 9,568 | 58,387 | 48,442 | 6,240 | 85,813 | |
TOTAL | 90,225 | 72,730 | 75,549 | 74,133 | 133,270 |
NB: 1. Of total stock accrued from 1998, 49,474 tonnes has not yet cleared customs.
2. LPMO 1999 quota 61,800 tonnes, SBS 1999 quota 144,200 tonnes.
Cattle prices and beef consumption
Cattle price
(Unit: '000 won)
December 1998 | June 1999 | Early July 1999 | 20 July 1999 | |
Large steer | 2,129 | 2,098 | 2,199 | 2,404 |
Calf | 743 | 887 | 929 | 1,033 |
Cattle yardings
(Unit: head, %)
December 1998 | January 1999 | June 1999 | Early July 1999 | |
Offered | 299 | 271 | 248 | 211 |
Traded | 84 | 83 | 87 | 88 |
Daily consumption of domestic beef
(Unit: tonnes)
December 1998 | June 1999 | Early July 1999 | 19 July 1999 | |
Daily | 867 | 704 | 749 | 1,034 |